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Minimum Wage Kills Goodwill

Seattle has imposed a $15/hour minimum wage.

Of course, this will kill jobs. It is basic economics: you cannot pay someone $15 to produce $10 worth of value. However, this essay is not about that. Nor is it about the impact on prices.

This essay is about the impact on goodwill. I am developing a series about the concept of goodwill. America once had lots of it. It is now being dribbled down the drain, dripping away, one drop at a time. This new minimum wage hike helps.

How?

This picture of a card helps explain. This may be just one angry dude, or it could be a big movement. I see it as another notch taken out of goodwill.

min wage

As with the cops and perps I wrote about previously, both sides have a legitimate gripe. Emotions are running high. And no one sees the merit in the other side, only in their own.

It’s the perfect toxic cocktail for killing goodwill all around.

Think on it for a moment. What cultural backdrop is necessary for a whole industry to pay near zero in wages, and workers earn the majority of their compensation from tips given voluntarily by total strangers? It is remarkable how much trust and goodwill must be there. This is not typical in the third world, and it was not typical through most of history.

Will people continue to tip, and tip generously, if they feel workers are overpaid? What if they feel that these workers lobbied the government to mandate their overly rich compensation? And suppose the patron resents that his favorite restaurants have closed, and now in any survivors, he pays a lot more than he used to.

Of course, the workers feel that they are falling farther behind, as real wages are lagging everything else in the economy. They resent their bosses for being too greedy, and they resent politicians for not setting the wage high enough. They are angry and resentful at lots of things, except the root cause: the failing dollar.

What do you get when you cross worker resentment with restaurant patron resentment?

We could be one coercive wage hike away from killing tipping in America.

The Great FreedomFest Debate Was Like Watching Tom and Jerry

With apologies to his fans, Jerry is an evil little mouse who constantly pesters Tom the Cat. Tom tries and tries, but cannot seem to overpower someone who is a fraction of his size and strength.

Watching Stephen Moore attempt to debate Paul Krugman was like that.

The “economics” of Krugman is Keynesian economics. It consists of central planning your life by force, because market failure. And Krugman repeated this phrase “market failure” several times. Of course the solution was always government intervention.

Here is an interesting endorsement about one of Keynes’ books.

“Fascism entirely agrees with Mr. Maynard Keynes, despite the latter’s prominent position as a Liberal. In fact, Mr. Keynes’ excellent little book, The End of Laissez-Faire (l926) might, so far as it goes, serve as a useful introduction to fascist economics. There is scarcely anything to object to in it and there is much to applaud.”

This was said by someone who knows all about fascism, Benito Mussolini. Fascism is a corporatist system. Although it has private ownership in name, it’s all under government control. Krugman is a real economic lightweight who proposed fascism for nearly everything that came up. His debate tactics consisted of context-dropping, asserting simple fallacies, and cherry-picking data.

Tom-and-Jerry-Wallpaper-tom-and-jerry-2507494-1600-1200

In the TV cartoon, Jerry would steal something and run into his mouse hole. Tom would be left whacking at the hole with a broom, in vain. At FredomFest, Krugman would say that the government must spend more to get the economy out of recession. Moore disagreed, and Krugman displayed a chart showing government spending and GDP growth rates for many countries around the world. Government spending and growth correlated very well.

Instead of flailing away with a blunt instrument, I would have said “Seriously, Paul? What a simple fallacy. The definition of GDP includes government spending. You haven’t proven anything. It’s a tautology that if government spending goes up, GDP goes up. This is the flaw in GDP. Sometimes, rising GDP means the people are being impoverished.”

Next, Krugman moved on to one of the central fallacies of Keynesianism. In Krugman’s words, “You just gave the logic for government deficit spending. Your spending is my income. Where is the income supposed to come from, if everyone cuts spending? Government has to make up the difference.”

I would have said, “Seriously Paul. Again?! This is like the Broken Window fallacy [which Krugman said in 2011 “ceased to be a fallacy”]. Not all spending is consumer spending. Investment spending is important. When people slow consumption, it doesn’t mean they hoard dollar bills. They increase their bank deposits. Banks lend to promising companies. You know, that next new product or lifesaving technology? Except you don’t know it, because government spending has crowded them out.”

