Tag Archives: Economics

Problem of low wages not easily solved

Writing from New Orleans, Louisiana

A group in Kansas has been pressing for raising our state’s minimum wage. Other groups in Kansas seek to impose a “living wage” that is higher than the federal minimum wage, which itself has been raised recently.

The great appeal of a higher minimum wage mandated by an act of the legislature is that it seems like a wonderfully magical way to increase the wellbeing of low-wage workers. Those who were earning less than the new lawful wage and keep their jobs after the increase are happy. They are grateful to the lawmakers, labor leaders, newspaper editorialists, and others who pleaded for the higher minimum wage. News stories will report their good fortune.

That’s the visible effect of raising the minimum wage. But to understand the entire issue, we must look for the unseen effects.

The not-so-visible effect of the higher wage law is that demand for labor will be reduced. Those workers whose productivity, as measured by the give and take of supply and demand, lies below the new lawful wage rate are in danger of losing their jobs. The minimum wage law says if you hire someone you must pay them a certain amount. The law can’t compel you to hire someone, nor can it compel employers to keep workers on the payroll.

The difficulty is that people with lose their jobs in dribs and drabs. A few workers here; a few there. They may not know who is to blame. The newspaper and television reporters will not seek these people, as they are largely invisible, especially so in the case of the people who are not hired because of the higher wage law.

If we are truly concerned about the plight of low-wage workers we can face some harsh realities and deal with them openly. The simple fact is that some people are not able to produce output that our economy values very much. They are not very productive. Passing a law that requires employers to pay them more doesn’t change the fact that their productivity is low. But there are ways to increase productivity.

One way to increase workers’ productivity is through education. Unfortunately, there is ample evidence that our public education system is failing badly.

Capital — another way to increase wages — may be a dirty word to some. But as the economist Walter E. Williams says, ask yourself this question: who earns the higher wage: a man digging a ditch with a shovel, or a man digging a ditch using a power backhoe? The difference between the two is that the man with the backhoe is more productive. That productivity is provided by capital — the savings that someone accumulated (instead of spending on immediate consumption or taxes) and invested in a piece of equipment that increased the output of workers and our economy.

Education and capital accumulation are the two best ways to increase the productivity and the wages of workers. Ironically, the people who are most vocal about raising wages through legislative fiat are also usually opposed to meaningful education reform and school choice, insisting on more resources being poured into the present system. They also usually support higher taxes on both individuals and business, which makes it harder to accumulate capital. These organizations should examine the effects of the policies they promote, as they are not in alignment with their stated goals.

The Candlemaker’s Petition

By Frederic Bastiat

A PETITION

From the Manufacturers of Candles, Tapers, Lanterns, sticks, Street Lamps, Snuffers, and Extinguishers, and from Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting.

To the Honourable Members of the Chamber of Deputies.

Gentlemen:

You are on the right track. You reject abstract theories and little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is, to reserve the domestic market for domestic industry.

We come to offer you a wonderful opportunity for your — what shall we call it? Your theory? No, nothing is more deceptive than theory. Your doctrine? Your system? Your principle? But you dislike doctrines, you have a horror of systems, as for principles, you deny that there are any in political economy; therefore we shall call it your practice — your practice without theory and without principle.

We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation.

This rival, which is none other than the sun, is waging war on us so mercilessly we suspect he is being stirred up against us by perfidious Albion (excellent diplomacy nowadays!), particularly because he has for that haughty island a respect that he does not show for us.

We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds — in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat.

Be good enough, honourable deputies, to take our request seriously, and do not reject it without at least hearing the reasons that we have to advance in its support.

First, if you shut off as much as possible all access to natural light, and thereby create a need for artificial light, what industry in France will not ultimately be encouraged?

If France consumes more tallow, there will have to be more cattle and sheep, and, consequently, we shall see an increase in cleared fields, meat, wool, leather, and especially manure, the basis of all agricultural wealth.

If France consumes more oil, we shall see an expansion in the cultivation of the poppy, the olive, and rapeseed. These rich yet soil-exhausting plants will come at just the right time to enable us to put to profitable use the increased fertility that the breeding of cattle will impart to the land.

Our moors will be covered with resinous trees. Numerous swarms of bees will gather from our mountains the perfumed treasures that today waste their fragrance, like the flowers from which they emanate.

Thus, there is not one branch of agriculture that would not undergo a great expansion.

The same holds true of shipping. Thousands of vessels will engage in whaling, and in a short time we shall have a fleet capable of upholding the honour of France and of gratifying the patriotic aspirations of the undersigned petitioners, chandlers, etc.

But what shall we say of the specialities of Parisian manufacture? Henceforth you will behold gilding, bronze, and crystal in candlesticks, in lamps, in chandeliers, in candelabra sparkling in spacious emporia compared with which those of today are but stalls.

There is no needy resin-collector on the heights of his sand dunes, no poor miner in the depths of his black pit, who will not receive higher wages and enjoy increased prosperity.

It needs but a little reflection, gentlemen, to be convinced that there is perhaps not one Frenchman, from the wealthy stockholder of the Anzin Company to the humblest vendor of matches, whose condition would not be improved by the success of our petition.

We anticipate your objections, gentlemen; but there is not a single one of them that you have not picked up from the musty old books of the advocates of free trade. We defy you to utter a word against us that will not instantly rebound against yourselves and the principle behind all your policy.

Will you tell us that, though we may gain by this protection, France will not gain at all, because the consumer will bear the expense?

We have our answer ready:

You no longer have the right to invoke the interests of the consumer. You have sacrificed him whenever you have found his interests opposed to those of the producer. You have done so in order to encourage industry and to increase employment. For the same reason you ought to do so this time too.

Indeed, you yourselves have anticipated this objection. When told that the consumer has a stake in the free entry of iron, coal, sesame, wheat, and textiles, “Yes,” you reply, “but the producer has a stake in their exclusion.” Very well, surely if consumers have a stake in the admission of natural light, producers have a stake in its interdiction.

“But,” you may still say, “the producer and the consumer are one and the same person. If the manufacturer profits by protection, he will make the farmer prosperous. Contrariwise, if agriculture is prosperous, it will open markets for manufactured goods.”

