Tuesday, June 06, 2006

Will someone tell Paul Krugman to avoid labor economics?

Via Don Luskin and one of his readers, Krugman recently gave a speech that defies economic reality. One would think it's hardly worthy of an MIT-trained, Princeton-tenured economist, but it is typical of Krugman. Instead of focusing on his specialty of international trade economics, he again descended into other aspects of economics where he's just a pundit, not a serious economist.

Krugman, once upon a time, did good economics -- at least, academic economics. I mostly share Robert Musil's criticism, "What example, in the real world, is a single meaningful application of Paul Krugman's trade insights anywhere outside of academe and academic journals?" I say "mostly share" because certain scientists do spend an inordinate amount of time and resources explaining how this and that part of the universe works, only to produce nothing practical, but the findings still can be interesting from an academic standpoint or to curious laymen. On the other hand, science can be practical and productive: physicists develop the latest technology in lasers, optics and superconductors; chemists achieve advances in polymers; and biologists genetically engineer stronger crops.

I disagree with Don on whether economics is a true science. He doesn't believe it is, whereas I think that it is -- as a social science. Science involves gathering data, forming initial hypotheses, subjecting the hypothesis to testing, then developing a theory. The difficulty with economics, and indeed other social sciences, is that the data is typically imprecise, particularly when it comes down to observing human nature. But that's why we have the "social sciences" classification separate from the natural sciences. Economists can't measure trade patterns or calculate tax policy effects with the precision that chemists use in analyzing reactions of known quantities. That doesn't mean, though, that economists aren't scientific in their methods. Also, with each decade we accumulate more data about economic phenomena, or improve our techniques (like Dr. Vernon Smith's work in experimental economics), allowing us to better analyze the past, refine our theories, and make better predictions about the future. Now, I personally distinguish between real economics and the pseudo-economic punditry that's so commonplace, evident in the differences between Krugman's papers from years ago and his New York Times op-eds. That's not real economics, only what Don has criticized as "economics as politics" or "economics as a weapon." There are still real economists, however, who objectively try to analyze and explain human action and its consequences.

The title of this post is because when Krugman said, "There's no reason Wal-Mart couldn't have reasonably high wages, but they choose not to," he showed he doesn't know what he's talking about. Or perhaps he does, but for the sake of his punditry, he continues to ignore the simplest economic principles of business. I never went to MIT, nor have I ever taught at Princeton. Yet I know enough to discuss the economic differences between Costco, Sam's Club and Wal-Mart. Isn't it evident to everyone that if Wal-Mart paid its workers more, then it would have to raise prices? Raising prices, naturally, would price out the poor from shopping at Wal-Mart, despite the fact that Wal-Mart's "everyday low prices" are of greatest benefit to those with the lowest incomes. So who really champions the poor: a business like Wal-Mart that aggressively delivers the same goods at lower prices, or Krugman's conception of nanny state government that has never delivered in all these decades?

"Krugman noted that General Motors Corp. was the largest American company during the 1960s and paid good wages and benefits to its workers. Today, he said, the country's largest corporation is Wal-Mart Stores Inc., which pays its workers $17,000 a year." Krugman's fallacy here is to claim that the largest employer is indicative of the average American worker. General Motors may have been the largest employer, but hardly so large that it reflected typical labor conditions. The same applies for Wal-Mart. We can readily see this in Bureau of Labor Statistics data, which tells us that average earnings in May 2006 (preliminary estimate) for non-supervisory, non-farm, private workers was $16.59 per hour. That's about $34,500 a year, tor twice as much as what Wal-Mart pays its regular shelf-stockers, which makes sense. After all, Wal-Mart employs only one out of every three hundred U.S. residents.

And once again, Krugman compared apples and oranges. The "good wages" are completely relative when we consider all the modern things within reach of the working class: more fuel-efficient cars with more amenities, computers and Internet access, large color TVs and DVDs, cell phones, effective over-the-counter cold remedies, even air conditioners in most houses. Who would want to live 30 years ago and not have all the benefits of today? Maybe some would, but I wouldn't at any rate of pay. Just the ability to go online and acquire information is more valuable to me than ruling the world of decades ago.

Krugman has attacked executive pay before, but let's be logical here. If Wal-Mart took $100 million in annual executive pay and distributed it among the workers, since Wal-Mart has over one million employees, that's only $100 more each year. By the time Wal-Mart got to significant amounts, perhaps $1 billion that would be $1000 per employee, it wouldn't be able to attract top executives that make the company so successful -- meaning bye-bye to a lot of jobs. What Wal-Mart does is no more than indicate the true market value of people's labor, not because the company says they're only worth $x per hour, but because ultimately the decision is indirectly made by the customers.

