Thoughts on economics and liberty

Category: Economics

Blacks were almost WIPED OUT from the job market after the minimum wage laws in USA

Thomas Sowell is one of the world’s best economists alive today. His analyses are brilliant – without exception.

I’m particularly interested in his analyses of the completely opposite consequences of bad policies.

E.g. he wrote:

“you will discover that “gun control” laws do not control guns, the government’s “stimulus” spending does not stimulate the economy and that many “compassionate” policies inflict cruel results, such as the destruction of the black family.”

And this he wrote regarding the impact of minimum wage on black unemployment:

EXTRACT from Differential Impact, The Thomas Sowell Reader

The history of black workers in the United States illustrates the point. From the late nineteenth century on through the middle of the twentieth century, the labor force participation rate of American blacks was slightly higher than that of American whites. In other words, blacks were just as employable at the wages they received as whites were at their very different wages. The minimum wage law changed that.

Before federal minimum wage laws were instituted in the 1930s, the black unemployment rate was slightly lower than the white unemployment rate in 1930. But then followed the Davis-Bacon Act of 1931, the National Industrial Recovery Act of 1933 and the Fair Labor Standards Act of 1938—all of which imposed government-mandated minimum wages, either on a particular sector or more broadly. The National Labor Relations Act of 1935, which promoted unionization, also tended to price black workers out of jobs, in addition to union rules that kept blacks from jobs by barring them from union membership. The National Industrial Recovery Act raised wage rates in the Southern textile industry by 70 percent in just five months and its impact nationwide was estimated to have cost blacks half a million jobs. While this Act was later declared unconstitutional by the Supreme Court, the Fair Labor Standards Act of 1938 was upheld by the High Court and became the major force establishing a national minimum wage. The inflation of the 1940s largely nullified the effect of the Fair Labor Standards Act, until it was amended in 1950 to raise minimum wages to a level that would have some actual effect on current wages.

By 1954, black unemployment rates were double those of whites and have continued to be at that level or higher. Those particularly hard hit by the resulting unemployment have been black teenage males. Even though 1949—the year before a series of minimum wage escalations began—was a recession year, black teenage male unemployment that year was lower than it was to be at any time during the later boom years of the 1960s. The wide gap between the unemployment rates of black and white teenagers dates from the escalation of the minimum wage and the spread of its coverage in the 1950s.

The usual explanations of high unemployment among black teenagers—inexperience, less education, lack of skills, racism—cannot explain their rising unemployment, since all these things were worse during the earlier period when black teenage unemployment was much lower. Taking the more normal year of 1948 as a basis for comparison, black male teenage unemployment then was less than half of what it would be at any time during the decade of the 1960s and less than one-third of what it would be in the 1970s. Unemployment among 16 and 17-year-old black males was no higher than among white males of the same age in 1948.

It was only after a series of minimum wage escalations began that black male teenage unemployment not only skyrocketed but became more than double the unemployment rates among white male teenagers. In the early twenty-first century, the unemployment rate for black teenagers exceeded 30 percent. After the American economy turned down in the wake of the housing and financial crises, unemployment among black teenagers reached 40 percent.

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Transition from transaction taxes to land tax

This is a placeholder post, to assemble some notes on this topic.

SBP policy

In general, land tax is one of the more efficient taxes. We will significantly strengthen the land tax system, to be used mainly by the States, union territories and local governments, helping them reduce their dependency on central taxes. [SBP manifesto]

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POLITICAL PROBLEMS FACED WHILE TRANSITIONING

This article summarises well: Why Economists Love Property Taxes and You Don’t

OPTIONS to transition

The ACT model is an excellent way to transition.

SUMMARY OF A SIMPLE TRANSITIONAL OPTION

Source: “state governments should commit to making a gradual transition to a broad-based recurrent property tax (i.e. a land tax using CIV). While described in greater detail in subsequent chapters, such a tax should have the following features:

  • It should be a single, broad-based low rate tax based on the value (CIV + HB) of all residential property with the same tax-free threshold as the simplified transfer duty (outlined in Chapter 5) to ensure the annual tax burden is a low as possible and is progressive by property
  • Collection and administration of the tax should be integrated with local government rates (as per existing emergency service levies).
  • In the interests of simplicity and transparency the property tax should be applied to all dwellings (rather than existing owners being exempt or ‘grandfathered’), but introduced gradually to avoid excessive double
  • Revenue from the broadened property taxation regime will be used to fund a reduction in transfer duty rates, and deferral provisions would be available to owners eligible under mitigating circumstances
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How Adam Smith’s ideas transformed Ronald Coase the socialist into one of the world’s greatest economists

This extract from the book Ronald H. Coase by Steven G. Medema is of some interest:

Coase was at that time a social¬ist, and he thought that studying economics (which was required for the commerce degree) would be quite interesting. During this preparation period, he studied economics, geography, French, English economic history and accounting. He passed his intermediate examination, and enrolled at the London School of Economics (LSE) in October 1929 to continue his work towards a bachelor of commerce degree.

