Free the Price-Cutters!
Don Boudreaux  
In the current issue of _Regulation_ 
(http://www.cato.org/pubs/regulation/index.html) , law professor Daniel Crane 
has a _well-worth-reading article_ 
(http://www.cato.org/pubs/regulation/regv28n4/v28n4-4.pdf)  on the perverse 
consequences  of prohibitions on so-called "predatory pricing." 
Here's an especially interesting part of the article: 
A study by Case Western law professor Arthur Austin is telling.   Austin 
interviewed jurors in four antitrust trials, including Brooke Group  v. Brown & 
Williamson, the latest predatory pricing case decided by  the Supreme Court.  
Austin's interviews revealed that "the jurors were  overwhelmed, frustrated, 
and 
confused by testimony well beyond their  comprehension.... [A]t no time did 
any juror grasp -- even at the margins --  the law, the economics, or any other 
testimony related to the allegations or  defense."  Austin reports,


At no time have I encountered a juror who had the foggiest notion of what  
oligopoly, market power, or average variable cost meant, much less how they  
applied to the case....  Typical is the response I received when I  asked a 
juror 
whether he remembered average variable cost.  The juror  replied, 'Yes, 
explain it to me.  I still don't know what it  means.'


Mind you, the jury found that Brown & Williamson engaged in predatory  
pricing, which required a finding that it had priced below average variable  
cost.  
If the jury did not understand the legal test, on what basis did  it award a 
$148.8 judgment against Brown & Williamson?
Fortunately, in 1993 the U.S. Supreme Court _found in favor_ 
(http://www.ripon.edu/faculty/bowenj/antitrust/brkevb&w.htm)  of Brown & 
Williamson on appeal. 
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January 19, 2006
Shoplifting as Governance
Russell Roberts  
In _this very nice piece_ 
(http://www.washingtonpost.com/wp-dyn/content/article/2006/01/18/AR2006011801873.html)
 , George Will looks at the  Maryland's 
General Assembly's _recent mugging_ 
(http://cafehayek.typepad.com/hayek/2006/01/maryland_malfea.html)  of Wal-Mart. 
  
