• Tag Archives economics

  • How Bad Economics Chased Uber and Lyft Out of the Twin Cities

    Posted on by Azrael Comment

    The ride-hailing services Uber and Lyft announced last week that they are pulling up stakes in the Twin Cities because of a new ordinance designed to raise driver pay.

    The Minneapolis City Council voted 10–3 to override the veto of Mayor Jacob Frey, passing a policy that will raise the pay of drivers to the equivalent of $15.57 per hour.

    In response to the plan, Uber and Lyft announced that they will cease offering rides beginning May 1 throughout the entire Twin Cities, the 16th largest metro in the United States, saying operations were economically “unsustainable” under the plan.

    “We are disappointed the Council chose to ignore the data and kick Uber out of the Twin Cities, putting 10,000 people out of work and leaving many stranded,” Uber said in a statement.

    City Council supporters say they simply want drivers to earn the minimum wage, but if that’s the case, they passed the wrong ordinance. The Star Tribune reports that council members “seemed oblivious” to a recent Minnesota Department of Labor and Industry study that concluded drivers could be paid $0.49 per minute and $0.89 per mile and make the minimum wage.

    “By contrast, the plan approved by the City Council guarantees a floor of $1.40 per mile and 51 cents per minute,” the newspaper reports.

    In other words, the wage plan the council passed doesn’t appear remotely close to the minimum wage. But this ignores the larger problem: Neither the Minneapolis City Council nor the State of Minnesota should be setting the wages of Uber or Lyft drivers.

    Nobody is forcing drivers to give rides. The arrangement between ride-share companies and drivers is an entirely voluntary one. This is the beauty of gig work. It allows people flexibility and choice about how they’d like to spend their time.

    It’s all about opportunity cost. One person might wish to spend $20 to see Dune: Part Two. Others would rather spend the two hours earning money driving Uber. Others might want to see Dune but might not have $20, so they drive Uber for an hour or two while coming back from work.

    Nobody knows precisely how much money the driver will make. But that’s not what matters. What matters is that this is a voluntary arrangement that works for drivers and ride-share companies alike and also benefits customers who can utilize services at affordable prices.

    This arrangement works across countless cities in the United States, but it is now threatened in the Twin Cities because City Council members believe they know what a “just” wage is. This might sound progressive. In truth, it’s regressive.

    Wage and price controls have been failing for some 4,000 years. They appear in the Code of Hammurabi (1755–1750 BC), and that’s not even their earliest appearance. Some might be tempted to blame Marxists for importing price controls to the United States, but the truth is that they existed in North America well before Marx was born.

    In the early 17th century, Puritans in the Massachusetts Bay Colony departed from the wisdom of Thomas Aquinas, who argued in the Summa Theologiae that the “just” price of a good was the market price. Wage controls were enacted in the second year of the colony’s existence. These were followed by a ban on “excess profits.” Puritans in Connecticut passed similar policies, and all of the policies had similar adverse effects.

    “The men involved in trade in 1635 had about as little notion of what constituted the limits of state authority in the realm of economics as men have today,” Gary North argued in An Introduction to Christian Economics.

    Fortunately, the early American Christians were practical people. They learned that these policies tended to create a host of problems, including shortages, surpluses, waste, and inactivity. After people learned these lessons over a few decades, price controls would mostly fade away from America for the next 200 years, with some notable exceptions.

    Wage and price controls were resurrected with a vengeance in the 20th century, of course. And though the harms of minimum wage laws are well known by economists, and national price-control schemes failed conspicuously, modern Americans are apparently slower learners than our Puritan ancestors.

    This is particularly true of Twin Cities lawmakers. In 2022, St. Paul passed the harshest rent control law in the U.S. only to walk back and hollow out the policy to avoid a housing catastrophe.

    Minneapolis is playing a similar game with Uber wage controls. It is likely to fail just as badly, and for the same reason.

    Prices are signals that convey information to buyers and sellers about scarce resources. Instead of allowing them to work in a voluntary market, lawmakers, like Hammurabi and the Puritans, fell for the false idea that they know what a “just” wage really is.