In an economic downturn, people go on fewer gambling and drinking binges to Las Vegas. Krugman is basically saying that the government has to take up the slack, and go on gambling binges. Because demand shortfall.

Shortly after telling Moore that one cannot cherry-pick one’s data, Krugman showed a graph comparing Jerry Brown’s California to Sam Brownback’s Kansas. For one year. I felt embarrassed for him, as there were sounds of amused laughter from the audience.

Why did it come to Kansas vs. California for the year 2014 (I didn’t write the year in my notes)? It’s because Moore was defending free markets by appeal to aggregate statistics. Moore used red states as examples of freer markets, and blue for less free markets. He showed a few charts in which red states fared better than blue.

Krugman’s cherry-picking got him safely back to his mouse hole, with Moore stuck outside, banging with a floor cleaning tool.

You cannot defend freedom using statistics, as you cannot get a mouse out of the wallboards with a broom.

Both Krugman and Moore were nervous speakers. Krugman was hunched a bit in on himself (though to be fair, he was in hostile territory and he knew it). Both spoke too rapidly and with a jittery character to their voices. Each has a nervous tell, with Moore incessantly taking little sips from his iced tea and Krugman playing with his fingers.

Krugman took the lead on each issue. Moore often respond with a long caveat, which conceded the point to Krugman. For example, Krugman said that some kids are born disadvantaged, so we need to give them each $8,000 to $10,000 (per year, I assume) in free money. He actually said they “choose the wrong parents.”

Someone please tell him that this is only possible by robbing the taxpayers. Maybe add that it will just accelerate America’s collapse into bankruptcy. Trillions in welfare spending do not fix anyone’s problems, and are actually the cause of the disadvantage Krugman discusses.

Moore said he supports a social safety net, because America is rich, we can afford it, and it’s morally right. When the broom failed to defeat the mouse, not even Tom tried singing to Jerry.

The topic moved to healthcare. Moore noted that government involvement has caused costs to spiral. Krugman offered another whopper. It’s because innovation.

This is absurd, and even Krugman knows it. In computers, there’s been decades of both rapid innovation and falling prices.

Krugman moved on to his shining moment, in the Ellsworth Toohey sense of shine. He unshrunk from his hunch, and his voice rang with moral clarity. “Obamacare is a life saver!”

The audience booed.

“I know someone whose life was saved by Obamacare. If you don’t know anyone like that, then I’m sorry for your narrow little world.”

This is a faux-apology and a presumption. Who the heck is this guy to apologize to me for my life not conforming to his ideology? Not to mention, Krugman glosses over the people harmed by it. There ain’t no such thing as a free lunch, even if handout beneficiaries think there is.

Worse yet Krugman implies that, to be moral, you must sacrifice yourself. He is cashing in on the guilt many people feel, at their own success. He’s learned that all he has to do is raise the specter that someone else is suffering, and they will concede him anything he demands.

This being FreedomFest, and not the People’s Workers’ Party, a large majority of the audience supported Moore. However, moderator Mark Skousen asked a very clever question, “If you did not enter this room in agreement with Paul Krugman, did you change your mind as a result of what he said today?” I estimate about 50 people clapped or cheered.

Krugman won because he appealed to people’s sense of right and wrong. Morality trumps economics any day of the week. Moore didn’t even respond to Krugman’s economic errors, much less smack down his phony judgmentalism.

Securities Regulation Harms Businesses

I attended a panel discussion yesterday on the problems startups have in raising capital caused by securities regulation. Startups have to hire a lawyer before they raise the first dollar of capital. It’s a real catch-22.

Entrepreneurs are often surprised to find that raising capital means selling securities. They cannot legally sell securities to just anyone. They are restricted to Accredited Investors (basically people with high income or high net worth). Most young entrepreneurs don’t have a rolodex full of such investors. There are other restrictions, for example, they can’t hire someone to help them raise capital unless he has a license to sell securities.