This is part of the tawdry drama of state politics as governments grasp for  
novel sources of money. Forty-eight states are to varying degrees dependent on 
 revenue from gambling. Forty-six states are addicted to their cut, to be 
paid  out over decades, from the $246 billion coerced from the tobacco industry 
by  using the specious argument that smoking costs their governments huge sums. 
As  a result, 46 states have a stake in the long-term profitability of 
tobacco  companies. 
Maryland's grasping for Wal-Mart's revenue opens a new chapter in the  
degeneracy of state governments that are eager to spend more money than they  
have 
the nerve to collect straightforwardly in taxes. Fortunately, as labor  unions 
and allied rent-seekers in 30 or so other states contemplate mimicking  
Maryland, Wal-Mart can contemplate an advantage of federalism. 
States engage in "entrepreneurial federalism," competing to be especially  
attractive to businesses. A Wal-Mart distribution center, creating at least  
800 
jobs, that has been planned for Maryland could be located instead in more  
hospitable Delaware. 
Meanwhile, people who are disgusted -- and properly so -- about corruption  
inside the Beltway should ask themselves this: Is it really worse than the  
kind of rent-seeking, and theft tarted up as compassion, just witnessed 20  
miles 
east of the Beltway, in Annapolis?
The first part of the piece has some very thoughtful analysis of rent-seeking 
 and the Founders worries about it. 
If the legislature wants to give money or health care to poor people, it  
should raise taxes and make the people who elect the officials sanction it via  
elections.  Taxing Wal-Mart's customers and stockholders is the wrong route  
for a democracy.  The title of Will's article, "Shoplifting as Governance,"  
says it eloquently. 
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January 18, 2006
For Whom the Governor Tolls
Don Boudreaux  
Virginia's new governor, Tim Kaine (D), _gave a speech_ 
(http://www.washingtonpost.com/wp-dyn/content/article/2006/01/17/AR2006011701465.html)
  earlier 
this week proposing to help solve  Virginia's (terrible) traffic-congestion 
problem by restricting economic  growth.  The idea, of course, is to keep 
population growth down so that  less traffic than otherwise clogs Virginia's 
roads. 
Kaine is also opposed to placing tolls on existing roads.  _In his own words_ 
(http://www.tollroadsnews.com/cgi-bin/a.cgi/CO9fCmecEdqcEIJ61nsxIA) : "as a 
general rule, I don't believe  in tolling existing roads." 
While I can find no reason expressed by Kaine to justify his opposition to  
tolling existing roads, a good bet is that -- like _many other  people opposed 
to tolls_ (http://www.notolls.org.uk/sep05news.htm)  -- he believes that tolls 
are an unfair  burden upon the poor. 
Does Gov. Kaine not see that any plan, such as his, to restrict the building  
of new homes causes housing prices to rise to heights higher than they would  
otherwise reach and, hence, creates a larger burden for the poor to bear?   
Or perhaps the Governor believes that higher prices caused by 
government-imposed  restrictions on housing supply are inherently more fair 
than are the 
burdens  that arise from pricing inherently scarce road space. 
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January 17, 2006
Should We Worry About Chinese Dollar Holdings?
Don Boudreaux  
_This story_ 
(http://www.washingtonpost.com/wp-dyn/content/article/2006/01/16/AR2006011600450.html)
  in today's Washington Post reports  that the Chinese 
now hold $819 billion in reserves of foreign currencies --  presumably mostly 
in U.S. dollars.  And presumably we Americans are  supposed to worry. 
But I can't figure out why we Americans (or anyone else, for that matter)  
should worry. 
Take the extreme case: the Chinese continue to stockpile U.S. dollars without 
 every spending them.  What a boon this scenario would be for Americans, for  
it would mean that the price we paid to China for the many valuable goods 
that  we bought from producers in that country is green-ink-smeared paper.  We  
got electronics, textiles, and other things that make our lives better; in  
return, China got lots of miniature, monochrome portraits of dead American  
statesmen. 
Of course, this extreme case doesn't describe reality.  The Chinese are  no 
fools; nor do they so intensely love American history that they'll accumulate  
without end U.S. currency for the sake of possessing U.S. currency. 
So they plan to spend this currency. 
Does it matter when they spend it?  Not much. 
Consider the opposite extreme from the one described above: the Chinese (and  
other foreigners with whom the Chinese deal) spend each dollar they earn the  
moment they earn it.  In this case, the Chinese accumulate no dollar  
reserves.  Each dollar Americans spend on imports from China returns  
immediately to 
the U.S. as demand for U.S. goods, services, or assets.   This scenario 
apparently is the punditry's preferred one, for in it China holds  no dollar 
reserves. 
But how does this spend-their-dollars-immediately scenario differ from what  
is the likely, actual scenario?  In this most likely scenario, the Chinese  
accumulate lots of dollars and then spend them over time -- sometimes spending  
them in big lumps (say, to buy several Boeing 777s), other times spending them 
 more gradually, and always holding on to a few as a part of their portfolios 
or  as part of a plan by the Chinese government to keep the dollar's value 
higher  against the yuan than it would otherwise be. 
In both scenarios -- one in which the Chinese spend their dollars  
immediately, the other in which the Chinese spend their dollars eventually --  
the 
dollars are spent and return to the U.S. as demand for U.S. goods, services,  
and 
assets.  The only difference is the timing. 
I know that some people worry that the Chinese will suddenly dump their stash 
 of U.S. dollars on the foreign-exchange market.  A sudden drop in the  d
ollar's value would indeed be unfortunate.  But the fall in the dollar's  value 
in 
this case would be from a height that the dollar reached only because  the 
Chinese accumulated the stockpile of dollars in the first place -- the same  
stockpile of dollars whose sudden dumping on foreign-exchange markets caused 
the  
value of the dollar to fall. 
Also note: insofar as people with a serious stake in the matter -- namely,  
currency speculators -- really are worried about the Chinese suddenly dumping  
their dollars, these traders would start to short the dollar as soon as their  
concern became serious.  These actions on world currency markets will tend  
to smooth out the change in the dollar's value.  That is, the value of the  
dollar will start to fall before the Chinese begin to dump their dollars -- 
thus  
reducing, if not eliminating, the quickness of the dollar's fall. 
It's possible, of course, that world currency traders and speculators are  
naive and never accurately anticipate what the Chinese will do with their  
dollars, but, if so, you'll pardon me for paying no attention to pundits and  
politicians who fret about the size of Chinese dollar holdings. 
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Maryland Malfeasance II
Russell Roberts  
In its ongoing effort to make the workplace less friendly to  working people, 
the Maryland legislature voted today to raise the minimum wage  in Maryland 
to $6.15, overriding a veto by Governor Ehrlich. 
This vote comes quick on the heels of _its earlier decision_ 
(http://cafehayek.typepad.com/hayek/2006/01/maryland_malfea.html)  to make 
Maryland a less 
hospitable  place for Wal-Mart to do business. 
Both of these pieces of legislation make it harder for low-wage, low-skilled  
workers to find work in Maryland. 
The opening of the Washington Post _story_ 
(http://www.washingtonpost.com/wp-dyn/content/article/2006/01/17/AR2006011700581.html)
  treats the debate over 
raising the minimum wage  as a worker vs. business struggle: 
The Maryland General Assembly today voted to raise the state's minimum wage  
by $1 an hour, brushing aside concerns by Gov. Robert L. Ehrlich Jr. (R) that  
the move would hurt small businesses.
For those of you keeping score at home: 
Good Guys: Maryland General Assembly that cares about the poor.
Bad Guy:  Governor Ehrlich who cares about business. 
Or: 
Friend of the worker: GA
Friend of business: Gov 
You have to go farther down the page to find out that the Governor actually  
cares about workers: 
In his veto message last spring, Ehrlich called passage of the bill "a bad  
decision that elevates politics over economics and ultimately hurts the people  
it claims to help." 
He argued that small businesses would either have to raise costs for  
consumers or fire low-wage workers, arguing that "more than half of minimum  
wage 
workers nationally are of high school or college-age, and minimum wage  jobs 
for 
them are a means by which to enter the labor market and acquire  skills 
necessary for career advancement."
_Here's_ (http://www.gov.state.md.us/billvetoes/2005/message_HB391.html)  the 
Governor's statement from last spring.   It closes with this observation: 
I believe that each working person deserves an appropriate wage that  
reflects his or her work, skill level, and productivity. Accordingly, I  
believe 
employment and education provide the necessary foundation for future  success 
in 
life. Raising the minimum wage reduces employment opportunities for  those who 
need it most, thereby limiting an individual's training, experience  and 
skills.  
For the above stated reasons, I do not believe Maryland should break from  
its long history of respecting the federal government establishing a minimum  
wage. Accordingly, I have vetoed House Bill 391.
It is a bad week for Maryland.

