What Should We Make of the Gig Economy?

Noah Smith's recent column on job outsourcing does two things: it repeats mistaken claims about the plight of the average worker in the U.S. and it accurately identifies market-generated opportunities that could deliver economic improvements for everyone. In this post I'll respond to the former and give my thoughts on the latter.

Here are the problems Smith identifies. In some cases he's factually incorrect. In others I think it's important to shed light on the causes of the problems.

The average American worker is confronting a number of problems right now -- stagnant income,  an overhang of debt from the housing bubble, the high cost of college and the replacement of pension plans with high-fee, low-return 401(k) plans. But few would deny that one huge challenge is economic insecurity. Political scientist Jacob Hacker’s 2006 book, "The Great Risk Shift," discusses how many risks that were once borne by companies are now shouldered by individuals. ... Basically, the era of "good jobs” is a memory for most workers. Private-sector unionization is disappearing, average job tenure has plunged and benefits have been cut. 

First on the list is income. Data on total compensation shows that people are better off in real terms than they were 5, 10, and 15 years ago. Wage growth isn't stagnant. Neither is non-wage compensation, implying that benefits are not being cut. If medical benefits have been cut recently, it's likely a result of the "Affordable Care Act."

Food Labels and the Informed Consumer

Product labels are an important part of communicating product information to consumers. For a long time, regulators and politicians have been in the business of mandating the content of labels for a whole range of products, especially food. While other reputation mechanisms are important to being fully-informed, we all rely on labels to some degree.

But mandated labeling has its share of pitfalls. Regulators might require too much information on a label, increasing costs to consumers with little upside. They might reduce the amount of information on a product label by increasing the costs of using certain language. More bizarrely, they might require completely misleading information to be put on a label. Arguments in favor of different labeling requirements can come from consumer pressure groups, but often they come from within industries.

An example of the first problem is mandatory country-of-origin labeling (or MCOOL) of meat products. Though there are efforts in congress to repeal MCOOL, it is currently the law of the land. A fact sheet distributed by K-State concludes:

The overriding finding of limited awareness of MCOOL, narrow use of origin information in purchasing decisions, and no evidence of a demand impact following MCOOL implementation is consistent with the argument that voluntary labeling by country of origin would have occurred if it were economically beneficial to do so. More broadly, the findings of this project generally support the assertions of MCOOL opponents who have asked “where is the market failure?” 

MCOOL creates international trade issues and increases costs to producers, processors, and retailers with little to no upside.

Does Lower Unemployment Imply a Stronger Economy?

With all the buzz about a $15 minimum wage, or a $10.10 minimum wage, there's been a lot of discussion about the effects of minimum wage on the labor market. While some of the empirical work on the subject says the minimum wage doesn't affect employment, most of it says otherwise.

Another popular topic these days is Federal Reserve policy; specifically how and when the Fed will raise interest rates. A major concern is that raising rates "too soon" will cause unemployment to stop falling or start rising again. The Fed has cited improvements in labor markets as a sign that it could start raising interest rates soon. Looking only at the unemployment rate, the idea that labor markets are improving makes sense.

In this post I'll discuss unemployment and labor force participation rate data since the recession, then give a numerical example that shows that even if the unemployment rate is falling, the labor market and the economy overall may not be improving as much as we'd like to think.

Policy Pessimism (Realism?) in Economic Theory

One of my favorite Hayek quotes regards the necessity of humility in policy design:

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

I've come across a few interesting posts in the last few days on this topic and thought readers would be interested. I've reproduced the first post in its entirety.

Mike Munger lists four economic theories that imply there are serious limitations on the ability of policy to fix the problems identified with standard theory:

1. The theory of the second best. 

Simply put, if the world or model has multiple distortions in it, removing only one of those distortions may not make things better. This applies so strongly to macro and development economics, but it rarely even mentioned. Consider corruption. Suppose a polity has bad laws, weak rule of law, oppressive regulations, little protection of property rights and corruption. In such an environment, an anti-corruption campaign alone may actually make many people worse off. You can no longer bribe your way out of the oppressive regulation or bribe your way into protection of your property. This one is a real doozy. 

2.  Arrow's impossibility theorem. 

Simply put, this tells us that there is no ideal, comprehensive way of aggregating individuals preferences into an aggregate choice. Arrow shows there is no mechanism that is non-dictatorial, satisfies independence of irrelevant alternatives, and pareto efficiency. 

