Wednesday, June 21, 2006

Monopoly: Public vs. Private

Recently, the State of Indiana leased the Indiana toll road to a Spanish-Australian consortium for 75 years. This is an important step in the direction of privatization. The concerns about privatization – that is, the government giving over responsibility for an industry or utility to the private sector- are numerous. Most notably, those against privatization argue that privatization creates monopolies that extort the consumer. I argue that this concern is entirely unfounded.

First, let’s compare private companies and public, government operated ones. Private companies are far more efficient than public ones, especially with regards to setting prices and costs. This is because private companies have both a strong financial incentive and also competitive pressure to do so, something public companies do not. Furthermore, private companies’ pricing and purchasing decisions are not distorted by political pressures, or corruption, as public companies are. The problem arises, in regards to privatization, when the privatization of certain industries, companies or utilities leads to a monopoly.

Monopolies clearly are not beneficial to the consumer. They inhibit competition, innovation, and have the ability to extort consumers. Private monopolies are, however, a better alternative than public run companies. To begin with, we must understand that public companies are themselves monopolistic by definition. Therefore, in a public company, not only is competition inhibited, innovation stunted, and the consumer extorted, but pricing decisions are based almost entirely on petty politics and corruption. The other, and more important, difference between public monopolies and private monopolies is that while no possible alternative exists to a public monopoly, if a private monopoly exists, ever-changing technology and processes can bring competition to what appear to be protected markets if the profits are large enough. Take, for example, the monopoly that Microsoft held in the 1980s and 1990s. Microsoft was believed to the only available option for desktop users during that time, yet if Microsoft was not privately operated, we would not see today the other options that exist for PC users, such as Macintosh and Linux. Why? Because in order for a publicly run company to operate efficiently, and with profit, it must hold a monopoly on the services that it provides. This is logical, as public companies, which are far less efficient and profitable than private ones, would not be able to compete against privately run companies. So, in order to allow a public company to operate effectively (which, in actuality, it cannot in any situation) it must prohibit competition using its state power. This does two things: limit the freedom of the individual, and effectively prohibit any competition possible.

There are certain situations in which “natural monopoly” exists, because it is neither efficient, nor economical for there to exist competition in a given industry. If we take the Indiana Toll Road, for example, it is not at all economical for a competing company to build a toll road alongside the already existing toll road, so monopoly becomes inevitable. It is still, however, more efficient for the toll road to be privatized, as long as controls are imposed on prices levied by the company operating the toll road. This is because the operation of the toll road takes politics and corruption out of the business, and as long as the controls imposed on the company are just and fair to both the consumer and the company, a private monopoly allows the toll road (or any other industry) to be operated more efficiently.

Obviously, competition is the ideal, and monopoly, especially natural monopoly, is not. However, I believe that natural monopolistic situations are far less common today than they were, because of the ability of technology to foster competition, and allow companies that previously could not enter markets, to do so. Take as another example, AT&T. AT&T held a monopoly on telephone services in the United States, which was thought to be a natural monopoly, but new technology brought about cell phones and the internet, and the inability of AT&T to adapt to new competition has left them in the dust.

I am strongly in favor of privatizing all public enterprises when competition is effective and available, and would in most cases strongly support privatization of public enterprises in which no competition at the moment exists. Why? Because competition will always arise if profit is available, and in all industries in which a market exists, so does a profit.

Monday, June 05, 2006

Disregard the Status Quo: Minimum Wage Laws are Bad

Minimum wage laws are supposed to help the poor individuals and families who without minimum wage legislation would be severely underpaid. This logic is a fallacy of thought, because the minimum wage actually hurts the poor far more than it helps. Special interest groups (labor unions), much as is the case with public housing, have successfully been able to pressure the government into putting into legislation laws that explicitly hurt the people they claim to be helping.