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Rapacious Bullies?
Don Boudreaux  
Jonathan Yardley -- the Washington Post's generally excellent chief  book 
reviewer -- began _his review_ 
(http://www.washingtonpost.com/wp-dyn/content/article/2006/01/12/AR2006011201694.html)
  of a new biography of Milton Hershey 
this  way: 
During the Gilded Age of the late 19th and early 20th centuries -- the age  
of rapacious corporate bullies characterized by Theodore Roosevelt as  
"malefactors of great wealth" -- Milton S. Hershey was a man  apart.
Yardley's history, of course, is the standard one.  But while the  so-called 
Gilded Age had its share of rent-seekers (Jay Gould springs to mind),  most of 
the alleged 'robber barons' were simply successful businessmen in an age  
when the U.S. market was made truly national by railroads and telegraphy. 
Without getting into history here, I offer the following mental  experiment. 
Suppose farmer Jones works tirelessly to plow his fields, plant his crops,  
and tend them until they're harvested.  In his spare time, farmer Jones  
experiments with different recipes for fertilizer and pesticides.  As a  
result, he 
invents vastly more productive fertilizers and more effective  pesticides. 
He's a workaholic, spending every waking moment trying to increase his crop  
yields.  Over time, because of his success, he buys additional land and  
plants additional crops.  His output expands both intensively (more output  per 
acre) and extensively (more acres under his cultivation). 
Compared to average farmers, farmer Jones produces vastly more crops at much  
lower per-bushel costs. 
Is farmer Jones greedy?  Is he rapacious?  Is he a  malefactor?  Are the 
farmers who voluntarily sell their land to him, or who  are undersold by him, 
bullied by him?  Does farmer Jones deserve  scorn?  Or admiration and applause? 
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January 16, 2006
Missing Portraits
Russell Roberts  
[This post has been edited since it was first posted] 
A picture is worth a thousand words.  So the New York Times Sunday  Magazine 
_article_ 
(http://www.nytimes.com/2006/01/15/magazine/15wage.html?pagewanted=1)  
(discussed earlier _here_ 
(http://cafehayek.typepad.com/hayek/2006/01/on_legislating_.html)  and _here_ 
(http://cafehayek.typepad.com/hayek/2006/01/vertical_demand.html)  by Don and 
me) that found so many reasons to love  living 
wage ordinances and so few reasons to be skeptical of their virtues,  included 
powerful photographs of workers who expect to benefit from the Santa Fe  living 
wage ordinance with poignant descriptions of what these workers plan to  do 
with their raises: 
 