Or as the great philosopher Robyn Hitchcock put it, "When I hear the word "Democracy", I reach for my headphones." 

3. Related is Hurwicz's impossibility theorem of mechanism design, which shows that there is no strategy-proof, Pareto-efficient, and individually rational rule for allocation. In other words, a planner cannot get truthful revelation from people about their preferences and willingness to pay without wasting resources in the process. 

4. The Folk Theorem. 

This is a strange one because some "folks" take is as a feature, rather than the devastating bug that it really is. The folk theorem shows that if people are patient enough, any behavior pattern can be an equilibrium of an infinitely repeated game. I have actually seen papers invoke the folk theorem in a positive sense, citing it to prove their preferred story is an equilibrium story, without realizing the irony that in that setting ANY story is an equilibrium story.  Ouch.

Per Bylund says economics is dead and is being killed again.

Don Boudreaux shared an interesting quote from Dierdre McCloskey's book The Bourgeois Virtues. His own commentary on the post is interesting as well.

And here are a couple of related Farmer Hayek posts:
Demsetz on Comparative Institutions
Blackboard Theory Versus the Reality of Markets

Whole Foods Co-Founder on "Why Intellectuals Hate Capitalism"

This is just a fantastic conversation. Nick Gillespie usually does a good job with interviews; this time he did a great job. John Mackey, co-founder of Whole Foods,

My only quibble is that he misunderstands the idea of firms maximizing shareholder value. Keeping your customers happy and creating the perception in the public's eye that you value other stakeholders is 100% consistent with maximizing long-run shareholder value. What else do shareholders want?

The PR Cost of Pro-Ag Policy

Last week, Jayson Lusk commented on a recent strike down of an ag-gag law in Idaho. Such laws are designed to keep anti-ag activists from recording footage on farms and using it to make the industry look bad.

Lusk points out the potential for unintended consequences:

From the farmer's perspective, it isn't hard to see understand the motivation for such laws.  But, what kind of PR does such a law create for the agricultural sector?

... in trying to protect themselves from undercover activists, proponents of the law now created bad publicity for the entire industry (even for producers who weren't video taped and who did no wrong) in one of the largest newspapers in the country.  It is not as if there is no legal recourse for activists who break the law.

In an era where consumers demand greater transparency, the industry probably isn't doing itself any favors by engaging in public actions that make it appear as if there is something to hide.

 So, the industry pushes for ag gag laws, they pass, and those who love to bash the industry have more ammo. As the article Lusk refers to points out, we already have laws against "trespass, fraud, and defamation." Does the ag industry need enhanced versions of those laws? What are the public relations costs?

Over the last few weeks, I've had similar questions about all pro-ag laws. There are plenty of laws and regulations that impose heavy costs on the industry. I'd wager that most anti-ag activists are happy about them and wish they were more plentiful. However, there are a lot of pro-ag laws on the books that very likely impose a PR cost on the industry.

Consider the passage of the farm bill last year and the media frenzy it created. For example: here, here, and here. (I defended it here.) What does it cost the industry to deal with the objections made by anti-ag activists? I don't think that cost, whatever it is, comes to mind often enough in policy discussions. Ag is organized very well at the state and national levels with the many breed associations, crop producers' boards, Farm Bureau, and other organizations out there. I see no reason that these groups should ignore the PR costs of pro-ag policy.

Does the US Have a "Cheap Food" Policy?

It's often said, in defense of payments to ag producers, that these subsidies constitute a "cheap food" policy. Advocates of the policy contend that the subsidies incentivize increased production such that food prices fall. It's a win-win: producers benefit directly from the subsidy and consumers (especially the poor) benefit from reduced prices at the grocery store.

Leaving aside the question of whether or not these types of policies should exist, it's interesting to see whether the subsidies actually result in lower food prices. It's important to note that direct payments to producers have been reduced as of the 2014 Farm Bill and that the USDA spends an increasingly greater percentage of its budget on direct food assistance. That said, the article's findings are still interesting today.

With all that out of the way, I want to summarize the findings of a paper by Corey Miller and Keith Coble of Mississippi State University. The paper is relatively old; it was published in 2007 in Food Policy, but it nevertheless provides some interesting insights. The gated, full version is here and an un-gated but incomplete version can be found here.

