Kevin Williamson explains socialism's appeal

Small steps toward progress

Lost the apocalyptic news cycle, a little progress little noticed. "U.S. life expectancy has hit another all-time high, rising to about 78 years and 2 months."

Is it something we said?

Massachusetts ranks 47th according to Chief Executive magazine.

Details here.

2009 Nobel Prize

Professor Ben Powell supplies his thoughts on both the 2009 Nobel Prize and a grad discussion board about the topic as well as some further reading material. Enjoy!

Sorry I'm a bit slow on this but I was out of the country until last night and am only now reading the commentary on this year's nobel prize winners Lin Ostrom and Oliver Williamson. I was shocked and thrilled to see this year's announcement. Williamson was not a surprise at all but I would have expected him to share the prize with Alchien or Demsetz. Instead by awarding it with Elinor the committee has highlighted a commonality in that both of them illustrating how to generate institutions to improve economic outcomes. In Williamson's case, it's the reason for the firm. In Elinor's it's the spontaneous generation of rules governing the commons and the reason why many top down solutions don't work. In both cases these should be conceived of as institutions embedded in the market or more broadly, civil society.

The reason I'm writing to the grad students specifically (and cc'ing the faculty) is because of the very troubling grad student blog (and very popular) I read this morning (warning, comments in it are vulgar and sexist):

The crux of their complaints seem to be that Elinor shouldn't have one because:
1) They never read her in their grad education
2) She hasn't published in many "top" economics journals
3) She's trained in political science and therefore not capable of doing economics.

This is a VERY sad state of affairs. They instead should feel ashamed of the lack of breadth of their own reading and their narrow focus outside of the broader tradition of political economy. Elinor asks some of the biggest "big think" type questions about institutions that should have a major impact in one's thinking on economic development especially but many other things as well. Her main publications have been books rather than econ journals and she's influenced some of the other big thinkers in economics (for instance 2002 Nobel winner Vernon Smith). Her work doesn't collapse neatly into a max subject to type framework or other training these grad students have got. Instead of seeing this as a limitation of their models they see it as a limitation of what is interesting. This is very shallow thinking and blinds them to important questions. I'm glad I work in a place that does have some appreciation for a more broad tradition of political economy.

I encourage you all to get some knowledge of Ostrom (and Williamson but if you've done any IO you'll be familiar with him anyway, or perhaps should be regardless of field since he is the world's most cited economist). Here are a few excellent blog posts or op-ed's by accomplished economists who will give you a general sense of her work. If you want to read her own writing her most influential book is "Governing the Commons" but that is rather high cost. There was just a nice symposium in the Journal of Economic Behavior and Organization that summarizes the bloomington school and includes a contribution from her:
June 2005 57(2), "Polycentric Political Economy: Essays in honor of Elinor and Vincent Ostrom" that would be a lower cost intro.

At a minimum check out some of the following:

David Henderson's WSJ op-ed:

Vernon Smith's Forbes column:

Paul Romer's Blog:

Alex Tabborak's blog:

Peter Boettke's Blog:

And Peter Klein on Williamson

Congrats to Ostrom and Williamson and happy reading to all of you.

A morning Email

Before I had my first cup of coffee today, an interesting E-mail chain had formed. Starting with the following quote, curtosy of Professor Jonathan Haughton, a lively debate was set off. Professor David Tuerck, Professor Ben Powell, Alfonso Sancez-Penalver and I, both of BHI, weigh in on the subject of universal health care.

Just this weekend I came across this quote from Hayek (chapter 9 in The Road to Serfdom):

“Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance — where, in short, we deal with genuinely insurable risks — the case for the state’s helping to organize a comprehensive system of social insurance is very strong.”

Is this not a case for universal health coverage of some sort (and for some conditions)?

Jonathan Haughton
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Yes, it is. And I would say, sadly so. Of course, Hayek is talking about a state run insurance system as opposed to the single-pay system to which we are headed. Nevertheless, he did himself no good by succumbing to this one urge to recommend a statist solution.

