Category Archives: Economics

Free (Brewing of) Beer

Everybody seems to be making fun of Salon these days, and I think I’m beginning to understand why. Case in point: Marcy Wheeler’s post about the recent GOP debates, responding to some of Rick Santorum’s claims about insurance market consolidation under Obamacare:

Santorum claimed to be a lot less worried about consolidation in the watery beer market because, “There’s no town in American anymore that doesn’t have a brewery.” Given that alcohol is one of the most regulated markets, it’s odd that government involvement hasn’t created dangerous consolidation in bad beer.

Wheeler has this backwards. Government involvement did in fact cause consolidation in bad beer. At the very height of government involvement — the total prohibition of beer or any other kind of booze during the 1920’s — the beer market was consolidated under criminal gang bosses like Al Capone, who literally killed their competition. The beer was of terrible quality, and tainted alcoholic brews produced by criminal gangs are estimated to have killed thousands of people.

Even after prohibition, beer production was limited mostly to a few large companies, and it was hard for new and innovative breweries to get started, in part because of the red tape of regulation, and in part because the only place to learn beer making was the big breweries that were licensed for it. For most of the 20th century, the United States produced only a dreary selection of mass-produced corporate beers. If you wanted good beer in the U.S., you bought something imported.

That all began to change in 1979, when President Jimmy Carter signed the bill making it legal for people to brew beer in their homes. Over the next few decades, thousands of people learned to brew beer, and many of them got good enough at it to make the leap into commercial brewing. This was the start of the microbrewery revolution, and it transformed the United States from a country with famously bland beer to one of the most innovative and diverse brewing cultures in the world.

Some Questions to Ask About Those New York Nail Salons

The New York Times has a fascinating story by Sarah Maslin Nir about conditions in New York nail salons. According to her, thousands of immigrant nail technicians are being exploited by salon owners.

As if on cue, cavalcades of battered Ford Econoline vans grumble to the curbs, and the women jump in. It is the start of another workday for legions of New York City’s manicurists, who are hurtled to nail salons across three states. They will not return until late at night, after working 10- to 12-hour shifts, hunched over fingers and toes.

On a morning last May, Jing Ren, a 20-year-old who had recently arrived from China, stood among them for the first time, headed to a job at a salon in a Long Island strip mall. Her hair neat and glasses perpetually askew, she clutched her lunch and a packet of nail tools that manicurists must bring from job to job.

Tucked in her pocket was $100 in carefully folded bills for another expense: the fee the salon owner charges each new employee for her job. The deal was the same as it is for beginning manicurists in almost any salon in the New York area. She would work for no wages, subsisting on meager tips, until her boss decided she was skillful enough to merit a wage.

It would take nearly three months before her boss paid her. Thirty dollars a day.

It’s a well-reported, well-written story, and I have no doubt that there are some bad things going on in the nail salons. However, I think Nir is missing some important aspects to what’s going on in New York nail salons. When you encounter a tale of exploitation like this, there are some important questions you need to ask.

Probably the first of those question should be, If working in the nail salons is so awful, why don’t the women don’t just quit and get better jobs?

I’m sure just asking that question will make some readers want to tell me to “check my privilege,” but I think it’s important to think seriously about the answer. The news is full of complaints about McDonald’s and Walmart employees being paid only the minimum wage. That’s still more than these nail technicians are earning, so you’d think they would be applying for those jobs, offering to work for the same pay (but without protesting in the streets about it). So why don’t they? Why don’t they get better jobs?

Nir never address the issue directly, but she nevertheless supplies a few answers:

Almost all of the workers interviewed by The Times, like Ms. Ren, had limited English; many are in the country illegally. The combination leaves them vulnerable.

These workers are foreigners in this country illegally, so the biggest reason why these women can’t get better jobs is that the United States government doesn’t want them to work here at all. Most legitimate businesses, including major employers like McDonald’s and Walmart, are simply not allowed to hire them. They have to take what work they can get.

Also, they’re probably afraid to complain too much about working conditions because they fear they’ll be deported if they attract too much attention. My boss can only fire me, but Ms. Ren’s boss can get her thrown out of the country if she pisses him off.

Besides, even if their immigration status allowed them to work here legally, they still wouldn’t be allowed to work as nail technicians in New York because they haven’t met the state licensing requirements.

Between U.S. immigration law and New York State professional licensing requirements, government restrictions have robbed these women of much of their bargaining power.

The next question to ask is What do these women have to offer employers?

Not much, according the the facts in Nir’s story. Most of them don’t even know how to do the job yet, so they will have to be trained by whoever who hires them, and their inability to speak English means they can’t serve a customer without help.

In fact, their lack of English language skills severely limits the jobs they can do: Not only do they need to find a job where talking to English-speaking customers is not a requirement, they are also limited to seeking employment at businesses where the managers speak their language.

Another question to ask is What do these women get out of this?

The 20-year-old woman mentioned in the quote above, Jing Ren, starts out by paying $100 to get the nail salon job, and she works for almost three months for free, after which she earns $30/day for a 10-12 hour shift. Here’s the last report on how she’s doing:

She quit on March 8. Her boss said nothing; one colleague hugged her goodbye. After 10 months she had made about $10,000, she said.

Last month, she found a $65-a-day job at another nail salon.

Even if she only works an 8-hour day, that’s less than the New York minimum wage (but more than the minimum for tipped employees).

That doesn’t sound very good, but it does bring me to the next question. These workers certainly make less than regular American workers, but How do their wages compare to wages where they came from?