(javascript:pop_me_up2('http://www.nytimes.com/imagepages/2006/01/11/magazine/15cover.1.html',
 '15cover_1', 
'width=456,height=600,scrollbars=yes,toolbars=no,resizable=yes')) 
 
(javascript:pop_me_up2('http://www.nytimes.com/imagepages/2006/01/11/magazine/15cover.1.html',
 '15cover_1', 
'width=456,height=600,scrollbars=yes,toolbars=no,resizable=yes'))  
Alessandra Petlin for The New York Times
Name: Manuela Soto. Marital status: Single mom. Occupation:  Assistant hotel 
housekeeper. Home: Santa Fe, N.M. Hourly wage before local  "Living Wage" 
ordinance: $7.50. Hourly wage now: $9.50. What she'll do with  raise: Pay bills 
faster, offset higher gas prices, buy more supplies for sons.  _More Photos >_ 
(javascript:pop_me_up2('http://www.nytimes.com/slideshow/2006/01/11/magazine/200
50115_WAGE_SLIDESHOW_index.html', '20050115_WAGE_SLIDESHOW', 
'width=750,height=600,scrollbars=yes,toolbars=no,resizable=yes')) 
Strangely enough, there were no pictures of the workers who  expect to lose 
their jobs because the legislation will price them out of the job  market, 
though some of the pictured workers may tragically fall into this  group.  Nor 
were there any descriptions of how anyone who loses their job  plans to cope 
with 
being unemployed. 
I am proud not to be a progressive.
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Vertical Demand Curves
Russell Roberts  
A key issue in the debate over the virtues of the so-called living wage is  
whether the demand for labor slopes downward—will employers hire fewer workers  
when legislation forces employers to pay more? 
ACORN, the Association of Community Organizations for Reform Now, is the most 
 important advocate of living wage ordinances as reported in _this_ 
(http://www.nytimes.com/2006/01/15/magazine/15wage.html?pagewanted=1)  New York 
Times 
Sunday Magazine article.   (Don's post on the article is _here.)_ 
(http://cafehayek.typepad.com/hayek/2006/01/on_legislating_.html)  
I have read elsewhere that ACORN in 1995 tried to get itself exempted from  
the state of California's minimum wage legislation.  I have always wondered  
whether this was an urban legend.  Could it possibly be true?  It  appears to 
be 
true unless someone has hacked into the _Findlaw_ (http://lp.findlaw.com/)   
website.  (_Here's_ 
(http://login.findlaw.com/scripts/callaw?dest=ca/caapp4th/41/298.html)  the 
Court's judgment against ACORN.  If  that doesn't work, try 
googling this: Association of Community Organizations for  Reform Now v. 
Department of Industrial Relations (1995) 41 Cal.App.4th 298 , 48  Cal.Rptr.2d 
486. 
 I'd like to see ACORN's brief as well if someone knows  how to dig it up.) 
Most of ACORN's critics delight in pointing out the hypocrisy of ACORN.   How 
could an organization that fights for higher wages deny its own workers  
those higher wages?  But I'm more interested in the arguments that ACORN  used 
to 
make their case.  Here, from the court's decision, is why ACORN  argued that 
applying the minimum wage to ACORN would have an adverse impact on  the 
organization: 
According to ACORN, this adverse impact will be manifested in two ways:  
first, ACORN will be forced to hire fewer workers; second, its workers, if  
paid 
the minimum wage, will be less empathetic with ACORN's low and moderate  income 
constituency and will therefore be less effective  advocates.
The first argument was that demand slopes downward. 
The second argument is why I'd always wondered whether this story was an  
urban legend.  The second argument seems worthy of Saturday Night Live if  the 
show were written by economists. 
I am proud not to be a progressive.
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The Market for Health Care
Russell Roberts  
Any time someone complains to you about how bad the market for the health  
care works, it's important to remind them that most areas of the health care  
system are highly regulated in a top-down fashion or heavily subsidized.   The 
top-down part is often hidden, but today, at least, it's out in the  open.  
>From the _New York Times_ 
(http://www.nytimes.com/2006/01/16/politics/16drug.html?hp&ex=1137474000&en=f9353ff31dd315be&ei=5094&partner=homepage)
  (rr): 
With tens of thousands of people unable to get medicines promised by  
Medicare, the Bush administration has told insurers that they must provide a  
30-day 
supply of any drug that a beneficiary was previously taking, and it  said that 
poor people must not be charged more than $5 for a covered  drug.
Someone should ask Samuel Alito why this is constitutional. 
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January 15, 2006
On Legislating 'Living Wages'
Don Boudreaux  
Jon Gertner’s _cover article_ 
(http://www.nytimes.com/2006/01/15/magazine/15wage.html)  in today’s New York 
Times  Magazine offers no surprises. It’s as 
predictable as what you’ll read  here. 
Gertner reports on the movement for a “living wage” – a  movement working 
mostly at the local level, trying to persuade local governments  to legislate 
minimum wages well above the national minimum wage of $5.15 per  hour.
Of course, Gertner mentions the famous (or infamous) 1995  study by David 
Card and Alan Krueger in which the authors claim to find evidence  that a hike 
in 
New Jersey’s minimum wage caused no fall in employment and might  even have 
caused employment to increase. Card and Krueger are quoted, each  predictably 
insisting that their data exposes the error in the standard  economists’ 
analysis in which legislated minimum wages increase unemployment  among 
low-skilled 
workers.
Gertner makes no mention of the many critical responses to  Card’s and Krueger
’s study. (He does quote critic David Neumark – once – but  only on the 
success of the political movement for ‘living-wages,’ not on the  Card-Krueger 
study.) A good summary of the criticisms of Card-Krueger is _this essay_ 
(http://www.cato.org/pubs/regulation/reg18n1c.html)  by Donald Deere, Kevin 
Murphy, 
and Finis  Welch.  (I must also recommend _this outstanding blog-post_ 
(http://econlog.econlib.org/archives/2005/05/infinite_contra.html)  by my 
colleague 
Bryan  Caplan, over at EconLog.) 
Maybe Gertner can be forgiven, for Krueger told him that (in  Gertner’s 
words) “Some recent surveys of top academics show a significant  majority now 
agree 
that a modest raise in the minimum wage does little to harm  employment.” If 
a “significant majority” of “top academics” accepts the  Card-Krueger 
finding, why bother to talk with the lunatic fringe who cling to  the archaic 
superstition that higher minimum wages cause greater  unemployment?
But look more closely at what Krueger told Gertner – namely,  “top academics”
 (we’ll assume those to be economists and not sociologists and  experts on 
French literature) “agree that a modest raise in the minimum wage  does little 
harm to employment.” 

