It's Time to Abolish the LCBO

Following the end of prohibition in Canada in 1927, the government passed the Liquor Control Act. Howard Ferguson, who was then Premier of Ontario and main proponent of the act, claimed that its goal was to “allow people to exercise a God-given freedom under reasonable restrictions… and promote temperance, sobriety, personal liberty, and above all, respect for the law.” The result of the Liquor Control Act was the establishment of a Liquor Control Board of Ontario, the LCBO, which monopolized the sale of liquor in the province. Prohibition in Canada was a failure just as it had been in the United States. Widespread smuggling, bootlegging, prescription-abuse, and illicit production ensured that nobody was actually prohibited from drinking alcohol. However, when the United States ended prohibition in 1933, they privatized their industry, whereas in Canada, we opted for a more half-hearted solution. The Liquor Control Act of 1927 ensured that the ugly ghosts of prohibition are still lingering with us in the form of the LCBO. This system we are left with gives drinkers a lot to be desired; LCBO stores have poor selection, inconvenient hours, and unreasonably high prices. The current proponents of the LCBO argue that having a monopoly on liquor sales will allow the province to control alcohol abuse and prevent underage drinking. To its credit, the LCBO does a good job in that respect. Anyone who has ever shopped there knows how stringent most employees are with checking ID, and the LCBO also runs many campaigns aimed at promoting responsible drinking and healthy choices. Many people also argue that because the LCBO charges such a high mark-up on most of their products, that this discourages drinking. I believe that people who make such arguments underestimate the ability of the free market to prevent alcohol related abuse. The current system of province-enforced liquor control is antiquated, inefficient, unreasonable, and should be abolished to make way for privatization of the sale of alcohol.

To get an idea of the effects privatization would have in Ontario, we should look to Alberta. When Alberta privatized its alcohol industry back in 1993, many people argued that alcohol abuse, violence, and drunkenness would become rampant as a result. However, crime statistics indicate that violent crimes such as theft, murder, battery, and sexual assault declined sharply in Edmonton during the years following privatization. Instances of impaired driving fell nearly forty percent from 1993 to 1995.[1] A decline in violent crime can occur for a variety of factors, and I am not suggesting that the privatization of liquor sales in Alberta directly caused this drop in crime, but nobody can make the argument that privatization leads to more crime. Arguments that privatization would encourage alcohol abuse are also unsubstantiated.  From 1993 to 1997, Alberta witnessed a substantial decline in alcohol sales[2][3]. Although alcohol consumption per capita is high in Alberta, alcohol abuse is still much higher in Saskatchewan, a province which maintains a liquor monopoly similar to that of Ontario.[4]  I fail to see how the social ills attributed to alcohol are mitigated under a government monopoly. Provided they are over the age of 19, alcoholics, drunk-drivers, and those with violent tendencies can still access alcohol at the LCBO just as easily as the many responsible drinkers.

The "world's finest beer", according to the LCBO.

Arguments of public safety are not substantial enough to justify the enormous deadweight loss caused by the LCBO. Since it has no competition, the LCBO has no motivation to be efficient or price its merchandise according to supply and demand. LCBO has been known to reward suppliers by voluntarily paying them a higher wholesale price than is dictated by the market, which not only ensures retail prices are higher, but also that less revenue is being collected for the province.[5] The way LCBO justifies these astronomical price mark-ups is that they discourage people from drinking, but they also mean that the province is not maximizing their tax revenue. It would be pointing out the obvious to suggest these policies may not have been devised in sober judgement. Another inefficiency of the LCBO should be apparent to anyone who has shopped at any of the locations in the past twenty years—namely that the stores are all so well-decorated, staffed, stocked, and maintained. It may seem trivial to complain about how nice the stores look, but it demonstrates the inherent inefficiencies of having one firm supply the entire market. A monopoly has no competition and thus cannot be held to the same standards of accountability as in a market with multiple firms. If the staff at McDonalds piss you off, you can go to Burger King. If the décor at Home Depot makes you noxious, you can shop at Lowes. If a firm fails to live up to the standards of its customers, then the customers will go elsewhere, ensuring that every firm is held accountable to the needs and tastes of the market. However, LCBO faces no such competition, so why do they spend so much money to make the stores look pretty? People would still shop at the LCBO even if the stores were covered with bloodstains, broken glass, and the cashiers spat in your face as you left—simply because we have no other option.  The LCBO are profligate spenders, and everything from their lavish stores to their glossy magazine, Food & Drink, to their myriad of employees (many given $100, 000 salaries[6]) testifies to the inefficiencies of the liquor monopoly. All these resources being needlessly spent to maintain Ontario’s control on liquor sales could undoubtedly go to a better cause.