The Davos global wage calculator tells me that the average private sector wage in China is 32706 CNY, or about $5267. So Ms. Ren paid the equivalent of one week’s wages for the average Chinese worker to get her nail salon job, and worked for free for three months, and yet still managed to earn $10,000 that year. That means that at the age of 20 she is already earning the world average wage, or almost double the average wage in China. With her new $65-a-day job, she will be able to repeat that annual performance by working only three days a week. If she works a full five days a week, she will earn triple the average Chinese wage.

To put that in perspective, the equivalent for an American would be a 20-year-old without a college degree getting an offer to work overseas, paying an $800 fee to get into the program, working through a 3-month internship, and then going on to earn $80,000 the first year and $120,000 the next.

I’m not saying that all the nail salon owners are wonderful people — there’s way too much going on in that article (and its followup) to believe that. Nevertheless, that hasn’t stopped an ambitious, hard-working, risk-taking young immigrant like Ms. Ren from prospering. And as with most immigrants, if she has children, they will probably do even better.

(Obviously, I don’t know much about Ms. Ren’s specific circumstances, and I’m greatly simplifying things for purposes of this post, but I don’t think it invalidates the point that she seems to be doing pretty good compared to where she came from.)

The last question, and arguably the most important one, is What do these women want?

We can figure out what these women want by looking at the choices they make. Jing Ren chose to leave her home and cross the ocean to America to work as a nail technician in a string of seedy New York nail salons. And within a year, her mother came over to do the same. That tells us a lot.

Which brings me to my special bonus question: What happens next?

Well, the Governor has a (hastily pulled together) plan of sorts:

Gov. Andrew M. Cuomo ordered emergency measures on Sunday to combat the wage theft and health hazards faced by the thousands of people who work in New York State’s nail salon industry.

[…]

Nail salons that do not comply with orders to pay workers back wages, or are unlicensed, will be shut down.

In other words, if Cuomo’s task force finds workers who are being exploited, they will solve the problem by taking away their jobs? I understand that the goal here is to coerce nail salons into treating workers better by threatening to put them out of business, and it’s possible that this could have a net positive effect. But I guarantee that talk like this is scaring the crap out of all those workers Cuomo says he’s trying to protect. This could easily turn into a disaster that puts thousands of them out of a job. And if Cuomo thinks the nail salons are exploitative, he’s really going to hate some of the alternatives (NSFW).

“We will not stand idly by as workers are deprived of their hard-earned wages and robbed of their most basic rights.”

“Basic rights” like the right to work in a job they find acceptable for a wage they find acceptable?

Some of the proposed regulations seem like they might improve health and safety, but others show a real lack of understanding of the problem:

Salons will now be required to be bonded — which is intended to ensure, through a contract with a bonding agency, that workers can eventually be paid if salon owners are found to have underpaid the workers.

Yeah…salon owners employ illegal immigrants to do unlicensed work at illegal wages, but I’m sure they’ll get right on that bond thing…

The framework for the emergency measures began to take shape shortly after the first article was published on Thursday, according to Alphonso B. David, counsel for the governor. Staff members from several agencies reacted strongly, and began to call one another upon reading the findings, convening on Friday for hours of brainstorming sessions to hash out the plan. A decision was made to take emergency measures rather than go through the usual route by which policies are updated, which involve time-consuming steps like periods of public comment […]

I hear all the best government work begins that way. What could possibly go wrong?

Well, for one thing, the plan to force nail salons to pay their workers more might succeed. As Rich Lowry puts it in his wildly off-the-mark opinion piece,

Surely, one reason that salons can pay so poorly is that the supply of illegal workers is so plentiful.

And this supply of labor must, at least at the margins, crowd out workers already here who might consider working in salons if pay and conditions were better.

These immigrant women bring very little to the bargaining table except their willingness to work in unpleasant conditions for low pay. If you force the salon owners to spend more money on wages and equipment, they’re not going to stick with their unskilled labor force. They’re going to replace them with nail technicians who are already trained, who speak English, and who have the legal right to work here.

Apparently there’s also been a public backlash against low-cost nail salons in New York, with lots of middle class women saying they’ll stop using them. I think their hearts are in the right place, but a move like that that could put the cheap nail salons out of business, which would put immigrant workers like Ms. Ren out of a job.

I understand the desire to try to help, but it’s important to remember that these nail salon jobs (and other low-paying jobs like them all over the country) provide a path up out of poverty for thousands of people every year. The wrong response could shut that down and do a lot more harm than good.

It Helps To Get the Elementary Economics Right

One of the places I look for blog material is the Post Everything section at the Washington Post, and one of the regular contributors is Jared Bernstein, who bills himself as “former chief economist to Vice President Biden,” which doesn’t sound like the kind of employment you’d want to brag about.

Anyway, Bernstein has a post about the Trans-Pacific Partnership (TPP) trade agreement that is currently winding up negotiations, and which will soon be up for ratification by Congress. He criticizes supporters of the agreement for being too simplistic (emphasis mine):

Supporters of the Trans-Pacific Partnership (TPP), a trade agreement under negotiation between the United States and 11 other countries, make this case: Trade between countries is always good, and more trade with more countries is even better. Harvard economist Greg Mankiw goes further in a recent New York Times piece, arguing that anyone opposed to trade deals does not understand elementary economics.

Note the highlighted phrase. Because two paragraphs later, he writes this (emphasis mine again):

In the simple models of introductory textbooks, countries improve their respective economic outcomes by specializing in their “comparative advantage” — the goods they produce more efficiently than their trade partners — thereby increasing the supply of goods and lowering prices.

Actually, that’s not what comparative advantage is. In fact, it’s a common misunderstanding of comparative advantage. If Bernstein was an Economics 101 student, I think he’d lose a bunch of points for giving that definition in an exam.

