Coyote Blog

Economics have a concept called the "broken window fallacy" that many of the media to this day do not understand.  Here is an example:  Every hurricane season, the media always writes a "silver lining" story about how recovery from a devastating hurricane spurred the local economy.  One might assume from this reasoning that it is good to go around breaking windows, since one will make a lot of work for glaziers and boost the economy.  The problem is what is not measured.  What would the money that was spent on window replacement have been spent on instead?  It is a safe presumption that had they not had to repair storm damage, they would have spent the money on something more productive  (test:  if this were not true, everyone would be breaking their own windows).  Advocating the broken window fallacy is a bit like saying that stealing money from banks would increase the savings rate, since people would have to deposit even more money to replace that which was stolen.

Anyway, I bring this example up because today I saw the most amazing example of the broken window fallacy I have ever seen, via Kevin Drum and Business Week:

 Business Week's cover story in their current issue tells us that healthcare inefficiency is what's keeping the American economy afloat:

The
very real problems with the health-care system mask a simple fact:
Without it the nation's labor market would be in a deep coma.  Since 2001, 1.7 million new jobs have been added in the health-care sector, which includes related
industries such as pharmaceuticals and health insurance. Meanwhile, the
number of private-sector jobs outside of health care is no higher than
it was five years ago.

.... The U.S. unemployment rate is 4.7%, compared with 8.2% and
8.9%, respectively, in Germany and France. But the health-care systems
of those two countries added very few jobs from 1997 to 2004, according
to new data from the Organization for Economic Cooperation &
Development, while U.S. hospitals and physician offices never stopped
growing. Take away health-care hiring in the U.S., and quicker than you
can say cardiac bypass, the U.S. unemployment rate would be 1 to 2
percentage points higher.

....Both sides can agree that more spending on information
technology could reduce the need for so many health-care workers. It's
a truism in economics that investment boosts productivity, and the U.S.
lags behind other countries in this area. One reason: "Every other
country has the payers paying for IT," says Johns Hopkins' Gerard
Anderson, an expert on the economics of health care. "In the U.S. we're
asking the providers to pay for IT" "” and they're not the ones who
benefit.

Let's go back to slow-motion instant replay.  What was that first line?

Business Week's cover story in their current issue tells us that healthcare inefficiency is what's keeping the American economy afloat

I am not seeing things, am I?  Did he really write that it is the inefficiency of one of the largest and most ubiquitous and perhaps most important industries in the country that is propelling the economy?  Do I really have to state the obvious?  Do you really think that if all those people were not hired to push paper around in health care they would be sitting unemployed today?  What about all the money either consumers or corporations would be saving from more efficiency -- would that really not have been spent on something else?

In a way, I guess this is sort of consistent with Drum's position on Wal-Mart.  If Wal-Mart is detroying the economy (according to him) by bringing increased productivity to retail, I guess this argument that health care inefficiency helps the economy is at least consistent.  Maybe if we could get our state drivers' license agency folks to take over the whole economy, we would have a boom! And the old Soviet Union must have been an economic powerhouse!

This is some of the worst economics I have seen in a while.  Lefties like Drum often rail against conservatives for being anti-scientific in their opposition to teaching evolution or approving the morning-after pill, but for God sakes the most fundamentalist Bible-belt home schooled conservative Christian probably knows more about the science of evolution than journalists understand about the science of economics.

About ten years ago, I remember Microsoft started to get pounded by observers for "missing out" on the Internet.  One of their responses was the development of Internet Explorer, which, thanks to a good design and the fact it was bundled with the OS, quickly beat out Netscape and other incumbents.

Recently, PC-Pundit John Dvorak has argued that Microsoft's foray into Explorer has been its biggest blunder.  I'm not usually a Dvorak fan (I find him to be too much of a technocrat, tending to favor top-down standard setting over messy bottom-up innovation) but I thought his take was pretty interesting:

I think it can now be safely said, in hindsight, that Microsoft's entry
into the browser business and its subsequent linking of the browser
into the Windows operating system looks to be the worst decision"”and
perhaps the biggest, most costly gaffe"”the company ever made. I call it
the Great Microsoft Blunder....

If the problem is not weird legal cases against the company, then
it's the incredible losses in productivity at the company from the
never-ending battle against spyware, viruses, and other security
problems. All the work that has to go into keeping the browser afloat
is time that could have been better spent on making Vista work as first
advertised.

All of Microsoft's Internet-era public-relations and legal problems
(in some way or another) stem from Internet Explorer. If you were to
put together a comprehensive profit-and-loss statement for IE, there
would be a zero in the profits column and billions in the losses
column"”billions.