David G. Tuerck
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Agreed. You can find further, misguided, quotes from him in the Constitution of Liberty. I think these off the cuff concessions are inconsistent with the body of his work on knowledge and competition as a discovery procedure.

Ben Powell
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Perhaps. I see a somewhat different problem, which I am a bit surprised that he didn't address: some sickness really is not the fault of the individual - alzheimer's, Type 1 diabetes, and the like. But what about illness that results from personal choices - lung cancer (from smoking), Type 2 diabetes (from obesity), for instance. A key problem from an insurance perspective would be how to distinguish between these. In other worlds, how to insure against serious problems that are not one's fault without creating too much of an incentive to go easy on prevention.

Of course we already have universal health insurance (thanks to Ronald Reagan!), in that emergency rooms may not deny care to those who need it. That's appropriate, but one can't help thinking that it is a hugely inefficient way to provide such coverage - it is financed in haphazard fashion (mainly as cross-subsidies from our tax-favored health premia).

Jonathan
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
I keep thinking that, aside from the best solution, which would be complete government withdrawal from health care, the government should just take care of people who are sick through no fault of their own and who can't pay for their very expensive health care. This is the "high risk pool" of uninsurable people with chronic, unpreventable problems. It should ignore everyone else. People who go to emergency rooms could be chased down and made to pay for their care, and if they can't or won't pay, the hospitals could pass that cost along to the rest of us. In a rational market, young people could contract for health insurance now at rates that reflect the cost of their health care as they get older. By the way, I suspect that emergency room care is pretty efficient. I've gone to the emergency room at least three times to get a quick prescription for bronchitis and gladly paid the premium rather than wait for my doctor to see me. 'We could expand the availability of health clinics, too.

People who don't pay for insurance until they are middle age and then come down with some predictable middle-age disease have nothing to complain about. They rolled the dice and now they're out of luck. The key is health insurance available to the young, who are usually healthy, that they are guaranteed to keep even when they get older and sicker. I would rather let private charity take care of people in the high risk pool than give the government the job of caring for them, but that much government involvement I could take.

David
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Having read all these messages you are almost selecting what the government should cover instead of whether the government ought to cover. Going down that path opens a lot of questions that are not easy to answer. You mentioned before lung cancer from cigarette smoking. It is true that more patients of lung cancer are cigarette smokers but there has not been a definite scientific proof that smoking cigarettes causes lung cancer. What happens with patients of lung cancer that don't smoke? Even if it were to be proofed that smoking somehow caused lung cancer, what if the patient smoked in his 20s but had lung cancer in his 30s, what if he had it in his 40s, 50s or 60s? Continuing with cancer, what is considered to be the individual's fault? As we know cancer patients' descendents are at a higher risk of getting cancer. Is this the fault of the individual? Should the individual pay for the sins of the parents?

Having individually tailored insurance is not effective, either privately or publicly. The high risk patients may not be able to afford the insurance so the low risk patients are the ones who pay for the others' risks. Unless there is some risk poolin, insurance is not affordable by a lot of people. If you want the government to cover these high risk uninsurable patients, this funding is done via taxes. Why shouldn't it be done with a general private insurance plan? In the private plans they take into account whether you present a higher and lower risk at the time they issue the plan, so at least it is somewhat tailored. Private, for profit, companies have a higher incentive to look into a plead for free insurance from the people that claim to not afford the insurance they need.

The real question is, however, should we have universal insurance? The problem of answering yes to this question is that there are people who cannot afford it. How do they get it then? This may lead to government intervention, which is inefficient since government administration is not as efficient as private. The problem with answering no to that question is that some people cannot have their sicknesses treated. There are nonprofit health practices, but I'm not sure if they would cover open heart surgery.

Not a topic to be easily solved.