Consider a pair of dentists, Alice and Bob, who make all of their money filling cavities and doing root canals. Patients needing a filling are willing to pay $100, and patients needing a root canal are willing to pay $200, and they arrive with equal probability.

Alice has years of experience and is very fast at everything. She can fill a cavity in 20 minutes and do a root canal in 30. Thus, in an 8-hour day she can serve an average of 9.6 patients of each type, earning an average of $960 for doing fillings and $1920 for doing root canals, for a total of $2880 per day.

Bob is a new dentist, and he’s a lot slower. It takes him 30 minutes to fill a cavity and 90 minutes to do a root canal. At that rate, he can only see an average of 4 patients of each type per 8-hour day, earning an average of $400 for doing fillings and $800 for doing root canals, for a total of $1200 per day.

Now suppose Alice and Bob combine their offices and share all their patients, splitting the work as efficiently as possible. In that case, Alice will do 16 straight root canals in each 8-hour day to earn $3200 per day, and Bob will do 16 straight fillings in each 8-hour day to earn $1600 per day.

Note that both Alice and Bob make more money by splitting the work. And note that it’s worth it for Alice to let Bob do some of the work even though she is better at everything than he is.

We can see why this works by looking at their respective opportunity costs for each procedure.

  • Alice earns $300/hour doing fillings and $400/hour doing root canal procedures, so she makes more money by doing root canal procedures. Looked at another way, every hour she has to spend filling cavities instead of doing root canals will cost her $100. Alice therefore prefers to do root canals.
  • Bob earns $200/hour doing fillings and $133/hour doing root canal procedures, so he actually makes more doing fillings. Looked at the other way, every hour he spends doing root canals instead of filling cavities will cost him $67. Bob therefore prefers to fill cavities.

Thus, even though Alice as an absolute advantage over Bob in everything, she’s still better off by letting him fill all the cavities so she can do all the root canal procedures because she has a comparative advantage in root canals and he has a comparative advantage in fillings.

Of course, Alice and Bob don’t have to merge offices to do this. They can simply refer patients to each other. It’s still better for both of them that way. And if Alice and Bob are in separate countries, then whenever Alice refers a patient to Bob, that would count as an import from Bob’s country to Alice’s country, and vice versa.

(I probably should have picked an example with transportable goods instead of services — maybe bakeries where one is more efficient at making cakes and the other is more efficient at making pies — but it works out the same. When you buy services from outside your country, such as staying overnight in a hotel as a tourist, it counts as an import in the national accounts, the same as if you’d imported a physical good.)

That’s comparative advantage. Bernstein defined it as applying to “the goods they produce more efficiently than their trade partners,” but even if a country doesn’t produce anything more efficiently than its trading partners, it will still make economic sense to concentrate on the things it does best and outsource production of the rest to other countries. Thus there’s always something for everyone to do, no matter how inefficiently they do it.

It doesn’t really make much of a difference in the rest of Bernstein’s article — he goes on to make a good point about the lack of transparency in TPP negotiations and a dubious point about currency manipulation — but if you’re going to argue that academic economists are using a theory that is too simplistic, it helps if you state the theory correctly.

Equal Pay Won’t Help GDP

I stumbled across an In These Times article by Amy Domini and Sofia Faruqi called “5 Ways To Reduce Inequality By Holding Corporations Responsible.” It’s pretty much the usual progressive game plan, but one particular sentence in the last proposal caught my eye (emphasis mine):

5. Help women to prosper: Women are twice as likely as men to work for minimum wage. The gender pay gap in the retail sector alone costs women $40 billion annually in lost wages. This wasn’t so bad in 1960 when only 11 percent of American households had a female head, but it’s dire today when women are the primary breadwinners in 40 percent of homes. Plus, it’s bad for the economy. Equal pay would raise American GDP by 2.9 percent, or $448 billion.

The numbers in that last sentence are stunning, but I couldn’t see how equal pay legislation could increase GDP.

Tracing the link in the original article leads to last year’s U.S. Senate Budget committee testimony by Heather Boushey, Executive Director and Chief Economist for the Washington Center for Equitable Growth. She in turn cites a 2014 briefing paper titled “How Equal Pay for Working Women would Reduce Poverty and Grow the American Economy” by Heidi Hartmann, Jeffrey Hayes, and Jennifer Clark of the Institute for Women’s Policy Research.

Here’s what that paper has to say in the summary of its findings. Notice the very careful phrasing (emphasis mine):

The U.S. economy would have produced additional income of $447.6 billion if women received equal pay; this represents 2.9 percent of 2012 gross domestic product (GDP).

The paper gets to those numbers by using data from the 2010-2012 Current Population Survey Annual Social and Economic Supplement to estimate the pay difference between men and women, controlled for age, education, annual hours of work, metropolitan residence, and region of the country. The authors then use those figures to project how much more money women would have made if they had been paid the same as men.

The authors calculated that women earned an average of $36,129 a year, and that their pay was 85% as much as men for the same work. So if women earned as much as men, they would be earning $42,380 per year. That’s an increase of $6,251 a year for all 71.6 million working women. Multiply it out, and you get $447.6 billion, which is 2.9% of GDP. (I get a slightly different figure when I do the math, but it’s close enough.)

Income and production are two sides of the same process: We earn our income by selling our production of goods and services, and we spend that income buying and consuming the same goods and services. So if our collective income increases, production must also have increased. Consequently, if women earn more money, and they do not do so at the expense of anyone else, then the additional income would have to increase gross domestic product.

(There are actually many variations on income and production figures, depending on which components and flows are included in the calculations, and care has to be taken to add and subtract the right components when transforming numbers between two national accounts. In the U.S. we calculate GDP from both production data and from income data. In theory, this is an accounting identity, but there are always data discrepancies that keep income and production figures from matching exactly.)

