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In 1942, economist Joseph Schumpeter described “creative destruction” as a “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” There probably hasn’t been a better example of Schumpeterian creative destruction in the last decade or more than the recent ascendance of app-based ride-sharing services like Uber (and Lyft, Sidecar, Gett, Via, etc.) challenging traditional, legacy taxi cartels in cities like New York, San Francisco, Chicago and more than 160 other US cities. Market-based evidence of the gale of creative destruction in the transportation industry is displayed in the two charts above. The top chart above shows how the increasing popularity of ride-sharing apps like Uber has caused the price of New York City individual taxi medallions to collapse by at least 37%, from a peak of more than $1 million in August 2013 to only about $650,000 in recent months (based on advertised asking prices here, not actual sales).
Further evidence of the “Uber effect” is displayed in the bottom chart above, showing the collapse in the stock price of Medallion Financial Corporation, from $16.45 in November 2013 to below $7 per share in the last few days. Medallion Financial Corporation (NASDAQ: TAXI) is a NYC-based specialty finance company that originates, acquires, and services loans that finance taxicab medallions. Just as the sky-high taxi medallion prices have been significantly eroded due to competition from the upstart ride-sharing services, so has the value of Medallion Financial Corporation’s stock price been significantly dropping. After tracking the SP&500 Index closely for many decades, the share price of Medallion Financial has fallen by a whopping 58% from its November 2013 peak, during a time when the S&P 500 has increased by 7.1%.
As the traditional, legacy taxi industry continues to collapse under the Schumpeterian forces of market disruption, the taxi cartels like the one in NYC are asking for taxpayer bailouts, or at least taxpayer-supported guarantees for taxi medallion loans. Consumers are the obvious winners from the creative destruction in the transportation industry – we now have more choice, better and faster service, friendlier drivers, cleaner cars, and maybe most importantly — lower prices. Traditional taxi drivers and medallion owners, after being protected from competition by government regulations for many generations, are the obvious losers from the “Uber effect.” Medallion prices will continue to fall as the taxi cartels continue to crumble and collapse.
Q: Should we feel any sympathy for legacy taxi drivers and taxi medallion owners who were once part of a powerful government-enforced cartel/monopoly? Do they deserve any help from taxpayers as victims of Hurricane Joseph (Schumpeter)? Not according to Don Boudreaux who wrote this yesterday on the Cafe Hayek blog:
A temptation is to feel sorrow or pity for taxicab-medallion owners whose personal wealth, insofar as it has been based on these medallions, is now plummeting. Do not feel any sorrow or pity for these medallion owners. The wealth they are now losing to competitive forces was the product of government-imposed unnecessary restrictions on competition – restrictions that, for 78 years now, have artificially reduced the supply of taxi services in New York City and artificially raised the prices that taxi customers had to pay. Against the concentrated pain now being suffered by these former monopolists we must weigh the dispersed pain suffered by taxi customers in Gotham from 1937 until the arrival of Uber.
This dispersed pain is much harder to see than is the concentrated pain now being suffered by medallion owners. This reality, however, does not make this dispersed pain less real or significant than it would be were it more concentrated and more visible. This dispersed pain was suffered for decades, every minute of every day, by tens of millions of ordinary people seeking surface transportation in New York City. Every taxi rider in NYC, from 1937 until today, paid a price higher than the forces of competition would yield. This higher price was the product of an unholy alliance between medallion owners, taxi drivers, and New York City political officials. This higher price was the bitter fruit of cronyism.
And this dispersed pain, spread out over nearly eight decades and over tens of millions of people, while much less visible than is the concentrated pain suffered now by medallion owners, is in total much greater than is the concentrated pain. The taxi-medallion system was a clever cronyish method of hourly picking the pockets of unfortunate millions in order to line the pockets of a fortunate few. And while many of the fortunate few did indeed win genuine fortunes as a result of this corrupt system, a great deal of the money picked hourly, day after day and decade after decade after decade, from the pockets of innocent people was transferred to no one: it was simply wasted on supply restrictions.
In a related post about Uber and the great taxicab collapse Jeffrey Tucker wrote:
Now if this model can be applied to all other government-created monopolies, we might see genuine progress toward a truly competitive economy. After all, it turns out that the free market is the best anti-monopoly weapon ever developed.