It was during Coase’s second year at LSE that his career path was trans-formed. In 1930, Arnold Plant was appointed Professor of Commerce at LSE, and Coase began to attend his seminar. Plant’s effect on Coase was quick and deep:

I attended his lectures on business administration but it was what he said in his seminar, which I started to attend only five months before the final examinations, that was to change my view of the working of the economic system, or perhaps more accurately was to give me one. What Plant did was to introduce me to Adam Smith’s ‘invisible hand’. He made me aware of how a competitive economic system could be coordinated by the pricing system. But he did not merely influence my ideas. My encountering him changed my life. (Coase, 1991, p.4)

Changed his life indeed. Prior to hearing Plant’s seminars, Coase’s only real exposure to economics was at the Kilburn Grammar School while preparing for his intermediate examination. In fact, Coase did not take a single economics course while he was at LSE. Nor was he sorry for this, saying that it ‘gave me a freedom in thinking about economic problems which I might not otherwise have had’ (Coase, 1990a, p.3). That Coase came to economics, rather than being raised in it, may well account for much of the unique and original insight that he brought to economic problems.

Having passed his final examinations at LSE in 1931, and with one more year of residence being required for the degree, Coase had to decide what to do in his third year. He decided to study industrial law to complete a bachelor of science degree in economics. Had he followed through with this plan, he says, he almost certainly would have gone on to become a lawyer. However, the university awarded him the Sir Ernest Cassel Travel¬ling Scholarship for the 1931-2 school year — an award he attributes to Plant’s influence — and he decided to go to the US to study American industrial structures and, in particular, why organizational structures differ across industries. ‘Although I did not know it’, says Coase, ‘I was on the road to becoming an economist’ (Coase, 1991, p.5). It was this study, undertaken while he was still an undergraduate, that resulted in the insights that became ‘The Nature of the Firm’ (1937a), one of the articles cited by the Royal Swedish Academy of Sciences in awarding Coase the Nobel Prize.

But Plant’s influence went much further than this:

Until I met Plant my economic views were extremely woolly. From him I learned that producers maximize profits, that producers compete, and therefore that prices tend to equal costs and the composition of output to be that which consumers value most highly. Plant also explained that governments often served special interests, promoted monopoly rather than competition, and commonly imposed regulations which made matters worse. He made me aware of the benefits which flow from an economy directed by the pricing system. Clearly, I did not need Chicago. (Coase, 1988b, pp.6-7)

Elsewhere, Coase says of Plant that, notwithstanding his lack of interest in theoretical work, the theory he possessed, the theory of competition, was quite serviceable and, armed with it and a realistic view of what government could and would do, he was able to destroy many widely-held views and to pass on to his students an approach to economic policy which would protect them from much fashionable error and would enable them to devise policies more solidly based. (Coase, 1986, p.90).

Through Plant, he says, the students came to view the economic system as an essentially competitive system and to see many of the business practices which were attributed to the forces of monopoly as natural results of a competitive system (Kitch, 1983, p.214). As one moves through the pages of Coase’s career, one can see clearly the profound impression that these ideas, along with Plant’s approach of looking at real-world problems, made upon Coase.

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How China overthrew some elements of socialism but remains an intellectual backwater of the world

These five extracts from Coase’s How China Became Capitalist explain it very well:

CHINA’S IGNORANCE OF ECONOMICS IN 1980 WAS SIMILAR TO INDIA’S IGNORANCE OF BASIC ECONOMICS TODAY.

During the Cultural Revolution, China pursued a policy of self-isolation in diplomacy and self-sufficiency in the economy. At the same time, ideological monopolization in the name of pursuing pure socialism led to the stifling of intellectual development. Even Marxism was held to be a finished theory rather than a developing school of thought. As a result, Chinese knowledge of market principles was almost nil, and what little did exist was often erroneous. In 1980 Milton Friedman visited China and gave a week-long intensive course in price theory to the brightest Chinese bureaucrats. One day, at lunch after the lecture, a minister from the Ministry of Materials Distribution and his chief associate, who were to form part of a Chinese delegation to the United States, wanted to know who they should talk to in the United States. The first question they asked was, “Tell us, who in the United States is responsible for the distribution of materials?”

