Adam Smith on the value of self interest and the injustice of goverment trying to thwart it

Today is his 300th birthday. This is a post I originally did in 2019. 

See Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Cannan ed.), in 2 vols. [1776] from Online Library of Liberty.

From Volume 1.

"Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to the society."

From Volume 2.

"It is thus that the private interests and passions of individuals naturally dispose them to turn their stock towards the employments which in ordinary cases are most advantageous to the society. But if from this natural preference they should turn too much of it towards those employments, the fall of profit in them and the rise of it in all others immediately dispose them to alter this faulty distribution. Without any intervention of law, therefore, the private interests and passions of men naturally lead them to divide and distribute the stock of every society, among all the different employments carried on in it, as nearly as possible in the proportion which is most agreeable to the interest of the whole society."

"To prohibit a great people, however, from making all that they can  of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind."

The Illinois Scholarship Scandal

Teachers unions and Democrats kill a small program that showcases their failure

WSJ editorial. Excerpts:

"Unions want to kill the program (Illinois Invest in Kids scholarship program) because its popularity showcases the failure of the public schools. Invest in Kids had more than 31,000 applications last year, roughly five students for every scholarship it could provide. Every family lined up for a place at a private school is an indictment of a union monopoly that continues to prioritize its power over student learning."

"Black and Hispanic families support the scholarship program in large numbers because they often have children assigned to Illinois schools where less than a third of students are proficient at reading or math"

"The measurable educational shortfalls continue from fourth to eighth grades"

 "teachers at the failing schools are routinely categorized as excellent to ensure their job security."

"Illinois spends an average of more than $16,000 per pupil on its public schools."

"Where did the money go? The net benefit to educational outcomes has been zero. A glance at the National Assessment of Educational Progress for Illinois fourth-graders in 2017 showed 15% of black students were proficient or above in math. In 2022, 12% of black fourth-graders were proficient or above. In reading 15% were proficient in 2017 and 13% in 2022."

"Messrs. Harmon and Welch have each had their political careers funded by more than $1 million in contributions from the state’s teachers unions" (Illinois Senate President Don Harmon and House Speaker Emanuel Chris Welch)

"Mr. Pritzker washed his hands of the choice program when a spokesperson said this month that “the Invest in Kids Act has to pass the General Assembly. If it doesn’t pass that would not be the Governor eliminating it, that would be the General Assembly eliminating it.” On Friday he had the nerve to claim the budget “makes transformative investments in the children and families of Illinois.”"

Florida had better Covid outcomes than New York

See The Trump-Cuomo Covid Bromance: The once mortal enemies unite to distort Florida’s success. WSJ editorial. Excerpts: 

"The media feted Mr. Cuomo for his handling of Covid in 2020, but his harsh lockdowns continue to have baleful effects on the state’s economy as its recovery lags. We also know Mr. Cuomo made a literally fatal March 2020 decision to admit Covid patients to nursing homes. His administration then tried to fudge the number of nursing-home deaths from Covid.

In sharp contrast, Mr. DeSantis demonstrated true leadership. To the extent Florida had a second Covid “wave” during the summer of 2020, it was because it never had a big first wave in the spring.

Despite having a higher proportion of elderly citizens who were more vulnerable, Mr. DeSantis resisted Anthony Fauci and the media to keep his state’s schools and economy going. He lifted the lockdown in May 2020 and removed all restrictions on business capacity in September. That autumn he fought the teachers union in court to reopen schools far earlier than most states did.

Mr. Trump’s claim about Florida’s relative Covid deaths is a distortion. Florida had more total deaths than New York, but Florida’s population is older and thus more vulnerable to Covid. The Centers for Disease Control and Prevention reports that age-adjusted deaths were 245 per 100,000 residents for Florida against 311.5 for New York."

Access to additional federal loans did not improve access to existing graduate programs overall or for underrepresented groups

PLUS or Minus? The Effect of Graduate School Loans on Access, Attainment, and Prices by Sandra E. Black, Lesley J. Turner and Jeffrey T. Denning.

"In 2006, the federal government effectively uncapped student borrowing for graduate programs with the introduction of the Graduate PLUS loan program. Access to additional federal loans increased graduate students’ borrowing and shifted the composition of their loans from private to federal debt. However, the increase in borrowing limits did not improve access to existing programs overall or for underrepresented groups. Nor did access to additional loan aid result in significant increase in constrained students’ persistence or degree receipt. We document that among programs in which a larger share of graduate students had exhausted their annual federal loan eligibility before the policy change—and thus were more exposed to the expansion in access to credit—federal borrowing and prices increased."