Alfonso Sanchez-Penalver
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
I agree there has to be risk pooling; otherwise why bother with insurance. But if one forces everyone to buy insurance, this represents a very regressive tax. A solution would be to provide everyone in the country with (say) a $4,000 health insurance voucher, and people could pay more for fancier coverage; but this provides an incentive for insurance companies to spend a lot of money figuring out ways to not insure high-risk individuals - surely a directly unproductive activity. Increasingly, I get pulled toward some sort of "basic medicare for everyone" solution with fairly high copayments, with scope for individuals to buy additional coverage (private hospital rooms, lower deductibles, etc.).

David may be right that emergency room service may not be as inefficient as all that; but if we were to encourage more "doc in a box" outfits, a lot of the relatively routine stuff could be handled more cheaply. More generally, I think we need to address restrictive practices in medical education and practice (excess certification; requiring a bachelor's degree before strating medical school; limited use of nurse practitioners and nurses for routine stuff).

On a related, but different issue; if a generic drug is available for, say, $20, and the brand drug costs, say, $50, why do insurance companies not limit reimbursements to ($20 - deductible)?

Jonathan
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
The core problem here is that health insurance as it currently exists is no longer insurance, but prepaid health care. Insurance is a contract voluntarily arrived at according to terms voluntarily agreed upon in which the person insured is promised benefits, given a specified, adverse turn of events. Moral hazard makes it uneconomical for such contracts to cover events over which the insured has control. That's why my car insurance doesn't cover oil changes, tire rotations and minor accidents. Also, to be economical, insurance must cover events that occur with increasing probability over the lifetime of the insured, provided the insured buys into the insurance when he is young. In this respect, health insurance is exactly like life insurance.

So what's wrong with the status quo? For one thing, mandated benefits mean that I am insured against the cost of taking my Nexium, this for a condition that I could alleviate by the simple expedient of eating fewer spicy foods - the equivalent of insuring my car against damage due to not changing my oil. The second problem is the push to insure people against "pre-existing conditions." It is one thing if a patient is 22 and poor and has a pre-existing chronic problem like ALS. It's another thing if the patient comes down with diabetes at age 50, when he is wealthy but hasn't bothered to buy insurance. In my judgment, both patients should have to turn to charity for help. Presumably, a charity will take more pity on the first patient than on the second. But it doesn't matter since contributions to charity are voluntary. On the other hand, since I'm only 99% conservative, I'd be willing to go along with using taxpayer dollars to help the first patient, as long as I didn't have to help the second.

Anything wrong here?

David
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
You bring a good point. Here's my question, what should happen to the 50 year old who is poor, not wealthy, and comes down with diabetes? I believe in your mind you have a clear path where people are born poor and end up wealthy, but this is not necessarily the case. Even when it is, you are saying that in you 1% liberal mind, the government who is primarily financed by those wealthy 50 year olds to cover the 20 year old case... why? Well... because the 50 year old can afford to pay himself!!! Why should he have to when he is paying more taxes than the 20 year old??? That would be making him pay twice for insurance. That one percent mind of yours is very liberal!!!

Alfonso
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
My question on this, is in relation to what should insurance actually cover, regardless if its by the state or a private company. If I found out tomorrow that I was going to have a child, would I take out an insurance policy to pay for his or her first car in 16 years? Or would I start a small savings account, and put cash aside here and there. I know today that in 50 years time I will inevitably have medical issues. Should the insurance plan that I have cover there medical costs that I know will occur? Should I just expect insurance to cover actual random events (car crash injury, ect?) or above a certain expected level?

Mickey Head

Catching on, Sumner and his 15 minutes of fame

Getting viral on the internet is still pretty much a black-box enterprise. And of course, luck has something to do with it.

Prior to this over-extended 15 minutes of fame, Bentley economist Scott Sumner toiled in macro obscurity. But a lot of the flash out of the pan starts would with who you know -- or rather -- who knows you.

