Poor in Hong Kong

Hong Kong will soon be introducing it's first minimum wage law. Exactly what that minimum will be set to is under debate: anywhere from HK$23 to HK$33 an hour ($3 to $4, respectively). The Economist reports the average wage for a fast-food worker is about HK$22; they also report that if the minimum goes to HK$24, about 30,000 people will lose their job and to HK$32, about 170,000 will be fired; these are according to a study cited by Miriam Lau, a Liberal member of the legislature. They are not in favor of the law (though they are willing to do HK$24), so take these numbers with a grain of salt.

The party also claims that 138,200 work below the rate of HK$24 and 400,000 work below HK$33. I'm interested in what the elasticity of the demand for labor is (or how responsive employers are to wage changes). Since HK$33 is pretty close to HK$32, I'll treat those as the time. This seems like a good time to highlight that these are very rough calculations: don't take them to the bank.

Assume the average for fast-food is the same for all low-wage workers (as in, for those 138,200 working below HK$24). That means we are looking at an 8.7% increase. Since fast-food probably pays a little better than many low wage jobs, let's round that up to a 9% increase (HK$2/HK$23, where 23 is the average between HK$22 and HK$24). We should also see a 24% fall in low wage employment (-30,000/123,200, with 123,200 being the average of 108,200 and 138,200). This gives us an elastic demand curve for labor: -24/9 = -2.67, the absolute value of which is way more than one.

Let's see what happens when they increase to HK$32. That's a 37% increase (HK$10/HK$27). Employment for those in that group falls by 54% (-170,000/315,000). So -54/37 = -1.46, the aboslute value is still more than one and thus still elastic.

So what does this mean for the low wage workers of Hong Kong? It means that, on average, the poor will be getting paid less money. (I bolded that for those that wanted to skip the math.) Yes some will be paid more but others will be fired and the increase in payment is not nearly as much as the decrease in employment. Of course all of this is from the group that's ideologically opposed to the minimum wage law and I doubt the degree of effect will be as strong as it is here, but the direction (i.e. it's an elastic demand curve) is probably spot on.

Why? If you went to my class, you'd know. There are increasingly more substitutes for low-wage workers because it's generally easy to replace with a machine. (This is also why these results are believable: elasticity went down as the wage hike went up because higher wage workers are harder to replace.) We see this a lot in the US: fast food workers work a lot with machines and as robotics improve, labor gets more elastic. In economicspeak, machines are a substitute.

Costs and Benefits of Virtual Federalism

Arnold Kling and Tyler Cowen argue for virtual federalism (VF) to solve the Middle East conflict. Arnold Kling explains

I would like to have a different sovereign, but without having to move. Under virtual federalism (as proposed in the widely-unread Unchecked and Unbalanced), we would unbundle the services that the County provides. I could then contract with another provider for trash collection, snow removal, fire protection, or other services.

My initial thought is that this results in lots of important questions related to geographically-derived economies of scale. If several people have different sovereigns, then you've created a mix match of territory a government has to cover. With trash collection, this isn't a huge deal--workers just has to drive around everywhere, probably with an on board computer, and collect from customers. Kind of like UPS but in reverse.

But the logistics of snow removal get absurd. Trucks would have to lift their plows when they pass an outsider's home, which keep banks of snow that your neighbors have to navigate around. If you live in a cul-de-sac and two guys on either side of the street at the mouth of the dead end get their snow removal from someone far away, and the snow is bad enough, those on the inside get snowed in even though the snow plows have already passed. And since any local government would focus on the areas with the highest concentration of customers (which will probably be the neighborhood nearest the snowplows), those on the inside of the cul-de-sac could wait for a while.

Okay, so you could say that a path's made to link trapped areas with everything else, but how do you handle fires? A fire in one house can spread to another depending on wind. If the fire department for the home on fire is located farther away than the department for the neighbors, you'd get fire fighters arriving to contain (but not put out) the fire while someone might be inside suffocating. It seems remarkably inefficient.

But it still could be optimal--I don't know how much waste fire departments would eliminate in response to competition nor do I know how much people will opt to go for the closer department simply because it's closer (which would mitigate the impact of the first issue). But I suspect that time-sensitive services will be less efficient than than services that are not time-sensitive.

You don't really care when your trash is picked up, as long as it is picked up sometime that day. But the local governments want their trash route to be all in the same general area to makes it cheaper to pick it up. So trash services will be pretty good: they will make recycling easy for you, they take a large variety of trash (furniture, e-waste, yard waste). They know you'd easily change to a farther away government (because you don't really care) and the costs of many people leaving is high relative to the benefit, so they will work hard to keep you.