Privatization will be beneficial because it would open the sale of liquor in Ontario to market competition—providing consumers with a wider selection of alcohol, and more convenient ways of obtaining it. If alcohol is taxed and sold in stores like tobacco products, then it can still be kept out of the hands of minors, and the province can still make revenue off it. Since, the province of Alberta took in $11-billion off liquor mark-ups.[7]  Without the deadweight loss and inefficiencies incurred by the LCBO, Ontario would likely take in more revenue if liquor sales were privatized. Not only that, but the retail price of alcohol would likely decrease as it did in Alberta[8], even with government mark-ups taken into consideration. Everyone will benefit from privatization. The free-market can serve the needs of the public better than any monopoly—even one that is conceived with good intentions such as the LCBO. The ghosts of prohibition have haunted us for long enough. It’s time to abolish the Ontario liquor monopoly.

Now it's time to have a drink.

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[1] http://choiceforontario.com/uploads/ALCB_Privatization_Study.pdf, pg. 60-62

[2] http://choiceforontario.com/uploads/ALCB_Privatization_Study.pdf, pg. 65

[3] http://www.fcpp.org/files/9/70.%20Ending%20Saskatchewan's%20Prohibition-Era%20Approach%20to%20Liquor%20Stores.pdf

[4] http://www.fcpp.org/files/9/70.%20Ending%20Saskatchewan's%20Prohibition-Era%20Approach%20to%20Liquor%20Stores.pdf

[5] http://www.thestar.com/news/canada/2012/01/09/cohn_lcbos_pricing_policy_doesnt_add_up.html

[6] http://winesinniagara.com/2011/04/lcbo-sunshine-list-in-case-you-were-wondering/

[7] http://www.huffingtonpost.ca/mark-milke/alberta-privatized-liquor-stores_b_3984754.html

[8] http://oldfraser.lexi.net/publications/pps/5/s6_economics.html

Labour Unions Kill a Wal-Mart

Back in April 2005, workers at a Wal-Mart in Jonquiere, Quebec voted to join a labour union. In response, Wal-Mart closed down the store. Last week, The Supreme Court of Canada ruled that in doing so, Wal-Mart violated Quebec’s labour laws, and the employees who lost their jobs as a result of the closing are now entitled to receive financial compensation. Wal-Mart’s anti-union policies have angered many people throughout the years and the incident in Jonquiere was also featured in the documentary WALMART: The High Cost of Low Price. It seems that many people have this a priori assumption that Wal-Mart is evil and anything it does is utterly contemptible. Proponents of labour unions argue that workers cannot survive on a minimum wage and that in order to receive adequate wages, they need the representation of labour unions. The fact that Wal-Mart forbids employees to unionize, they argue, is indicative of the company’s greed and contempt for its workers.

I do not believe that Wal-Mart exploits its employees or harms poor communities. Due to their low prices, poor people can afford to buy more goods at Wal-Mart than they could at a less competitive store. Even if someone earns minimum wage, they can still afford to feed and clothe themselves thanks to the cheap supply of goods available at Wal-Mart. As a result of this cheap supply of goods, the standard of living in poor communities is greatly improved. The reason Wal-Mart can afford to keep their prices so low is because their business model is so austere and efficient—they cut corners wherever they can. Wal-Mart executives don’t ride around in gold-plated limousines; they fly coach and share hotel rooms with colleagues. The Wal-Mart headquarters isn’t a palace; it’s just a drab, normal-looking building.[1] This austerity extends to all Wal-Mart employees, which is why the company frowns upon unions and ostentatious benefits. Wal-Mart maintains its low prices because they pay their employees the wages that they do. If unionization, as in the Jonquiere case, would entail an increase in wages, then the Wal-Mart business model would no longer be viable to earn a profit. If the business model is not viable then the store must close. That’s Business 101. With these considerations in mind, one can see that Wal-Mart actually benefits poor communities—it’s labour unions that harm them.

The classic mantra from the left is that all corporations are greedy and wicked and they would pay their employees in pennies if the heroic labour unions weren’t there to stand up to them. Those who make such accusations not only betray their ignorance of basic supply and demand, but also their seething contempt for the rich. Labour unions are entirely self-serving organizations who benefit their own members at the expense of everyone else, and whose sole purpose is to siphon off wealth from one beneficiary to another. For example, if the US Airline Pilots Association bargains for a higher wage, then the cost will be passed onto the public through an increase of airplane ticket prices. Union leaders might claim that they are bargaining for wages at the expense of profits, but this is not true. Corporate profits are just not big enough. After taxes, corporate profits only amount to less than six percent of the total national income, whereas over eighty percent of total national income goes to pay for wages, salaries, and fringe benefits.[2]  Therefore, the cost of any benefits gained through union bargaining are almost always passed on to consumers. Since Wal-Mart prizes its ability to sell goods cheaply, one can see how unionization of their employees would not be in their best interest.

