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Friday, October 29, 2004

Basic Market Ethics

People need a set of guiding principles to help them decide difficult political questions. My guiding principles have to do with market ethics. If some action would violate basic market ethics, then I can be sure it is the wrong action.

For thousands of years man has been improving his well-being through the action of the marketplace. All great cities developed to promote trade. The rules of trade are what I call the ethics of the marketplace. The rules are few and simple. Here they are.

Buyers and sellers come together in the marketplace of their own free will, motivated only by self-interest. Buyers and sellers decide on price, which may change with time and place. No force, coercion, or intimidation is allowed in the marketplace. No one must buy or sell anything they don’t want to, for any reason. Everyone is free to come and go from the marketplace at any time. When a transaction occurs, it is because both buyer and seller believe it is to their own advantage.

The two groups of people who do use force in the marketplace are robbers and government. It is the government’s job to remove robbers from the marketplace, using force if necessary. On that we can all agree. It is when government uses force on the peaceful buyers and sellers in the marketplace that the controversy begins.

Today our government uses a lot of force on the peaceful buyers and sellers in the marketplace. For example, it uses force to set prices (minimum wage and rent control). It coerces some buyers to buy (mandated insurance like social security and workers’ comp). It coerces some sellers to sell (civil rights ban on discrimination). It prevents some transactions from taking place (insider trading and child labor laws).

If you carefully examine each case where government uses force in the marketplace, you will find that government force is not beneficial to society. In each case, market ethics are a reliable guide to proper action. That is why Adam Smith recommended in 1776 that government adapt a policy of laissez-faire. What to do about the marketplace: leave it alone.

Wednesday, September 15, 2004

Abolish Minimum Wage Laws

Put yourself in the place of union leaders who have managed to increase wages of union workers to artificially high levels. What is to prevent jobs from going to non-union contractors? Answer: minimum wage and prevailing wage laws.

Perhaps you thought unions just want to give poor people a raise. No, what they really want to do is keep poor people unemployed, reserving more jobs for themselves. Of course unions would never admit to such a thing; political agendas are always advanced for noble reasons.

But once in a while someone blurts the truth. That was the case when Dick Gephardt revealed the true agenda behind his support for minimum wages during his 2004 presidential campaign. He told Teamsters Local 238 in Cedar Rapids, Iowa, that he favors an international minimum wage -- one that he says is high enough so that American workers are not competing with slave, sweat-shop and child labor around the world. Apparently candidate Gephardt would like to un-employ all the world’s poor, not just the poor in his country.

Minimum wage is just one example of how government meddling into the marketplace hurts the very people they claim to be helping. Rent control is another. Both have to do with dictating price, which always upsets the balance of supply and demand. When you dictate a minimum price for labor, it causes the supply of jobs to be reduced. This is just basic economics that no economist would dispute. Isn’t it ironic that the same politicians who support minimum wage are the ones boasting how they are going to create jobs! Go figure.

Now suppose you are working at minimum wage. Would you be in favor of the minimum wage being raised? Maybe so, because you might get a raise. On the other hand, your employer might respond by laying you off. Do you want to risk it? If so, you don’t need a law. You can set your own minimum wage. Go to your employer and demand a higher wage now. Tell him you refuse to work for less. If he thinks you are worth it, he will give you what you demand. If not, he will dismiss you.

But wait a minute! If you have set your own minimum wage and it is refused, you can negotiate a lower wage if you want to. But if you let the government set your minimum wage for you, you are out of a job – period; the government has taken away your freedom to negotiate.

If minimum wage is not the answer to increasing wages, what is? Wages are governed by worker productivity, because employers will hire workers only if their productivity is enough to show a profit after wages are paid. Productivity is improved by innovation and capital investment; government has no part in the process except to get out of the way. Again, no economist would disagree, yet this is an answer politicians can’t live with because it doesn’t make them appear important.

Libertarians oppose minimum wage on moral principles; it is wrong to use force in the marketplace to dictate prices to buyers and sellers. Interesting how good moral principles turn out to be best for everyone in a practical sense as well.

Tuesday, September 7, 2004

Americans with Disabilities Act

The Americans with Disabilities Act, or ADA, passed during the first Bush administration, is intended to eliminate, or at least minimize, discrimination against the disabled. Trumpeted as equal rights for the disabled, it gives people the right to sue if they can show that someone has discriminated against them because of their disability, in the areas of employment and in access to facilities.

Supporters of the ADA claim that it is a violation of a person’s civil rights to be discriminated against. I disagree. My view is that discrimination is a violation of civil rights only when government is doing the discriminating. However, an individual or a business has the right to discriminate, because freedom of association is a basic human right, whereas freedom from discrimination is not.