But that's not all Krugman said. He called for "better education, although it's not a panacea," i.e. it's a good talking point that's of questionable value in the end. He called for "health care reform," but when the Medicare prescription drug bill alone is spiraling out of control, how can we expect to afford universal health care? If we simply soak the rich, everyone might have health care, but say bye-bye to the jobs that are made possible by rich people's money. Krugman wants to raise the minimum wage, ignoring that minimum wages create unemployment and/or raises the price of labor-based goods and services. Krugman wants to increase unions' power, meaning he supports the right of employees to infringe on employers' property rights. Would he also support civil employees illegally holding municipalities hostage?

Krugman wants a return to progressive taxation. Considering that the higher my income, the more I pay in income taxes, I have no idea why he thinks our current system is not progressive. Naturally he's referring to Bush's tax cuts, though the NCPA notes that "the rich" still pay the bulk of taxes, and EconoPundit's graphs prove everyone got the same tax cut as a matter of absolute percentage of income. (Lower incomes actually benefited more, because if taxes are reduced universally by 1% of income, that's a greater percentage of lower incomes' tax burdens than for upper incomes that pay a large portion of their income in taxes.) As I once described the graphs, "let's put it in a Sesame Street-simple picture, complete with colors so that even a Berkeley economics professor can understand." Or a Princeton economics professor.

Krugman wants a "reincarnation of FDR," but why would we want a liar who campaigns on one platform and does the reverse once he's in office? Why would we want someone who would wreck the economy by raising taxes and wastes it on digging and refilling holes, when the money could have gone to productive business investment? Why would we want someone who started the despicable idea of government paying farmers to destroy crops? Why would we want someone so corrupt and who had such little regard for the Constitution, the Supreme Law of the Land, that he tried to stack the Supreme Court with his own people? Heavens no, another FDR is the last thing we should want.

Krugman and John Kerry complain the rich don't pay enough in taxes, yet as people with more income and wealth than the average American, nothing prevents either from writing larger income tax checks to the federal government and refusing the refunds, donating money to charity, or giving money to the small businesses that they claim to champion. If they are so concerned with the alleged "inequality" in income and wealth, then why don't they start a trend by giving away their possessions? Nothing prevents them from setting an example for others, except the difficulty of doing so. They follow the easier path of using government to force people to act the way they want, and saying a few words to justify it, rather than persuading people with their own actions.

How FDR created the great American middle class is a subject on which Krugman has invested much thought. But he still isn't sure how Roosevelt did it, and how presidents since then undid it. In the end, he remains positive about the future.
So Krugman effectively admitted here he's not a good scientist. No chemist would dare argue that a change occurred unless he knew what it was before (i.e. Roosevelt supposedly creating the middle class), let alone what he thinks effected the change or even reversed it. Krugman also wants to throw around this term "middle class" though it means completely different things in succeeding decades. In the 1950s, it may have meant the nostalgic house with a white picket fence and a car for father, but two cars was unthinkable, unlike today. And as I pointed out above, technology advances so much that there's no comparison between today's classes and yesterday.

So many people fall for the ridiculous notion that income equality is desirable, let alone achievable. It defies the fact that people respond to incentives, and there are those in society who will work harder, smarter and more because they will acquire more wealth that way. If we tried to form a "just" society by equalizing incomes, we'd only make everyone poor. We wouldn't have the CEOs and other top executives whose supposedly "obscene" pay is what drives them to seek new oil fields, create new plastics, develop more efficient business models to transport goods all around the globe, etc., all of which improve life for everyone. We wouldn't have all the wealth that "the rich" are typically responsible for creating, which they either spend or save, creating jobs for everyone else. Perhaps academic economics is too limited in comprehending this.



Blogger Federalist said...

This is the first time I have read your blog. In looking around, I find I am in agreement with you on many things. However, on the subject of Wal-Mart (which I rather dissaffectionately refer to as Val-De-Mart, I don't.

It is difficult to pin down and it is time that I specifically consider my thoughts on the subject.

I should mention that the very mention of Paul Krugman's name makes me queezy.

Right now I vote with my dollars and Vol-De-Mart does not see any of them. For a long time I have been suspicious of them and the way they squeeze suppliers (I know three people who either Val wanted to supply, who did supply, or wanted to supply) and make their lives miserable.

It has been said that we can certainly pay to much for something. It has also been said we can pay to little. I have to wonder if this is not the case when it comes to the company from Arkansas (often refered to as the worlds largest chinese outlet mall).


Sunday, September 10, 2006 4:43:00 PM  

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