Exhibit A: As just one example of how the free market and cutthroat competition is an effective regulatory mechanism and an anti-monopoly weapon, the on-demand transit service Via (shared rides in premium vehicles in Manhattan for only $5) is challenging Uber (and Lyft and Gett) and traditional taxis and buses offering an app-based transportation service that is “smarter than the subway, better than the bus, cheaper than a taxi.” See NY Times article “Like Taking a Luxury Bus: Via, a Ride-Share App, Offers Manhattan Trips.”
Related: A friend of my mine in DC lost his house keys last night. After unsuccessfully checking everywhere that he might have left them, he remembered that he had used Lyft earlier in the evening. He called his Lyft driver (driver contact information is always part of a Lyft or Uber ride), who found my friend’s keys in his car and offered to deliver them to my friend’s location. If my friend had used a traditional taxi and left his keys in the car, he probably would have never been able to find the driver and would have never been able to retrieve his keys!
To paraphrase what Don said at the end of his post “Hail Uber and Lyft! (But don’t hail a cab in NYC or DC.)“
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A $15 an hour minimum wage would actually hurt those it’s designed to help, like recent immigrants and other low-skilled, limited-experience workers?
From a recent op-ed in the Washington Post by Mirta Gutierrez, now the executive chef at Tortilla Coast Restaurant in Washington, DC (“A $15 minimum wage would hurt entry-level workers“):
I am an immigrant who started at the bottom with nothing. I became an executive chef who understands the kitchen and an accountant who understands the numbers of running a business.
Today, I see many young people coming into the restaurant business with the same aspirations. But I am frustrated by those who come in with a sense of entitlement. Rather than seeking experience and skills, they are seeking shortcuts. I explain to them that nothing in life comes free; they need to work hard and learn the business so that when it is time for them to fly, they will be ready.
As a poor immigrant, would a $15 minimum wage [now proposed for Washington, D.C.] have helped me? Absolutely not. No restaurant owner would hire someone without experience, skills or English at such a high wage. I would never have made it to that first rung on the career ladder.
When I was hired in my first job, I was given something much more than a high starting wage; I was given the opportunity to learn, gain skills and grow. I was also given the mobility to advance unlike anything I had ever experienced. I am not alone. Growth in restaurant ownership among minorities and women outpaced growth in the overall restaurant industry in the past 10 years. More than 80 percent of restaurant owners started in an entry-level position. Fifty-nine percent of first-line supervisors/managers of food preparation and service workers last year were women, 19 percent were of Hispanic origin and 13 percent were African American.
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…. is from Frederic Jesup Stimson‘s 1910 book “Popular Law-Making: A Study of the Origin, History, and Present Tendencies of Law-Making By Statute” (emphasis added):
And now we find the first statutory origin of that utterly fallacious principle — although alive today — that the state, in a free country, a legislature-governed country, has the right, when expedient, to fix the price of anything, wages or other commodities; fallacious, I say, except possibly as to the charges of corporations, which are given special privileges by the government; the principle, which .prevailed throughout the Middle Ages, of fixing the prices of all things. In this case the price was on bread; but you find now for many centuries an attempt to fix the price of almost everything; and of labor, too, what wages a man should be paid. It lasted persistently for centuries and centuries, and it was only under the influence of modem political economy, Adam Smith and other quite modem writers, that the principle that it was possible to fix prices of commodities was utterly eradicated from the English mind.
And you hardly got it out of England before it reappeared in the United States. It is not a new-fangled principle. You find the newspapers commonly talk about fixing prices by law as if it were something utterly unheard of and utterly new. It is not so. It is on the contrary as old as almost any legislation we have, and you can make no argument against it on that ground. It has always been the custom of our ancestors to regulate the prices of wages by law, and the notion that it was either unconstitutional or inexpedient dates from a very few years back; yet all such attempts at legislation have utterly disappeared from any modem statute book. In no State of our forty-six States is any one so unintelligent, even in introducing bills in the legislature, as today to propose that the price of a ton of coal or a loaf of bread shall be so much.
This is the importance of these early laws, even when obsolete; because we never know when some agitator may not pop up with some new proposal — something he thinks new — which he thinks, if adopted, will revolutionize society. If you can show him that his new discovery is not only not new, but was tried, and tried in vain, during two or three centuries in the life of our own ancestors, until an enraged public abolished it, it will destroy any effect that he is likely to make upon the average legislature.
MP: Alas, the appeal of “utterly fallacious principles” (government price-fixing, e.g. minimum wage laws), “free lunches” and “getting something for nothing” never dies and we never seem to learn from history….