The point of the careful phrasing in the summary is that $447.6 billion is the estimated amount that GDP would have been higher if women had somehow earned at the same rate as men, all other things being equal. How exactly that could happen is carefully left unsaid. In particular, the study does not say that equal pay legislation would increase GDP by that amount.

If we just passed a law that forced employers to pay women 17% more for their work, that would increase women’s paychecks, which would increase the national income accounts…but not really.

For an economic story to make sense, it has to make sense when applied to the real economy of goods and services. So even though U.S. GDP is expressed in dollars, what really matters is the total amount of goods and services that are produced. So in order for GDP to increase by $447.6 billion, it’s not enough for paychecks to increase by $447.6 billion. Our economy must actually produce $447.6 billion worth of additional goods and services.

But by definition, the equal pay legislation is simply giving women more money for the work they are already doing, which means that the increase in paychecks is not accompanied by an increase in the production of real goods and services. We’d be paying more money for the exact same stuff.

When you pay more for the same thing, we call it inflation. The U.S. Bureau of Economic Analysis calculates both nominal GDP, which is inflated, and real GDP, measured in constant dollars adjusted for inflation. The increase in women’s nominal earnings would show up as inflation of nominal GDP, while real GDP would be unchanged.

Since we’re not raising men’s incomes, the inflation would actually eat away at their real earning power. So the benefits to women would come at the expense of men. Women would be getting a larger share of the pie, but the pie would still be the same size. The deadweight $447.6 billion gain to GDP that Domini and Faruqi envision from the simplistic IWPR calculation is a fantasy.

It Helps To Have an Argument

Somebody named Joe left a comment explaining that he didn’t like my post about New York rent control. I was going to reply in the comments, but my response got long enough that I decided to make it a post. Normally, I do that when a commenter brings up interesting points, but in this case I wanted to point out some particularly annoying argument tactics.

It’s sad that, as soon as the second paragraph, the writer here demonstrates the ignorance of rent regulation laws in New York City that advocates indicated exists on the panel. It’s almost as if advocates said, “beware if you write about rent regulation in NYC – because you probably do not understand it” and then the author proceeded to prove them right. Once you address this fundamental error in paragraph 2 I will read the rest of the article: “And apparently sets increases to the same amount for everyone, as if there was no variation in the housing market from one neighborhood to the next.”

I will not help you out by explaining how this is almost, but not quite completely, wrong. Please contact people at whatever organization offering expertise in this area and they will explain it to you. Until you do, writing about rent regulation in NYC should be in your “Let me wait and find out first” file (lol) and when this is corrected, I, for one, will be happy to read the rest of the article.

First of all, I don’t particularly care if Joe reads the rest of my post. (Or this one.) But he shouldn’t criticize it as broadly as he does later if he hasn’t actually read it. It’s like a reviewer who says he walked out of a movie and then complains about the ending.

Second, telling me I’m wrong and then not explaining why is a weak attempt to hide the lack of an argument. This isn’t Twitter, where space is limited. Joe could easily have written a brief argument or provided a few links.

Third, when you write “I will not help you out by explaining,” you’re not fooling anyone. We’ve all seen that trick before:

“Lots of zoologists will tell you that unicorns are real!”

“Like who?”

“You can find them if you know where to look.”

“Do you have any names? Or maybe a link?”

“I’m not going to do your work for you.”

Joe’s trying to spin his response as if he’s refusing to help a lazy writer like me find something obvious, in the hope that no one will notice that he hasn’t provided support for his argument.

Fourth, my main source for the assertion that rent control “…apparently sets increases to the same amount for everyone, as if there was no variation in the housing market from one neighborhood to the next” is Fraade’s own article, which describes a single 1% rate increase cap for all rent stabilized housing in the entire city of New York.

Fifth, a plain reading of the explanatory statement for most recent Apartment Order from the New York City Rent Guidelines lists a single rate for the entire city, as does the Apartment Order itself.

Sixth, I realize that there are differences between apartments based on the regulations they fall under, the year they were built, their individual rental history, and any improvements to the building or the individual units. But the 1% city-wide rent stabilization cap nevertheless implicitly assumes a certain unnatural sameness, regardless of changes in market value. I have yet to find anything that contradicts this.

Please don’t take that the wrong way – I’m not being arrogant about knowledge here; just insisting that you start off with an understanding of the rent regulation laws in NYC rather than letting your ideology guide you in discussing it. Look closely at the facts first (and get them right), do some research on the matter (your own research if you really want to impress your readers) and then construct an argument that gives us something to think about that is not talking points regurgitated from economics 101.

Suggesting I do research seems like a reasonable demand, but it’s actually another trick argument. It works like this:

“There are trolls living under our bridges!”

“I’ve never seen any.”

“Ah, then you must not be looking hard enough.”

If I say that I looked into it and can’t find anything wrong with what I said, he can respond that I’m just bad at research. Which is a lot easier than showing me his research that explains my error. I mean, it’s amusing that Joe’s advice on what I can do to impress my readers is to do research and construct an argument, since he does none of that in his comment.

(Seriously, the point about uniform rent increases is not actually a major part of the point I was making, but if anyone out there can show me where I got it wrong, I’d appreciate the correction.)

Further, Joe’s assertion that I shouldn’t let my ideology guide my discussion is just nuts. That’s what ideology is for. I swear, some people use “ideology” as a way to make having principles sound dirty. Joe doesn’t have to agree with my ideas, and Lord knows he’s welcome to dispute them, but to say I shouldn’t be bringing my ideas into an argument is just silly.