Unions also slow job creation. As labour unions bargain for higher wages and benefits, the cost for the business to hire new employees becomes more expensive. This means that a business will hire fewer employees and many people who are looking for work in that sector will be unable to find a job. Examples of this can be seen throughout history. In the 1920s, the United Mine Workers of America, led by John L. Lewis secured wages for its workers that were unprecedented at that time; as a result, the price of coal skyrocketed. Businesses also could no longer afford to hire coal workers, so they were gradually replaced with machines. By the early 1960s, there was massive unemployment in the coal industry and once prosperous mining towns became virtually deserted.[3] This example demonstrates the fact that unions only benefit their own members at the expense of everyone else. If unions were really looking out for the best interests of all workers, then they would dissolve themselves immediately.

Those who condemn Wal-Mart for closing their store in Jonquiere should reconsider their position. It is usually rich middle-class people who hate Wal-Mart because they see the company’s austere and frugal nature as exploitive of lower classes. However, Wal-Mart employs 1.4 million Americans[4] and 90 000 Canadians[5], contributing greatly to the workforce, and they can afford to sell goods at a discount to those who may not have been able to afford them otherwise. I see Wal-Mart as beneficial to any community because they are a cheap source of everyday goods. Why should Wal-Mart have kept that one store in Jonquiere open if unionization made their business-model unviable? Rational people are in business to make a profit, and if no profit is to be made in Jonquiere, Quebec, then businessmen will go elsewhere.

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[1] http://money.howstuffworks.com/wal-mart.htm

[2] Friedman, Milton. Free to Choose: A Personal Statement. Pg. 234

[3] Sowell, Thomas. The Thomas Sowell Reader. Pg. 72

[4] http://www.forbes.com/sites/realspin/2013/11/27/why-do-1-4-million-americans-work-at-walmart-with-many-more-trying-to/

[5] http://walmartcanada.ca/Pages/Company%20Profile/168/163/163

Our World Cannot Function Without Money

Money is the force that drives the economy of an open society. It functions as a unit of account, a store of value, and as a medium of exchange. While some utopian thinkers would argue that money is not a necessity, one would be hard-pressed to imagine a cashless society that allocates resources as efficiently as our own. Few civilizations throughout history have thrived without some form of currency. An open market composed of an intricate series of sales, purchases, investments, and exchanges would be impossible without a stable form of currency. This post is a response to a recent article writtenby the Socialist Party of Britain and posted on Libcom.org that attempts to explain why money is not necessary in a socialist economy. The author argues against Ludwig von Mises’ essay Economic Calculation in the Socialist Commonwealth, by claiming that economic calculations can be made in a socialist society as in a capitalist society without the use of money. I believe that the author of this article has misunderstood the point of von Mises’ essay, and makes the very same arguments that Mises was scrutinizing. Economic calculations could not be made in a cashless society that meets everyone’s demand and where all resources are used to the greatest efficiency. There are too many problems inherent in allocating goods in a centrally planned economy, let alone in one lacking a stable currency. A socialist economy could never rival the productiveness and efficiency of an open market, but without money such an economy would be doomed to failure. The article in question reveals a fundamental misunderstanding with the use of the price system and with the purpose of money.

In a socialist economy like the one proposed by the article, the means of production would not be privately owned, but would become the property of the state. As such, it becomes the responsibility of the state to distribute the goods they produce to the community. Rather than in a free market, where the distribution of goods takes the form of an exchange between the producers and the consumers, the distribution of goods in a socialist economy resembles an internal transfer, seeing as though under socialism there is no distinction between the two; the consumers are the producers. What Mises is arguing in his essay, is that such an economy could never satisfy the demands of consumers since the central planners would not have access to pricing information.[1] Prices in an open market are based on supply and demand. What the author of these articles does not grasp is how his utopian socialist state is going to obtain information about supply and demand without some kind of pricing system. He writes “Our answer is that the choice of which productive methods to employ, like working out what consumer goods are needed, will be based on estimations and calculations in kind.” What these calculations are exactly or what is being calculated he does not make clear. Socialists demonstrate incredible narrow-mindedness when they assume the government can somehow know and accommodate the needs of every single person in the economy. In reality, the series of exchanges and transactions that make up the economy are so many and so complex that nobody, including myself, could ever hope to know what everyone wants and it would be a painfully futile task to attempt to get information to this effect. The needs and tastes of individuals are also always changing, which only complicates matters. This is why I believe the author of that article completely missed the point von Mises was trying to make. Central-planned economies don’t work. There is no way that a government can somehow calculate the ever-changing supply and demand in any given market, let alone without an effective pricing system.