HT: Jeff Brown
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While at the Minnesota State Fair yesterday, I visited the display of “drop homes” that are manufactured in Minneapolis by “Next Door Housing” (see photo above), and available for short or long term rental ($900-$1,200 per month), or for purchase (starting at about $50,000). From the company’s website, here’s a description of the “drop homes” offered by NextDoor Housing:
Small Houses, Big Ideas. Introducing the Drop Home.
The innovative Drop Home Tiny House option from NextDoor provides unparalleled convenience with unmistakable comfort. Practical and efficient housing where it’s wanted, when it’s needed. Rent or buy your very own Drop Home today.
Here’s how the idea for “drop homes” came about, from an article in the St. Paul Pioneer Press:
Eino Lammi never should have been cleaning his gutters. Performing a task perhaps better left to a younger man, he was 92 when he fell off a ladder four years ago. His injury forced him to recuperate in a nursing home away from his family — an experience he hated.
That inspired his grandson to invent housing that would have allowed Lammi to recover right in his own front yard. “The whole purpose is to keep people out of institutions,” said Jesse Lammi of White Bear Lake as he gave a tour of his $50,000 NextDoor Homes unit.
The NextDoor is designed to allow any disabled person to live near their loved ones. It comes with a jack-up system that raises the house for highway travel, then lowers it for temporary parking on a driveway or lawn.
Watch a video below for a short demonstration of a drop home being delivered (currently requires a Ford F-350 pickup truck, but a new models will be able to be pulled and delivered with a Ford F-250). Drop homes can also be used for vacation homes — for example, they can be designed to serve as lake cabins, hunting cabins, etc.
Seems like a great idea and fills a much-needed niche. Could be a great way to keep elderly parents close to home and to their children for as long as possible before moving to an expensive assisted living arrangement or nursing home. Or it could accommodate urgent demand for immediate housing in places like the Bakken oil fields – not so much today, but it could have helped several years ago when there were chronic housing shortages.
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…. is from Thomas Sowell’s May 16, 2007 column:
If you start from a belief that the most knowledgeable person on earth does not have even one percent of the total knowledge on earth, that shoots down social engineering, economic central planning, judicial activism, and innumerable other ambitious notions favored by the political Left. If no one has even one percent of the knowledge currently available, not counting the vast amounts of knowledge yet to be discovered, the imposition from the top of the notions favored by elites convinced of their own superior knowledge and virtue is a formula for disaster.
If no one has even one percent of all the knowledge in a society, then it is crucial that the other 99 percent of knowledge — scattered in tiny and individually unimpressive amounts among the population at large — be allowed the freedom to be used in working out mutual accommodations among the people themselves. These innumerable mutual interactions are what bring the other 99 percent of knowledge into play — and generate new knowledge. That is why free markets, judicial restraint, and reliance on decisions and traditions growing out of the experiences of the many — rather than the groupthink of the elite few — are so important.
Elites are all too prone to over-estimate the importance of the fact that they average more knowledge per person than the rest of the population — and under-estimate the fact that their total knowledge is so much less than that of the rest of the population. They overestimate what can be known in advance in elite circles and under-estimate what is discovered in the process of mutual accommodations among millions of ordinary people.
Central planning, judicial activism, and the nanny state all presume vastly more knowledge than any elite have ever possessed. The ignorance of people with Ph.D.s is still ignorance, the prejudices of educated elites are still prejudices, and for those with one percent of a society’s knowledge to be dictating to those with the other 99 percent is still an absurdity.
HT: Dennis Gartman
The gradual phase-in of $15 an hour minimum wage laws as insurance policies against public relations disasters
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Seattle, San Francisco and Los Angeles have all recently passed $15 an hour
minimum wage laws government mandated price floors that guarantee reduced employment opportunities for low skilled and limited-experience workers, especially minorities. But those $15 an hour wage mandates are getting gradually phased in over time. Depending on the size and type of employer, Seattle’s $15 an hour minimum wage won’t take full effect until 2021 for all workers, Los Angeles’s $15 an hour minimum wage won’t take full effect until 2021 for all workers, and San Francisco’s $15 an hour minimum wage won’t be in full effect until July 1, 2018.
1. If minimum wage increases to $15 an hour generate net positive economic benefits (benefits that outweigh costs) for those cities as minimum wage proponents would have us believe, then why wait until 2018 (San Francisco) or 2021 (Seattle and Los Angeles) to take full advantage of those alleged positive economic benefits? Why force low-skilled workers to wait for up to six years before they can get the full benefits of the $15 an hour wage, when they could capture those benefits immediately if politicians and minimum wage advocates weren’t being so stingy and cruel?