Yeah, I know, the Internet was supposed to be the next platform for applications taking over from the PC.  This has always been a slow phenomena to emerge (I LIKE having my applications on my own PC and available even if Cox cable is having another hiccup) and its not at all clear you need a browser to play well anyway.  While Microsoft has screwed around with Explorer and dot-net, Google has become the gold standard of web-based applications, and they don't have a browser at all.

By the way, if you are waiting for the new version of Explorer, just get Firefox instead.  It is everything Microsoft is trying to make Explorer and it is there already.  And you don't even have to think in Russian to use it.  (OK, did anyone get my movie reference there or am I a total loser?)

Hat tip to the Mises Blog.

When I read this article on waste disposal, via Instapundit, all I could think of was Julian Simon.  For those who may be too young to remember, back in the 80's, after the panic that we were running out of oil was over, but before the current panic that we are producing too much carbon dioxide, there was a panic that we were running out of garbage dump space.  Uh, never mind:

Simply put, operators of garbage dumps are stuffing more waste than
anyone expected into the giant plastic-lined holes, keeping disposal
prices down and making the construction of new landfills largely
unnecessary....

The
productivity leap is the second major economic surprise from the trash
business in the last 20 years. First, it became clear in the early
1990's that there was a glut of disposal space, not the widely believed
shortage that had drawn headlines in the 1980's. Although many town
dumps had closed, they were replaced by fewer, but huge, regional ones.
That sent dumping prices plunging in many areas in the early 1990's and
led to a long slump in the waste industry.

Since then, the
industry and its followers have been relying on time - about 330
million tons of trash went into landfills in the United States last
year alone, according to Solid Waste Digest, a trade publication - to
fill up some of those holes, erase the glut and send disposal prices
skyward again. Instead, dump capacity has kept growing, and rapidly,
even as only a few new dumps were built.

Shortages seldom persist where the human mind is left free to attack the problem, and economic incentives are allowed to operate freely.  I wrote my own post attacking the zero-sum mentality that causes certain people to jump from one shortage-panic to the next. 

My prediction:  Five years from now, we will be seeing the same article on oil and natural gas.  "This oil field in west Texas is over 80 years old, and was thought to be depleted, until $60 oil prices and some new technology...."   You get the idea.

Civilization IV is coming.  This is mixed news.  I am excited about the game, but the previous offerings in this series, as well as related Sid Meier games Alpha Centauri and Master of Orion, have probably been the greatest threats to my productivity, my sleep, and my marriage I have ever encountered. Hat tip to Jane Gault.

OK, I will begin this post with what I guess is, for some, a damning admision:  My company pays many of its employees minimum wage. 

I believe that I have a very honorable relationship with my employees, but for many, particularly on the left, the fact that I pay minimum wage puts me at the approximate moral level of a forced labor camp gaurd.  For those of you that feel that way, you might as well move on now because this post will just irritate you further.

I want to present four case studies from my own business as to what happens to workers and consumers when minimum wages go up.  For the purpose of this post, I will leave out the philosophical argument of why voters or politicians should even have the right to interfere in the free decision-making between employer and employee, but I certainly addressed it here, in this post.  Unfortunately, a large number of voters accept the argument that there is a power imbalance between employer and employee that needs to be moderated by measures like the minimum wage  (folks who believe this obviously never have tried to attract and retain quality wokers). Many politicians support minimum wage measures, mainly because it is one of those measures, like protectionism, where the benefits (e.g. Joe got a raise) are much easier to identify than the costs (e.g. Mary lost her job).

Before I get into the case studies, it may be helpful to describe my workers, because in some ways their situation is unique.  To run our campgrounds, we mainly employ retired people.  Of my 500 workers, well over half are over 60 years old, more than 150 are over 70, some 25 or so are over 80 and a few are even over 90!  Most are on social security and medicaire, and many have pensions and retirement health plans.  A good number are disabled and have some sort of disability support.  While they work slower, they make up for their low productivity in part by their friendliness with customers and their life experience.

Most of  my employees travel the country in their RV.  They take most of the year off, but many like to work over the summer to make a little money and to pay for their camping site.  I give many of them a free or subsidized campsite, worth about $500+ a month, plus all their utilities and then pay them minimum wage for the hours they work.  Many are thrilled with these terms - so many that I have a waiting list now of over 300 names of people who are looking for this type work.  This list is currently growing by about 10 names a day.

There may be employers somewhere who have a power imbalance over their employees.  Some days, I envy them.  My employees most all have independent means of support.  Further, they all have wheels on their houses, so they can and do pick up and leave if they aren't enjoying their job.  And, if they don't like our company, there are thousands of other campground operators who are looking for help.