Time-sensitive services like fire fighting, snow removal, and water pipe repair will get worse because governments know it will be more expensive for you to go to a farther away competitor. If the plows nicks your car, you might let it slide because you're not willing to switch allegiance to a distant competitor where you'd have to wait an extra hour or two while he takes care of people who are close by.

Competition is not immune to waste and I'm not sure if this system has less of it. But VF buys peace in Jerusalem, then I'm sure it's worth it. But for us? Seems cheaper just to move.

Obamacare and Entrepreneurship

With legislation as sweeping as the recent health care reform, lots of interesting questions boil to the surface. For one, will the reform be good for entrepreneurship or bad for it? Two commentators at Megan McArdle give conflicting reports, one arguing that it's good and the other that it's bad.

On one hand, entrepreneurs tend to be younger people and younger people tend not to buy health insurance even if they can afford it. The reform makes people buy insurance (though the penalty for not doing so is somewhat low) and will subsidize those who make little enough to purchase it. Thus there are those who have to buy it but make enough so they will get little or no government help. A forced expense will take money away from the all-important start-up capital.

On the other hand, those with a pre-existing condition (since you can't deny someone based on if they have a pre-existing condition) can now leave their employer's health plan and strike out on their own, confident they can get the health insurance they need. Untethered, we could see more entrepreneurship.

Which effect is more powerful depends on various questions: How important is a few to several hundred dollars a month for a new business? How common are people with pre-existing conditions? Are people with pre-existing conditions more or less likely to start a business (unlikely but if it's true it would probably be the most important variable)? I don't know the answer to any of these, but I suspect the bad outweighs the good.

Bryan Caplan, however, points out another possible confounding issue:

If preliminary summaries of Obamacare are true, it looks like individual health insurance will soon be a better deal than employer-provided health insurance. In the individual market, you can now wait until you're really sick to buy insurance: "Heads I win, tails I break even." Firms won't have that gimme - and it seems more valuable than premiums' tax deductibility. Admittedly, Obamacare imposes a small penalty on individuals who don't buy insurance, and a moderate penalty on firms that don't provide it. But it still seems like it will be in the financial self-interest of many firms and their workers to get rid of insurance, and split the (cash savings minus penalties).

This could push it to being good for entrepreneurship as companies can pay the fine and neither has health insurance until the employee gets sick (in which case they might get a subsidy).

It's not an easy thing to sort out.

Peltzman on Germs

Slate columnist Darshak Sanghavi blames hand sanitizers' fundamental approach for their lack of effect on flu prevention.

To begin, the influenza virus mostly spreads via tiny droplets in the air (for example, from sneezes)—not by dirty hands or surfaces—which limits the role of Purell. It probably wouldn't matter even if flu transferred though hand contact, which is how most cold viruses spread...The average child touches his or her mouth and nose every three minutes, and both adults and children come in contact with as many as 30 different objects every minute. Even hospitals can't get staff to use Purell before seeing patients; it's impossible for day care staff, parents, or teachers to wash a child's hands 20 times each hour.

But what about adults? For that, I immediately thought of the Peltzman Effect.

Sam Peltzman discovered that increased safety standards on cars don't reduce accident fatalities. Because cars are safer, people feel safer and drive more recklessly. Similarly, hand sanitizer makes people feel braver and expose themselves to more germs. On net, there's no change, but it's not Purell's fault.

The Good, the Bad, and Healthcare

Critics of government backed health care seem schizophrenic: on one hand, they argue government run health care will be really awful. On the other hand, they argue it will crowd out private health care if the two compete. How can it be so bad no one will want it but so good everyone will abandon all other options?

The two seem to be mutually exclusive and on some level they are. For example, the post office competes with FedEx all the time for package delivers. Sometimes people use one, sometimes the other. No doubt that the existence of competition improved the government system, though how much better is not obvious.

There is an area, though, where the government system is quite low quality but people still attend it: public schools. Ignore your personal experiences for the moment. People complain a lot more about public schools than they do about private ones. And while I seem to remember some data that, like FedEx, private schools improve their government counterpart, again the degree is difficult to pin down.

How is this possible? How are public schools so popular but so bad? There's lots of possible reasons but one reason sticks out: it's really cheap. In fact, baring fees and supplies, it's free. Those costs are then burdened onto everyone else and the public subsidizes a low quality service. There is some value to public schools, of course, which is why people still send their kids there. Everyone else, including private schools, indirectly pays for a product they either don't value that much or compete with. So is the nature of taxes.