Welcome to compliance hell. It’s perfectly legal to fail, to lose your own money and even your house. It’s fine by the law if your dream dies, your marriage fails, and all of the other negative consequences occur when a business does not succeed. But if you raise money, you better be fully compliant. Where’s the concern for people?

The stated purpose of regulation is to protect investors from fraud and bad actors. However, fraud was illegal even before regulation. It is already a crime to lie to someone to take his money. Regulation does not change that. It does not make crime more illegal.

Regulation offers a tantalizing promise. We don’t have to wait for criminals to strike their victims. We can make it impossible for them to commit the crime in the first place. We just force them to comply with regulations. No matter how many Enrons and Bernie Madoffs happen, few stop to ask if the theory is even valid. Can regulators proactively prevent bad things from happening?

Nor do people ask if investors deserve to be treated as children. It used to be (before the Nanny State) that once you reached the age of 18, your majority, you were able to enter into any contract or do anything that any adult could legally do. Now 18 is just one milestone. Until you have a million dollars net worth, you aren’t an adult investor and cannot invest in startups. It’s for your own good, you understand. You might make a bad investment.

While we’re at it, we should also ask the age old question: qui bono–who benefits? Lawyers are one obvious group. More importantly, it protects big and wealthy incumbents. Wall Street can easily afford compliance, unlike its small would-be competitors. More insidiously, regulation implicitly supports Wall Street’s model and makes it more difficult or impossible to develop a new one. This is why no one has done the Uber or AirBnB of the stock market yet.

I found it odd that when several speakers on that panel began with apologies, “of course, we want to protect investors.” They began with total capitulation, saying in effect, “I can’t be trusted without a government minder.” Any reform based on this will be little more than deck chair rearrangement on the Titanic. There is a real solution, and it’s simple. The law should treat adults like adults. Let entrepreneurs raise capital without having to get permission at each step, so they can build new products to offer us, make money for themselves, and create jobs.

The Doctor-Laborer Inversion

The battle over minimum wage is raging. Emotions are running hot. Some cities are setting the bar very high. For example, Seattle is mandating a $15/hour wage.

Economically, the issue is very simple. Minimum wage laws do not raise anyone’s wage. This is because it’s not sustainable to overpay.

Suppose you run a small tailor shop. Customers are willing to pay $20 to repair a pair of slacks. Why are they willing to pay that, and no more? It’s not just their budget, but also the relative value of fixing their old trousers compared to buying new. A higher wage for your employees will have no effect on customer willingness to pay.

You have rent, utilities, insurance, wear and tear on your sewing machines, etc. that add up to $10. Therefore your maximum gross profit is $10. You cannot pay someone $11, much less $15, to do this work. If the law attempts to force you to overpay, then you have to lay off workers or even close your doors. Going out of business is no fun, but it beats losing more money.

This is black and white. Minimum wage law can destroy jobs and businesses but it cannot raise wages. However, many people become very emotional on this issue. So let’s look at the issue from a different angle.

There is an endless outpouring of sympathy and support for the unskilled laborer. How is this poor downtrodden helpless victim supposed to feed a family, cover medical expenses, and save for retirement earning only $7.25 per hour?

I don’t know.

My lack of an answer to this question is no justification for minimum wage laws. This is not even the right question. It is an example of the logical fallacy known as begging the question—when you presume what you should be asking. We should ask if one man’s need creates a duty in anyone else. Then the answer is a lot clearer.

The last time I checked, we had not adopted the Communist Manifesto as our new constitution. There is no law saying that each is to be given according to his need.

In comparison to the general sympathy for unskilled laborers, there is none for doctors. Just look at the endless commentary about Obamacare. What are the most popular complaints today? In my admittedly non-scientific sampling, the most common are higher costs, reduced choices, or a broken website. Some people worry about lower quality or less access to care.

There is virtually no discussion of what Obamacare will do to doctors. Doctors make far more than the minimum wage. One presumes that their needs are covered by their incomes, and therefore of no worry to us.

Need is the wrong way to look at it.

Instead of asking what someone’s need is, you should ask what are these people doing for you? What do they create? What value do they add? This brings the issue into sharp focus.