To demonstrate why central-planned economies are inefficient even on a small scale, consider this thought experiment. Suppose you’ve been given the task of making lunches for an entire school of a thousand students. You have access to a huge selection of food that would allow you to make whatever meals you wish, but you don’t have information about the preferences of each student. Thus, it would be impossible to satisfy them all. Some students inevitably would not like their lunches and would be forced to discard or exchange them with others, creating wasted resources. A central planner would never be able make lunches that optimize every student’s utility more any than if the students were allowed to make their own lunches. How then, is the government under socialism supposed to distribute goods to the entire population, allocating them all efficiently? This thought experiment also demonstrates that in an economy where goods are not allocated efficiently, agents are forced to exchange their goods with others in order to maximize utility. Even in a socialist country where currency is abolished, a medium of exchange would naturally arise to satisfy these needs. We can see examples of this throughout history. In American POW camps during World War Two, this medium took the form of cigarettes.[2] Prisoners would exchange their rations for cigarettes since they were light, easy to carry in bundles, and could be smoked. Goods and services in these camps were expressed in terms of cigarettes, just like goods in America are expressed in dollars and cents. Using cigarettes, prisoners whose preferences were not satisfied by rations they received could purchase goods they wanted throughout the camp. I believe that if a state were to dismantle the entire banking system and abolish money, then a commodity currency like cigarettes would develop in its place. Money is more useful than barter for trading and to propose that we could live effectively without a currency of any kind is absurd.

The article later goes on to criticize the pricing system by claiming that the cost of an item only takes into consideration the labour and time it took to produce it. He argues, “To make this the only consideration that counts (as is imposed by the economic laws of capitalism) is an absurd aberration.”

The author of this article is clearly mistaken about several things. Capitalism does not impose laws on anyone. Capitalism is merely a system wherein individuals are free to make their own choices and where property laws are enforced by the government. As far as the price system goes, to suggest that only labour and time are considered in the cost of a good is the true absurd aberration. Supply and demand are determined by a variety of factors, including labour costs, but goods can have value for many other reasons including aesthetic or historical significance, taste, popularity, scarcity, or other seemingly arbitrary factors. The extraordinary value of a coin collection, an antique armoire, or a Vermeer painting is not derived from the labour and time they took to produce, but rather from the scarcity of these goods compared to how much they are demanded. How is a socialist state going to allocate works of art without some unit of account with which to assign them value? It appears that art collecting is to be abolished along with money in this supposed socialist utopia. The purpose of money is as a unit of account, that is, it assigns values to objects based on their demand and supply, which in turn are determined by any number of things. Money allows for the trade of value for value. Money ensures that every good that is produced is traded to someone who wants it for the appropriate value in dollars and cents. It reflects a poor understanding of the economy to assume that somehow the government will know how to allocate its resources efficiently without even a basic unit of account. Therefore, any suggestion that a socialist economy can provide for everyone’s needs better than a market economy is absolute rubbish.

       

Under Socialism, Vermeer's The Astronomer is worth 9 million cigarettes

Another ridiculous claim made by the article is that under socialism, producers would not take into account monetary or market values, but rather “human values”. I believe what the author means by this is that goods will only be produced in accordance with their need in society rather than to make a profit. This kind of mentality, well-meaning and idealistic as it may be, does not correspond to how the world really works. I feel the following quote by Adam Smith has relevancy here: “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest.” In order to create a given product, it requires technical ingenuity, time, effort, resources, imagination, and market knowledge. In a market economy, firms are willing to invest all that effort because if the product they create is successful, it will confer a benefit in the form of profit. Threats of competition also ensure that producers make the best goods possible, utilizing their time and resources to the greatest efficiency to satisfy the greatest demand. Under a socialist economy however, there is no threat of competition and no opportunity to make a profit off anything, so where is the motivation under socialism to satisfy these “human needs” to the best of its ability? To engineer some product for the masses, using the fewest resources possible, and without the accountability incurred by competition, it seems that any good produced under socialism would inevitably be of lesser quality that its equivalent in a market society. If you compare the technology of Soviet Russia to that of the United States, this becomes evident. The state of the Soviet automobile industry was so poor, that in the 1960s, Soviet leadership turned to the Western powers to help them produce a proper car.[3] The infamous Lada, a product of communist ingenuity, was a car so unreliable that if you purchased one brand new, it still required extensive repairs in order to be made roadworthy.[4] The Lada also had horrible fuel economy and they became an object of ridicule anywhere outside Soviet Russia. If the socialist’s way of satisfying “human needs” is to have its people driving around in obsolete deathtraps, then I will take my chances in a market economy. 

How do you double the value of a Lada? 

Fill up the gas tank.