Very well, If you grant us a monopoly over the production of lighting during the day, first of all we shall buy large amounts of tallow, charcoal, oil, resin, wax, alcohol, silver, iron, bronze, and crystal, to supply our industry; and, moreover, we and our numerous suppliers, having become rich, will consume a great deal and spread prosperity into all areas of domestic industry.

Will you say that the light of the sun is a gratuitous gift of Nature, and that to reject such gifts would be to reject wealth itself under the pretext of encouraging the means of acquiring it?

But if you take this position, you strike a mortal blow at your own policy; remember that up to now you have always excluded foreign goods because and in proportion as they approximate gratuitous gifts. You have only half as good a reason for complying with the demands of other monopolists as you have for granting our petition, which is in complete accord with your established policy; and to reject our demands precisely because they are better founded than anyone else’s would be tantamount to accepting the equation: + x + = -; in other words, it would be to heap absurdity upon absurdity.

Labour and Nature collaborate in varying proportions, depending upon the country and the climate, in the production of a commodity. The part that Nature contributes is always free of charge; it is the part contributed by human labour that constitutes value and is paid for.

If an orange from Lisbon sells for half the price of an orange from Paris, it is because the natural heat of the sun, which is, of course, free of charge, does for the former what the latter owes to artificial heating, which necessarily has to be paid for in the market.

Thus, when an orange reaches us from Portugal, one can say that it is given to us half free of charge, or, in other words, at half price as compared with those from Paris.

Now, it is precisely on the basis of its being semigratuitous (pardon the word) that you maintain it should be barred. You ask: “How can French labour withstand the competition of foreign labour when the former has to do all the work, whereas the latter has to do only half, the sun taking care of the rest?”

But if the fact that a product is half free of charge leads you to exclude it from competition, how can its being totally free of charge induce you to admit it into competition? Either you are not consistent, or you should, after excluding what is half free of charge as harmful to our domestic industry, exclude what is totally gratuitous with all the more reason and with twice the zeal.

To take another example: When a product — coal, iron, wheat, or textiles — comes to us from abroad, and when we can acquire it for less labour than if we produced it ourselves, the difference is a gratuitous gift that is conferred up on us. The size of this gift is proportionate to the extent of this difference. It is a quarter, a half, or three-quarters of the value of the product if the foreigner asks of us only three-quarters, one-half, or one-quarter as high a price. It is as complete as it can be when the donor, like the sun in providing us with light, asks nothing from us. The question, and we pose it formally, is whether what you desire for France is the benefit of consumption free of charge or the alleged advantages of onerous production.

Make your choice, but be logical; for as long as you ban, as you do, foreign coal, iron, wheat, and textiles, in proportion as their price approaches zero, how inconsistent it would be to admit the light of the sun, whose price is zero all day long!

Frédéric Bastiat (1801-1850), Sophismes économiques, 1845

Henry Hazlitt explains Frederic Bastiat, or, a broken window really hurts no matter what the New York Times says

This simple lesson from Henry Hazlitt’s Economics in One Lesson explains so much, yet so little people realize and apply the truths explained here. Even trained economists like Paul Krugman, writing in The New York Times, fail to recognize the truth of Bastiat’s lesson as explained by Hazlitt when he remarked that “the terror attack [of 9/11/2001 that destroyed the World Trade Center] could even do some economic good.”

Part TWO
THE LESSON APPLIED
THE BROKEN WINDOW

Let us begin with the simplest illustration possible: let us, emulating Bastiat, choose a broken pane of glass.

A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business?

Then, of course, the thing is endless. The glazier will have $50 more to spend with other merchants, and these in turn will have $50 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever- widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $50 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $50 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.

The Shine Is Off Corn Ethanol

Our economy is so intertwined and interdependent that it is impossible for the government to guide it in any direction without setting off a long chain of consequences. This is another example of the folly of centralized economic planning.

As I’ve written in the past, to determine the true value of ethanol, remove all subsidies for producing it and the corn used to make it, and end the tariff on imported ethanol. Very rapidly the market will tell us just how much a gallon of ethanol is worth.

Dan Mitchell summarizes The Wall Street Journal:

The shine is off corn ethanol, and oh, what a comedown it has been. It was only in January that President Bush was calling for a yet a bijillion more gallons of the wonder-stuff in his State of the Union address, and Iowa’s Chuck Grassley was practically doing the Macarena in his seat. And why shouldn’t Mr. Grassley and fellow ethanol handmaidens have boogied? They’d forced their first mandate through Congress, corn farmers were rolling in dough, billions in taxpayer dollars were spurring dozens of new ethanol plants–and here was the commander-in-chief calling for yet more yellow dollars. All in the name of national security, too! Corn ethanol seemed unstoppable, but a remarkable thing happened on the road from Des Moines. Just as the smart people warned, the government’s decision to play energy market God and forcibly divert huge amounts of corn stocks into ethanol has played havoc with key sectors of the economy. Corn prices have nearly doubled, which means livestock owners can’t afford to feed their animals, and food and drink manufacturers are struggling to buy corn and corn syrup. Environmentalists are sour over new stresses on farmland; international aid groups are moaning that the U.S. is cutting back its charitable food giving, and many of these folks are taking out their anger on Congress. …The hugely influential National Cattlemen’s Beef Association has gone so far as to outline a series of public demands, including an end to any government tax credits (subsidies) for ethanol and an axe to the import tariff on foreign ethanol. Put another way, the cattlemen are so angry that they are demanding free markets and free trade–a first. …The National Turkey Federation estimates its feed costs have gone up nearly $600 million annually and is surely letting loose on members from turkey states such as Minnesota and Missouri. The National Chicken Council, which represents companies that produce, process and market chickens, has been hitting the southern political caucus, putting pressure on senators from big poultry states such as Georgia, Arkansas and Alabama. Chicken giant Tyson’s, the second largest employer in Arkansas (after Wal-Mart), even felt the need to warn about the effect of rising corn prices on its business in its first quarter earnings statement. Food and drink manufacturers, which rely heavily on corn and corn syrup for their products, are also making the Washington rounds. The Grocery Manufacturers Association this week called for Congress to undertake a study before it imposed a bigger ethanol mandate. Soft-drink companies such as Coca-Cola (of Mr. Chambliss’s Georgia) are also up in arms.
http://www.opinionjournal.com/columnists/kstrasselpw/?id=110010094