The unskilled laborer can be put to work turning a crank. He needs lots of supervision, which is an additional cost. The crank is paid for by someone else’s saved and accumulated capital, and this investor must be paid a return on capital for placing it at risk in a business. The laborer can be held accountable for showing up every morning and turning the crank all day, but not for business profitability.

This, by definition and by nature, is what unskilled labor is. He brings no capital, no skills, no knowledge, no expertise, no prior learning. He may be a young and inexperienced worker. Or he may have years of prior experience, but he is the sort of person who learns nothing from experience. Either way, the employer is taking on real risks and expenses.

Finally, the unskilled laborer is virtually indistinguishable. Many towns have a street corner, where construction contractors go to pick up a few laborers for a day’s work. There is a standardized market wage for these workers, and the employer doesn’t care who jumps in the back of the truck on any given workday.

How much does one of these workers impact your life? What would happen to you, if one of them stopped working?

For the next part of the discussion, please bear with me. I am assuming a free market in healthcare. In a free market, patients pay doctors for their services, the same way that homeowners pay plumbers, and diners pay restaurants.

Suppose you notice a lump in your neck. You’re worried it may be cancer. Catching it early is the key to surviving with maximum quality of life. You really want to see the best doctor that you can afford. You get a recommendation, and you call his office. They tell you he just retired. You get a second recommendation. You call this doctor’s office, but her receptionist says she was hit by a car this morning and is in critical condition. You open the phone book and call the last specialist. He is on sabbatical, teaching head and neck surgery in Thailand.

Now what do you do? Three doctors are unavailable, and you already feel a bit desperate.

You widen your search, and keep calling more. Suppose for some reason, all the doctors you call are unavailable. One by one, you hear why they can’t see you and you become increasingly frantic.

Why?

The doctor contributes the most value to your life, including saving it. By contrast, the laborer contributes the least. If 10 doctors stopped practicing medicine, you could die. In comparison, if 100 laborers stopped working, you wouldn’t even notice it.

What would you be willing to pay someone who saved your life?

If you would like a doctor to be available, in case your life needs saving, you must change how you think about wages. Start thinking about the value someone produces, and stop thinking about need. Your willingness, indeed your happiness—no your eagerness—to pay the doctor big money has nothing to do with his need. It has everything to do with what he does for you. Your life is worth more to you than the money you spend.

In comparison you aren’t willing to pay the same to someone who washes your dishes or trims your front lawn. If you would like restaurants and landscaping to be available, you must approach it the same way as with doctors. Start thinking about the value they provide and stop thinking about the needs of their unskilled workers.

Debates That Ought Not to Be

Every so often (ok, at least once a day) I encounter seemingly intelligent, rational, and educated people debating a black-and-white point of contention. The topic under debate is no mere opinion, but a matter of fact. Yet despite this—or perhaps because of this—the contention is irresolvable, and the debate bitter.

For example, ever discuss the probability of a flipped coin coming up heads? Many adults still cling to the belief that if you got tails four times in a row that means heads is now due.

fool

 

I know an engineer who works at a large corporation. Many engineers and managers there don’t understand how to design experiments. He told me about an hour-long facepalm moment. A manager was trying to order some engineers to do the absurd. Based on his misunderstanding of statistics, he wanted them to achieve a higher confidence interval. This does not mean to become more confident. It basically means to increase the size of the data set—i.e. waste more time and money collecting unnecessary data.

There is only one thing worse than when someone doesn’t know something. It is when what he knows just isn’t so (with due respect to Will Rogers and Ronald Reagan). It’s much easier to teach than to persuade someone to unlearn that which is false.

I see the same kind of error all the time in entrepreneurial circles. Clayton Christiansen defined the term disruptive innovation very precisely. Yet despite this, many entrepreneurs and business managers use the word disruptive merely to mean big, or perhaps competitive. Existing customers of incumbent businesses don’t particularly want the disruptive product. However, it has the potential to slowly eat the market from the low-margin soft underbelly up to the high-margin top end.

The transistor radio is a textbook example. In 1954 when Sony released the first transistor radio, were the existing makers of tube hi-fi equipment thinking to replace their good-sounding sets with tinny transistors? Within a few short decades, transistors took over the market.