Any economy with a stable currency can provide for the needs of its people better than a cashless socialist hell. For all the high-minded rhetoric espoused throughout the Libcom.org article, little of it amounts to more than idealistic navel-gazing. Money allows for individuals to exchange their labour for an equivalent value of goods and services. It ensures that workers are properly compensated and that all resources are allocated efficiently. Socialists and utopian thinkers are hard-pressed to demonstrate how a world without money could ever function.  Money gives the individual freedom to make his own choices.  Supply and demand, more so than any amount of socialist rhetoric, reflects the true needs of the people, and this is why I believe socialists despise money. Ultimately, money represents the responsibility the individual has over his own life and his freedom of choice, ideals that do not fit the socialist’s vision of man as a form of sacrificial livestock—to be herded and organized by the whim of a central planner.  No state or central planner, regardless of the means at their disposal, can never accommodate these needs better than an open market.

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[1] https://mises.org/pdf/econcalc.pdf pg. 36-37

[2] http://www.clsbe.lisboa.ucp.pt/docentes/url/jcn/ie2/0POWCamp.pdf

[3] http://en.wikipedia.org/wiki/Automotive_industry_in_the_Soviet_Union#Historical_production_by_year

[4] http://www.economist.com/node/11703067

Why Nobody is Bound By Poverty

It's The Socialist Party headquarters.

Whiney Socialists who rail against capitalism on the internet always have a difficult time hiding their seething envy of the rich. In this article I found entitled Meritocracy is a Myth, James Bloodworth doesn’t just fail to hide his envy, he revels in it. His entire exposition is a scathing rant against the rich and successful and the “obscene privileges” they enjoy. The main argument of the article is that because wealth is unevenly distributed, it is impossible for people to rise out of poverty. Bloodworth fails to cite any evidence of this, other than asserting that “a disadvantaged child will nearly always and everywhere become a disadvantaged adult” as well as offering an out-of-context quote by Karl Marx. The notion that anyone is perpetually bound to poverty is absolutely false and there is no shortage of billionaires or people in your community who have risen out of poverty and are living rebuttals to Bloodworth’s nonsense.

Bloodworth writes: “We insist on telling children that they can be ‘whatever they want to be’, knowing full well that crushing disappointment lies further in their future”. Essentially, this is just a variation of the oft-repeated argument that the poor are perpetually poor and the rich remain perpetually rich. “A disadvantaged child,” Bloodworth argues, “will nearly always and everywhere become a disadvantaged adult”. However, this is simply not true. Social mobility is alive and well in North America, regardless of what Bloodworth and his ilk would have you believe. Of all the billionaires on last year’s Forbes 400 list, 273 started with less-than-wealthy beginnings[1]. For example, when Shahid Khan, a Pakistani immigrant, arrived in the US at the age of 16, he earned 1.20$ an hour as a dishwasher, but through hard work and dedication, he started one of the largest private companies in the US, Flex-N-Gate. Khan is no exception. The founders of many successful companies—from Howard Shultz of Starbucks to Oracle founder Larry Ellison, were born into circumstances described by Bloodworth. However, poverty did not stop these people from starting multi-billion dollar companies and achieving their dreams. They could do it, so why can’t you?

The fact that one can improve their economic standing through hard work is not just true of a few select billionaires, but with most people in western society. Through 1996 to 2005, the US Treasury Department conducted a study in which they observed the wages earned by individuals over time. The data they collected shows that the incomes of those individuals in the bottom twenty percent increased on average by 90 percent over that time.[2] Whereas, the incomes of those in the top 20 percent of wage-earners only saw a 10 percent increase over that same time. What does this tell us? It shows that people’s incomes fluctuate over time. Most people who are earning shitty pay at a given instance (usually because they are young, inexperienced, unskilled, or just unlucky) will be earning more sometime in their future. There is no consistent “1%”. In North America at least, it is the norm that people earn more money in the 30s and 40s than they did in their teens. Anybody who is a hard worker and has a skill that is valuable in the market can move up the ladder, so to speak, and enjoy the fruits of their labour.

Relevant.

Bloodworth argues further that children of rich families are more privileged than the poor because the rich can afford to send their kids to University. “Around 10 percent of young people at the bottom rung of the social ladder go to university compared with over 80 per cent of those from professional or managerial backgrounds”. While I do not dispute that statistic, I fail to see how this is an argument against meritocracy. If someone has worked hard their whole lives and made an honest living, they have earned the right for their families to live comfortably. Rich parents can afford to hire tutors for their kids. They can afford books, calculators, pencil-crayons, private-school fees, and of course college tuition. Kids from rich families are certainly more privileged than the poor in this respect, but I believe the old adage “You can lead a horse to water but you can’t make him drink” should not be forgotten. All the financial support and tuition fees in the world won’t educate someone who is unwilling to help themselves. Even though more rich students are enrolled in university than poor students, they are still held to the same standard. I personally knew many students throughout high school who were borderline retarded but only got into university because their parents were rich and would accept no other option for their jewel-encrusted offspring. However, many of these students were the first ones to drop out once they found things difficult. Even if you are born spoiled rotten with wealth and privilege, you still have to work in order to maintain it. Those who are born into poverty, whose business sense and work ethic are stronger than average, can only increase their economic standing over time. Whereas, someone with no desire for work who is born into a rich family will only lose his money over time.