So why are so many people lining up for minimum wage jobs when lefties and progressives are telling them that they should not want those jobs?  Here are some reasons:

• They value the amenities that come with the job, including living for free in a beautiful outdoor setting, something it is impossible to value under minimum wage laws
• They have other means of support, so the money is incidental.  In fact, I get more inquiries from employees asking me to reduce their hours so as not to mess up their social security or diabiloity payments as I do people asking for more pay
• They get to work with their spouse as a team.  There are not many employers out there that let a husband and wife split up work between them any way they want or even work together - can you imagine such a situation on a GM assembly plant?
• They would have a hard time getting hired by anyone else.  Very few employers will hire new workers in their sixities, and certainly not older than that.  Older workers can be slower and less productive.  For $12 an hour, I would have to hire younger workers too, but at minimum wage, I can afford the lower productivity of older workers and gain the benefit of their experience and trustworthiness.

This last point help set the stage for our cases.  I love hiring older workers at $5.15 an hour, and they love the job and line up for it.  But what happens when I have to pay these less productive workers $6.00 an hour?  What about $7.50?  What about at $12.00 an hour?  Here are some examples of what happens:

Case 1:  The jobs just go away

Washington State has one of the higher minimum wages in the country, at $7.35 an hour.  What makes the Washington minimum particularly hard to manage is the fact that it has a built-in escalator, such that it rises each year based on an inflation index (as you might imagine, since labor is a major component of most goods and services, this creates a positive feedback loop). 

We run a number of campgrounds in Washington under concession contract from the US Forest Service.  Most of these campgrounds are both small and very isolated, and are therefore labor intensive.  Given local market conditions, it is increasingly difficult to raise fees fast enough to keep up with rising labor rates (as well as labor-linked costs such as workers comp and unemployment) since we are competing against larger private campgrounds that are designed more efficiently and may be closer to local labor.  We have effectively given up trying to make money in this area, and will very likely not rebid the contract when it expires.  Given USFS experience on other similar contracts in the area, there is a good chance that no private company will bid for the contract, and the campgrounds will revert to USFS operation.  In this case, many will likely be closed, and instead of having minimum wage jobs, there will be no jobs left at all.

Case 2:  The jobs get outsourced to contractors

In a number of locations, we have been forced by rising minimum wages and associated costs (particulalry workers comp.) to switch some of our cleaning and landscaping duties from our live on-site employees to local contractors.  These contractors may pay their workers more than minimum wage, but the workers are often twice as productive as ours, yielding a cost savings for us.  When minimum wages are $5.15 an hour, these contractors can't compete with our own workers, but when minimum wages rise over $7.00, as they are across the west coast, this option starts to become attractive.

Case 3:  The jobs get automated away

One of the more frustrating situations we have is one government concesion contract where the government has continued to insist that the Service Contract Act (SCA) applies.  Like the Davis-Bacon act, the SCA sets minimum wages that contractors have to pay to employees when serving the government (for example, on a contract to clean the bathrooms in a goverment office building).  These rates, while ostensibly the market prevailing wages, are in almost every case FAR higher than what a private company would have to pay in the market to get good employees.  By specific Labor Department regulation, the SCA typically does not apply to concession contracts (I won't bore you with the details, but more in this series here or email me if you need help in a similar situation, I have been forced to become an expert).

Anyway, on this particular concession we have to pay our living-on-site workers based on the SCA.  This means, for example, that someone who sits in a parking lot booth collecting parking fees must be paid something like $12.50 an hour, which translates to a bit over $15.60 when you factor in FICA, SUI and workers comp.  Over 2000 hours a year that is $31,200 a year. 

A fully automated fee collection machine (which actually does more than the attendent, since it takes credit and debit cards as well as makes change for cash) costs $23,000.  Plus, the machine never will sue over wrongful termination, never will discriminate against or sexually harass a customer, never will steal, and never will fail to show up for work. 

What would you do?  I would prefer to have the person there, and if we put the machine in I will still  probably staff the booth on busy summer weekends to help customers out, but over 5 years the machine may save us over $100,000.

Case 4:  Prices go up to customers

Last election, Floridians voted themselves a minimum wage increase of $1.00, and worse, voted that the wage will increase each year by a cost of living factor.  As a result, on the May 2 effective date, our costs will go up by about 15% in managing the swim areas and campgrounds in that area.  Since this is well over our profit margin, prices will also go up by the same amount on the same day.  This is unfortunate, because it tends to be lower income people who most enjoy the recreation opportunities we offer, since historically we have been able to keep our costs, and therefore the pricing, so much lower than outrageously expensive attractions like Disney and Universal Studios.

Final Thoughts

I'm not going to cry that my business is doomed by minimum wage increases, because it is not.  As you can see above, we have many options for dealing with these changes.  What I fear may be doomed, though, is the special relationship our company has always had with older, retired workers. For now, the business model is OK, but there is a point, somewhere between about $7.00 and hour and $10.00 an hour, where rising minimum wages will push us to look for other ways to staff our parks rather other than our traditional use of live-on-site retirees.  And that would be sad for everyone.

