Friday, May 19, 2006

Are Consumers to Blame?

During a recent discussion with a friend about immigration, I made the argument that prices on some goods and services would be higher if it weren't for the availability of cheap labor provided by illegal immigrants. My friend responded with skepticism because she doesn't believe the cost savings on labor are necessarily being passed on to consumers. This belief is pretty common, and those of us who are believers in the invisible hand of the free market would argue that competition among businesses provides an incentive for passing those savings on to their customers, as he who offers the best service at the lowest price should be the most successful. Still, this doesn't mean that some businesses don't continue to save money on labor (or other factors of production), charge the same prices, and pocket the difference. But how can a business that does so stay in business if the potential exists that his rivals will underprice him, thereby taking away his customers?

I think I have an idea of at least one factor that contributes to that ability significantly...irresponsible consumerism.

My friend cited landscaping and painting as her example, as there are services for which she's contracted with local businesses in the past. She said that it's been her experience that bids for the same job from different businesses seem to come in "all over the place." Business A may bid $1000 for a painting job, while business B may bid $3000 for the same work. Why the difference?

There could be many reasons. Business A may not do as good a job as B, or B may be in higher demand than A. Maybe B uses only certified, bonded laborers, whereas A hires day labor. Regardless of the reasons for the disparity, it is the consumer's responsibility to ensure that he or she is getting the best value. This is why my friend gets at least 3 bids for any job, putting her among the responsible ones. There are plenty of people, though, who simply take the first bid they get. Since prices are ultimately determined by what people are willing to pay for a particular good or service, this could certainly contribute to rising prices.

In addition to shopping around, further responsible action may be required, such as asking Business B why his bid is so much higher than his rival's. This gives notice to B that he must compete with A for your money, providing him with incentive to either lower his price or convince you that his work is worth the additional cost. By the same token, calling A to find out how he's able to charge so much less than B would provide information that could help make an informed decision. Of course, A, B, or both could simply respond by talking smack about the other, which would be telling in itself.

Too often, people are unwilling to put in the legwork necessary to make an informed purchase decision, and in the event that it leads to a bad experience the typical response is to shift the cost of the poor choice onto someone else. Whether the cost is shifted to the manufacturer or service provider in the form of a lawsuit, or widely distributed to taxpayers and consumers in the form of increased regulation resulting in higher prices, we all pay extra for the bad choices made by some. Government intervention in the form of regulation, the Consumer Product Safety Commission (CPSC), and the Food and Drug Administration (FDA) only serve to exacerbate the problem by making it unnecessary for consumers to act responsibly. Such paternalistic tendencies affect all areas of our lives, undermining personal responsibility every step of the way.

Thursday, May 18, 2006

Absolutely Unbelievable...

Forget about defining marriage, the city council of one Missouri town has taken it upon itself to define what a "family" is and is not. Further, it presumes to dictate who may live with whom, and under what circumstances.
The current ordinance prohibits more than three people from living together unless they are related by "blood, marriage or adoption."
This is unmitigated gall in the extreme. I don't even know what else to say. I know I should explain exactly why I feel that way about it, but right now I'm too disgusted.

Friday, May 12, 2006

Yet Another Post on U.S. Auto Makers

In the Soviet Union, there were frequent problems with production for its own sake, and the problem was often made worse because it was hard to monitor the managers in every industry -- the old joke is that an order for 1000 pounds of nails was just as likely to result in one 1000-pound nail as it was to result in 1000 pounds of "normal-sized" nails.

But getting back on topic:

Saying that the Detroit auto builders employ more workers per car built is just another way of saying they're less efficient. It's hard to believe that anyone thinks this should be a badge of honor.

There's an old story about an economist visiting the Soviet Union in the 60s. He is taken on a tour of a new dam project East of Moscow, and he observes that the workers are using shovels to prepare a foundation while various bulldozers and earth-movers sit idly by. "Why are the workers using shovels instead of heavy equipment?" he asked.

"Well, we can employ many more workers if they dig by hand," responded his tourguide.

To which the economist said: "Well, if the goal is to employ as many workers as possible, why not dig with teaspoons instead of shovels?"