Proponents of minimum wage believe that low wages are a sign of poverty, and that by introducing a minimum wage, poverty can be reduced. Isn’t poverty diminished if people are paid more? Not exactly. A minimum wage artificially raises wage rates to a level that is above their market value. Employers attempt to purchase the specific skills they need at the lowest available price, while individuals selling their labor attempt to find the highest-bidding employer. Thus the market value of wages, as well as prices, is determined entirely by the market – a simple concept of supply and demand. When the government sets wages through coerciveness (i.e. minimum wage legislation), however, the demand for labor will fall, and will result in unemployment.

Take, for example, an employer who would without a minimum wage set by government pay his lowest paid employee $5.50 an hour. If a law is passed dictating that the employer must now pay all his employees no less than $6.15 an hour, he will now hire less workers than he would before, as an individual will not be hired at $6.15 an hour if he is unlikely to produce at least that much value for the employer. Thus, a minimum wage creates unemployment, especially among the lowest paid and lowest skilled workers. The problem is, these are the individuals who are in most need of employment, and the very individuals that a minimum wage is supposed to help.

So what about those who are actually struggling to live on the bottom rung of the economic ladder? Is the government helping them by arbitrarily establishing the minimum living wage? To put it concisely, the answer is no. The government cannot create wealth by setting a minimum wage; it can only redistribute the existing wealth. So while for those who are already employed and skilled a distinct advantage is given, those who are the least employable are greatly hurt by the redistribution of wealth that results from a minimum wage. Minimum-wage legislation fosters economic inequalities by creating a gap in the economic ladder: those on the bottom rung are kicked off, but those on higher rungs climb up. By no means are such government-created inequalities fair or just.

It is the unskilled and inexperienced workers who are hurt the most by minimum legislation, so it follows logically that teenagers are the potential workers who are hurt the most. The unemployment rate for teenagers searching for a job is over 16%, while national unemployment is around 5%. Furthermore, the black teenager unemployment rate is a whopping 33.1%, 6 times higher than the national average. Why the discrepancy between black teens and white teens? It is due to the intrinsic link between a minimum wage and racism.

Say, for example, an employer is racist, and prefers to hire whites instead of blacks. And for simplicity, suppose that the employees from which he chooses are identical in terms of productivity. If there is a law, such as the minimum wage law, that requires that employers pay the same wage no matter who is hired, the employer is able to effectively discriminate against certain individuals at no cost to himself. This is because, if we assume the minimum wage is $6.15 an hour, the employer will be paying $6.15 an hour to the employee, no matter what his skin color. Without a minimum wage, the black could be hired for less, which although still discriminatory, is better than not being hired at all.

Proponents of a minimum wage argue that they are intended to help adults trying to support a family. What they neglect to realize, however, is that over 76% of minimum wage earners are not heads of households, and only 2.2% of working adults earn the minimum wage. So in actuality, a minimum wage is not helping most adults trying to support a family, and is at the same time considerably raising unemployment.

The job loss that results from a minimum wage is evident. According to a 1981 study, the 46 percent rise in the minimum wage between 1977 and 1981 destroyed 644,000 jobs among teenagers alone. Yet the government has continued to raise the minimum wage since then, because of lobbying from labor unions. Matthew B. Kibbe of the Cato Institute writes,

“Labor unions and their members are the most obvious beneficiaries of government-imposed minimum wages. As the established elite of the workforce, union members are on the receiving end of the minimum wage's redistribution process. To fully understand how unions gain from minimum-wage legislation, one must consider the essential nature of unions.”

So the government, bowing to the demands of labor unions, has disrupted the efficiency and equilibrium of the economy, and tremendously hurt unskilled workers who are made unemployed by the minimum wage.

Furthermore, the minimum wage, while preventing many from getting a job, also lessens the incentive for many workers to become more skilled, and prevents those who became unemployed from getting the experience they need to receive higher wages in the future. Obviously, this is not beneficial to the economy, and essentially allows a few to benefit at the expense of many.