Joe tries the same trick again when he refers to my argument as “talking points.” Saying that you’ve heard my argument from someone else is not the same as proving me wrong. I have to admit though, while I’ve seen political pundits attacking each other for spouting Republican or Democratic talking points, I’ve never before seen someone refer to economics as talking points.

I guess maybe Joe’s tired of hearing opponents of rent control explain over and over that the problems of price controls are “basic Economics 101.” But that doesn’t change the fact that the problems of price control are basic Economics 101. Literally. As in, the effects of price caps on supply is covered in Chapter 6 of one of the most popular introductory economics textbooks. (If you don’t want to buy a whole textbook, this is quick summary of the effects of price controls, and this summary even uses New York rent control as an example.)

Economists disagree over a lot of things, but the awfulness of rent control is not one of them. Only 2% of the members of the IGM Experts Panel agreed with the statement that “Local ordinances that limit rent increases for some rental housing units, such as in New York and San Francisco, have had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them.”

I mean, for God’s sake, economists as far apart as Paul Krugman and Thomas Sowell are both against rent control. Do you realize how crazy that is? The reason you keep hearing economics “talking points” about rent control is because the idea that rent controls reduce the quality and quantity of housing is arguably the most agreed-upon proposition in economics.

Clap If You Believe In Rent Control

While idling my brain on Twitter, I stumbled across Jordan Fraade promoting his Baffler article about how New York needs rent control. It’s a little like discovering a grown-up who believes in fairies.

For something that so deeply affects the workings of the city’s housing market, rent regulation in New York is widely misunderstood. At a recent event put on by the Pratt Institute and the NYC Planners Network, a group of progressive city-planning professionals, housing advocates on the panel spent as much time explaining how rent regulation works as they did explaining why we should keep it.

The only sensible response to rent control is to get rid of it. All of the discussion should be about how to phase out rent control in a way that doesn’t produce painful market shocks that devastate poor tenants.

Rent stabilization is less stringent; it covers multi-unit dwellings built between 1947 and 1974, and yearly rent increases are set by the Rent Guidelines Board (currently 1 percent, the lowest in fifty years).

A board that oversees pricing. And apparently sets increases to the same amount for everyone, as if there was no variation in the housing market from one neighborhood to the next. This is how the Soviets managed their economy, and look where it got them.

In rent stabilized apartments, tenants have the right to renew their leases, and have more leeway than market-rate tenants when pursuing legal remedies against their landlords if they are being mistreated. (Rent-stabilized tenants have historically and frequently been targets of landlord harassment.)

The linked story is about a building owner with a criminal history who is harassing tenants by degrading the quality of the building. This is to be expected under rent control.

Property owners want to earn a profit. That’s why they buy apartment buildings. When owners can’t increase their gross income by improving the building and raising the rent, their only choice is to cut costs by skimping on building maintenance and operation. They fire the doorman, let the carpets wear thin, and give tenants buckets to collect water when the roof leaks. They switch to lower wattage lights in all the public areas. They shut down the elevator, close the laundry room, and stop replacing busted security cameras. They let repairs go as long as possible, and they use substandard materials and unlicensed contractors. If anyone complains or makes trouble, they get harassed into leaving.

That’s a shitty way to run a building, and decent landlords will try not to run that kind of building. Of course, the easiest way to avoid being a shitty landlord is to not be a landlord at all. Thus rent control discourages good people from owning rental properties, pretty much guaranteeing that landlords are disproportionately likely to be shitty.

According to the panelists, renewing both these regulations is their first priority, simply because they affect so many people—2.5 million New Yorkers, living in about 45 percent of the city’s apartments.

This is why we can’t solve the rent control problem the easy way — by letting it expire. Disrupting the housing of 2.5 million people all at once would create havoc, with some tenants of formerly rent-controlled apartments being forced to seek housing in lower-cost neighborhoods, bidding up the rental prices there. Eventually some tenants will pay more, some tenants will leave, some landlords will lower their rents, and some developers will build new housing until the turmoil settles. But a good plan for getting rid of rent control would get the city to that same endpoint without all the disruption and pain in the middle.

And despite a media tendency to hold up middle-class Manhattanites as the face of rent control, rent-regulated tenants are disproportionately low-income people in low-income neighborhoods. This fact led Delsenia Glover of the Alliance for Tenant Power to make perhaps the most dramatic prediction of the night: if rent regulation is not renewed, low- and moderate-income people will be forced out of New York within a decade.

Either that or New York would have to come up with realistic housing policies. Which is what they do in the vast majority of the U.S. that doesn’t have rent control and yet still have low and middle-income residents living in apartments they can afford. It’s not like free-market housing is a wacky libertarian idea that’s never been tried.

The main problem with rent control in New York is that the system is administered in the clumsiest way possible.

No. The main problem with rent control in New York is the rent control.

Even worse, according to Harvey Epstein of the Urban Justice Center, 250,000 units have been removed from the rolls of rent-stabilized apartments over the years. This happens in a variety of ways, most notably through “vacancy decontrol,” which infamously allows landlords to make an apartment market-rate once the rent reaches $2,500 per month and the tenants move out (Mayor de Blasio has come out in favor of repealing this rule). No matter how it’s done, though, once an apartment becomes market-rate, it stays that way for good.

If you’ve been following along, New York rent control means that if you own apartments that rent for less than $2500 a month, your rent increase last year was capped at 1 percent. That’s less than the inflation rate of 1.6 percent, so your real income actually went down. On the other hand, if you own apartments that rent for more than $2500 a month, you can raise the rent as much as the market will bear.

That leads me to a question: All other things being equal, if you were investing in New York real estate, would you rather invest in units that rent for less than $2500 or more than $2500?