Health care risks walking down the same path. In fact, it already has. Medicare and Medicaid, by law, buy hospital services at about 20% less than the cost to the hospital. It is one of the reasons why everyday objects, like Tylenol, run several dollars a pill. Hospitals have to make up the difference somewhere. Adopting this policy for everyone follows depressingly close to Bastiat's take on government: "Government is the great fiction through which everybody endeavors to live at the expense of everybody else." A great fiction indeed.

What Vegas Can Teach You About the Recession

In last week's EconTalk, economist Allan Meltzer argued one of the main reason for our current financial mess is the Fed's policy of too big to fail. If a large financial institution collapses, it will harm countless other institutions and hamstring the the market as a whole. By preventing disaster and saving these companies, the Fed saves the economy. Knowing that in the worse case scenario someone will help you out, these banks then took riskier chances than they otherwise would. Thus the mess we're in now. In a world of superheroes, there are more extreme athletes.

Some are skeptical of this relationship, made evident by the fact that this is not at the forefront of the popular debate (the much more vague and non-scientific "animal spirits" is). But suppose you went to a conference in Las Vegas and your company agreed to reimburse you for any gambling losses you suffered during the trip. It's obvious that you would gamble more. And you would take bigger risks. Why wouldn't you?

You could point out that the companies are worse off than those that didn't take the housing gamble (such as JP Morgan Chase, Pittsburgh National, Wells Fargo). But they are better off than if the Fed hadn't intervened at all. If the company compensates you only half or a third of what you lost from gambling, you would still gamble more but not as much as full compensation. Regardless, this policy would immediately prove to be a terrible idea. But that's the rule in place at the Fed now.

Most Interesting Sentence I Read Today

From this week's Economist:

Indeed, some say the Few learnt [Irving] Fisher too well: from 2001 to 2004, to contain the deflationary shock waves of the tech-stock collapse, it kept interest rates low and thus helped to inflate a new bubble, in property.

A concise reminder that artificially fixing one sector one sector of the economy has unintended consequences in other sectors. One must wonder where the new holes will appear in the aftermath of the $787 billion stimulus package.

Keep Your Fallacies Straight

Russ Roberts discussed the bailout on Reason.tv, arguing it'll encourage more risk taking in the future. A commentator, Trumpit, accused Prof. Roberts of circular logic:

You state that the bailout will encourage more imprudent risktaking in the future leading to lower standard of living for the next generation. LOL. That's was the cause/reason for the bailout. I took an upper division math class and on the 1st exam the professor drew a big circle to make fun of my circular proof.

Let's take a moment to remember what circular logic is. Also known as begging the question, it occurs when "its conclusion is among its premises...assuming what it's trying to prove." The argument of the bailout goes like this:

1. The Congressional bailout implies imprudent risk taking is cheaper.
2. The financial sector seeks cheapness.
Thus
3. The financial sector will engage in more imprudent risk taking.

It would be circular if the argument was this:

1. The Congressional bailout implies imprudent risk taking is cheaper.
2. The bailout occurred.
Thus
3. Imprudent risk taking is cheaper.

It's not that circular logic is nonsense, it just doesn't say anything interesting.

Asbestosis Gone Wild

A court in New Jersey recently ruled Spanish citizens can now sue Owens-Illinois and other asbestosis-related firms based on exposure from U.S. ships. This does not have to translate into actual harm from the exposure. Like most asbestosis litigation, post hoc ergo propter hoc works just fine in the court of law. Indeed, the even possibility of harm is enough to cost Owens-Illinois. To punish firms so overwhelming cheapens our society in two ways.

First we get too little asbestosis. Asbestosis is not evil and its optimal amount is not zero. It's useful and safe in many areas of our society. (Indeed, its wide application is why asbestosis litigation never seems to go away.)

Second we lose good ideas in the process. This is not limited to opportunity costs coming from litigation-related expenses. The possibility of similar attacks can destroy a development before it even starts. If asbestosis litigation can completely ruin an industry, companies are less willing to engage in ideas that they think could be twisted down that same route. Sometimes this is good but the level of asbestosis litigation likely makes firms so risk averse that the net effect is undesirable.

This second issue is critical but often ignored because this lost opportunity is never seen (be definition). It makes it difficult to estimate the true cost of asbestos litigation. But if the technological and economic progress in the past few decades is any indication, that cost is a lot higher than most people might think.

The Paradox of Control

Eliezer Yudkowsky at Overcoming Bias explained scarcity as psychologists think of it: as something becomes less attainable, you value it more. It's not clear how widely this applies but I can see it function in many areas such as dating, fads, and fashion. While Yudkowsky explains the phenomenon with evolutionary psychology (our ancestors had to grab what was scarce or they'd die out) we can also see it as signaling. If you have something that's hard to get, it suggests you're important, hip, or otherwise exceptional in some way.