I am still piecing together how I suddenly went from obscurity to semi-obscurity yesterday. I had sent Brad Delong my piece on Friedman and Schwartz, and he was kind enough to link to it (without comment.) I assume that Tyler Cowen saw that link, and his very kind comments suddenly pushed my blog into the public eye. Then Arnold Kling also had some nice things to say here.

Now that I have readers, I obviously need some new material. Please be patient as my teaching responsibilities (and my cold) will slow things down for a few days. However, this weekend I plan two of what I hope will be my best posts. So please stop back later. I greatly appreciate all those who commented. I will reply to recent comments later today.

Ironically, I had already been planning a post to send to some of my favorite pragmatic libertarians (such as Tyler Cowen, Will Wilkinson, Deirdre McCloskey, Robin Hanson) on a non-monetary topic (my recent research on cultural values and neoliberalism.) I’ll try to have that ready by Sunday. By Saturday you can expect a longer than average post on rational expectations, policy lags, and monetary transmission mechanisms that will give you an idea of how I developed my somewhat unorthodox take on monetary theory. I think you will find it interesting.

DeLong and Cowan, that's pretty much the A-team of econ bloggers projecting their own form of the Oprah effect. Get there and you can get far. Professor Sumner may regret the new workload and the glare but that's the price you pay when you are "Oprahsized."

The against-the-grain theory is explained here.

Wish List cont.

History has shown that the greater threat to economic prosperity is not too little government involvement in the market, but too much,

Our aim should not be more government, it should be smarter government.

2.) I wish that G.W. Bush had actually acted over the last eight years like he believed that statement of his.

(HT: Bloomberg.com)

Panel Discussion Video

I am proud to present the the October 21st Panel Discussion on the Federal Financial Bailout co-hosted by BHI video!

It is in .mov format, so Quicktime is required.

Moderated by Professor Haughton, the panel discusses different economic aspects of the current financial crisis, including who is to blame, details of the "Bailout Bill" and the roots of the crisis.

Panelists included:

Lynn E. Browne, Executive Vice President, Federal Reserve Bank of Boston
Kevin M. Cuff, Executive Director, Massachusetts Mortgage Bankers Association
Henry Kim, Associate Professor of Economics, Suffolk University
Jeffrey Miron, Senior Lecturer in Economics and Director of Undergraduate Studies, Harvard University

Running time is about 90 min.

Pres. Bush on Economic Crisis

The current economic issues in America are so complicated and intertwined, that I won’t even pretend to have an analysis. But, as I’m sure most readers did, I listened to Bush speak last night. After all it is Bush and his administration that has to deal with this issue now, as McCain and Obama are merely senators in the short term.

Two quotes jumped out at me, and hopefully someone can post a comment to help me understand the rational behind them.

“Eventually, the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell, and this created a problem.”

Nice that he attempted to throw a bit to the economists, but the last part is where I have an issue. Why is this a problem? The market will go back to equilibrium. Yes, people will suffer, but that is because they either overpaid for a house or signed a mortgage that was above their means. Why should taxpayers have to pay? The government getting involved will merely add to more distortions.

“The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal.
And when that happens, money will flow back to the Treasury as these assets are sold, and we expect that much, if not all, of the tax dollars we invest will be paid back.”

Now this made me wonder, why would the American Government be the only place with the patience and resources to buy this? I know the Chinese Sovereign Wealth Fund has some cash, as well as some other Oil producing nations. Certainly other countries have a more balanced budget, supplying them with resources.

This does not even consider the private sector, which is willing to purchase assets that will “return to normal”. The fact is that the private market does not see these as investment worthy, so please do not try to convince us that the Treasury is doing this to break even.
Secondly, if we are buying at “current low prices” and the market for them will “return to normal” why not just say that the Treasury will make a profit, instead of just being “paid back”? Does Bush consider that to much of a stretch to pull off?