And then I have a followup question: Can you think of any reason why New York might be experiencing a shortage of affordable rental units?

Which leads us to…

The roots of 421a are in the distressed New York of the 1970s, when city leaders feared developers would never again build new housing. In some neighborhoods, 421a comes with no strings attached—if you build, you get a tax break. In other areas, developers can only take the tax break if they include 20 percent affordable housing in a project.

Either way, the result has been a bonanza for builders, allowing luxury towers like One57 to be built mostly tax-free. Williams estimated that the city loses $1.1 billion per year to 421a, and has only gained a measly 12,000 units in exchange. Most housing advocates in the city want the program to be significantly scaled back or scrapped altogether.

Having made the construction of affordable housing unprofitable because of rent control, the city then sets up a program to give away taxpayer money to developers. Through the miracle of regulatory capture, however, many of those developers aren’t actually using the money on projects that advance the affordable housing goals of the program. The programs do manage to further tie up the city’s housing stock in regulatory knots.

Which leads to…

Noting that 90 percent of all tenants in housing court appear pro se, Epstein said that New York’s current system for resolving housing disputes is “complaint-driven,” explaining that “we’ve set up a structure that prevents people from preserving affordable housing because no one’s looking over the landlord’s shoulder, and they know it.”

In a functioning free market, the people “looking over the landlord’s shoulder” are the tenants. If they don’t like the way their landlord is treating them, they can move out. If the vacated unit rents for a $1000-a-month, and it takes the landlord a month to get somebody in it, that’s equivalent to fining the landlord $1000 for mistreating the tenant. Landlords will work hard to avoid that, if not because they’re nice people, then because they like their money.

That incentive system breaks down under rent control. The threat to move out and stop paying rent is less effective when the rent is low because the landlord has less to lose. And if the tenant has locked in a good rate, the threat to leave isn’t very credible since it would mean moving someplace with higher rent. Actually, since decades of low rental rates have discouraged investment in rental properties, where would the tenant go? Tenants are stuck and the landlords know it, so they don’t have to try very hard to hang onto good tenants.

Without the discipline of the market, tenants’ rights advocates are stuck proposing layer after layer of regulations and procedures, each one trying to offset the perverse incentives of what came before.

There has been plenty of advocacy around the rights of rent-regulated tenants—like this spring’s battle to renew state rent laws, and last year’s unsuccessful fight to get a rent freeze. But there’s been little visible work done on behalf of tenants who are still a majority of the city’s renters: those who don’t live in rent-stabilized or public housing. I asked Williams after the panel what market-rate tenants might be able to expect after this spring’s battles, and she was blunt: “They’re screwed.”

I’d like to hear more of an explanation of why Williams thinks that. According to Landlord.com only four states have rent control — California, Maryland, New Jersey, and New York — along with the District of Columbia. The rest of us live without rent control, and we’re not exactly living in a hellscape. In fact, Googling around for the “Top 10 priciest U.S. cities to rent an apartment,” seven of them — San Diego, Oakland, San Jose, Los Angeles, Washington D.C., New York City, San Francisco — have some kind of rent control.

That doesn’t mean that rent control causes higher rents — the causality could go the other way, with high rents making it politically likely that a city will adopt rent control — but it does cast doubt on the long-term effectiveness of rent control.

Furthermore, some basic economics tells us that artificially capping the price of a good is likely to create a shortage. We had a spectacular example of this during the 1973 oil crisis, when the government respond to shocks in the oil market with price controls. As with New York real estate investors who stopped building rental units, oil companies stopped importing as much oil, and gas stations started running out of gas at the pumps. Even with alternate-day rationing, there were long lines for the gas stations, and fights would break out between people waiting in line. The trucking industry was especially hard hit by the high prices and shortages, and tensions rose to the point that there were shootings and bombings.

In the housing production chain, renting an apartment to a tenant is only the last step, and trying to force prices lower there is only going to work if the production process itself can actually be modified to operate less expensively. If New York isn’t producing enough affordable housing, they place to fix it is further back in the process. You have to figure out what barriers are keeping the market from producing the low-cost housing that is so clearly in demand.

We do this all the time with other products. Just in my lifetime we’ve figured out how to make lots of things less expensive — food, clothing, appliances, mobile phones, televisions. The most extreme example I can think of is computers. When the Cray 2 supercomputer was released in 1985 it cost $40 million in today’s dollars. Equivalent computing power costs maybe $800 today (and it’s more reliable and fits in your briefcase). But we didn’t hammer down the cost of computers by having an Alliance For Computer Users that pressured the Computer Pricing Guidelines Board into lowering the caps on computer prices.

And that won’t work for housing either.

The Unappreciated Virtues of Low Prices

Former Joe Biden chief economist Jared Bernstein has a piece up at PostEverything extolling the virtues of the $20/hour wage rate paid to McDonald’s employees — and other fast food workers — in Denmark.

The base pay for a fast-food worker in Denmark is $20, and the pay package includes considerable non-wage benefits, including five weeks’ paid vacation, paid maternity and paternity leave and a pension plan. What’s the U.S. fast-food pay package? Um…not so much. The average hourly wage is $8.90, with few benefits, and the base wage is closer to $8.

Now, this huge difference poses a huge problem for those who want to argue that such compensation levels are set solely by the market fundamentals of supply, demand and productivity.

I don’t know too many people who argue that that compensation levels are set solely by the market, but lots of free market advocates argue that compensation levels should be set solely by the market.

Surely those factors play a role, but the difference in pay is too large to be explained by market factors alone. Denmark and the United States are different countries serving different markets, but a burger is a burger — and we’re not in different universes.

