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.

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.

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.

Dollars and Saints

Sean Payton is the head coach of the Super Bowl-champion New Orleans Saints. The Saints are known for their high-powered offense, but few know that their best play this year was made by Sean Payton, before the season even began. Payton gave away $250,000 of his salary so that the Saints would have the funds necessary to sign defensive specialist Gregg Williams. We seldom hear of such sacrifice, but it's actually commonplace; sacrifice is necessary for success in competition.

Payton's goal was to win the Super Bowl. Forced to compete, he had to generate the best possible team with limited salary money. Instead of keeping the $250,000 for himself, Payton improved his team by using the money to acquire Gregg Williams. Williams revamped the team's defense, bringing victory to the Saints and prosperity to the city of New Orleans.

In capitalism, entrepreneurs and executives must compete to attract customers. A company attracts customers only if the price of its service is as low as possible. Low prices are possible only if production costs are low, meaning that resources are allocated efficiently. For example, say that Comcast can more efficiently provide the same Internet service that Verizon provides. If so, then Comcast will attract customers by offering prices lower than Verizon's. Comcast will turn a profit, which is great not only for Comcast, but for the entire country! People will get Internet service more cheaply, and will have extra money to be spent in other industries, which ultimately helps people who don't have Internet service at all.

Success in competition requires an efficient allocation of resources, thus competitors are compelled to sacrifice. In the end, Sean Payton profited from his sacrifice. Instead of equating profit with greed, we should commend risk takers like Payton for trying in the first place, for profits benefit not only the risk takers, but everyone who's counting on them. Just ask anyone on Bourbon Street.

The Value of Efficiency

Carpe diem. Seize the day. With all the rushing around we do, I'd say we take this phrase to heart. But why do we hurry to get things done? Why do we take on so much in a day? Well, there's a good reason: we know the value of efficiency.

Efficiency means getting desired results without wasting time or effort. We hurry to get things done so we have time left over for fun and relaxation. We take on so much in order to live life to the fullest. Efficient allocation of time leads to healthy and impactful lives.

Similarly, efficiency strengthens economies. Distinguished economist Thomas Sowell cites history to support this claim. For example, China's departure from Mao's heavy-handed government control led to an economic growth rate of 9 percent per year between 1978 and 1995.¹ As we discuss America's economy, it's important to understand that efficiency is the lifeblood of free enterprise, yet the antithesis of government.

Companies must be efficient to survive. Successful companies produce desired goods and services without wasting resources. This lowers production costs, which lowers prices for consumers. Thus we get what we need for less, and have money left over for spending (which creates jobs) and charitable giving. The free market system of companies cutting costs to survive has given us our world-class standard of living.

Contrastingly, government does not need to be efficient to survive. In fact, government is often motivated to waste. Take the 2009 Stimulus Bill, enacted to create jobs via shovel-ready projects. The bill's success is defined by the number of jobs created (number of workers used) for a given project. As a result, success is achieved by wasting workers! To illustrate this, imagine that 20 people are needed to build a bridge. The government could do the job with 20 people, but why not hire 100? Sure, manpower would be wasted, but more jobs would be created! This inefficient approach certainly helps the 80 extra workers, but ultimately prevents them from working to meet real needs in America.

This inherent difference between business and bureaucracy is the reason why free enterprise is the backbone of a strong economy. As America faces its highest unemployment in decades, Americans should support policies that promote efficiency.

1. Thomas Sowell. Basic Economics, pg. 27.

Taxes and Job Creation

Can the government create jobs? Absolutely. But it's important to examine how these jobs are created in order to understand the economic impact of government job creation.

Creating a job requires money, for the worker must be paid. Government dollars come either from taxation, printing money, or borrowing money. As printing and borrowing are unsustainable options, it's apparent that government job creation requires higher taxation. Ironically, raising taxes is the surest way to stifle overall job creation and hurt the economy.

To see this, consider that the overall number of jobs created is the amount created by government plus the amount created in the private sector. Jobs created by the government are made possible only by taxing the private sector, which results in fewer jobs created in the private sector. For example, say that the government uses $1 million in taxes to create 10 jobs. What if that $1 million hadn't have been taken away from the people? Those 10 jobs wouldn't exist, but the public would have had $1 million more to spend on desired goods and services. The companies providing those goods and services would have made more money, allowing them to hire more workers to handle the increase in business. So the $1 million in taxes created 10 jobs, but prevented an untold number of jobs from coming into existence.

Two other factors further demonstrate why raising taxes to create jobs is counterproductive. First, taxes discourage people from starting their own businesses. People already face the daunting fact that two-thirds of small businesses fail within five years; higher taxes let them keep less of what they earn, lowering the likelihood of expansion and their incentive to try in the first place. Second, bureaucracy means inefficiency. To create jobs, government workers are paid to collect and redistribute the taxes and to organize and oversee the jobs. Money intended for job creation must first pay for more government! This problem is bypassed by letting the free market create jobs where they are needed.

Government job creation is made possible by raising taxes, which ultimately suppresses overall job creation. Today, administration officials boast of the jobs that they've created, even as the overall job market plummets. With more government intervention on the horizon, let's hold our leaders accountable for the prosperity their policies are preventing.