This plan that Bush is supporting comes from Paulson who declared in April 2007 that

"All the signs I look at" show "the housing market is at or near the bottom," Paulson said. The U.S. economy is "very healthy" and "robust,"

Not sure I would take his word to predict that these securities will be worth holding for a long period of time. If he truly believe this I'm all for him using his savings to make a fortune, but please don't use the Taxpayers.

I, Pencil

Not many short stories can claim an introduction written by Milton Friedman that mentions both Adam Smith's thoughts on the invisible hand and Friedrich Hayek's thoughts on the importance of dispersed knowledge, but Leonard E. Read's short story I, Pencil is able too claim just that. Few other authors can bring the making of a pencil and the free market together in such a basic and understandable way.

~Leave all creative energies uninhibited

Solution Lies in the Free Market System

On Monday, John P. Holdren criticized global warming skeptics for challenging the scientific "consensus" around global warming. He also accused skeptics of stalling the political process necessary to combat global warming:

The extent of unfounded skepticism about the disruption of global climate by human-produced greenhouse gases is not just regrettable, it is dangerous. It has delayed - and continues to delay - the development of the political consensus that will be needed if society is to embrace remedies commensurate with the challenge. The science of climate change is telling us that we need to get going. Those who still think this is all a mistake or a hoax need to think again.

The Boston Globe printed my response today.

SKEPTICS OF climate change not only doubt the "scientific consensus" behind global warming but the proposed mechanism to combat global warming.

Supporters of decisive action on climate change assume that the federal government must step in and solve the global warming crisis using a "cap and trade" or carbon tax program. Advocates of these programs do not realize that both these mechanisms will severely hamper economic growth, and neither plan will slow global warming.

The only way to slow global warming is to allow entrepreneurs to create more energy-efficient products and technologies. As the demand for these products grows, entrepreneurs will naturally react to market forces and direct their energies to producing more energy-efficient products at a cheaper cost. Government intervention is not the solution to this problem, the free market is.

Another Failed Government Stimulus Program

Martin Feldstein says the last federal stimulus plan didn't work nor will a future stimulus plan or tax rate increase:

The small rise in spending in response to these tax rebates is similar to what previous studies of one-time tax cuts found. It also corresponds to what both basic economic theory and common experience imply. Although someone who receives a permanent annual salary increase of $1,000 typically would increase his annual spending by an almost equally large amount, a $1,000 rise in wealth caused by a share price increase or a tax rebate would raise spending only gradually over a number of years.

All of the evidence on one-time tax rebates implies that the Obama plan to send $1,000 rebate checks would do little to raise consumer spending and stop the decline in employment. If the past is an indicator of what would happen, the $65 billion he proposes to spend on this plan would raise consumer spending by only about $10 billion, or less than one-tenth of 1% of GDP.

The distinction between one-time tax rebates and permanent changes in net income is also important for the debate about Mr. Obama's proposal to raise income and payroll taxes. Because those tax increases would be permanent, they would cause a substantial reduction in consumer spending and aggregate demand. Moreover, as taxpayers begin to focus on the possibility of such a future tax hike, they will reduce spending without waiting for such legislation to be enacted. If Mr. Obama is looking for a way to stimulate the economy, he could begin by discarding his proposal to increase future taxes.

Here is more on Senator Obama's tax plans.

HT: Greg Mankiw

Anti-Business Climates and State Budget Deficits

States that have unfavorable business climates generally tend to have high taxes that attempt to redistribute income across the state. Not surprisingly, states that try to redistribute income overextend themselves and run large deficits. Steve Malanga, an editor of the excellent RealClearMarkets.com, found that the top five anti-business states are running combined deficits of $33 billion! That amounts to 2/3 of all projected state budget deficits (twenty-nine states are projected to run deficits).

Development Counsellors International surveyed business executives to find out what states they thought were too hard to do business in. Executives named New York, California, New Jersey, Michigan and Massachusetts as the most anti-business states. Executives complained that these states had high taxes and too many regulations. As Malanga writes:

But any look at the states with the biggest deficits reminds us that governors and legislatures are largely the authors of their own problems, and that the biggest trouble some of them seem to have is that their taxing and chronic overspending have made them toxic to the business community.