HOW LEE KUAN YEW CHANGED CHINA. SADLY, ALL THE CLOWNS OF INDIA THINK THEY KNOW MORE THAN LKY – THE PAST-MASTER OF GOVERNANCE

There is no doubt that such intensive exposure to the outside world, particularly to the West, served as a powerful catalyst for changes in Chinese attitudes to the market, to capitalism, and to economic development. For example, when visiting Singapore in November 1978, Deng inquired in detail about the working of foreign direct investment and its contribution to the rise of Singapore’s economy. To the surprise of his host, Deng openly admitted mistakes the Communist government had made and earnestly sought advice from Lee Kuan Yew, Singapore’s founding and long-serving Prime Minister, on how to improve the Chinese economy. More than a decade later, Lee still remembered his meeting with Deng.

“I had told Deng over dinner in 1978 in Singapore that we, the Singapore Chinese, were the descendants of illiterate landless peasants from Guangdong and Fujian in South China, whereas the scholars, mandarins, and literati had stayed and left their progeny in China. There was nothing that Singapore had done that China could not do, and do better. He stayed silent then. When I read that he had told the Chinese people to do better than Singapore, I knew he had taken up the challenge I quietly tossed to him that night fourteen years earlier.”

HOW CHINA DEVELOPED A DESIRE TO LEARN FROM OTHERS (A DESIRE THAT INDIAN SOCIALISTS NEVER DEVELOPED, BEING ULTRA-ARROGANT AND FULL OF THEMSELVES) –

After visits to Hong Kong, Macau, Singapore, Japan, the United States, and Western Europe in 1978 and 1979, Chinese officials had been shocked by the astonishing technological advancement and economic efficiency achieved by the capitalist system and the pleasant living conditions enjoyed by the middle classes. They were forced to appreciate the extraordinary strength of capitalism in innovation, technological as well as institutional, a point actually made a long time ago by Marx himself.

CHINESE LIBERATION OF PRICES IN 1990s WAS CRITICAL TO ITS CONVERSION TO CAPITALISM

The most serious defect of China’s economic reform in the 1980s was the lack of price reform, which had resulted in chaotic pricing, massive resource misallocation, and economic disorder.

In 1992 the Chinese government took a series of decisions that would ultimately abolish price control. The list of prices for raw materials, capital goods, and transportation services to be set by the central government was reduced from 737 to 89 (it would be further reduced, to 13, in 2001).63 The market for grain was fully liberalized nationwide at the end of 1992. The National Planning Commission halved the mandatory production plan for 1993, leaving more room for market forces to operate. China also significantly reduced the import tariffs for more than 3000 items, beginning at the end of 1992. The process of price deregulation would continue throughout the coming years. In 1993, the dual-pricing practice used for steel and machinery products was ended; in 1994, dual pricing for coal and crude oil ended. By 1996, the dual-track pricing for industrial inputs became history. The share of producer goods transacted at market prices increased steadily from almost zero in 1978, to 13 percent in 1985, 46 percent in 1991, and 78 percent in 1995.

 

CHINA IS A KEEN FOLLOWER OF LKY’s SINGAPORE MODEL AND THE WORLD’S BEST ECONOMISTS. THE NEXT MAJOR REFORM IN THE 1990s IN CHINA WAS OF ITS STATE ENTERPRISES, WHICH MOVED TO THE SINGAPORE TAMASEK MODEL.

With the endorsement of a market economy as the ultimate goal for China’s economic reform in 1992, the proponents of enterprise reform gained a new mission: turning state-owned enterprises into independent, autonomous, and market-oriented economic entities.

It was reported that in 1988 about 10.9 percent of state enterprises were insolvent. The rate rose to 16 percent in 1989, 27.6 percent in 1990, over 30 percent in 1993, and 40 percent in 1995. A survey of state enterprises in 16 big cities, including Shanghai, Tianjin, Shenyang, and Wuhan, jointly conducted by nine central government ministers and bureaus in 1994 revealed that 52.2 percent of state enterprises were insolvent. At the same time, the share of state enterprises in industrial production plummeted from 77.6 percent in 1978 to 54.6 percent in 1990 and 34 percent in 1995

Chinese economists drew much theoretical inspiration from a growing school of thought in modern economics, the economics of property rights, as mainly developed by Armen Alchian, Steven Cheung, Harold Demsetz, Douglass North, as well as Ronald Coase.

Zhucheng, a small county-level city in Shandong, quietly privatized 272 out of its 288 state or collective enterprises. This happened between late 1992 and mid-1994. Chen Guang, who became mayor of the city in 1991 and Party Secretary in 1993, oversaw this radical episode of enterprise reform. As mayor, Chen quickly found out that the majority of state enterprises were actually insolvent and had to rely upon government subsidies to survive. The local government, however, could no longer afford to subsidize the loss-making state enterprises.