And summarizing John Stossel:

When everyone in politics jumps on a bandwagon like ethanol, I start to wonder if there’s something wrong with it. And there is. Except for that fact that ethanol comes from corn, nothing you’re told about it is true. …If ethanol’s so good, why does it need government subsidies? Shouldn’t producers be eager to make it, knowing that thrilled consumers will reward them with profits? But consumers won’t reward them, because without subsidies, ethanol would cost much more than gasoline. The claim that using ethanol will save energy is another myth. Studies show that the amount of energy ethanol produces and the amount needed to make it are roughly the same. …even turning all of America’s corn into ethanol would meet only 12 percent of our gasoline demand. …the standard mixture of 90 percent ethanol and 10 percent gasoline pollutes worse than gasoline. …Surely, ethanol must be good for something. And here we finally have a fact. It is good for something — or at least someone: corn farmers and processors of ethanol, such as Archer Daniels Midland, the big food processor known for its savvy at getting subsidies out of the taxpayers. And it’s good for vote-hungry presidential hopefuls. Iowa is a key state in the presidential-nomination sweepstakes.
http://www.townhall.com/columnists/JohnStossel/2007/05/23/the_many_myths_of_ethanol

Economic fallacy supports arts in Wichita

Recently two editorials appeared in The Wichita Eagle promoting government spending on the arts because it does wonderful things for the local economy. The writers are Rhonda Holman and Joan Cole, who is chairwoman of the Arts Council.

I read the study that these local writers relied on. The single greatest defect in this study is that it selectively ignores the secondary effects of government spending on the arts.

As an example, the writers in the Eagle promote the study’s conclusion that the return on dollars spent on the arts is “a spectacular 7-to-1 that would even thrill Wall Street veterans.” It hardly merits mention that there aren’t legitimate investments that generate this type of return in any short timeframe.

So were do these fabulous returns come from? Here’s a passage from the study that the Eagle writers relied on:

A theater company purchases a gallon of paint from the local hardware store for $20, generating the direct economic impact of the expenditure. The hardware store then uses a portion of the aforementioned $20 to pay the sales clerk’s salary; the sales clerk respends some of the money for groceries; the grocery store uses some of the money to pay its cashier; the cashier then spends some for the utility bill; and so on. The subsequent rounds of spending are the indirect economic impacts.

Thus, the initial expenditure by the theater company was followed by four additional rounds of spending (by the hardware store, sales clerk, grocery store, and the cashier). The effect of the theater company’s initial expenditure is the direct economic impact. The subsequent rounds of spending are all of the indirect impacts. The total impact is the sum of the direct and indirect impacts.

Relying on this reasoning illustrates the problem with the Eagle editorials: they ignore the secondary effects of economic action, except when it suits their case. The fabulous returns erroneously attributed to spending on the arts derive from this chain of spending starting at the hardware store. But what the authors of this study and the Eagle editorial writers must fail to see is that anyone who buys a gallon of paint for any reason sets off the same chain of economic activity. There is no difference — except that a homeowner buying the paint is doing so voluntarily, while an arts organization using taxpayer-supplied money to buy the paint is using someone else’s money.

The study also pumps up the return on government investment in the arts by noting all the other spending that arts patrons do on things like dinner before and desert after arts events. But if people kept their own money instead of being taxed to support the arts, they would spend this money on other things, and those things might include restaurant meals, too.

The fact that these editorials have been printed might lead me to suspect that government-supported arts organizations and Eagle editorial writers might feel a little guilty about using taxpayer funds. They should. To take money from one group of people by government coercion and give it to other people, especially when that purpose is to stage arts events, is wrong. It’s even more so when the justification for doing this is so transparently incorrect.

Arts organizations need to survive on their own merits. They need to produce a product or service that satisfies their customers and patrons just as any other business must.

It may turn out that what people really want for arts and culture, as expressed by their own selections made freely, might be different from what government bureaucrats and commissions decide we should have. That freedom to choose, it seems to me, is something that our Wichita City Council, Arts Council, and Wichita Eagle editorial writers believe the public isn’t informed or responsible enough to enjoy.

I, Pencil: A Most Important Story

I, Pencil is one of the most important and influential writings that explain the necessity for limited government. A simple object that we may not give much throught to, the story of the pencil illustrates the importance of markets, and the impossibility of centralized economic planning.

From the afterword to I, Pencil by Milton Friedman:

Leonard E. Read’s delightful story, “I, Pencil,” has become a classic, and deservedly so. I know of no other piece of literature that so succinctly, persuasively, and effectively illustrates the meaning of both Adam Smith’s invisible hand — the possibility of cooperation without coercion — and Friedrich Hayek’s emphasis on the importance of dispersed knowledge and the role of the price system in communicating information that “will make the individuals do the desirable things without anyone having to tell them what to do.”

Link to a pdf of I, Pencil: http://www.fee.org/pdf/books/I,%20Pencil%202006.pdf

Link to Leonard E. Read reading I, Pencil: http://www.fee.org/events/detail.asp?id=6239

Hillary Clinton and Milton Friedman: The Contrast

The contrast between the statist Hillary Clinton and the libertarian Milton Friedman. Gathered by Thomas D. Kuiper.

The Free Market

“The unfettered free market has been the most radically destructive force in American life in the last generation.”
— First Lady Hillary Clinton on C-Span in 1996 stating her troubles with the free market

“What most people really object to when they object to a free market is that it is so hard for them to shape it to their own will. The market gives people what the people want instead of what other people think they ought to want. At the bottom of many criticisms of the market economy is really lack of belief in freedom itself.”
— Milton Friedman, Wall Street Journal, May 18, 1961

Social Security

“We can’t afford to have that money go to the private sector. The money has to go to the federal government because the federal government will spend that money better than the private sector will spend it.”
— First Lady Hillary Clinton in a disagreement with a Republican congressman

“I have long been a critic of Social Security, basically because I believe that it is not the business of government to tell people what fraction of their incomes they should devote to providing for their own or someone else’s old age.”
— Milton Friedman, WSJ, March 15, 1988

Health Care

“I had a few ideas about health care, and I’ve learned a few lessons since then, but I haven’t given up the goal, and that’s why we kept working step-by-step to insure millions of children through the Children’s Health Insurance Program.”
— First Lady Hillary Clinton at the 2000 Democratic Convention, still wanting socialized medicine in the United States