This survey is interesting in comparison to BHI's 2007 State competitiveness Report. BHI found that the five states mentioned above had terrible fiscal policies for business competitiveness. The best fiscal situation was Massachusetts at 34th, while Michigan was 37th, New Jersey 46th, California 49th and New York finished last. However, it terms of overall competitiveness, Massachusetts finished 2nd, California 24th, New York 38th, Michigan 41st, and New Jersey 43. While state fiscal policies might have an effect on business climates, human capital, technology and security play important roles in state competitiveness.

Red Sox Nation's Economic Impact

As a lifelong member of Red Sox nation, I can tell you that nothing controls the mood and emotions of New Englanders more than the Red Sox (and in the winter, substitute the weather). From 1918-2003, New Englanders were a solemn bunch as the Sox went through an 86 year World Series drought. However, Red Sox nation is in a better mood lately, winning two World Series championships in four years.

Does the Red Sox success have any implications for economic conditions in Boston? According to a recent study by Bank of America, the Red Sox' success does effect the local economy. 29% of workers surveyed admitted to skipping work and 14% have missed a business meeting to attend a game. Economists would point to the productivity loss from this lost work time, but I think there is some "psychic profit" from bringing the community together and putting everyone in a good mood. These benefits probably bring greater productivity gains in the long run.

However, given the recent Red Sox skid and the antics of LF Manny Ramirez, do you think more than the reported 9% of people are skipping work to recover from a Red Sox loss hangover?

HT: Freakonomics

Economics Does Not Lie

Guy Sordon exclaims that "Economics Does Not Lie" in the summer edition of City Journal, a periodical published by the Manhattan Institute. Sordon, a contributing editor to City Journal, argues that the increasing mathematical sophistication of economics is responsible for tremendous improvement in worldwide living standards:

Behind all this unprecedented growth is not only the collapse of state socialism but also a scientific revolution in economics, as yet dimly understood by the public but increasingly embraced by policymakers around the globe. The revolution began during the sixties and has finally brought economists to a broad, well-founded consensus about what constitutes good policy. No longer does economics lie; no longer would Baudelaire be able to write that “economics is a horror.” For the mass of mankind, on the contrary, it has become a source of hope.

Sordon finds the ten essential tenets of the "science of economics." Sordon argues that if policymakers follow these largely laissez-faire principles, the world economy will prosper. The whole article is worth a read.

HT: RealClearPolitics

Good Sign from the Senate

In 2006, the Massachusetts General Assembly created a 25% tax credit for film production companies to shoot films in Massachusetts. The legislature believed that this tax credit would attract new business and create jobs in the Commonwealth. However, other states have joined in the act and a film tax credit "arms race" has erupted to see who can offer the biggest subsidies to the film industry.

Remarkably, the Massachusetts Senate has declined to take up the film industry tax credit bill. Senate President Therese Murray said the bill was "not on top of our agenda" as the legislative session ends next Thursday.

Subsidies such as tax credits distort the natural marketplace by favoring one industry over another. BHI suggested that Massachusetts simplify and lower the corporate tax rate to help all industries, not just the film or biotech industries. A uniform, lower tax rate will attract business to Massachusetts. Kudos to the Senate for rejecting this unnecessary tax giveaway.

Cox and Alm ask "How are we Doing?"

Economic pessimists would like Americans to believe that our current economic struggles echo the harsh conditions of the Great Depression. John Stossel reports in a recent column that the media is reacting more negatively to economic news than their counterparts in the early 1930s.

As we have previously noted, not everyone agrees with such dismal forecasts of the economy. In this month's The American, W. Michael Cox, a Senior Vice-President and Chief Economist at the Dallas Federal Reserve, and Richard Alm, the bank's senior economics writer, argue that our economy is doing quite well in historical terms. Compared to our grandparents' generation, real incomes have risen, productivity has increased, and gasoline is cheaper per hour of work. Moreover, we enjoy a greater standard of living, safer workplaces, more leisure and access to luxury products unimaginable to previous generations.