“Equality”, when used in the context of Bloodworth’s article is not about equality of opportunity, where everyone is held to the same standards and expectations, but about equality of outcome. Although he doesn’t explicitly say so, Bloodworth wants equality to be mandated and enforced by the state. He advocates a world in which people are truly not free to improve their economic standing through hard work and effort. Equality of opportunity and equality of outcome are mutually exclusive. If individuals are not free to succeed or fail by their own efforts, then they are not really free in any meaningful sense.

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[1] http://www.forbes.com/sites/kathryndill/2013/09/18/by-their-bootstraps-billionaires-who-started-from-scratch/

[2] http://online.wsj.com/news/articles/SB119492157951090886

The Consequences of Increasing the Minimum Wage

I have written previously about the minimum wage and the effect this price-control has on the unemployment rate. Many economists are in agreement that raising the minimum wage has negative effects on employment, particularly among workers who are unskilled or inexperienced. By raising the wage above a given amount, the government makes it harder for those workers whose labour is worth less than that amount to find employment. That is why most victims of minimum wage legislation are typically the poorest and the youngest. However, this belief is not unanimous among economists, and I came across this article the other day by Jared Bernstein that argues in favour of raising the minimum wage. Some common misconceptions are espoused in the article and I will try to explain why they are incorrect.

Bernstein writes that minimum wage laws are integral to the functioning of the economy, much like laws against child labour, discrimination, wage theft, and overtime without extra pay. While I agree that discrimination and wage theft are generally bad for the economy and I support legislation that attempts to eliminate them, the absence of minimum wages laws in many developed countries suggests that we could easily survive without them. Despite having no minimum wages laws, Switzerland has a prosperous economy and a very low unemployment rate. While Hong-Kong was still a British territory, it had no minimum wages laws and its unemployment rate was only 2 percent.[1] However, in 1997, while under Chinese rule, employers in Hong Kong were forced to hire more workers and pay increased wages and benefits. This law had the predictable effect of raising the unemployment rate. In 2002, it was 7.3 percent, nearly triple would it was under British rule. In 2003, unemployment in Hong Kong hit an all-time high of 8.3 percent.[2] This example illustrates that legislation that attempts to artificially raise the wage rate has the effect of increasing supply and decreasing demand beyond the equilibrium level. When there is excess supply of a good, we call it a surplus. When there is excess supply of labour, it is called unemployment. The real minimum wage is always zero dollars, since you have to be employed in order to receive it. Unlike laws that mitigate workplace discrimination or wage theft, the minimum wage is an artificial price control that does not make workers better off than without it. Bernstein is being misleading when he claims that such wage laws are integral to the functioning of the economy.

Bernstein paints a rosy picture of how minimum wage laws came into existence. He quotes FDR and Frances Perkins, both proponents of minimum wage on the basis that it would establish an equal plane of competition and would prevent market failures. The first minimum wage in the United States was set at 0.25$ per hour in 1938 with the passing of the Fair Labour Standards Act. A previous attempt to establish a minimum wage in 1933 was declared unconstitutional (and rightfully so). However, wage controls were proposed earlier than that, namely in Canada and South Africa as early as 1920. The goal of these policies however, was not to raise the living standard of workers. People supported these laws with the explicit intention of keeping undesirables like blacks and Asians out of the workplace. [3]As I have already stated, the biggest victims of minimum wage legislation are typically low-skilled workers or those without previous job experience. Since most blacks and Asian immigrants to Canada in the 1920s fit those criteria, the racists of the time knew that enforcing a minimum wage would make such people unemployable. It is fortunate that these laws never came into existence, but the fact that they were advocated for this reason shows that even before they existed, people were aware of the inverse relation between minimum wages and employment.