“It is taken for granted that workers should receive their pay partly in kind, in the form of medical care provided by the employer. How come? Why single out medical care? Surely food is no less essential to life than medical care. Why is it not at least as logical for workers to be required to buy their food at the company store as to be required to buy their medical care at the company store?”
— Milton Friedman writes against Hillary’s health care plan; WSJ, Feb.13, 1993

Government Spending & Taxes

“Other developed countries…are more committed to social stability than we have been, and they tailor their economic policies to maintain it.”
— First Lady Hillary Clinton writes her affinity for Europe’s cradle-to-grave welfare policies

“Cutting government spending and government intrusion in the economy will almost surely involve immediate gain for the many, short-term pain for the few, and long-term gain for all.”
— Milton Friedman, WSJ, June 15, 1995

Free Trade vs. Fair Trade

“Too many people have made too much money.”
— First Lady Hillary Clinton condemns the insurance industry, feeling it’s not fair that certain businesses are making ‘too much money’

“‘Fair’ is in the eye of the beholder; free is the verdict of the market. (The word ‘free’ is used three times in the Declaration of Independence and once in the First Amendment to the Constitution, along with ‘freedom.’ The word ‘fair’ is not used in either of our founding documents.)”
— Milton Friedman, WSJ, Mar. 7, 1996

Williams’ law: the vital role of profits

This is an excerpt of a speech given by Walter E. Williams on February 6, 2005 at Hillsdale College. The complete speech, titled “The Entrepreneur As American Hero,” can be read here: http://www.hillsdale.edu/imprimis/2005/03/.

At this juncture let me say a few words about the modern push for corporate social responsibility. Do corporations have a social responsibility? Yes, and Nobel Laureate Professor Milton Friedman put it best in 1970 when he said that in a free society “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

It is only people, not businesses, who have responsibilities. A CEO is an employee, an employee of shareholders and customers. The failure of the corporate executive community to recognize this, and its willingness to engage in activities unrelated to the pursuit of profits, means national wealth will be lower, product prices will be higher and the return on investment lower.

If we care about people’s wants, rather than beating up on profit-making enterprises, we should pay more attention to government-owned non-profit organizations. A good example are government schools. Many squander resources and produce a shoddy product while administrators, teachers and staff earn higher pay and perks, and customers (taxpayers) are increasingly burdened. Unlike other producers, educationists don’t face the rigors of the profit discipline, and hence they’re not as accountable. Ditto the U.S. Postal Service. It often provides shoddy and surly services, but its managers and workers receive increasingly higher wages while customers pay higher and higher prices. Again, wishes of customers can be safely ignored because there’s no bottom line discipline of profits.

Here’s Williams’ law: Whenever the profit incentive is missing, the probability that people’s wants can be safely ignored is the greatest. If a poll were taken asking people which services they are most satisfied with and which they are most dissatisfied with, for-profit organizations (supermarkets, computer companies and video stores) would dominate the first list while non-profit organizations (schools, offices of motor vehicle registration) would dominate the latter. In a free economy, the pursuit of profits and serving people are one and the same. No one argues that the free enterprise system is perfect, but it’s the closest we’ll come here on Earth.

Gambling study flawed. Ask casino workers.

Did you know that a study used to promote the economic development benefits of gambling in Wichita has casino workers paying for a large part of the social costs of gambling?

There is a document titled “Economic & Social Impact Anlaysis [sic] For A Proposed Casino & Hotel” created by GVA Marquette Advisors for the Wichita Downtown Development Corporation and the Greater Wichita Convention and Visitors Bureau, dated April 2004. One presentation concludes that the average cost per pathological gambler is $13,586 per year. Quoting from the study in the section titled Social Impact VII-9:

Most studies conclude that nationally between 1.0 and 1.5 percent of adults are susceptible to becoming a pathological gambler. Applying this statistic to the 521,000 adults projected to live within 50 miles of Wichita in 2008, the community could eventually have between 5,200 and 7,800 pathological gamblers. At a cost of $13,586 in social costs for each, the annual burden on the community could range between $71 and $106 million.

If all we had to do was to pay that amount each year in money that would be one thing. But the components of the cost of pathological gamblers include, according to the same study, increased crime and family costs. That is, people are hurt, physically and emotionally, by pathological gamblers. Often the people harmed are those such as children who have no option to leave the gambler.

But this study makes the argument that the economic benefits of gambling will more than pay for this social misery: “While this community social burden could be significant, its quantified estimate is still surpassed by the positive economic impacts measured in this study.”

How does the report make this conclusion? The largest components of the positive economic impacts are employee wages ($37 million), additional earnings in the county, and state casino revenue share, along with some minor elements. Together these total $142 million, which is, as the authors point out, larger than the projected costs shown above.

But this analysis is flawed. Casino employee wages can’t be used to offset the social costs of pathological gamblers, as these employees probably want to spend their wages on other things!

Economic impact studies like this often assume that any economic activity the proposed development might create is due solely to its existence, and that these monies can be used to pay for whatever problems or costs the development causes.

Just ask the prospective casino employees where they want their wages to go: into their own pockets, or be used, as this study uses them, to pay for the social costs of gambling.

Economic fallacy alive in Kansas at Docking Institute

As reported in the Wichita Business Journal at wichita.bizjournals.com/wichita/stories/2007/03/19/daily26.html, the Docking Institute of Public Affairs at Fort Hays State University has produced a report that seems to say that the $727 million deferred-maintenance backlog at Kansas universities is, well, really a good thing.

(The report is available to read at www.kansasregents.org/maintenance.html)

Why? Quoting from the press release that accompanies the report: “This report displays the substantial and positive economic impact that a comprehensive state university building maintenance funding solution would have on the state’s economy,” said Reginald L. Robinson, President and CEO of the Kansas Board of Regents. “University maintenance funding would produce a dramatic ripple effect through the state’s economy creating thousands of new jobs, millions of dollars in increased earnings, and billions of dollars in increased state economic output. As state policymakers continue to focus on ways to improve the state’s economy, they need not look any farther than our crumbling state universities.”

After reading this, it is tempting to wish that our universities were in even worse condition. By fixing them, we could really ramp up our state’s economy!