2. Further, if a $15 an hour minimum wage generates positive net benefits for workers, why make a distinction between employers with more than 500 (25) employees and employers with fewer than 500 (25) employees, like in Seattle (Los Angeles). Employees have no control over the number of workers their employers hire, so why discriminate against workers who are employed by small businesses and make them wait up to three extra years in Seattle and one extra year in Los Angeles to gain the full benefit of a $15 an hour wage?
Bottom Line: If a $15 an hour minimum wage generates positive economic benefits for workers as proponents believe, then there would be no logical or economic reason to delay those benefits, and the $15 an hour minimum wage should be implemented immediately for all workers and for any size employer. On the other hand, only if a $15 an hour minimum wage generates net economic losses as economic theory clearly predicts, would it make sense to delay the full implementation of the price floor and have it phased in more slowly for smaller employers. In conclusion, the phase-in schedule for $15 an hour minimum wage hike, and the distinction between large and small employers, is really an implicit admission that the minimum wage generates net negative economic losses, especially for smaller employers.
As Byran Caplan so aptly observed in 2013 in his post “Phase-In: A Demagogic Theory of the Minimum Wage” (emphasis added):
A gradual phase-in is a great insurance policy against a public relations disaster. As long as the minimum wage takes years to kick in, any half-competent demagogue can find dozens of appealing scapegoats for unemployment of low-skilled workers.
Most non-economists never even consider the possibility that the minimum wage could reduce employment. But if minimum wage activists were as clueless as the typical non-economist, they wouldn’t bother with a phase-in, they’d go full speed ahead. The fact that activists’ proposals include phase-in provisions therefore suggests that for all their bluster, they know that negative effects on employment are a serious possibility. If they really cared about low-skilled workers, they’d struggle to figure out the magnitude of the effect. Instead, they cleverly make the disemployment effect of the minimum wage too gradual to detect.
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Full text of my op-ed in Thursday’s Investor Business Daily:
Despite a challenging market, the U.S. oil and gas industry is hanging tough. But our government’s inability to craft a sensible energy policy is at best handcuffing our producers and at worst threatening to reverse the gains of America’s shale revolution.
The U.S. oil rig count has dropped by more than one-half in less than a year, from slightly more than 1,600 last September to fewer than 700 in every week since early May of this year. Oil prices, driven largely by a Saudi attempt to reassert control over the oil market, have fallen to below $40 per barrel and could slip further.
And yet the shale industry has not collapsed. In fact, production has remained steady, even growing in some places. Imports of foreign petroleum products have fallen to 25.4% of our domestic supply, a 44-year low. These are not small gains.
No thanks to President Obama, we are approaching a level of energy security that lawmakers have promised but never delivered since the oil shocks of the 1970s. Signs of a manufacturing renaissance are emerging along the Gulf Coast, where low-cost oil and natural gas have become magnets for energy-intensive industries.
American households, too, are saving thousands of dollars per year on lower prices at the pump and on lower heating and electricity bills. Environmental benefits have also been noteworthy. Greater use of natural gas in place of coal for electricity generation has helped reduce U.S. carbon dioxide emissions in recent years to their lowest level in 20 years, making America the world leader in reducing carbon emissions.
Yet shale producers continue to face formidable political obstacles. The Obama administration, always happy to take credit for surging oil and natural gas production, is using the EPA and other regulatory bodies to burden energy companies with red tape and added costs.
Take the EPA’s landmark report on the safety of fracking. After years of research, the agency found what we already knew — that fracking is being done, and can continue to be done, safely. And yet what did our domestic producers get from this? New, onerous fracking rules for federal lands from the Interior Department. The EPA followed those rules by proposing unnecessary regulations on methane emissions from oil and gas production.
The Obama administration and the EPA in particular seem intent on creating problems for our domestic oil and gas industry where there is none. According to the EPA’s own data, methane emissions have fallen 38%, while production has grown by 35% since 2005. The methane “problem” simply doesn’t cry out for new, expensive regulation.
If it’s not new rules hampering our energy companies, it’s missed opportunities to turn the page on outdated legislation like the ban on crude oil exports. It’s past time to lift the crude oil export ban, an outdated relic of misguided, reactionary energy policy from the 1970s.
The export ban’s continued existence is nonsensical. It weakens our commitment to free trade, plus creates market distortions that discourage domestic oil production, reducing our impact on global supply.
Those who argue that lifting the ban on oil exports would somehow weaken U.S. energy security fail to grasp that security is enhanced more by greater domestic production, and a more transparent marketplace, than by protectionism.