Contrast this with Robin Hanson's theory of regulation. If a regulator can require something of a person but doesn't, the person will likely conclude doing what the regulator wants isn't all the important. If you can ban something but don't, then it's not all that dangerous. If you can require something but don't, then it's not all that helpful. A lack of regulation is a signal that tells people that if they made a bad decision, they'd still be alright.

Again, it's not clear how widely this framework applies but we can imagine quite a bit of overlap. Drugs come to mind first. If you ban drugs, people will want to do them more to either suggest they're hip or to get them while they can. If you don't ban drugs, people (possibly the same group, possibly different) will then conclude they're aren't a big deal and use them. In other words, if you don't want anyone in a society to use drugs, there's nothing you can do about it.

Is Wal-Mart A Collective Action Problem?

Wal-Mart gets a lot of criticism from a long list of groups from environmental to protectionist to labor union. People complain it destroys jobs and runs local stores out of business. None of these arguments hold water (environmentalism is about private property, free trade emboldens economies, Wal-Mart only works because people choose to go there, etc) and I have yet to hear the rara avis: an anti-Wal-Mart argument that makes economic sense. On a theoretical level, I think I have one.

Consider a small town. Each of these people value two things: their downtown mom-and-pop stores (that small town feel) and low prices (everyone likes a bargain). Let us also suppose that each person values the small town atmosphere over the prices--in other words they are willing to pay a premium to keep the charm of the hamlet.

Now suppose a Wal-Mart comes to town. Each resident has a choice between shopping downtown (and thus supporting it) or shopping at Wal-Mart (and thus get the lower prices). Since the downtown won't go away if one person "defects" to Wal-Mart, that defector can enjoy low prices and still have that small town feel they love so much. It's strictly better. (Note enjoying that small town feel does not require actually trading with them--they simply walk along Main Street and breathe in the atmosphere.)

Naturally everyone has an incentive to do this, thus everyone goes to Wal-Mart (or a lot do) and the downtown disappears. (Set aside any arguments of downtown revival because people can now afford more stuff.) As an individual, you can choose to end your defection and go downtown, but you, lone patron, will not save the stores. It will only work if everyone (or a lot) of people will work with you. But their personal incentives doesn't lend them to that so no one does. It's a collective action problem.

The downtown atmosphere is what economists call a positive externality--people who aren't paying for it still are able to enjoy it. The town could solve this issue by walling off the downtown and charge a small fee to those who wish to visit it. Taxes to the stores could be reduced by a proportional amount (who could then decrease their prices slightly) and the only difference ends up being that free riders can no longer ride for free. Naturally, the town could also ban Wal-Mart if it turns out internalizing these externalities prove too costly (which it very well might be).

Anti-Wal-Mart groups who wish to use this argument should exercise caution. The assumptions are rather strong (nobody is willing to swap low prices for their downtown) and demonstrating they apply to a given community is difficult. Moreover, the establishment of this argument can quickly be applied to areas the group may not desire. If one can ban Wal-Mart on the grounds that low prices are too expensive, then one can ban Internet access, delivery services, resident mobility, and a host of other options on the grounds that people cannot be tempted by alternatives lest the downtown is abandoned. The line between preventing a collective action problem and outright tyranny is a thin one indeed.

"No Lye" but a Lot of "Tomfoolery"

I recently picked up a copy of Tulani Kinard's No Lye, a book promoting "natural hair care" for African American women. Surprise, surprise! State regulation was advocated in the same breath as upholding tradition!

Kinard's argument is straightforward: Age-old African hair care methods are safer, healthier, and self-esteem building. In keeping with these traditions, black women today should braid, loc, and twist their hair.

"Now for the clencher": Increased demand for these traditional hairstyles require legal definitions for the techniques and certified professionals to do them.

Gee, these techniques supposedly survive today because of hundreds of years preservation by women who weren't certified. Why change all of the sudden now?

Safety Regulations Can Be Dangerous

People often scoff when I argue that more laws and standards reduce innovation. Scoffers probably can't think of an example of what wasn't created because of those restrictions. Enter the Tata Nano, a $2,500 unveiled in India yesterday. In a country where the next cheapest car runs about four times as much, the Nano has a lot of potential to give mobility (and opportunity) to a lot of people.

But don't expect the US (or Europe) to benefit from mobility--the Nano won't meet the government's safety standards. We are forced to favor safety over price, or get nothing and the poorest are hurt most of all. In a country where it's hard to go anywhere without a car, those who need the most opportunities find their job choices severely curtailed.