Clearly, Bernstein doesn’t know very much about burgers if he thinks they’re all like Big Macs, but I’ll grant that McDonald’s burgers are probably mostly the same everywhere. But that doesn’t mean that McDonald’s restaurants are operated the same everywhere. I’m guessing that a McDonald’s with those labor costs operates a bit differently than the ones I’m used to.

An economy is a complex system, and trying to push it around often produces unintended consequences. Bernstein implies that the higher pay for McDonald’s workers comes at the cost of making restaurants less profitable. If that’s the case, then we would expect that the higher wages would force McDonald’s to cherry-pick its best locations for restaurants, and drop all the less profitable locations, or never build anything there in the first place.

And indeed that seems to be the case. In proportion to its population, Denmark has about 1/3 as many McDonald’s as the U.S. Now I’m not saying that Denmark could triple the number of jobs in its fast food sector by allowing lower wages — there are undoubtedly other factors explaining the relative lack of McDonald’s — but the high wages probably aren’t helping, and if they’re widespread in other sectors of the economy, they may be contributing to the high cost of living in Denmark.

Denmark does have a much more balanced distribution of income according to World Bank estimates, but their overall income is lower, with the average person in Denmark earning a GDP per capita that is about 80% of what U.S. residents make. Denmark also currently has an extra point of unemployment.

Naturally, the higher labor rates raise the prices on a McDonald’s menu:

Of course, burgers cost more in Denmark. A Big Mac is $5.60 there, compared to $4.80 here. But that price difference is dwarfed by the wage difference. Not that she’d necessarily want to, but a Danish worker can buy almost twice as many Big Mac’s on her wage than her American counterpart.

A worker at McDonald’s could buy almost twice as many Big Macs on her wage, but every other person in Denmark who is not a McDonald’s worker can only buy about 85% as many burgers as their American counterparts because of the higher price. The burger price increase may not be as steep as the wage increase, but it affects many times more people.

Here in the United States, we’re all about lower prices. What we often fail to do is connect lower prices to lower wages. In part, that’s the result of a national economic model that puts the consumer at the center of the action.

That’s a little mixed up. Prices and wages are connected, but not just in the way Bernstein suggests. Let me see if I can explain what I mean.

To keep it simple, let’s suppose you work for one hour a day for $10 per hour, and you spend all $10 every day on food at McDonald’s. Day in, day out, that’s your routine: Work for an hour, buy food to stay alive.

Then one day, you negotiate with your boss for a 10% raise. Now you make your daily trip to McDonald’s with $11 in your pocket. You still spend $10 on a burger, fries, and a drink, but you have $1 left over to spend on something else — maybe a mini-desert at McDonald’s, or something to read, or maybe you save up and buy an article of clothing. Whatever you buy with that extra dollar is the tangible manifestation of your increased income.

But suppose that when you get to McDonald’s, you’re shocked to discover that prices have gone up 10%, so your regular meal now costs $11. You can still afford to eat, but don’t have money left over for anything else. Once again, you’re working an hour a day and spending all your income on the same food. Your quality of life has not changed. Your income has gone up in nominal terms, but in reality nothing has changed because you are not able to consume any more than before.

Finally, let’s back up and suppose your negotiation with your boss failed, and you still earn $10 an hour. Feeling a little dejected, you stroll into McDonald’s only to receive a pleasant surprise: McDonald’s has cut its prices by 10%. Your meal now only costs $9, meaning you have $1 left over to spend on something else, just as you would have if you had received a 10% raise. By lowering its prices, McDonald’s has effectively given you a small raise.

The true measurement of your income is not the money that you’re paid, but the goods and services you can consume. You are better off if your employer pays you more money per hour of work, but you are also better off if the production of things you buy becomes more efficient, so you can buy more stuff for the same amount of money. The money itself is only the medium of exchange that you use to convert your hard work producing goods and services into an improved quality of life by consuming goods and services. In fact, we can take the money out of the equation entirely and conclude that your quality of life is directly related to the amount of goods you are able to consume for every hour of work you do.

If we expand our view to encompass the whole economy, it’s pretty clear that we can only consume as much as we produce — because those consumer goods and services don’t materialize out of nowhere. (I’m ignoring fluctuations due to imports, exports, and warehousing for the sake of simplicity.) So the more we can produce in an hour, the more we have available to consume. Or to put it another way, the less labor it takes to make something, the more of that thing we can produce with our existing labor force, and the more we have to consume.

Labor productivity has increased dramatically in the developed world, and it has made us rich. Historically, keeping humanity fed used to require the labor of anywhere from 50 to 80 percent of the population, including women and children. But over the past few hundred years we’ve figured out much more efficient forms of agriculture, and the percentage of agriculture workers in developed countries like the United States has fallen to less than 2 percent.

All those people who used to labor at farming are now working to produce everything else we have — sturdy housing, reliable transportation, electric power, advanced medicine, colorful clothing, instant communications, stimulating entertainment — all the advantages of our modern civilization. We have so much more than our ancestors because it’s all so much cheaper to produce.

In denouncing the pursuit of low prices, Berstein is attacking the source of our prosperity.

What Could Be Worse Than Raising the Minimum Wage?

I see that our mayor has proposed a city ordinance to raise Chicago’s minimum wage to $13 an hour. The current minimum wage in Illinois is $8.25/hour, a buck over the federal minimum, so that amounts to a 58% hike. This follows Seattle’s decision to increase their minimum wage to $15 a few months ago, and it’s in step with attempts to raise both the Illinois and federal minimum wages.

There are a number of arguments against raising the minimum wage — it’s poorly targeted, it causes economic distortions, it’s unfair — but the one that attracts the most attention is the argument that increasing the minimum wage will cause a drop in employment among the kinds of workers who earn minimum wage.