But I am saddened to conclude that the authors of this report see only the immediate effects of the spending they promote. They fail to see the secondary effects. As Henry Hazlitt wrote in his classic work Economics in One Lesson:

This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences. (emphasis added)

It’s easy to fall victim to this type of thinking. The economist Walter E. Williams summarizes the broken window fallacy that Frederic Bastiat recognized long ago:

Bastiat wrote a parable about this that has become known as the “Broken Window Fallacy.” A shopkeeper’s window is broken by a vandal. A crowd forms, sympathizing with the man, but pretty soon, the people start to suggest the boy wasn’t guilty of vandalism; instead, he was a public benefactor, creating economic benefits for everyone in town. After all, fixing the broken window creates employment for the glazier, who will then buy bread and benefit the baker, who will then buy shoes and benefit the cobbler, and so forth.

Those are the seen effects of the broken window. What’s unseen is what the shopkeeper would have done with the money had the vandal not broken his window. He might have employed the tailor by purchasing a suit. The broken window produced at least two unseen effects. First, it shifted unemployment from the glazier, who now has a job, to the tailor, who doesn’t. Second, it reduced the shopkeeper’s wealth. Explicitly, had it not been for the vandalism, the shopkeeper would have had a window and a suit; now, he has just a window.

As Professor Williams also brought to our attention, even educated people such as Princeton economist Paul Krugman failed to take into account all factors — the broken window fallacy that Bastiat recognized — when he wrote in The New York Times that the destruction of the World Trade Center “could do some economic good.”

In general, public works — like fixing the universities — are promoted as job-generators. It is as though the jobs generated come at no cost. But that’s just not true. Here’s Hazlitt discussing the building of a bridge:

… The first argument is that it will provide employment. It will provide, say, 500 jobs for a year. The implication is that these are jobs that would not otherwise have come into existence.

This is what is immediately seen. But if we have trained ourselves to look beyond immediate to secondary consequences, and beyond those who are directly benefited by a government project to others who are indirectly affected, a different picture presents itself. It is true that a particular group of bridge workers may receive more employment than otherwise. But the bridge has to be paid for out of taxes. For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. If the bridge costs $1,000,000 the taxpayers will lose $1,000,000. They will have that much taken away from them which they would otherwise have spent on the things they needed most.

Therefore for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $1,000,000 taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, radio technicians, clothing workers, farmers.

There really is no free lunch. What Kansans spend on university repairs can’t be spent on something else.

Should Kansas spend the money that the Regents are asking for to repair the universities? Because it fails to recognize the secondary effects of the proposed spending, the analysis put forth by the Docking Institute doesn’t answer that question.

The Williams rules

Here’s why we should listen to the economist Walter E. Williams. From a column of January, 2007.

The kind of rules we should have are the kind that we’d make if our worst enemy were in charge. My mother created a mini-version of such a rule. Sometimes she would ask either me or my sister to evenly divide the last piece of cake or pie to share between us. More times than not, an argument ensued about the fairness of the division. Those arguments ended with Mom’s rule: Whoever cuts the cake lets the other take the first piece. As if by magic or divine intervention, fairness emerged and arguments ended. No matter who did the cutting, there was an even division.

We have a set of rules that are known, neutral and intended to be durable. Those rules were created by our founders and embodied in the U.S. Constitution. Those rules have been weakened by a Congress of both parties that picks winners and losers in the game of life. The U.S. Supreme Court, which was intended to be a neutral referee, has forsaken that role and become a participant. All of this means we can expect a future of bitterly fought elections and enhanced conflict.”

How To Judge the Worth of Ethanol

From The Wall Street Journal, January 27, 2007: “Ethanol gets a 51-cent a gallon domestic subsidy, and there’s another 54-cent a gallon tariff applied at the border against imported ethanol. Without those subsidies, hardly anyone would make the stuff, much less buy it — despite recent high oil prices.”

Remove this subsidy and the tariff. Remove the subsidy paid to farmers who grow the corn that is used to make ethanol. Then, the free market will rapidly tell us the true value of ethanol.

Denouncing “Greed”

Today there are adults — including educated adults — who explain multimillion-dollar corporate executives’ salaries as being due to “greed.” Think about it: I could become so greedy that I wanted a fortune twice the size of Bill Gates’ — but this greed would not increase my income by one cent. …One of the reasons why central planning sounds so good, but has failed so badly that even socialist and communist governments finally abandoned the idea by the end of the 20th century, is that nobody knows enough to second guess everybody else. Every time oil prices shoot up, there are cries of “greed” and demands by politicians for an investigation of collusion by Big Oil. There have been more than a dozen investigations of oil companies over the years, and none of them has turned up the collusion that is supposed to be responsible for high gas prices. Now that oil prices have dropped big time, does that mean that oil companies have lost their “greed”? Or could it all be supply and demand — a cause and effect explanation that seems to be harder for some people to understand than emotions like “greed”?

— Thomas Sowell

Preserve farmland at what cost?

A writer in the January 2, 2007 Wichita Eagle laments the loss of farmland to development, particularly residential homebuilding. The writer states that if farmland were preserved, Kansas could become more prosperous.

There are two areas in which I believe this writer is mistaken. First, if the transaction between developer and farmer was voluntary, each is better off than they were before. The developer (and by extension the people he hopes to sell houses to) valued the land more than the farmer did. Otherwise, why would the transaction take place? These voluntary transactions that make both parties better off than before are the basis for the creation of wealth and prosperity.

Second, farmers in Kansas produce so much output that they continually complain of the low prices they receive. Farmers tell us and Congress that if they don’t receive huge subsidies, they will go out of business. In 2005, farmers in Kansas received $1,056,866,760 in subsidy payments. This involuntary transaction reduces the wealth and prosperity of Kansas and the United States.

Minimum wage price controls hurt Kansas

This article presents compelling evidence that raising the minimum wage is not in the best interests of low-wage workers.

An issue that the very existence of a minimum wage reveals, one that no one seems to talk about is this: Why are so many workers capable only of doing work valued so low? We should be asking why we spend so much on public schools and education, only to have groups of workers with so little skill that their work output is valued so little.

Minimum Wage Price Controls Hurts Kansas
By Karl Peterjohn

The minimum wage is going to rise. That is the consensus from both political parties out of Washington. Raising the minimum wage is at the top of the rather thin 2007 public policy agenda for the new Democratic majority in Congress. The new GOP senate minority leader Mitch McConnell has indicated that senate Republicans will not stop this price control expansion from being enacted.