Some might say we don't want less safe (but cheap) cars, but even that is not obvious. Recall that in the wake of Hurricane Katrina, where people lost their lives because they has no way to escape New Orleans, the more expensive car was the more dangerous one.

No Long Term Fix

President Bush is mistaken if he thinks he--or Congress--can "fix" subprime mortgages. Force banks to give people, even a few people, a lower rate than agreed on and you set a precedent for abuse. While their situation is unfortunate, borrowers are not victims. If you treat them as such, years from now they will gamble as though they cannot lose.

AP paradoxically called Bush's plan a "no quick fix" but it's the long run that could prove more disastrous. Give a man a Pinto and he will drive like a saint. Give him a tank and he'll drive like however he wants.

Incentives Matter

In the 1970s union leaders were concerned about the stress that air traffic controllers were under. They asserted that a sign of stress was if a controller nearly caused a collision. So a policy was enacted that if a controller had 2 or more near misses in a month then the worker would have a two week paid vacation. This graph illustrates the effects of the policy:

Domo Arigatou, Mr Doctoros

The laws of economics knows no borders.

As calls for universal health care fill the campaign talking points, let us take a moment to learn from other countries. Drs. Michael A. Glueck & Robert J. Cihak wrote earlier this year concerning Japan's failing health care system. It should not surprise any economist: doctors have barely a few minutes per patient, people are being denied care, resources are strained, government debt continues to skyrocket, and "[p]atients are told they¹ll never get better, even when treatments exist, and many are not even informed of their diagnoses."

When you give something away for virtually nothing, people will use more of it, even when they don't need to. It's not merely that universal health care, causes waste. It really isn't "universal" because so many people are forced out. It's not even "health care;" it kills people.

HT: Matt Huber

Weller On Incentives

Tonight on Kudlow and Company, Christian Weller, senior economist at the Center for American Progess, argued there would be no moral hazard problem if the government bailed out people's mortgages.

I'm not sure what's going through Weller's mind but when you pay for people's bad decisions, you don't create much of a reason for them to avoid mistakes in the future. And you certainly can't expect other borrowers (or lenders for that matter) to be cautious in the future after you proved there's a safety net just aching to spring up.

Edwards Plans to Punish the Weak

John Edwards has been running all over Iowa lately promising a higher minimum wage, stricter work safety laws, and a crackdown on "predatory" lenders. These, strangely, are supposed to "reward hard work."

The minimum wage does not reward hard work. It does, however, reward people who deserve a raise but don't argue for one. It also punishes those who have the hardest time getting a job.

Safety laws do not allow hard work to be rewarded but make it more difficult for companies to pay their workers what they deserve. Looks like more people will have to take a larger chunk of their compensation in the form of additional handicap ramps.

Making a loan harder to get isn't going to help those who need a loan. Sub prime rates (loan deals offered to those with a poor credit rating and require a lot of collateral, usually a house) are options that people don't have to take. Here we see the free market offering a chance to those who need it most and Edwards wants to see that option ripped away.

Impoverished Logic

Maude Hurd, President of Acorn (an antipoverty organization), needs to check her economics. In a letter to the New York Times, she defended John Edward's work in raising the minimum wage. To her, "his efforts were both sincere and a very effective way to fight poverty."

I fail to understand how making it more expensive to hire those that have the hardest time finding employment eases their burden. For those that are good enough to not be fired, they could have gained a raise on their own. Perhaps Hurd's organization should have helped with their negotiation skills instead of raising their wages at the expense of the most downtrodden.

Salads Do Not Melt

The Supremes ruled against allowing public schools to use race as a factor to determine where children went to school. The ruling, which a lifetime ago would have made conservative white folks very angry, now is making liberal black folks very angry. The ruling declares "racial balancing" as unconstitutional.

This technique, used by countless school districts the country over, attempts to create an equal balance of races in all the schools they reign over. This has not only had the nasty unintended consequence of denying a better student because they weren't the right race but making sure a student doesn't leave because they were the right race. In other words, it's forced integration.

Maybe it can be a good thing: people can learn through diversity. But all schools shouldn't be forced to comply with that particular strategy. At the same time, the Supremes shouldn't outlaw the practice, either.

I am surprised to hear that few talk about why schools are segregated, indeed communities in general. We have Chinatowns, black and white neighborhoods, and Little Tokyos. Yes, some of this is based on income, but people seem to prefer to hang out with people like them. They self-segregate. The melting pot seems like a fine idea in the abstract but in practice, most reveal they are happy with salad bowls, despite the possible benefits. Why force it any other way?