I concede that discrimination against the disabled can be senseless and bigoted. But a government social engineering program based on coercion is not the answer. Not only does it expand government authority in a dangerous way, but it is actually making the situation worse. For example, the ADA has hurt employment of the disabled by increasing litigation risk associated with hiring the disabled.

The proper way to reduce discrimination against the disabled is through education, persuasion, and social pressure. We will always have some discrimination, which is quite appropriate; after all, blind people can’t be airline pilots. The real question is – who should decide when discrimination is or is not appropriate? Should it be a free people, or should it be the government?

Government must grant equal rights to all, but special privilege to none. When ADA is used to give the disabled access to government services, it is defending their right to equal protection under the law. However, when ADA is directed against the private sector, it being used to grant special privilege.

Thursday, September 2, 2004

Child Labor Laws

No doubt you learned from your government school text book that unions pushed to pass labor laws in the early twentieth century to stop the exploitation of children by greedy industrialists, who paid children low wages to work long hours in unsafe sweatshops. These laws made it illegal to employ pre-teens and young teens is factories.

Now think for a minute. Surely you suspected something wrong with the story you were being told. If conditions were so harsh, why couldn’t these young people just quit their jobs. Who was forcing those poor hapless children to slave in these sweat shops? Was it their parents? If so, then are we to believe that union leaders care more about children than parents do? And how can you help young workers by taking away their jobs?

See what I mean? Something is wrong with this government school text book story.

The real story is quite different. Children originally left the farms to work in harsh factory conditions because it was a matter of survival for them and their families. Since child labor competes with unionized labor, unions have long sought to use the power of the state to deprive younger workers of the right to work. Union workers wanted those factory jobs for themselves.

As a side note, union-backed legislation prohibiting child labor came after the decline in child labor had already begun in America. The reason for the decline was that capital investment and subsequent productivity improvements meant that more people were lifted from poverty and could afford to keep their children at home and in school.

In the Third World today, where poverty is still the norm, the alternative to "child labor" is all too often begging, prostitution, crime, or starvation. Today’s Unions absurdly proclaim to be taking the moral high road by advocating protectionist policies that inevitably lead to these consequences.

It often happens that social legislation inadvertently harms the very people it claims to help. In the case of child labor laws, the harm was (and is) intentional.


Portions taken from related article “Markets, Not Unions, Gave us Leisure” By Thomas J. DiLorenzo, 8/24/04, at http://www.mises.org/

Saturday, August 28, 2004

Outsourcing Jobs

We are hearing lately about job loss due to "greedy" U.S. corporations contracting for IT services with workers in India at low wage rates. John Kerry has stated "… I want to repeal every tax break and loophole that rewards any Benedict Arnold CEO .. for shipping American jobs overseas". However, Bush chief economist Gregory Mankiw calls outsourcing "… probably a plus for the economy."

California joint legislative hearings in early 2004 reviewed possible options for dealing with this latest perceived crisis. One action considered was to deny state contracts to those companies which outsource jobs to foreign lands. It is clear that the California Legislature holds the interests of California taxpayers in very low priority.

The two questions I first would ask are, - Is this a real problem? If so, what did government do to cause the problem? My answer to both questions is - it is only a problem to the extent that government is causing the problem.

In my view, market trends based on freedom of choice and self interest are never a problem. Cheap foreign labor boosts American prosperity, whether the labor comes here (immigration), or whether the jobs go there (outsourcing). Free trade benefits both us and our foreign partners, whether the trade is in goods, services, labor, or capital.

Expect the outcry about outsourcing to evaporate once job creation recovers. Meanwhile, state government could (but won't) help, by ending some of the policies that reduce the competitive advantage of our California workforce; policies such as - minimum wage laws, payroll taxes, worker's comp, mandated unemployment insurance, work practice regulations, environmental regulations, and healthcare coverage mandates.

Technology and capital spending have made U.S. workers among the most productive, and therefore the best paid, workers in the world; misguided government attempts to forcibly "help" workers serves only to create unemployment and to drive jobs abroad.

Monday, August 16, 2004


Public school costs per student are now about twice that of private schools. Charter schools help supply needed competition, but true reform will begin when students pay some tuition directly to the public school of their choice. I do not support vouchers, tax credits, or expanded school funding. I do support charter schools, and I also advocate significant reforms to introduce competition and other market forces, as the only way to make the system responsive to customer needs. Specific steps in that path are:

(1) Repeal compulsory education laws; children are not the property of the state.