Many social liberals like Bernstein advocate a high minimum wage so that those who receive it may live comfortably or even support a family. While you should seriously refrain from starting a family if you make 7.25$ an hour, the majority of those earning the minimum wage are young single people who still receive financial support from their parents. According to the Wall Street Journal, 42 percent of minimum wage earners still live with mommy and daddy. Only 15 percent are actually financially independent.[4] The condition of the working poor is a transient one. Most people do not work minimum wage jobs their entire lives; they work at McDonalds for a few years in high school, and as they gain experience, qualify for higher-paying jobs. This is corroborated by evidence. According to the US Treasury Department, the incomes of those individuals in the bottom 20 percent rose 91 percent from 1996 to 2005, while the incomes of those in the top 20 percent rose by only 10 percent in those same years.[5] This shows us that the wages earned by individuals fluctuates over time. Someone who is in the bottom 10 percent of wage-earners may be in the top 10 percent sometime in the future. This is why minimum wage legislation is so harmful—because it robs young people of the opportunities to gain work experience and qualify themselves for higher wages in the future. The poor are similarly affected. Therefore, when people advocate a “living wage” so that the poor can live more comfortably, they really are incurring misfortune upon the very people they claim to help.

Contrary to what Bernstein claims, market failures have never been caused by the absence of minimum wage laws. As I have shown, they are responsible for more failures than they attempt to mitigate. In an economy without a minimum wage, workers would not be paid in pennies (as Bernstein writes). Any business that paid their employees like that would not be in business for very long, as nobody sane would want to work for them. An excess supply of workers in relation to demand is only caused when there is interference in the economy. Workers must be allowed to earn whatever wage is determined in the market and employers should be legally permitted to pay it to them.

Other Related Posts:

The Economic Fallacies of Robert Reich

Unemployment and Minimum Wage

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[1] http://www.creators.com/opinion/thomas-sowell/minimum-wage-madness.html

[2] Philip Segal, “Hong Kong Solutions,” Far Eastern Economic Review, March 20, 2003, p. 13

[3] Charles H. Young and Helen R. Y. Reid, The Japanese Canadians (Toronto: The University of Toronto Press, 1938), pp. 49-50

[4] http://online.wsj.com/news/articles/SB121694456522983005

[5] “Movin’ On Up”, Wall Street Journal, November 13, 2007, p. A24

The Economic Fallacies of Robert Reich

A recent article from our yellow journalist friends at Salon.com furthers the website’s tradition of economic illiteracy and unoriginality. The article, entitled “The 4 biggest right-wing lies about income inequality” was written by the economist Robert Reich, and as the title suggests, attempts to debunk several alleged economic myths. What makes this article significant is not the complete lack of economic understanding displayed, but that it was contrived by a person who has no small influence in the field. Reich is currently a professor of policy at the University of California, Berkeley. He was a member of Barack Obama’s economic advisory board, and has also contributed to such esteemed publications as the Wall Street Journal, the Atlantic, and the Harvard Business Review. Despite his reputation among economists, Reich’s Salon article is poorly argued, badly written, and espouses common misconceptions that should be above someone of his education. Many of his arguments are commonly made by people on the left and in this post, I am going to address them one-by-one.


The first lie (or so he claims) is that CEO’s are America’s Job creators and that they should be exempt from taxation. Reich argues that “the middle class and poor are the job-creators through their purchases of goods and services. If they don’t have enough purchasing power because they’re not paid enough, companies won’t create more jobs and economy won’t grow.” If all firms just paid their employees higher wages, they would not gain any more purchasing power since the market price for goods would also increase correspondingly. Higher nominal wages do not create higher real wages. The arguments he presents for the first two supposed “lies” are essentially the same. Reich writes that, “We’ve endured the most anemic recovery on record because most Americans don’t have enough money to get the economy out of first gear. The economy is barely growing and real wages continue to drop.” Social liberals like Robert Reich never tire of bringing up the long misconceived fact that real wages have either dropped or remained stagnant over the past fifty years. Although Reich fails to cite where he got this information, he is most likely referring to the often-quoted statistic regarding household incomes, which have only increased by six percent over the last fifty years. Many social liberals have suggested that this is evidence of wage stagnation. However, if you look at the average income earned per individual over the past fifty years, the numbers tell a different tale. Individual incomes have actually increased by a whopping fifty-one percent since 1969 when adjusted for inflation.1 There is also further evidence to suggest that people today are now working less than they did in 1960 to earn the same amount of goods.2 Real costs of living in the United States have generally decreased over the past decades, at least for individuals. The reason why the statistics regarding real income per household suggests stagnation is because of the decline in household size. As the standard of living has increased over the decades, people are more likely to live on their own instead of relying on their parents or siblings to supplement their incomes. As the number of individuals per household declines over time, so does income per household, and thus it appears to the uncultivated economist that wages have not increased since the 1960s, which is demonstrably false. Robert Reich’s argument and many others similar to his are based on misleading reading of statistics about real incomes. This is an amateurish mistake, and one that I suspect Reich may have intentionally overlooked for the purposes of the Salon.com article and to further support his own ideology.