The federal minimum wage is $5.15 per hour and has been for the last nine years. The new increase is likely to be $7.25 an hour and this could be very bad news in Kansas. Federal labor data indicates that Kansas is one of four states with the highest percentage of the workforce getting paid between $5.15 and $7.25 per hour. Over 10 percent of working Kansans are getting paid $7.25 or less. The other three states over 10 percent are South Carolina, Mississippi, and Louisiana.

Raising the minimum wage to $7.25 won’t have much of an impact in the coastal areas of the U.S. where hour wages already easily exceed these levels. In low income Kansas, the impact is likely to be substantial and highly negative. One senior Kansas legislator discussed this new price control expansion with this pithy comment: “Look for a lot of small town restaurants to close.”

The recent death of Nobel Laureate and free market economist Milton Friedman ties into this return to government expansion of price controls, in this case over labor. “Economists may not know much. But we know one thing very well: how to produce surpluses and shortages. Do you want a surplus? Have the government legislate a minimum price that is above the price that would otherwise prevail,” Friedman said. Numerous examples of the negative results of price controls are cited in his classic “Free To Choose.”

Friedman warned against the negative impact of price controls hurting job hunters. People looking for work will be banned from working at less than the new legally mandated minimum. A surplus of labor in the form of increased unemployment will appear next year.

Since these minimum wage workers are at the lower end of the job scales, they will be disproportionately the under-educated, low-skilled, and least employable workers losing their jobs. This will create a demand for more government spending to aid the newly unemployed.

If raising wages was as simple as having the government wave a wand and pass a law, why stop at $7.25 per hour? How about $1,000 an hour? If government price controls on labor are a good thing, why not? There would be lots of folks willing to work at that wage. However, there would not be many willing employers. Government created labor surpluses in the form or massive unemployment would soar. The economy would collapse.

Everyone knows that setting this type of extreme price control is bad. Why are folks so willing to make this mistake to a smaller degree? Unions benefit since the minimum helps to serve as a floor underneath their contractual efforts. This union tie explains the Democratic Party’s adamant support for expanding this price control. This still harms low income people by destroying their jobs and, with it, opportunity for something better.

Government price controls also weaken the economy by sending incorrect signals, mis-allocating both capital and labor. This hurts the economy by misallocating resources. Price controls remove necessary incentives for efficiency. Economic misallocation occurs when signals from market pricing are replaced with government edicts.

The most pernicious impact of this price control is removing the first step for people entering the labor market. While most folks make a lot more than the minimum wage, these entry level jobs are important to first time workers, low skill level workers, and poorly educated workers. Price controls that destroy the jobs these folks perform are pernicious to society and destructive to individuals striving to get their first step into the job market. A large number of Kansas jobs will be destroyed by a $7.25 minimum wage. Look for more unemployment ahead in 2007.

Why won’t Republican senators filibuster against government mandated job destruction? The only accomplishment for the Democrats during the last two years in the U.S. Senate has been their filibusters. The Democrats won their majority with their filibusters.

Unintended but foreseeable harms of the minimum wage

Understanding the minimum wage, and why an increase will be harmful to those it is meant to help, requires thinking beyond stage one.

Commentary by David R. Henderson in the August 1, 2006 Wall Street Journal shows how the unintended effects may harm those who are still working after an increase in the minimum wage:

… because the minimum wage does not make employees automatically more productive, employers who must pay higher wages will look for other ways to compensate: by cutting non-wage benefits, by working the labor force harder, or by cutting training. Interestingly, the Economic Policy Institute (EPI), a union-funded organization in Washington that pushes for higher minimum wages, implicitly admits the last two of these three. On its Web site, EPI states, “employers may be able to absorb some of the costs of a wage increase through higher productivity, lower recruiting and training costs, decreased absenteeism, and increased worker morale.” How would an employer get higher productivity and decreased absenteeism? By working the employers harder and firing those who miss work. Lower training costs? By training less.

Other things employers might to do compensate for higher labor costs include these:

  • Reduce non-wage benefits such as health insurance.
  • Eliminate overtime hours that many employees rely on.
  • Substitute machines for labor. We might see more self-service checkout lanes at supermarkets, for example.
  • Use illegal labor. Examples include paying employees under the table, or requiring work off-the-clock.
  • Some employers may be more willing to bear the risks of using undocumented workers who can’t complain that they aren’t being paid the minimum wage.
  • Some employers may decide that the risks and hassles of being in business aren’t worth it anymore, and will close shop.

Increasing the wellbeing of low-wage workers requires more work than passing a mere law.

Problem of low wages not easily solved

It seems like an easy fix for social injustice: pass a law requiring employers to pay workers more than they would otherwise. Magically, everyone has more wealth.

It would be nice if it were so easy and simple. Looking at only the immediate effects and listening to the rhetoric of some politicians and editorial writers, it would seem that a higher minimum wage is good. But considering all effects of a higher minimum wage reveals a different situation.

As Milton Friedman writes in Capitalism and Freedom:

Minimum wage laws are about as clear a case as one can find of a measure the effects of which are precisely the opposite of those intended by the men of good will who support it. Many proponents of minimum wage laws quite properly deplore extremely low rates; they regard them as a sign of poverty; and they hope, by outlawing wage rates below some specified level, to reduce poverty. In fact, insofar as minimum wage laws have any effect at all, their effect is clearly to increase poverty. The state can legislate a minimum wage rate. It can hardly require employers to hire at that minimum all who were formerly employed at wages below the minimum. … The effect of the minimum wage is therefore to make unemployment higher than it otherwise would be.

There are those who say that increasing the minimum wage won’t have any impact on the demand for labor, and therefore people won’t lose jobs. But that is false. If it weren’t false, why not raise the minimum wage to, say, $25? Most people would say that at that level, employers wouldn’t hire low-skill workers because they aren’t “worth” that much. But some workers aren’t “worth” even the present minimum wage, or they could find jobs at this wage.

(When we say workers aren’t “worth” a certain wage, we are really saying that the marketplace — that’s you and me — places a certain value on the output the worker is able to produce. It has nothing to do with their worth as a person. It has everything to do with their ability to produce goods and services that people are willing to pay for.)