    Source: How Bad Economics Chased Uber and Lyft Out of the Twin Cities – FEE


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  • Debunking All the Main Arguments for Antitrust Laws

    Posted on by Azrael Comment

    It does not take too much upstairs to see through the Biden administration’s rejection of the JetBlue-Spirit Airlines merger. The latter is on the verge of bankruptcy. It is $1.1 billion in debt. It faces the headwinds of a new labor agreement raising pilot pay by 34% and has trouble with its Pratt & Whitney engines. JetBlue offered Spirit a $3.8 billion buyout. Together the two of them would account for a 10.5% market share, fifth in this industry.

    It is exceedingly difficult to see the logic behind this antitrust refusal, unless it is to protect the market share of the “big four”: Delta (17.7%), American (17.2%), Southwest (16.9%), and United (16.1%).

    Nor was this the only recent interference with free enterprise on the part of the Biden administration. Another took place with its kibosh on biotech giant Illumina’s $7.1 billion reacquisition of Grail. These bureaucrats have also put paid to deals between air carriers Alaska and Hawaiian, between grocery chains Kroger and Albertsons, and between amusement park giants Six Flags and Cedar Fair. They have been busy little bees ruining the US economy.

    A more important consideration is to ask why we need antitrust law in the first place. After all, the entire ethos of competition is to outdo your rivals in terms of providing consumers with a better and more reliable product at a lower price. The better you perform that task, the larger your base of operations becomes… and the more likely you are to run afoul of antitrust law. Here is a public policy that explicitly, knowingly, and purposefully clamps down on entrepreneurship, profits, earnings, and customer satisfaction, the very ideals of the free-enterprise system.

    The Rotten Roots of Antitrust Law

    The justifications for this set of laws are several. From an academic point of view, it stems from a diagram in microeconomics which has been crammed down the throats of aspiring economics students for lo these many decades. On the basis of it, four indictments of so-called “monopoly” have emerged.

    First, the price charged by the monopolist will be higher than that exacted by the perfectly competitive industry. But what is wrong, necessarily, with a higher price? You pay more for a Maserati than you do for bubble gum. Should we legally penalize the purveyors of the former? Of course not. Economic efficiency—and justice too—requires free-market prices, which reflect scarcity and utility; we should not aim solely to minimize prices at any cost.

    Second, the monopolist will produce a smaller quantity than the perfectly competitive industry. But there are far fewer of these luxury automobiles than there are pieces of these chewy sticks. Should we get upset about this? Rectify this “problem”? Don’t be silly. There’s nothing wrong with producing less of something if that’s what you decide to do.

    Third, the monopolist will earn profits in equilibrium, while firms in the perfectly competitive industry will not. But profits are integral to the free-enterprise system. They make the economy go ’round. They signal entrepreneurs to invest in corners of the economy where they are most needed. Profits are the market’s call for help. Squelching them is akin to imposing decibel control on hikers lost in the wilderness. Further, if the monopoly is sold at a price that fully reflects the present discounted value of this future profit income stream, the new owners will earn zero profits.

    Fourth and last and most important in the case against monopoly is deadweight loss (DWL). It is claimed that the area under the demand curve, between the quantity supplied by the two organizational forms, is greater than that which lies below the marginal cost curve. The difference is the DWL. Consumers value the additional quantity more than it costs manufacturers to produce. This constitutes, horrors, a presumed misallocation of resources.

    But this is a totally fallacious way of looking at the matter. It commits the fallacy of making interpersonal comparisons of utility, a big no-no in any good economics. It attempts to compare the utilities of buyers and sellers, and cannot account for producers or consumers’ surplus, which are both merely psychological and thus can’t be measured.

    I have been calling the economic actor who ruins matters in this example the monopolist. More correctly, he is merely the single seller. The word “monopolist” should be reserved for firms which are able to use violence against their competitors, such as the U.S. Post Office for the delivery of first-class mail, or the Army Corps of Engineers, which does not have to bid against competitors for gigs and accesses funds through taxation, not a voluntary process. Ditto for labor unions, which can dismiss competitors (scabs) through legal violence.

    What about Predatory Pricing?

    Enough of economists misleading the public on these matters via academic legerdemain. The fear apparent to the man in the street is that if these airplane and other unifications go through, and/or companies grow into being the only suppliers in their respective industries, they will jack up prices to the roof, and renege on promoting the customer satisfaction that brought them the success that enlarged them in the first place.