A healthy business, industry, or even economy, does not function to provide employment. Employment is a side effect of a healthy, growing economy. The purpose of an economy is to produce goods and services that consumers will want to buy. One service provided is labor. But labor is only valuable when it is willingly bought by those who demand it. Employment for its own sake makes no more sense than production for its own sake (think of the 1000 pound nail).

Thursday, May 11, 2006

More U.S. Auto Maker Frenzy

Okay first off, the name of the group referenced in this article (the Level Field Institute) kills me. There’s no such thing as a “level playing field” in a free market. Businesses that are good at serving their customers will be successful, while those that aren’t will fail. “Leveling the field” usually means hindering a successful business for the benefit of one (or a group) that is less competent. Hobbling the fastest runners so the slower ones have a chance to win hardly results in a moral contest.

The group’s central argument is the fact that U.S. auto manufacturers employ more workers that foreign auto makers.
"The truth is, U.S. automakers still employ eight out of every 10 autoworkers — four times more than all the automakers from Japan, Korea and Europe combined."

…to which I say, “so what?” Lots of businesses employ more workers than lots of other businesses. The comparison is silly, especially since domestic auto makers are talking about more plant closings in the near future. Are they suggesting that the foreign auto makers’ plants in the U.S. should be shut down and their workers divvied up between Ford, GM, and Chrysler plants?
"I'm surprised that with the Big Three meeting with President Bush next week to talk about their survival, few people seem to care," [Jim] Doyle said. "I don't think people appreciate the difference in the scale and quality of the jobs at stake..."

No, of course they don’t...nor should they. Consumers care about the quality and price of the vehicles being produced. They will support the jobs they value most highly by spending their money…and condemn those of lesser value by not spending it. The fact that U.S. auto manufacturers are unable to compete in any market, domestic or global, means that consumers have chosen them for extinction unless they get their shit together. I’ve said it before...the giant, uncompetitive American auto makers must be allowed to fail, so that the workers they employ can find jobs in areas more highly valued by consumers.

There is a bright spot in the article, though…
"Detroit's ability to shape important government policies, such as fuel-economy and air-pollution rules, will be much diminished, and the likelihood of federal aid for research and development will be reduced," Patel wrote in a recent research note.

We can only hope. they're taking our jobs AND our houses!

The methodology used in this study is a bit silly, but the numbers are still interesting. I am a little confused, though. If illegal immigrants (most of which are hispanic) are supposedly depressing wages and lowering the standard of living everywhere they go, how is it that they're able to buy houses? Surely they're taking homes away from hard-working Americans!

Wednesday, May 10, 2006

Protecting our Borders

Boy, am I glad we have people like Sheriff Arpaio, to protect our borders from those no-account, blood-sucking, wage-depressing, culture-diluting, non-English-speaking illegals! What ever would we do without these fine individuals to protect us from paying less for thousands of products and services? The ability to sleep better at night, knowing our borders are safe is well worth the extra money we’re forced to spend! What a load of crap.

Beyond the nonsense about “protecting our borders”, there’s something in this article that most people will probably miss:

The immigrants had been on their way to build a dairy farm
in this town about an hour southwest of Phoenix.
So, now there’s a dairy farm that probably won’t be built. If it is built, it will have to be done by American workers, so it will cost more to build. The extra expense could cause the dairy farmer to rethink his plans entirely, possibly deciding not to build the farm at all, or he could decide to build it in a more cheap-labor-friendly location. Even if the farmer does choose to go ahead and build the farm using American workers, there will be less money left in his pocket to spend on other things, such as equipment for the farm or food for his family. He will probably be forced to hire fewer workers, or pay lower wages to those he does hire, in order to recover the building costs. Should he decide to build the farm elsewhere, fewer jobs will be created in the original location, and local businesses will lose the benefit of those additional customers. Because of Sheriff Arpaio’s zeal to keep out the undesirable element, many people (besides just the illegals) will be worse off.

Monday, May 08, 2006

Mankiw on Trade and Outsourcing

Two years ago Greg Mankiw got a lot of heat for publicly suggesting that (gasp!) outsourcing jobs to India could be an example of creative destruction, noting that it's better if we don't try to hang onto jobs that the U.S. no longer holds a comparative advantage in.