After most of the state enterprises being privatized or simply closed, Chen faced little resistance in abolishing five government bureaus formerly in charge of administering state enterprises.

In January 1996, a delegation of twenty-three members from nine different Ministries was sent by Zhu Rongji, Premier of the State Council, to visit Zhucheng for a week. Their report enthusiastically approved the Zhucheng experience of restructuring state enterprises. In March, Zhu himself led a delegation to Zhucheng, visiting many restructured enterprises. After his visit, Zhu pointed out some shortcomings in Zhucheng’s enterprise reform, but praised it as a model that deserved serious consideration for other cities.

To reform their state enterprises, most of which had been the pride of China during Mao’s time, officials from Shanghai visited several western European countries to study how they managed their state assets.

Many small and medium-sized state enterprises were simply liquidated. As a result, their number was cut dramatically. Even those remaining were separated from direct government control and put in the hands of a few state asset management companies. In principle, the state asset management company would behave like a private investor, subject to certain political constraints. Moreover, all state asset companies reported directly to the State Assets Management Committee, slashing the bureaucratic red tape that had plagued state enterprises in the past.

The practices of both Zhucheng and Shanghai were incorporated into the “Decision on Issues Regarding the Establishment of a Socialist Market Economic System,” which was passed at the Third Plenum of the Fourteenth Central Committee of the Party in November 1993. This meant that those practices were now part of the main approach to reforming state-owned enterprises. The strategy was then called “holding on to the big and letting go the small.”

THE THIRD MAIN MARKET REFORM IN CHINA WAS CREATION OF JOINT STOCK COMPANIES in 1997 AND PRIVATISATION AS A POLICY

At the Fifteenth National Congress of the Party in 1997, the role of the non- public sector was stressed as “an important component” of the socialist market economy. Joint-stock companies were officially recognized. Privatization was no longer seen as undermining socialism. Afterward, the state-owned enter- prises went through a drastic process of restructuring and downsizing, resulting in massive layoffs.

CHINA’S FAILURE TO PRIVATISE OR LET GO THE HIGHER EDUCATION SECTOR IS HOLDING IT BACK – ITS ACHILLES HEEL – AND EXPLAINS WHY IT WILL REMAIN A THIRD TIER COUNTRY IN COMPARISON TO THE USA.

Most Chinese universities and the educational system in general still remain under state control. It is here that the most serious deficiency of China’s market reform reveals itself. This deficiency stands at the root of the troubling symptoms we have identified above, as well as other shortcomings in the Chinese economy.

The most significant change in Chinese universities in the past few decades of rapid market reform has been the commercialization and expansion of higher education. At the end of the 1980s, Chinese universities started to enroll fee- paying students who otherwise would not have been able to attend college because of their poor performance at the national college entrance examination. As a result, the state ceased to be the only funder of higher education. The pace of commercialization and expansion of the higher education sector picked up greatly in the 1990s, giving rise to what is widely referred to as “China’s great leap in higher education.” In 1995, only 5 percent of age group 18–22 had access to higher education; by 2007, that had increased to 23 percent

The fatal organizational flaw of Chinese universities is their lack of autonomy. The majority of Chinese universities remain primarily funded by the state and under the strict control of the Ministry of Education.

In 1995 and 1998, the Chinese government launched Project 221 and Project 985, with the aim of building up a few world-class universities and critical academic disciplines.85 The Ministry of Education introduced the piece rate compensation system to Chinese universities, an incentive scheme that had served well in manufacturing firms. University professors are evaluated and rewarded according to their publications. The total compensation of a professor typically consists of a basic salary, which is tied to his or her academic rank, and a performance-based reward, which is mainly dependent on publications. In most cases, the basic salary is set so low that all professors have to publish to earn a decent living. Not surprisingly, this scheme, which is now widely applied, has turned Chinese professors into publication machines.

Given the pervasive administrative meddling of the state, it is not difficult to understand the mediocre performance of Chinese universities. As Milton Friedman remarked, the surest way to destroy an industry is to protect it with state monopoly. The state monopoly in China has severely curtailed the production of ideas. Administrative interference is so severe that even in areas such as physical and biological sciences and technology, where the impact of political ideology is limited, a free market for ideas hardly exists.

People of critical thinking and independent thought, the most valuable human assets in any society, often find themselves labeled political dissidents. In turn, political dissidents often find themselves deemed to be “anti-Party,” or “anti-socialism,” a charge that can end their career, if not their life.

The lack of a market for ideas is directly responsible for the lack of innovation in science and technology, the Achilles’ heel in China’s growing manufacturing sector.

 

 

 

 

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