Sunday, April 18, 2010

Prices and Scarcity

I love this excerpt from Thomas Sowell's Basic Economics:
"Misconceptions about the role of prices are common. Many people see prices as simply obstacles to their getting the things they want. Those who would like to live in a beach-front home, for example, may abandon such plans when they discover how expensive beach-front property is. But high prices are not the reason we cannot all live on the beach front. On the contrary, the inherent reality is that there are not nearly enough beach-front homes to go around and prices simply convey that underlying reality. When many people bid for relatively few homes, those homes become very expensive because of supply and demand. But it is not the prices that cause the scarcity, which would exist under whatever other kind of economic system or social arrangements might be used instead of prices. There would be the same scarcity under feudalism or socialism or in a tribal society.

"If the government today were to come up with a 'plan' for 'universal access' to beach-front homes and put 'caps' on the prices that could be charged for such property, that would not change the underlying reality of the high ratio of people to beach-front land. With a given population and a given amount of beach-front property, rationing without prices would have to take place by bureaucratic fiat, political favoritism or random chance—but the rationing would still have to take place. Even if the government were to decree that beach-front homes were a 'basic right' of all members of society, that would still not change the underlying scarcity in the slightest."1
1. Thomas Sowell. Basic Economics, pg. 13.

Saturday, April 10, 2010

Extending Unemployment, Part II

President Obama said that the number one goal of the 2009 Stimulus Bill was to create jobs. This bill extended unemployment benefits by up to 33 weeks and increased their amount by $100 a month. Unemployment benefit money comes from taxing employers, so expanding these benefits reduces the number of jobs — the opposite of the Stimulus goal.

Existing Jobs Are Destroyed

All employers strive for revenue (income from sales) to exceed costs; otherwise, debt accumulates and failure awaits. Expanding unemployment benefits requires raising taxes on employers, which lowers their revenue. Reduced revenue compels employers to cut costs. A major cost is employee salary, so cutting costs generally means cutting employee salary, which means laying people off. In this way, expanding unemployment benefits sets off a chain reaction that expands unemployment.

There's another aspect worth considering. Say that you're an employer thinking about laying someone off. On a personal level, you'd feel guilty for causing hardship. But wouldn't you feel less guilty knowing that this person would receive expanded benefits, and knowing that you've funded those benefits? Any policy that makes it easier for employers to cut jobs is bad for job creation.

Fewer Jobs Are Created

Expanded unemployment benefits discourage the creation of new businesses because prospective employers know that higher taxation makes it more difficult to profit and to survive. And fewer new employers translates to fewer new jobs.

Additionally, the fact that money is taken from people who create jobs (employers) and given to people who are only looking for jobs suggests that fewer jobs will be created.

Since the Stimulus Bill was signed, the number of Americans receiving unemployment benefits has more than doubled, growing from 4.8 million to 11.4 million people. Recently, there's been an additional benefits extension of up to 20 weeks. As generous as these benefits seem, we should keep in mind that they require taxing employers, which just ends up expanding unemployment! America cannot afford to continue this vicious cycle.

Sunday, April 4, 2010

Extending Unemployment, Part I

Currently, $10 billion a month is spent on unemployment benefits for 11.4 million people.1 That's an average of about $900 a month per person. Normally, these benefits can only be received for 26 weeks, but recently there have been multiple extensions due to high unemployment. People in states with the highest unemployment can now receive benefits for 99 weeks. Sadly, extending unemployment benefits discourages recipients from taking available jobs, which just extends unemployment.

Say that you're offered a job. Which monthly salary would entice you more, $600 or $1500? Clearly, $1500 is more attractive. Now consider hypothetical Joe — unemployed and receiving monthly benefits of $900. Say that Joe is offered a job for $1500 a month. Since he already gets $900, the job would only give him an additional $600 a month. So his reward for taking the job is really only $600 a month, not $1500. Just as you're less enticed to work for $600 than for $1500, Joe is less enticed to take this job. And just as unemployment benefits reduce the incentive to take this job, they reduce the incentive to take any job.

Virginia resident Jerome Boyd has been unemployed for seven months, and currently receives $1200 a month in benefits.1 Jerome admits that he's only looking for jobs that pay above minimum wage, saying, "I can't take something that's minimum wage because I just won't be able to pay my bills." But bills aside, he would be a sucker to take a minimum wage job! Minimum wage is $7.25 an hour, so a full-time job (8 hours a day) would pay $1276 a month (22 working days). Why would he work a full month for $1276 when he can stay home and receive $1200 in unemployment benefits? With these benefits, Jerome is better off avoiding many available jobs.

This tendency to avoid available jobs is natural so long as benefits continue to come. With temporary benefits, recipients have to find work before the benefits stop; recent extensions have significantly delayed this urgency, and have likely led to widespread expectation of future extensions. In this way, the extension of benefits has reduced or removed the incentive for people to take available jobs.

Despite the consequences, extending unemployment benefits seems compassionate. My next post will show how this policy hurts the unemployed by making it more difficult for them to find work.

1. Michael A. Fletcher and Dana Hedgpeth. "Are Unemployment Benefits No Longer Temporary?" The Washington Post, March 9, 2010.