    This widespread apprehension is due to a misinterpretation of the Standard Oil of New Jersey law case of 1911. John D. Rockefeller is used as a stick with which to beat up on the case for eliminating antitrust law root and branch. It is not too dissimilar to holding up a cross to ward off a vampire. John D. is reputed to have cut his prices way below costs, locally; he could afford to do so, since he could finance these losses from the profits of his nationwide holdings of refineries. The local competition was thus bankrupted; they could not compete with his artificially low prices and had no outside sources to finance themselves in this unfair price-cutting he imposed upon them. Then our man JDR would jack up prices to the stratosphere, and march on to the next victim. Eventually, he owned just about the entire oil refinery business in the country. Thank God for antitrust law; otherwise, evil monopolists would take over the entire economy. Or so, at least, goes the usual scare story.

    Not so, says John McGee in a brilliant analysis. The real source of Standard Oil’s success had nothing to do with such unfair, made-up, local-price-cutting machinations. Rather, vast success was the result of the fact that Rockefeller could refine oil far more effectively and cheaply than his competitors. As a result, he was able to lower prices and benefit consumers.

    Wouldn’t One Big Firm Just Take Over?

    Second, the charge that without government regulation One Big Firm would run roughshod over an entire industry—maybe an entire country, not only in oil, but in fast food, groceries, autos, airplanes, etc.—is just plain silly. The charge is that such companies would smash all smaller competitors. If you didn’t work for or patronize one of these behemoths, you didn’t work at all, and you could purchase nothing.

    No. The only way companies can succeed under free-enterprise rules is by making better offers, not worse ones, to employees, customers, and suppliers. The moment they get “uppity,” if ever they do, and stop providing better goods and services at lower prices, they get smashed down by the logic of the free-enterprise system: the supposed “victims” go elsewhere; new entrepreneurs spring up.

    The One Big Firm, were it to take over the entire economy, would face the same challenges as does the socialistic economy. True, the former would have arisen to its present (hypothetical) status through a voluntary process, we are allowing, but only arguendo, while the latter took over via coercion, a great moral difference. But economically, they would be indistinguishable. Without markets—and there would be none in either case—economic calculation would be impossible.

    The leaders of neither would know, could know, whether to build train rails out of steel or platinum; the latter, let us stipulate, would be preferable, but with no market-driven prices neither would know that platinum should be reserved for more important tasks. Further, with no market interest rate they would have no way of knowing whether to build a tunnel through the mountain or set up a highway around it. The former would cost more now, but save money in the future. The latter, the very opposite.

    No, the One Big Firm would be a “pitiful, helpless giant” subjected to overwhelming competition from a bunch of Lilliputians. This process would occur long before any one company got too big for its britches, obviating this entire scenario. (For more on this point, see Murray Rothbard’s discussion “Vertical Integration and the Size of the Firm” from Man, Economy, and State.)

    It’s Time to End the Antitrust Era

    To conclude: by all means allow all of these mergers to take place. If they bring about a better, more reliable product at a lower price, all will be well and good. If not, these companies will lose profits and court bankruptcy.

    But let’s also dig deeper than these particular cases, and reform the system that allows central-planning bureaucrats to determine which mergers shall get the thumbs-up signal, and which the thumbs-down.

    Additional Reading:

    How the Free Market Handles Monopoly by Peter Jacobsen

    Good and Bad Monopoly by Leonard E. Read

    https://fee.org/articles/debunking-all-the-main-arguments-for-antitrust-laws/


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  • California’s Politicians Appear Determined to Bring ‘Atlas Shrugged’ to Life – Foundation for Economic Education

    Posted on by Azrael Comment

    The plot of Ayn Rand’s 1957 novel Atlas Shrugged can be briefly summed up as follows: the productive leaders and innovators of the country go on strike by disappearing from society to protest the cronyism, corruption, and oppressive taxes that have made living a virtuous life unbearable. The nation is then on the brink of an economic collapse as the remaining politicians, intellectuals, and mediocre businessmen are only able to take from others and have no capability to create or add value. Atlas Shrugged is very popular with those whose views lean toward libertarianism, while those who lean to the left react to it like a vampire does to a crucifix, despite never even reading a page.