Cox and Alm argue that our current economic struggles are a mere blip in economic progress:

Taken together, it’s enough to shake our faith in American progress. The best path to reviving that faith lies in gaining some perspective— getting out of the short-term rut, casting off the blinders that focus us on what will turn out to be mere footnotes in a longer-term march of progress. Once we do that, we see the U.S. economy, a $14 trillion behemoth, is doing quite well, thank you very much.

So, as the authors ask, "How are we Doing?"

HT: Jeff Jacoby

Addendum: Robert Samuelson agrees that we are not heading towards a depression.

Demand curves still slope downward

A headline from the Boston Metro "U.S. gas demand falls, prices blamed". According to a report issued by MasterCard, U.S. gasoline demand fell 3.3 percent.

I'm glad to know that my Econ 101 class was right and that demand curves slope downward. Prices continue to act as a signal for people to their alter behavior, in this case by buying less gasoline.

Why are we surprised?

The Wall Street Journal is reporting that teenage unemployment could be at its highest rate in decades:

A weaker summer employment market, stemming from an anemic economy and higher age requirements for many jobs, has resulted in a idle summer for many teens. Almost one in four 16- and 17-year-olds can't find work, and the Northeastern University Center for Labor Market Studies found this summer's teen employment rate could reach a postwar low. That decline could have implications far into the future.

...

Howard Rosen, an economist with the Peterson Institute for International Economics, said that though teenage labor data are volatile, the figures could indicate a problem in the teenage job market. He said higher minimum wage requirements may be leading employers to favor older workers.

A higher minimum wage encourages employers to move away from the use of unskilled teenagers. Typically, they will give more work to current employees or hire more skilled workers instead. The Fair Minimum Wage Act of 2007 boosted the federal minimum wage from $5.85 to $6.55 this summer and to $7.25 next summer - that's a 24% increase over two years! Are we to be surprised that a dramatic increase in the minimum wage is followed by a dramatic jump in teen unemployment?

BHI did a study of a proposed minimum wage hike in Massachusetts several years ago and found that it would hurt low wage workers - the exact people that it was supposed to help.

Politicians love raising the minimum wage because it makes them feel good about themselves. If they paid attention to the actual consequences of their actions, they would feel a lot different.

Government and Free Markets?

This blog likes to identify how the absence of a market system in the allocation of scare resources cannot be solved efficiently by government intervention. Secretary of Transportation Mary Peters makes a compelling case for a free market solution to congested airports by illustrating the virtues of a peak pricing system for runways during rush hour--something that's clearly lacking today:

You’re already familiar with the concept of demand-based pricing. It’s why using your cellphone at night is cheaper than making a call on your lunch hour and why renting a beach house in New Jersey costs more in the summer than in the winter.

Under the current system, however, the airlines pay the airports the same price (based on aircraft weight) for flights at heavily congested times as every other time.

These weight-based prices mean that there’s no incentive for airlines to use larger planes, which can move more people during busy flight times. In fact, using smaller planes keeps demand — and ticket prices — higher. It should come as no surprise that delays at popular flying times and into popular airports have exploded in recent years...

After all, the airlines themselves lower ticket prices to attract passengers when demand is low and then raise prices to maximize revenues when demand is high. What would happen if airlines were required by the government to charge the same ticket price for travel on Dec. 24 as they charge in the middle of September? There would either be rationing of extremely scarce seats on Dec. 24 or exorbitantly high prices for widely available seats in the middle of September. In either case, this inefficient outcome would damage the economy broadly and the aviation sector specifically.

Yet that is exactly how airports charge airlines for the use of their terminals and runways.

Even as airfares at Logan Airport continue to rise while the number of flyers continues to fall, a peak hour pricing system would improve efficiency.