It seems as if Krueger is saying that  economists now agree that “modest” 
increases in the minimum wage are justified,  or at least not harmful. That is 
certainly Gertner’s reading of Krueger’s  meaning. 

But taken literally, the economist  consensus that Krueger reports is neither 
new nor inconsistent with the  traditional understanding that higher minimum 
wages reduce employment. This  understanding has nothing to do with the extent 
of the effect that higher  minimum wages have on employment; it has to do 
with the direction of the effect:  higher minimum wages, lower rates of 
employment of un- and low-skilled  workers. 

Because more than 95 percent of American  workers have skills sufficient to 
enable them to earn wages higher than the  federal minimum, any “modest raise 
in the minimum wage” is unlikely to have an  effect on employment that is more 
than modest. 

But let’s assume that Krueger really  means something more substantive – 
namely, that economists have been wrong to  assert that higher legislated 
minimum 
wages increase unemployment – and that,  therefore, the economists’ case 
against the minimum wage is without merit.  (Again, this meaning is the one 
that 
Gertner takes from Krueger.) 

Because there are margins other than  pecuniary wage rates upon which 
employers and employees can adjust, it’s  possible that higher legislated 
minimum 
wages don’t so much reduce employment as  reduce the quality of available 
employment. Most obviously, employers of  low-skilled workers can reduce (or 
not 
increase) fringe benefits, or they can  work their employees harder (thereby 
extracting more output per hour from  them). 

If the brunt of employer and employee  adjustments to higher minimum wages 
take place on these non-wage-rate margins,  even the finest empirical studies 
will show little or no effect of higher  minimum wages on the rate of 
employment. 

But it would still be a grotesque error  to conclude that low-skilled workers 
are generally better off as a consequence  of the higher minimum wage. 
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    *   _Free the Price-Cutters!_ 
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    *   _Shoplifting as Governance_ 
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    *   _For Whom the Governor Tolls_ 
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    *   _Should We Worry About Chinese Dollar Holdings?_ 
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    *   _Maryland Malfeasance II_ 
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    *   _Rapacious Bullies?_ 
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    *   _Missing Portraits_ 
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    *   _Vertical Demand Curves_ 
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    *   _The Market for Health Care_ (http://cafe
hayek.typepad.com/hayek/2006/01/the_market_for_.html)   
    *   _On Legislating 'Living Wages'_ 
(http://cafehayek.typepad.com/hayek/2006/01/on_legislating_.html)  
  
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