He finally sets the record straight in this post. If you neither believe that free trade makes everyone better off in the long run, nor that free movement of labor does, than that's a failure of we, the economists, to educate the public. But if you believe in free trade for goods but not of labor (or like some real geniuses, the other way around), then you're just a stubborn person in denial.

Saturday, May 06, 2006

Why do things cost so much?

This question was asked of me by my sister some time ago. In a similar vein, a friend recently lamented the fact that the final price of most products on the market don't faithfully reflect the costs of their production. The point of this post is to show how the workings of the price system answer the first question, while examining the relevance of the price vs. cost argument.

First, let's talk about labor. Labor is everything. Nearly 100% of the cost to produce any given service or product is traceable back to the labor employed to create every item used in its creation. In order to understand the full impact of this fact, one must look beyond the manufactured goods used to create a product and realize that those items began as crude resources buried in, laying on, or growing out of the ground. The resources themselves have no inherent cost, nor by the same token any inherent value. They are given value through the labor used to harvest them and make them into useful things. Therefore, it is impossible to determine the cost of any item without considering the labor used to produce each of its parts from crude resources, and the cost of such labor is determined by relative scarcity, along with the level of effort required to harvest those resources. No one person, committee, or government bureaucracy is able to determine what the cost of labor "should be", as it's relative to the difficulty of the labor being performed, the demand for the final product on the market, and the number of laborers with the necessary skills to perform the work. (This is one reason those who lament the transition in America to a mostly "service-based economy" need to calm down, but I'll save that discussion for another post.) And so the cost of labor, as with the cost of the final product or service, is determined by supply and demand.

The law of supply and demand is really a simplified way of explaining the very complex process that is the "price system". Prices do more than just generate revenue and profit for entrepreneurs and corporations. They are also a "yardstick" that helps show market actors (entrepreneurs and investors) where to invest their time and dollars for the greatest return. If the price of an item is high in relation to its cost of production, the market actors will invest in the production of said item in order to receive a profit. As more actors invest in the production of the same or similar items, competition forces them to adjust their prices in order to maintain their share of the market. If the cost of production remains constant, lower prices will mean less profit, so cheaper ways of producing the item(s) will have to be devised. In this way prices and profits constantly adjust to meet the changing conditions of the market.

Now, suppose the government stepped in and mandated a price control, saying that businesses were only allowed to make a certain amount of profit so that prices more accurately reflected the costs of production. Since profits would be the same across the board, the lure of investors to potential profit would be reduced, if not outright eliminated, meaning fewer dollars invested in new products or services. Additionally, competition between firms producing similar goods would be pointless. Since no one has the opportunity to make more profit than any other, why bother competing for consumer dollars? Probably the most intense effect would be the elimination of any incentive to find cheaper, better ways to produce anything, meaning that prices would remain high, while quality would stagnate or decline.

A friend told me the other day that his father paid $700 for a VCR when they first came out in the early '80's. Nowadays, a 4-head, hi-fidelity VCR with wireless remote can be had for under $50. Had government decided at the time that $700 was a ridiculous price to pay for a VCR and passed a profit cap on the product that limited its price to say, $300, 20 years later we'd still be paying $300 for a grainy picture and mono sound...complete with a wired remote. Unless, of course, the workers producing VCRs were unionized, at which point we'd probably be paying $1000...but I digress.

I'm a giant slacker.

Okay, so it's been over a month since I posted anything to the wombat blog. I know...I suck. I have no real excuses, other than to say that for a while I've been wondering what the point in posting really is. There are so many blogs out there that it's not terribly likely anyone will run across mine, and even if they do will my ramblings really give anyone food for thought?

Maybe...maybe not. But I guess that's not really the point after all. The point is that ideas are where change begins. Most likely anyone that runs across my blog, whether they agree with me or not, will agree that there is something wrong with the world we live in, and most of them will probably not be sure what exactly it is that's wrong. For a long time, I was one of those people.

Now though, I have a much better understanding of the role that freedom (or lack thereof) and economics play in shaping society. So hopefully I have some things to say that will give others something to think about and reach their own conclusions. In the process my own conclusions and understanding will be tested, shaped, and solidified. So, even if nobody reads my spouting off about this or that, someone still benefits in the process...and that's the whole point.