Exactly how the job market responds to increases in the minimum wage is a somewhat murky issue, and research on the effects of raising the minimum wage have been inconclusive. However, the idea that increasing the minimum wage will hurt employment is not based on some esoteric theoretical proposition that has caught economists’ fancy. It’s based on a very broad theory that has proven itself often: When the cost of something goes up, people will buy less of it.

It’s that simple. The whole world of commerce is built around that theory, and we see it working every day. For example, it’s a lot easier to eat at a restaurant than to make dinner at home, and restaurant food likely offers better taste and more variety, and yet people don’t eat dinner out every day, because restaurants are more costly than eating at home. Alternatively, if you’re at the grocery store and you notice a great sale on your favorite food, you’ll probably buy more, which means that before it went on sale, the higher price was making you buy less. That quantity demanded declines as prices increase is pretty much the way of the world.

Therefore, I think we can safely say that raising the minimum wage (1) increases the income of low-skilled workers who were earning less than the minimum wage, (2) raises the cost of hiring low-skilled workers, and therefore (3) makes hiring low-skilled workers less attractive for employers. The benefit of increased pay comes in exchange for increased labor costs for employers.

Still, raising the minimum wage does provide some benefit to low-skilled employees, and it may even provide a net benefit, since the people who lose their jobs will be losing crappy minimum wage jobs. There are worse ways to help low-skilled workers.

As proof of that, Sarah Jaffe at In These Times is touting an even worse idea: The Bad Boss Tax.

As conceived, the “bad business fee” legislation would require companies to disclose how many of their employees are receiving public assistance from the state or federal government. Companies would then pay a fine based on the de facto subsidies they receive by externalizing labor costs onto taxpayers.

Some of the proposals for implementing this “bad business fee” would be a compliance nightmare:

The fee might be implemented on a per-employee basis—in Cook County, Illinois, NPA and JWJ partners are considering a $5,000 charge for each employee receiving public assistance—or as a lump sum based on how much an entire sector costs taxpayers, which would then be split up among the employers in that sector. The organizers also want to hold big businesses accountable for their supply chains and franchisees. For instance, if McDonald’s Corporation got slapped with a fee for each restaurant that underpays its workers, it could be pushed to include higher wages in its franchise contracts. Similarly, if Walmart had to pay not just for its retail employees, but the workers in its warehouses, it might have an incentive to require better wages from subcontractors.

Well, whatever else it does, this will certainly increase employment of accountants and lawyers. I mean, can you imagine the nightmare of a business having to obtain these reports from dozens or hundreds of suppliers and thousands of franchisees?

And can anyone seriously believe that charging businesses $5000 for hiring people who are on public assistance will not discourage businesses from hiring people who are on public assistance? How will low-skilled laborers acquire the skills they need to get off public assistance if we make it harder for businesses to give them jobs?

In fact, the low-skilled laborers are being cut out of the process almost completely. As with raising the minimum wage, the bad boss tax would also take money away from businesses that hire low-skilled workers, making them less attractive as employees, but at least increasing the minimum wage funnels the money from employers to low-skilled employees. The “bad business fee,” on the other hand, would take money from employers and give it to the government.

To be sure, the money would only be used to fund the finest of progressive social programs:

At a municipal level, Murray explains, the money could go to an existing development department that could manage and distribute the money. On a statewide level, it could be distributed through the revenue department as a tax break for workers. There’s also the possibility of distributing some of the funds to nonprofits involved with direct worker support, childcare or food assistance.

McGrath says the money could go to bolster the public services that workers rely on, or to hire more people to enforce wage and hour laws. “Minnesota succeeded in raising its minimum wageto $9.50 an hour by 2016 and indexing it to inflation,” he says. “But we have a paltry number of wage and hour investigators in our state. How will we know that people are actually being paid the wage that was just won?”

Elsewhere, other community and labor partners are busy brainstorming about what would make sense in their states and cities. In Chicago, housing subsidies are a possibility; in New York, the money could be used to offset the rising costs of public transportation; in San Francisco, a combination of housing and transportation issues is under consideration, as gentrification has rapidly made it harder for low-wage workers to live near their jobs. In New Mexico, using a bad business fee to support early childhood education is being discussed.

This is a familiar pattern for spending on social welfare programs. It seems that wherever you find a recognizable group of disadvantaged people, you will find a buzzing cloud of middle class people who make a living off of providing them with government-paid services. It would be simplest, and arguably most efficient, to just give poor people the money they need to improve their lives, but instead the money is used to hire social workers, clerks, lawyers, psychologists, and childcare specialists or it’s used to fund programs in education, public transit, or housing.

In this case, to be completely cynical about it, the logic at work seems to be, “Those greedy companies aren’t paying workers enough, so we should tax the companies and use the money to hire people like me to provide services to their workers.”

The public choice implications aren’t pretty either. Once there are thousands of people earning a living by providing services paid for by the “bad boss tax” on workers receiving public assistance, won’t that create a constituency that never wants workers to get off public assistance?

In that way, the fee is win-win. If companies seek to avoid it, they end up doing something just as good for their employees, or even better. Martin says, “For me in particular, the better part is my boss may be thinking, ‘Well, I should just pay my employees better. I should just pay a living wage. I should just give Cliff some benefits.’ ”

Or “Cliff shows promise and I was thinking of promoting him, but now I can’t afford the $5000 I’d have to pay to keep him around. Better to terminate him and give the hours to Mary and Bill.”

Or “I should just terminate Cliff and Mary and Bill and replace all three of them with one employee trained to operate the machine that does their job.”

I think proponents of this idea are sacrificing the welfare of the people they claim to be helping so that they can revel in the joy of punishing businesses they don’t like.

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