Another error, closer to home, is when people think they can raise the wage by raising the minimum wage. Marginal productivity, like confidence interval or disruptive innovation, sounds like something it is not. Who would object to raising productivity?

But that is not what marginal productivity means. If you raise marginal productivity—for example by raising the legally mandated wage—you increase the bar. This is the hurdle all workers must get over, or else be rendered submarginal. Submarginal means unemployable.

When you find yourself in such a debate, be aware of what you’re up against.

The above examples are fictional, and purely for entertainment purposes. Any resemblance to actual errors made in monetary economics is purely coincidental.

Nobel Prize Awarded to Regulatory Apologist

Only last week, I published an article about the madness of Fed regulation. I presented several key assumptions behind all regulation, and exposed them to be false.

  1. Regulators Are Smart and They Care
  2. Compliance Makes Things Safe
  3. Unregulated Businesses Will Harm Us
  4. Regulation Turns Crooks Into Producers
  5. The Financial Crisis Occurred Due to Private Crimes
  6. The Fed Can Create Stability
  7. Central Planning Works

And now the Nobel committee has chosen to honor Jean Tirole with the prestigious prize. He earned this award and recognition for his work on the best way to regulate large, powerful firms in industries including banking.

He helped show, “what sort of regulations do we want to put in place so large and mighty firms will act in society’s interest,” Tore Ellingsen, the chairman of the prize committee, said after the award announcement.

How many of the fallacies I debunked are implicit in this? I count at least 5…

High Frequency Trading

If you’ve read about High Frequency Trading (HFT) then you may know that it’s all about bad things such free markets, ruthless trading, Wall Street, banksters, greed, and profits.

Or else, you may have read that it’s about good things like the American can-do spirit, ingenuity, technology, and improving markets to the betterment of all.

Both HFT’s detractors and its defenders are missing the point. It’s an exploit of a system that is grossly distorted by regulation. I don’t refer to the old-fashioned kind of regulation, such as requiring a doctor to show he is competent before doing open-heart surgery. I refer to the modern kind, in its full malignant glory of cronyism.

Richard Christopher Whalen makes the case in this article. Our markets are fragmented. They’re kept in this state, constantly on the verge of breaking, by 600 pages of regulation enacted in 2007, Regulation National Market System (Reg NMS).

Only a crony could love Reg NMS. To build a robust, realtime transaction server that is going to be used and abused by so many market participants is complicated. I know, my old company DiamondWare built one for real time voice communications.

Many times, we had engineering meetings that would last for hours, passionately arguing about a point so abstract and so specific that no one outside the room would have been able to grasp it, even if we tried to explain. Those complicated and technical little points were the difference between scalable and non-scalable, or secure vs. non-secure. They could be the difference between Facebook and Second Life. The former has become a large public company. The latter seemed to be on that path, but some software compromises caused them great pain later.

At DiamondWare, we would often get to a temporary impasse, with one or more engineers arguing on both sides of an issue. One time, I tried to lighten the mood and said hey, it could be worse.

“We’re unregulated. This room has just a handful of engineers in it. We all understand the problem. We know what’s at stake and we care passionately about it. We all understand the ramifications of the solution. Just imagine if we had adversarial parties in here: regulators, competitors, and hackers. Each of them brought their lawyers, business people, and engineers. Each has conflicting goals. You think you’re frustrated now? Just imagine how you’d feel if a hacker deliberately misstated your idea and proposed one of his own. His proposal creates a subtle but serious vulnerability.”

Of course, in that scenario your competitors are taking good notes. They’re all planning to exploit the hacker’s deliberate flaw. The regulator smiles at the hacker, and you are now forced to design the flaw into your architecture. Next year, you read the news that the regulator now has a multi-million dollar salary working for the hacker.

Is this fiction? It doesn’t happen in voice servers. But even back in my voice server days, I suspected it was happening in stock market servers. Whalen has researched it and gives us a glimpse of how incomprehensible regulations governing a complex area work. They are openly gamed by well-connected cronies.

More regulations cannot fix a problem caused by regulation in the first place.