Potpourri... Again

Bob Murphy, in his characteristic fashion, uses Paul Krugman's analysis to show that fiscal austerity leads to a robust recovery.

The story of Tesla's crony capitalism takes a sharp turn for the worse. 

Not content with the billions it gets in government help, Tesla Motors now wants tougher fuel economy standards that would cripple its competitors.

It's just regulatory capture. Of course, such regulations are seldom consistent with what consumers actually want:

Tesla expects to sell about 55,000 cars in 2015. Chevy sold more Silverado pickups — which get a paltry 20 mpg — in one month. Overall, consumers bought about 120,000 plug-in electrics last year, while Ford sold more than four times as many of its F-150 trucks.

The only thing Tesla's "tough" fuel economy standards would do is force millions of consumers to buy cars they clearly don't want.

Then again, Tesla is already heavily dependent on government. As the Los Angeles Times reported earlier this year, Tesla Motors has received almost $2.4 billion in government support in the form of special tax breaks, cheap government loans, regulatory "credits" and subsidies to buyers.

The sad part is, even with all the favors it gets, Tesla can't manage to turn a profit:

The Silicon Valley automaker is losing more than $4,000 on every Model S electric sedan it sells, using its reckoning of operating losses, and it burned $359 million in cash last quarter in a bull market for luxury vehicles. The company on Wednesday cut its production targets for this year and next. 

And speaking of regulation, here's yet another example of how licensure regulations keep the poor from improving their lives.

Natural Resource Potpourri

I don't have the expertise in natural resource economics to really do a lot of writing on the topic. However, I want to make sure we cover it at least occasionally, so I'll probably stick to this potpourri format for now. I hope some day we find a contributor who is interested in this area.

Lynne Kiesling has a great post on the benefits of retail electric markets. Living in the state of Texas, I can attest to the advantages of this kind of direct competition between providers. Here's Kiesling:

The report’s policy recommendations are in keeping with the idea that market processes provide opportunities for producers and consumers to benefit through experimentation and trial-and-error learning, and that product differentiation through innovation is the most potent form of dynamic competition for creating meaningful consumer benefits.

Digital Trends has an interesting piece on electric vehicles and their actual impact on the environment:

The best outcome for EVs was a 24-percent improvement in global-warming potential over the average gas powered car, and between 10 percent and 14 percent over diesel. These numbers are nothing to sneeze at, but they change radically depending on the source of electricity that EVs are powered on. 

The above numbers rely on the European power mix, which more heavily favors nuclear, hydroelectric, and renewable sources of energy than other parts of the world. 

The global warming potential for EVs that rely on natural gas – generally considered to be the cleanest fossil fuel – show an improvement of only 12 percent over gasoline, and break even with diesel. 

Most alarming, EVs that depend on coal for their electricity are actually 17 percent to 27 percent worse than diesel or gas engines. That is especially bad for the United States, because we derive close to 45 percent of our electricity from coal. In states like Texas, Pennsylvania, and Ohio, that number is much closer to 100 percent. That’s right folks; for residents of some of the most populous states, buying an EV is not only toxic, it’s warming the planet more than its gas-powered counterparts.

Acton Institute's Milton Friedman Quotes

July 31st would have been Milton Friedman's 103rd birthday. Several blogs featured tributes to Friedman, but I really enjoyed the Acton Institute's six quotes by Friedman on economics and freedom.

Friedman was a fantastic communicator of sound economics and the benefits of free markets to the public. His interviews, debates, and televised discussions with other thinkers are still relevant informative decades later.

I've reproduced the 6 quotes below:

The conditions for freedom: “History only suggests that capitalism is a necessary condition for political freedom. Clearly it is not a sufficient condition.”

On shortages: “We economists don’t know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a law that retailers can’t sell tomatoes for more than two cents per pound. Instantly you’ll have a tomato shortage.”

On private property: “Nobody spends somebody else’s money as carefully as he spends his own. Nobody uses somebody else’s resources as carefully as he uses his own. So if you want efficiency and effectiveness, if you want knowledge to be properly utilized, you have to do it through the means of private property.”

On minimum wage laws: “The high rate of unemployment among teenagers, and especially black teenagers, is both a scandal and a serious source of social unrest. Yet it is largely a result of minimum wage laws. We regard the minimum wage law as one of the most, if not the most, anti-black laws on the statute books.”