The minimum wage should not be accepted solely because it is the status quo, and has been in operation for an extended period of time. The effect of powerful special interest groups on the government is profound, and in the case of minimum wage legislation, the economy, and the people, are hurt as a result.

Thursday, June 01, 2006

Public Housing: Not What It Seems

Public housing, the darling of those who support social welfare, view the government, in undertaking public housing projects, to be humanitarian. This is far from being the case. While one may not realize it, the effects of public housing are deleterious to those that one may not expect: the poor. The real reason that public housing has been built by the government is not to help the poor, far from it. Instead, the government, pressured by special interest groups (who will be explained,) has, like so many of its projects, undertaken the seemingly good-willed public housing program in order to secure votes.

Arguments are frequently made that public housing improves two things: the welfare of the poor, and the well-being and appearance of the neighborhood. We will term the latter “neighborhood effects,” as Milton Friedman has termed them. In dealing with neighborhood effects, it can be said that destroying slums in order to build public housing betters the appearance of the neighborhood, but it does not better the neighborhood’s well-being. Why? Well, let’s first examine what well-being is, in a neighborhood. A low crime rate, and good education, these are two factors that lead to a neighborhood’s well being. Let’s look at each individually, in relation to public housing.

One would think that public housing deters crime. This cannot be further from the truth. In fact, public housing greatly increases crime, by concentrating the number of potential criminals together (as those who live in public housing commonly are), in one housing unit, crime becomes, obviously, more prevalent. Furthermore, public housing actually reduces the amount of housing available, as the amount of housing that has been destroyed in the course of erecting public housing projects has been far larger than the number of housing units constructed. In reducing the number of housing units available, public housing leads to homelessness and over-crowding, both of which contribute to crime for obvious reasons.

Education is also significantly worsened by public housing. “Good” students, those who behave, and work hard at school, often do not come from so called “broken” families. This is an unfortunate but true fact. Therefore, a high concentration of broken families, as there exists in public housing, for reasons that are clear, lead to schools in close proximity to public housing units to be considerably worse off. Indeed, the plight of inner-city schools is visible for all to see. Granted, public housing is not the sole cause for the ineffectiveness of inner city schools, but it does account for a large part of it.

So as a neighborhood’s well-being is clearly not promoted through public housing, what is? Those who are proponents of public housing argue that they help those poor individuals and families who would not otherwise be able to afford decent housing. But if we are interested in the poor’s welfare, why does the government not give the poor cash handouts, for the poor to use at their own accord, instead of using that money to build housing for them? What the government is doing, in building public housing, is paternalistically telling the poor: you should not trust yourselves to spend money correctly, so we will do it for you. This obviously infringes on the individual’s ability to choose. Milton Friedman states of public housing: “It can be justified, if at all, only on grounds of paternalism; that the families being helped “need” housing more than they “need” other things but would themselves either not agree or would spend the money unwisely.” So why shouldn’t the poor be able to spend money, being used on them anyway, as they wish? I am not a proponent of treating the poor without equality, as they should be given the ability to spend money as they deem fit, not the government.

Furthermore, as mentioned above, public housing projects actually destroy more housing than they create, so instead of providing more housing for the poor, public housing displaces many, and leads to severe overcrowding. This overcrowding, of course, is exacerbated by the faulty plumbing, miserable conditions of living in the ghetto, and the too often inability to rise from public housing to better accommodations.

So what is the real reason that public housing is built? A common theme in politics, it is due to powerful lobbying, and, perhaps, unintentionally paternalistic attempts at good will. The lobbying comes from those who own business, property, or interests in areas in which slums exist. They, obviously, would rather see a public housing unit instead of a slum, because this would bolster their business, their property value, or other such things.

Public housing, like many other governmental projects, should not be regarded as “good” because it is the status quo. When taking a look at the evidence, it is clear that public housing does far more harm than good, especially to the poor. My solution would be for the government to subsidize both private companies wishing to build low-cost housing, and economically disadvantaged individuals, not specifically for housing, but for whatever they determine their needs to be.