In debunking the second supposed lie, Reich writes that, “Meanwhile, most American workers earn less today than they did forty years ago, adjusted for inflation, not because they’re working less hard now but because they don’t have strong unions bargaining for them.” Everything about this statement is incorrect. Not only have workers’ real wages not deceased over the past forty years, but workers indeed have been working less. There are more part-time employees in the work-force than there have been forty years ago, and since many labour statistics do not distinguish between full-time and part-time employees, it may appear that workers today earn the same as they did four decades ago for the same amount of work. However, part-time employees generally work less than full timers and thus their wages should not be compared on the same basis. Also, American workers today earn much more in employee benefits than workers forty years ago. When medical and dental coverage, unemployment insurance, and retirement benefits are taken into account, worker compensation rose by about a third from 1980 to 2004.3 Contrary to what Reich claims in the article, unions are not responsible for the creation of wages and benefits, nor do labour unions create wealth in general. Unions do nothing but siphon off wealth created by others. When a union succeeds in securing higher wages and benefits for its members, it always comes at a cost, which is usually passed onto the consumer. For example, If the coal-miners’ union gets a higher wage for coal miners, the market price of coal goes up. If a department store chain bargains for a higher wage for cashiers, then cashiers become more expensive and thus fewer will be employed. Those people who champion labour unions do not understand that higher wages for union members always comes at the expense of higher prices for goods in that sector, as well as lower rates of employment. Many firms will actually pay their employees more than the equilibrium wage in the market for the sole purpose of keeping the labour unions out.

Robert Reich’s third economic myth that he tries to debunk is that nothing should be done for lower-income children in America. This seems to me like nothing more than a twisted depiction of libertarian ethics. A desperate strawman. Nobody seriously argues that poor children should not be helped in any way and denied a proper education. In fact, the state of many schools in poor areas of the United States is indeed deplorable and the children who attend them truly deserve better. It’s difficult to disagree with Reich on this fact. However, the failure of American public schools is more an indictment against government ineptitude and a bloated and incompetent bureaucracy than it is against wealthy people. Try again, Reich. 


Reich saves the last economic myth to drop his bombshell of idiocy. He claims that raising the minimum wage does not contribute to unemployment and that it will actually benefit workers by giving them more spending money. Reich’s arguments can easily be refuted with only the most basic economic understanding. When a price is artificially raised beyond the market equilibrium, then supply will increase and demand will decrease. If the equilibrium wage in a market for shit-shovelers is x dollars per hour, increasing the minimum wage in this market simply means that the shit-shovelers are now more expensive to hire and fewer will be employed. The minimum wage, regardless of how high it is set, will not benefit someone who is unemployed. Sadly, the greatest victims of high minimum wage laws are young people. Since only 2% of workers above the age of 24 currently work a minimum wage job4, those people who are just entering the workforce are placed in the most disadvantageous position, lacking the skills and experience to justify the high price for their labour. If the labour of a high-school student has a value of 7$/hour, that student is unlikely to find a job in a state whose minimum wage is set at 10$/hour. Such is the plight of any worker whose labour is worth less than what the law demands an employer may pay him. Ironically, the poorest people in society have the most to lose from minimum wage legislation—the very people whom these laws are intended to help. Reich cites a study done by IRLE which lists unemployment rates across the United States as independent of the minimum wage laws. However, comparing data from the US alone would naturally differ a lot less than comparing data from the US to other countries with different policies. Most Canadian provinces have minimum wage rates that are a higher percentage of output per capita than American states. Canada correspondingly has a higher unemployment rate, a higher average duration of unemployment, and a lower rate of job creation than much of the United States.5 Nations such as Hong Kong and Switzerland do not have minimum wage laws and have a much lower unemployment rate than the United States and Switzerland especially has one of the lowest unemployment rates on earth.

Switzerland is pretty awesome.

Robert Reich’s call to action at the end of his article, “Don’t listen to the right-wing lies about inequality. Know the truth, and act on it” sounds like something I would read on a social justice warrior blog. It’s like a Smokey the Bear slogan for socialist retards. Reich’s poorly written article is definitely befitting of it though. It’s just one of the many gems you can find on Salon.com.

1 U.S. Bureau of the Census, "Changes in Median Household Income:
1969 to 1996," Current Population Reports, P23-196, p. 1.
2 http://econpapers.repec.org/article/fipfeddar/y_3a1997_3ap_3a2-24.htm
3 Alan Reynolds, Income and Wealth, p. 64.
4 U.S. Department of Labour, Bureau of Labour Statistics, Characteristics of Minimum Wage Workers: 2004, (Washington: Department of Labour, Bureau of Labour Statistics, 2005), p. 1 and Table 1.
5 Jason Clemens, Measuring Labour Markets in Canada and the United States: 2003 Edition (Vancouver, Canada: The Fraser Institute, 2003)