On freedom and fairness: “’Fair’ is in the eye of the beholder; free is the verdict of the market. The word ‘free’ is used three times in the Declaration of Independence and once in the First Amendment to the Constitution, along with ‘freedom.’ The word ‘fair’ is not used in either of our founding documents.”

On free markets: “What most people really object to when they object to a free market is that it is so hard for them to shape it to their own will. The market gives people what the people want instead of what other people think they ought to want. At the bottom of many criticisms of the market economy is really lack of belief in freedom itself.”

Krugman the Psychologist

In his July 25th column, Paul Krugman attempts to discredit a view he apparently doesn't understand. This time, he focused on Ron Paul, calling him names, comparing him to Bernie Madoff, and suggesting that he is a white supremacist. He claims that the only reason people would believe Ron's analysis is that they too are crotchety racists. Sadly, this is par for the course for Krugman.

When he's done psychologizing, he does manage a bit of substance in the post. He apparently thinks his criticism is utterly devastating to Ron and to Austrian Business Cycle Theory (ABCT). His claim is that, since the CPI hasn't risen due to loose monetary policy, the ABCT is wrong and so is everyone who espouses it.

ABCT has little to say about consumer prices, but a lot to say about asset prices. Though it certainly doesn't apply in all situations, ABCT can explain the dynamics of asset markets in the face of interventionist monetary policy. The 2008 crisis is a textbook example.

When it comes to consumer price inflation, proponents of ABCT have made different predictions at different times. One example is a bet between David Henderson and Bob Murphy. Mish Shedlock is another example of a proponent of ABCT who thought, at one time or another, that deflation was a bigger risk than inflation.

The Importance of Applying Market Process Theory

I came across an interesting post by Chris Dillow on markets vs gov't direction of resources. He starts off by criticizing an article in the Telegraph about privatization as a solution to the tragedy of the commons.

He rightly points out that many commentators fail to provide a sophisticated analysis of the markets vs gov't trade-off. Dillow deserves kudos for mentioning (if only briefly) the work of Elinor Ostrom in analyzing non-market and non-gov't solutions to the tragedy of the commons.

However, his own analysis of the market vs gov't trade-off lacks the important insights of market process theory. His discussion of the role of transactions costs in the examination of this trade off is problematic as well. He writes:

As Terry Anderson has shown (pdf), the emergence of property rights requires among other things that technology permits a lowish-cost enforcement of those rights.

and later

 This is, of course, a variant on Coase's famous point (pdf) - that there are costs to market transacting. These costs must be weighed against the costs of other forms of economic organisation - be it the firm or state control.

There are a couple of problems here. He claims that property rights require "lowish-cost enforcement of those rights" and that said costs "must be weighed against the costs of other forms of economic organization." First of all, there is the question of who is responsible for "weighing" these costs. If it's the state, there is clearly an incentive for politicians and bureaucrats to claim the costs of property rights are too high and that the state should control the resource on efficiency grounds. The same incentive problem exists for firms that are in a position to lobby the state for exclusive rights to the resource. Markets are clearly at a disadvantage in these cases.

Noah Smith and the Panglossian Fallacy

Over the past few months, I've spent some time pushing back against what I believe are poor arguments made by professional economists who oppose market direction of resources. The "arguments" I want to examine this time aren't really arguments. They're really just bald assertions with nothing to back them up. I suppose this makes my job easy, so I'll try to be brief.

Noah Smith's recent Bloomberg View piece makes the case that Berkeley is, in fact, the #1 economics department in the U.S. Chicago, he claims, has lost its luster and M.I.T. plays second fiddle to Berkeley in its ability to "influence" the profession.

While Smith makes some good points about the intellectual diversity and pioneering work by Berkeley faculty, his derision of Chicago borders on childish. Here's Smith:

... the Chicago school is a term used to refer to free-market fundamentalism and the belief that economic actors are always rational ...

and

The Chicago School was Panglossian in its belief that markets work well; the Berkeley Reformation showed deep, fundamental reasons that they break down.

This is a recurring theme in Noah Smith's writing: he paints his intellectual opponents as idiots or religious zealots who unthinkingly spout discredited theories about markets and government action. While this is true about a lot of non-economists on the internet, it doesn't properly characterize professional economists who favor markets. Further, as usual, Smith offers no evidence to back up his extreme claims.