For more on the topic, Powerline has a nice article today on minimum wage increase proposals in Minnesota.  It is astounding to me that people still want to believe the notion that minimum wages don't affect employment.  Just look at France and Germany for living proof.  Or, consider any other commodity in the market.  If the government set a price floor for gasolene, say at $3.00 a gallon, would anyone out there argue that people wouldn't use less gas?  But when we try to raise the price floor on labor, the media and politicians with a straight face try to argue that businesses won't use less labor.  Or, for the reverse, look at the experience with natural gas and airline travel - the government removed price floors on these commodities in the lates 70s / early 80s and look at how demand has skyrocketed.  (update: Powerline has a second post on the topic here)

For even more good reading, Cafe Hayek is always a good source for defense of free market economics, including this good post on French work week laws.  More on minimum wage here.

I have never been bothered by the trade deficit.  Concern over the trade deficit always seems to be a holdover of 18th century mercantile thinking.  The key failure seems to be thinking of wealth as static or zero sum.  In a zero sum world, running a consistent trade deficit might indeed pour all of a countries wealth overseas like a tank springing a leak.

Wealth, of course, is not zero sum.  New ideas, productivity, technology create wealth.  Ever year, the US creates tremendous amounts of new wealth.  If we spend some of it overseas, so what?   

Often, problems like the deficit that seem problematic at a macro level fall apart when studied as part of individual behavior.  Cafe Hayek takes this approach in a nice post on why not to panic about the deficit:

If my paying my Virginia neighbor $10 to mow my lawn creates neither
debt nor other economic problems, how would my paying a Canadian $10US
to mow my lawn create debt or other economic problems? What conceivable
economic difference can the latitude or longitude of the seller's
residence make?

UPDATE: I always felt this same way, from Steve Landsburg:

I hold this truth
to be self-evident: It is just plain ugly to care more about total
strangers in Detroit than about total strangers in Juarez. Of course we
care most about the people closest to us-our families more than our
friends and our friends more than our acquaintances. But once you start
talking about total strangers, they all ought to be on pretty much the
same footing. You could say you care more about white strangers than
black strangers because you've got more in common with whites. Does
that make it okay to punish firms for hiring blacks?....

Stealing assets is wrong, and so is stealing the right to earn a living, no matter where the victim was born.

Over the last several days, more revelations have emerged that the Bush administration seems to be spending unprecedented amounts of taxpayer money for third party PR support of administration policies.  There is nothing that makes me madder than politicians using my money to help cement their own position in office.  For all the majesty of the office, the President is still the taxpayers' employee, and we should expect an honest accounting of his performance and programs.  What makes this even more ridiculous is that the US Presidency is the greatest bully pulpit in the world -- no one gets more of a chance to get his/her point of view into the public domain than the President.  But Bush is generally a crappy communicator, so he has squandered this opportunity and is forced into paying others to speak for him.

Often business people like myself lament that the government needs to be run like a business - meaning more focus on efficiency and productivity and process improvement.   But there are a number of ways the the government is NOT like a business.  The key difference is that a private company can, at the end of the day, give outsiders the brush-off.  As a private company (with no public stock float) I don't have to tell anyone anything about the decisions I have made or why I made them.  I am not only allowed but expected to pay money (in the form of PR, sales, advertising, etc.) to  put a public spin on my products and services -- this is called marketing.  The government, of course, is not supposed to do this.  They have an accountability to everybody.  (actually, even CEO's of public companies are not supposed to do this either, at least with their shareholders, but they do).

The Bush administration wants to believe they are still running their own private business, rather than a public trust.  They have used 9/11 and the war on terror as excuses to pull a veil of secrecy over decision-making, data, and even mistakes that often have little to do with national security.  They have set a number of unsettling precedents around managing their public image, and their payments for PR and good press fall into this category.

I find that most experienced managers have become experts at identifying and gaming flaws in measurement systems. The in and outs of measurement systems have always interested me, both in business and in sports (how about that segue-way?)

Those of you who are baseball fans may be familiar with Bill James. Bill James came to the conclusion that baseball stats really didn't say very much about what went on in a game, and were misleading in evaluating individual performance. He and people like him have asked questions like "is RBI production really a fair measure of individual performance (since it depends on teammates getting on base)" and "why are walks left out of traditional hitting stats". My post is really on football, but if these baseball questions interest you, check out the book Moneyball.

Much like these baseball stat pioneers, there are a number of people trying to rethink football statistics. For example, is total yardage given up a good measure of defensive productivity? Won't a mediocre defense on a team with a great offense that grinds out 8 minute drives sometimes look better on this stat than a good defense on a team with an offense that is always 3 and out? A site called Football Outsiders is one example of the search for better football understanding. If you are numerically inclined, and are tired of the "its all about execution, about taking it one game at a time" football analysis, check these guys out.