(2) Allow students to choose any public school.

(3) Allow schools to reject or expel any student for any reason;

(4) Allow schools to charge student tuition, in amount to be determined by each school in accordance with entrance demand, with the resulting funds to go directly to that school.

I also advocate reforms that require breaking the grip of the teacher unions. They are:

(5) Eliminate teacher tenure regulations and credential requirements, but simply require schools to publish teacher qualifications.

(6) Empower principals to hire and fire teachers at will, and to determine teacher pay based on such things as merit, workload, and supply/demand considerations.

With regard to the tendency toward legislative micromanagement, I would

(7) eliminate all legislative control of curriculum and methodology.

In summary, I would give educators the freedom to educate, and I would give them market-based incentives to be rewarded for success, punished for failure.

Social Security has Always been Bankrupt – Morally!

Consider the problem: some people retire in poverty, either because they don’t save enough for their retirement, or because their private pension plan fails. FDR’s 1935 New Deal solution was to force everyone into an Old-Age Survivor Disability Insurance (OASDI) plan, commonly called Social Security. Thank goodness we have a Constitution to limit such arbitrary authority of government - or so we thought. While much of the early New Deal legislation was declared unconstitutional, by 1937 the Supreme Court was so corrupted by progressive socialist ideology that it allowed Social Security to stand.

Even though people were being forced to pay for this “insurance”, many people loved the new system. Why? For two reasons. 1) Payout was based on your pay history, not your contributions, so older workers got something for nothing. 2 ) Half the contributions were taken from a person’s employer, so younger workers thought they were getting something for nothing too. Of course, employers would respond by paying people that much less, but few people were (and are) that economically aware.

Politicians love Social Security most of all, because it allows them to conceal deficit spending. Here is how it works. OASDI taxes generate more tax revenue each year than the system pays out, and Congress mandates that the extra money be used to purchase government bonds at a special low interest rate. Congress then spends the money, but the money is called tax revenue, not borrowing, for purposes of computing the deficit. (OASDI is a tax – get it?) This funny accounting means that our national debt is actually about $12 trillion larger than claimed (according to Forbes, October 1995). Alas, this party will be over starting in about 2016, when annual Social Security payout will first exceed annual OASDI tax revenues, at current tax rates.

Even assuming Congress can repay all of its borrowings, the system still becomes insolvent in about 2042, because of the ever-growing liabilities of an aging population. To solve this problem, politicians would love to keep raising the combined OASDI tax rate, which started at 2% of pay in 1935, and is now over 14%. That is the way the socialist countries of Europe do it too, but because they started ahead of us, their combined payroll tax rate is now approaching 50% (in France and Italy), with no end in sight. Such a high tax on employment is a real job killer, and it partially explains why socialist countries have such chronic high unemployment rates.

If Social Security is so great, why must workers be forced to participate? Furthermore, how can the government claim greater wisdom than the individual for deciding when and how much to save for retirement? Many young households carry debt on their house, car, and credit cards, ranging in interest rate from 6% to 15%. Does it make sense for these households to be investing money for retirement at 2%? Clearly, they would be better off paying down their debt first, and saving for retirement later. So much for the wisdom of government.

It has been proposed to allow workers to put part of their OASDI tax in a private account, protected from political whim, to possibly grow by investment. This would alleviate the problem of stealth deficit spending, and it might improve the rate of return for some workers. But it still does not address the basic moral problem - that Social Security is a socialist program founded on force and plunder. Instead of being fixed, the program should be ended.

Because two-thirds of people polled now say they expect nothing from Social Security, it may be politically feasible to end the program. This can be done as follows. 1) No new participants added to the system. 2) Pre-retirement participants allowed to opt out. 3) Means testing for all current and future retirees. 4) Funding shortfall paid from the general fund. The time to do this is now, before the baby boom generation retires.

Healthcare Welfare

Regarding the Medicare Modernization and Prescription Drug Act of 2002 passed by our Republican congress and signed by President Bush; I do not support expansion of the welfare state into the area of prescription drug insurance. Consider these points.
1. Seniors are the second most affluent segment of society, but even if they were not, it is not right to single out any one group to receive special favors at the expense of others.
2. The plan separates payer from recipient, which will cause an increase in the cost of drugs for everyone, by adding demand that is insulated from cost.
3. The plan adds another $50 billion a year in entitlement costs, at a time when our profligate congress is running half-trillion dollar annual budget deficits.
4. It is unconstitutional (but dare I even mention this, since all of Medicare and most of what the federal government spends money on these days is not included in it's enumerated powers).