Half-measures designed to poke holes in the ban — like the recently announced fuel swaps with Mexico — aren’t enough. Let’s not add more government meddling to energy trade. We need to modernize our energy policy for the 21st century to reflect America’s new status as a world energy superpower and lift the oil export ban altogether.
The shale revolution and its myriad economic, environmental and energy security benefits are fighting for their survival against the Saudis and OPEC, both of which are bent on regaining control of the oil trade. As a counterweight, we need a U.S. energy policy and a regulatory approach that encourage our oil and gas producers. Overzealous environmental regulation and inaction on the crude export ban are gifts from the Obama administration that Saudi Arabia, Russia and Venezuela don’t deserve.
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Here’s an update to my recent post about Seattle area restaurant employment “Minimum wage effect? January to June job losses for Seattle area restaurants (-1,300) largest since Great Recession.” Local area employment data by industry was released last week for the month of July, and showed a large increase in restaurant employment of 2,500 jobs during July for the Seattle MSA (seasonally adjusted), giving minimum wage proponents a lot to cheer about (see chart above). But before declaring victory for the success of Seattle’s (and San Francisco’s) pending increase to a $15 an hour minimum wage, we should consider the following:
1. The month to month changes in restaurant employment are inherently volatile and noisy, both for the not seasonally adjusted series reported by the BLS (dark blue line above) and for the seasonally adjusted series reported by the Federal Reserve (lighter blue line above). Therefore the month-to-month changes in Seattle area restaurant employment aren’t nearly as reliable for detecting underlying trends as the changes over longer periods of time.
2. For example, the chart above shows the 6-month percentage changes in Seattle area restaurant employment from January to July in each of the last 12 years back to 2004. The January to July percentage change of 1.8% in Seattle restaurant employment this year was lower than the increases over that same period last year and in 2012 (both 2.0%) and lower than the 4.3% increase in 2013. Put into the context of a longer 6-month time period, the one-month increase in July for restaurant employment in Seattle doesn’t seem quite so impressive.
3. Another way to smooth the month-to-month volatility in Seattle area restaurant employment and uncover any underlying trends is to calculate quarterly averages of the seasonally adjusted monthly data and then compare those quarterly averages to the same quarter in the previous year. The chart above displays the year-over-year changes for the quarterly averages for each month between January 2003 and July 2015. For example, the average number of Seattle MSA restaurant jobs over the last three months (May to July) of 135,000 is 3.4% above the average over the same months last year of 130,500. Similar growth rates have been calculated for each month.
An interesting pattern emerges in the chart above, which shows an acceleration of the year-over-year growth in restaurant jobs in the Seattle area following the Great Recession peaking at above 6% growth in six of the months between July 2013 and March 2014. Starting in the spring of last year, there has been a noticeable downward trend in the year-over-year growth rate of Seattle area restaurant jobs (quarterly averages), which fell below 3.6% in each of the last three months (May, June and July) for the first time since July of 2012, three years ago. Again, the one-month gain in July restaurant jobs may have created a slight up-tick for the last quarter’s average, but certainly didn’t come close to reversing the downward trend in growth rates over the last year.
4. The same analysis uncovers a very similar pattern in the year-over-year growth in San Francisco area restaurant employment, see chart above. In the most recent quarter (May to July), restaurant employment growth in the San Francisco MSA slowed to just over 4%, the lowest growth since October 2011, almost four years ago.
Bottom Line: It will take more time, probably several more years, to completely assess the employment effects of the $15 minimum wages in Seattle and San Francisco as those mandated wage hikes get phased in over the next few years. And the month-to-month job losses or gains in Seattle and San Francisco won’t tell us very much compared to looking at smoothed quarterly averages over longer periods of time like in the analysis above. But unless the time-tested, irrefutable, ironclad economic laws of supply and demand somehow don’t apply to the cities of Seattle and San Francisco, then it’s likely we’ll see some of the adverse effects of government price floors and the $15 an hour minimum wage that economic theory and empirical evidence clearly predict: reduced employment opportunities for unskilled, low-skilled, and limited-experience workers especially for minorities, adjustments from businesses and restaurants that include reducing workers’ hours, reducing workers’ fringe benefits, and raising prices. In other words, there’s no “free lunch” from a minimum hike to $15 an hour, despite what politicians (and minimum wage proponents) think. In the extreme, one only need look to the disastrous consequences of failed socialist, government policies in Venezuela (including price controls) to get some understanding of the effects of excessive government interference in the marketplace – including the effects (even if less extreme) of a $15 an hour minimum wage.