Furthermore, if we are willing to agree that raising the price of employing certain workers won’t decrease the demand for their labor, we also have to be willing to ignore the law of supply and demand, which states that as the price if something increases, less will be demanded. I am confident that this law applies.

The problem is that an increase in the minimum wage does nothing to increase the productivity of workers, and increasing productivity is the only way that workers can make real progress.

How do we increase worker productivity? One way is through education. Sadly, as documented in many articles on this website, our public education system is failing children badly.

Capital — another way to increase wages — may be a dirty word to some. But as the economist Walter E. Williams says, ask yourself this question: who earns the higher wage: a man digging a ditch with a shovel, or a man digging a ditch using a power backhoe? The difference between the two is that the man with the backhoe is more productive. That productivity is provided by capital — the savings that someone accumulated (instead of spending on immediate consumption) and invested in a piece of equipment that helped workers to increase their output. Those who call for higher taxes — often the same people calling for a higher minimum wage — make it more difficult to accumulate capital.

These are the things we must do to increase productivity, and with it, real wealth. If the solution was really as simple as some claim, that in order to increase the wellbeing of low-wage workers we could merely pass a law, shouldn’t we be outraged that this law wasn’t passed a long time ago?

Then, if a law is passed to raise the minimum wage to x, shouldn’t we insist that it have been increased to x + $1, or x + $2, or x + …?

No, the solution to low wages is much more difficult than that.

Remarks to Wichita City Council Regarding the AirTran Subsidy on July 11, 2006

Mr. Mayor, Members of the City Council:

You may recall that I have spoken to this body in years past expressing my opposition to the AirTran subsidy. At that time we were told that the subsidy was intended to be a short-tem measure. Today, four years after the start of the subsidy, with state funding planned for the next five years, it looks as though it is a permanent fixture.

Supporters of the subsidy have made a variety of claims in its support: that the subsidy and the accompanying Fair Fares program are responsible for $4.8 billion in economic impact, that being a pioneer in subsidizing airlines is equivalent to the role that Kansas played in the years immediately prior to the Civil War, and that we would have a mass exodus of companies leaving Wichita if the subsidy were to end.

I believe there is no doubt that fares are lower than what they would be if not for the subsidy. That points to the subsidy’s true achievement: government-imposed price controls. Its effect is to force many airlines to price their Wichita fares lower than they would otherwise. If it didn’t do that, there would be no reason to continue the subsidy.

Economists tell us — and human behavior confirms — that when the price of any good is held lower than it would be in a free market, the result is a reduction in the quantity supplied.

We see this happening. Earlier this year the Wichita Eagle reported that there are fewer daily flights supplied to and from Wichita, from 56 last year to 42 at the time of the article. It has been explained that the financial woes of Delta and NWA are to blame for this reduction. This is demonstrably false, as NWA recently added a daily flight to Wichita, and both airlines have added (and dropped) flights on many routes while in bankruptcy. Furthermore, even though in bankruptcy, theses airlines still desire to operate as profitably as possible.

Now we learn that the legacy airlines — those established, older airlines that take pride in their comprehensive nationwide networks of routes — are revising their strategies. A Wall Street Journal article from earlier this year (“Major Airlines Fuel a Recovery By Grounding Unprofitable Flights” published on June 5, 2006) tells us that the legacy airlines are beginning to look at the profitability of each route and flight. They are not as interested as they have been in providing flights just for the sake of having a complete nationwide network.

When we couple this change in airline strategy with our local price controls, I believe that we in Wichita are in danger of losing more service from the legacy airlines. If AirTran — a new-generation airline with low labor costs — can’t earn a profit on its Wichita route at the fares it charges, how can the legacy airlines be expected to do so? And if they can’t earn a profit on a flight to or from Wichita, and if they are beginning to scrutinize the profitability of each flight, can we expect them to continue providing service in Wichita?

No government has ever been able to successfully impose price controls without the people suffering harmful consequences. As economist Thomas Sowell wrote in a 2005 column:

Prices are perhaps the most misunderstood thing in economics. Whenever prices are “too high” — whether these are prices of medicines or of gasoline or all sorts of other things — many people think the answer is for the government to force those prices down.

It so happens there is a history of price controls and their consequences in countries around the world, going back literally thousands of years. But most people who advocate price controls are as unaware of, and uninterested in, that history as I was in the law of gravity.

Prices are not just arbitrary numbers plucked out of the air or numbers dependent on whether sellers are “greedy” or not. In the competition of the marketplace, prices are signals that convey underlying realities about relative scarcities and relative costs of production.

Those underlying realities are not changed in the slightest by price controls. You might as well try to deal with someone’s fever by putting the thermometer in cold water to lower the reading.

This is my fear, that someday I will open the newspaper and learn that American, United, Delta, Northwest, or Continental has reduced or even ceased service to and from Wichita. That day, when it becomes difficult to travel to or from Wichita at any price, that is the day we will feel the harm the subsidy causes.

On a personal level, my job as software engineer requires me to make from ten to twenty airline trips each year. Some of the places I travel to — Jackson, Mississippi and Lexington, Kentucky, for example — are not served by AirTran. If I am not able to travel there, no matter what the price, I will either have to find a different job or move from Wichita.

Mr. Mayor and Council Members, I urge you to reconsider your support of the AirTran subsidy. Even though the legislature and governor have agreed to pay for most of the subsidy, I believe the subsidy is not in our long-term interest. We need to let the price system, operating in a free market, do its job in guiding the allocation of scarce resources for both producers and consumers. The result may be more expensive fares. The alternative, which is the very real possibility of greatly reduced service to and from Wichita, is much more harmful.

Other Voice For Liberty in Wichita articles on this topic:

The AirTran Subsidy and its Unseen Effects
As Expected, Price Controls Harm Wichita Travelers
AirTran Subsidy Is Harmful
Wichita City Council Meeting, April 19, 2005
Wichita Eagle Says “AirTran Subsidies Foster Competition”
AirTran Subsidy Remarks
The Downside of Being the Air Cap by Harry R. Clements. This article makes a striking conclusion as to why airfares in Wichita were so high.
Letter to County Commissioners Regarding AirTran Subsidy
Open Letter to Wichita City Council Regarding AirTran Subsidy
Stretching Figures Strains Credibility

The AirTran subsidy and its unseen effects

Writing from Natchez, Mississippi

In a June 16, 2006 column, Wichita Eagle editorial writer Rhonda Holman again congratulates local and state government for its success in renewing the AirTran subsidy, and for getting the entire state of Kansas to help for it.