    Concerningly, the state of California seems determined to bring Rand’s novel to life.

    During the 20th century, California was the jewel of America. Beautiful weather, diverse landscapes, access to the Pacific Ocean, and other features made it the leading state of the nation. There is a saying that says “As California goes, so goes the nation” because to many Americans this seemed like the best place in the entire country to live and raise a family.

    Things seem to have changed in the 21st century though. When times were good, the government of California grew and spent more money than it had. In the short term, most people ignored this problem, but as time went on the deficits grew and grew. By the year 2000, the government had run up a debt of $57 billion. Twenty-two years later that number had almost tripled to $145 billion dollars. Since California is a state and not a nation they couldn’t print money to make up for the downfall, so their only options were to either cut spending or raise taxes. They chose the latter.

    For state income taxes, California has the highest rates in the entire nation. They also have a declining population, with a loss of more than half a million people since a peak population of 39.5 million in 2019—and they did not all die of Covid. The majority are people who left to live in other states that did not have oppressive taxes and draconian Covid restrictions.

    While wise leaders might look at this indicator and see it as a sign that they should change course, wisdom seems to be in short supply for the political elite in this state. Rather than move towards freedom, they are instead moving to erode and attack property rights even more through the form of a wealth tax. Of course, the people proposing this are trying to sell the idea to the public by saying only the super wealthy will be on the hook for this. The rest of us in the ninety-percent will benefit thanks to the rich paying their “fair share”.

    The 16th amendment was sold to the American people under this promise too, and had people back then known that income taxes would lead to the system we have today, where the majority of the people use the majority of their income to pay taxes (federal, state, local, property, sales, etc), then this proposal would have been dead on arrival. Today’s politicians are trying to use the same tricks to pass a wealth tax, but the difference between now and then is that now we should know better.

    What makes California’s proposed wealth tax even more disturbing is that they wish to still collect the tax for years after a person moves out of the state, like a feudal lord persecuting a serf for moving off his land. They also wish to impose the wealth tax on “part time residents” for the portion of the year that they “reside” in the state. In other words, a family vacation to Disney Land might come with a tax bill from the State of California. And when tourism declines, I wonder who the politicians will blame?

    While the wealth tax has not become law yet, it is already prompting some of the mega-rich to move away, depriving California of their portion of the income tax and increasing the deficit. And it’s not just individuals who are leaving the state. National corporations are also deciding not to do business there as well.

    As inflation rages across the nation, the costs of everything have gone up, and building materials are no exception. It costs more to replace a house now than it did five years ago. To meet this new reality, home insurance premiums everywhere have increased. California’s Department of Insurance has responded to the new reality by placing new regulations on the insurers to prevent them from raising rates on their customers. The logic here is that the state has the largest population so if insurers wish to do business in the largest market in the United States, then they must abide by our rules.

    The reaction has essentially been a boycott of the state by the companies. In addition to normal risks, California is also prone to natural disasters like wildfires, earthquakes, and even mud slides from heavy rains. With these new regulations limiting what prices could be charged, the cost of doing business in the state increasingly outweighs any potential profits. As a result, many of the largest insurance companies in the nation like Allstate and Hartford are no longer issuing new policies in the state.

    California government policy has created an insurance desert in the state and with private business unwilling to respond because the once free market is no longer free, the politicians have solved the problem with a government insurance system called FAIR so that homeowners can comply with the insurance requirements for their mortgage. Under this state-owned enterprise, California residents get to enjoy reduced coverage at a higher premium than they would have been able to get before the politicians stepped in to help. This is a clear cut, black and white example of the standard of living decreasing.

    The theme of Atlas Shrugged is that the freedom of American society is responsible for its greatest achievements. The book warned that as freedom declined, so too would the standard of living. California’s politicians seem determined to recreate the dystopian world of the book with oppressive taxes, attacks on personal property, and regulations that drive away private businesses.

    Someone really ought to tell them that the world of Ayn Rand’s novel was not meant to be aspirational.


    Daniel Kowalski

    Daniel Kowalski is an American businessman with interests in the USA and developing markets of Africa.

    This article was originally published on FEE.org. Read the original article.


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