We should take a moment to understand, however, that while the allure of the subsidy is undeniable, it may eventually extract a high price on Wichita. Currently, the legacy airlines provide service to Wichita and other small markets partly because they feel a duty to provide comprehensive, nationwide service. But that may be changing. In an article titled “Major Airlines Fuel a Recovery By Grounding Unprofitable Flights” from the June 5, 2006 Wall Street Journal, we learn that this may change:

The big carriers, which for decades have doggedly pursued market share at any cost, now are focusing just as aggressively on the profitability of each route and flight.

The so-called legacy carriers — those like American Airlines and Delta Air Lines, with big pension and other obligations that predate the industry’s deregulation in 1978 — have abandoned many of the tactics that have led to their cyclical weakness. They are increasingly unwilling to fly half-empty aircraft to stay competitive on a given route just for the sake of feeding their nationwide networks.

As I have written before, if AirTran — one of the newer airlines without the baggage of high costs that plague the legacy airlines — can’t earn a profit on its service to Wichita, it may be that other airlines are not, either. This article tells us that we may be in danger of losing the service of the legacy airlines. And, as I have written earlier, there are a great many destinations you can’t get to on AirTran.

(The same article also tells us that during much of the time of the subsidy, airfares were falling nationwide anyway: “… the Air Travel Price Index, a quarterly measure of changes in airfares, rose 9.1% in the fourth quarter of last year from a five-year low a year earlier.” So we might have had lower fares even without the subsidy. Of course, we can’t know that, just as subsidy advocates can’t know how much we’ve saved from the subsidy, no matter what they may say.)

Our local government leaders simply do not have the knowledge needed to successfully run a planned economy, which, in essence, is what they are doing when they apply price controls to the airfare market in Wichita. That’s right. The subsidy is a form of price controls. After all, if the subsidy didn’t serve to reduce the price of airfare, what would be its reason for existence?

No government has ever been able successfully impose price controls without the people suffering harmful consequences. As economist Thomas Sowell wrote in a 2005 column:

Prices are perhaps the most misunderstood thing in economics. Whenever prices are “too high” — whether these are prices of medicines or of gasoline or all sorts of other things — many people think the answer is for the government to force those prices down.

It so happens there is a history of price controls and their consequences in countries around the world, going back literally thousands of years. But most people who advocate price controls are as unaware of, and uninterested in, that history as I was in the law of gravity.

Prices are not just arbitrary numbers plucked out of the air or numbers dependent on whether sellers are “greedy” or not. In the competition of the marketplace, prices are signals that convey underlying realities about relative scarcities and relative costs of production.

Those underlying realities are not changed in the slightest by price controls. You might as well try to deal with someone’s fever by putting the thermometer in cold water to lower the reading.

Municipal transit used to be privately owned in many cities, until local politicians’ control of fares kept those fares too low to buy and maintain buses and trolleys, and replace them as they wore out. The costs of doing these things were not reduced in the slightest by refusing to let the fares cover those costs.

All that happened was that municipal transit services deteriorated and taxpayers ended up paying through the nose as city governments took over from transit companies that they had driven out of business — and government usually did a worse job.

The immediate effect of the subsidy is a drop in airfares. The long-term effects, the effects that we can’t really see right now (even though the number of daily flights to and from Wichita has decreased in the last year) are unknown, but are likely to be quite bad for our town. These unseen effects of a policy are important, and, being unseen, are hard to spot, even if you’re looking. Frederic Bastiat, in his pamphlet titled “That Which is Seen, and That Which is Not Seen” http://bastiat.org/en/twisatwins.html said this:

Between a good and a bad economist this cons
titutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, — at the risk of a small present evil.

Henry Hazlitt writes of the fallacy of unseen effects, but realizes they are often obfuscated by “the special pleading of selfish interests.”

Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousandfold by a factor that is insignificant in, say, physics, mathematics or medicine — the special pleading of selfish interests. While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for then plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.

In addition to these endless pleadings of self-interest, there is a second main factor that spawns new economic fallacies every day. This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.

We must hope that the legacy airlines choose to continue their service to and from Wichita, in spite of our government’s action.

As expected, price controls harm Wichita travelers

Writing from Tallahassee, Florida

As reported in the Wichita Business Journal on May 12, 2005: “The average number of daily departures dropped to 45 in March 2006 from 54 in March 2005.”

The effect of the AirTran subsidy is to reduce the price of airfare to and from Wichita. That is its stated goal. If the subsidy did not work to reduce prices, we would be wasting our money. The fact is that the subsidy does work to reduce airfares to and from Wichita. It also does what any economist could predict: it reduces the supply of air transport to and from Wichita. I think that’s why economics is called the “dismal science.” There really is no free lunch.

The same article also reports this:

Sam Williams, chairman of the Wichita Fair Fares campaign, believes that the airlines will see there is enough passenger growth to justify reinstating the lost destinations.

“The numbers always showed that we had the ability in our catchment area to, over time, make this airport very successful,” Williams says. “Nothing has dampened my enthusiasm that that’s still going to happen.”

I have a picture in my mind of a group of planners for, say, American or United or Northwest, planning whether to increase capacity to and from Wichita, or even if to stay in the Wichita market at all. If AirTran — a “new” airline with low labor costs — can’t earn a profit on its Wichita route at the fares it charges, how can the “legacy” airlines be expected to do so? And if they can’t earn a profit, how can we expect them to continue providing service in Wichita?

The answer is this: we can’t expect the legacy airlines to continue their present levels of service in Wichita as long as we continue to apply price controls.

For all the gushing over AirTran, try using it to get to some of the destinations I regularly fly to: Lexington, Jackson, Cincinnati, and Tallahassee. But I can get to these cities on most of the legacy airlines — the very airlines that we are punishing. If we lose the service of the legacy airlines, we will be in deep trouble.

If we want to allow Mr. Williams’s dream of a successful Wichita airport to come true, we need to let market forces set fares. Any other solution will cause — and has already caused — our city harm.