Conflict Over a “Citi Bike” Illustrates Popularity of a New Mobility Alternative

By Marc Joffe of Cato.

"In early May, a video showing a physician’s assistant and a group of teenagers arguing over a shared e‑bike in Manhattan went viral. The video gave rise to conflicting narratives about race and gender, but it also has an important transportation policy implication: at least in New York, there is a lot of interest in shared e‑bikes, and we could use more of them.

Micromobility vehicles, usually docked bicycles and undocked electric scooters, are now common in many large cities. According to the National Association of City Transportation Officials (NACTO), US total micromobility ridership rose from 2.4 million in 2011 to 112 million in 2021. In New York City, at least, the ridership surge has continued into 2023: in early May, Citi Bike provided a record 867,838 rides in a single week.

The vehicles are typically owned by private companies, such as Lyft, Lime, and Bird. But micromobility is often a public‐​private partnership, with cities providing public space for docking stations and other infrastructure.

For many intermediate length trips, shared bikes and scooters provide key convenience advantages. Compared to the subway, there is no need to descend into a station and wait for a train, so many trips can be completed faster even though the maximum speed of a bike or scooter is lower. There is also the opportunity to get fresh air and exercise while avoiding the security concerns that come with traveling on mass transit.

For those who don’t want to work up a sweat, electric powered micromobility vehicles are becoming increasingly popular. NACTO found that e‑bike utilization increased thirty‐​fold between 2018 and 2021. E‑bikes are safer to ride than e‑scooters, which pose balance challenges for some riders.

E‑bikes are still not for everyone. Heavier and more senior riders might prefer the greater stability of e‑trikes (three wheeled, electric powered vehicles). These have become available for purchase and may be a good addition to the options currently available at shared mobility docking stations.

But, given what we now know about the so‐​called Citi Bike Karen incident near New York City’s Bellevue Hospital, the supply of shared e‑bikes may not be keeping up with the demand. Media accounts suggest that the teenager was trying to economize on rental costs by limiting his rides to no more than 45 minutes, after which the rental rate goes up. He would then dock the bike for five minutes before starting another 45‐​minute rental.

But when he docked the e‑bike at the Bellevue Hospital Citi Bike facility, it became available for the physician’s assistant to rent on the Citi Bike app. She did so, and then attempted to claim the bike that the teenager was hoping to reuse. Had more e‑bikes been available at the docking area, the conflict would not have been necessary: either party could have rented another bike.

It also may be the case that some e‑bike riders are renting vehicles at below their all‐​in cost, which includes routine maintenance and expected losses from accidents and vandalism. If policymakers see the need to make mobility more affordable to low income and other disadvantaged riders, it may be better to offer these riders vouchers than providing service to all comers at below market rates.

An unfortunate downside of city life is that it sometimes brings people with varying cultural expectations into conflict, and, in the smartphone era, these conflicts can turn into national issues. While that may be a problem without an easy solution, it should not be difficult to dramatically increase the supply of e‑bikes, introduce e‑trikes, and provide other micromobility alternatives. Such investments would undoubtedly be more cost‐​effective than the multi‐​billion‐​dollar, multi‐​year transit projects that are all too popular with urban planners today."

Three Big Strikes Against ‘Greedflation’

Rising profits and inflation aren’t a corporate conspiracy

By Scott Lincicome.

"In case you haven’t noticed, “greedflation” is having quite the moment. In just the last couple months, several major media outlets have promoted—sometimes repeatedly—the formerly “fringe” idea that corporate profiteering, not supply and demand, are to blame for our current inflationary moment. As these stories detail, a small cadre of academics and policymakers allege that companies with price-setting market power have seized on supply chain problems, the Ukraine invasion, and other newsworthy economic disruptions to justify prices increases that far exceed their own heightened labor and input costs, thus boosting profit margins and “heighten[ing] inflationary pressures” for the U.S. economy overall. When this idea first arose, I—like a lot of other people, it seems—dismissed it as a momentary fad. But since the “greedflation” concept has not just stuck around but actually accelerated, it warrants more discussion.

That doesn’t mean, however, that it’s any less wrong.

‘Greedflation’ Isn’t New

For starters, there’s nothing really novel about corporations raising prices after a recession and thereby enjoying a temporary boost in profits. As just documented by the Kansas City Federal Reserve, for example, companies during and after a recession routinely engage in “anticipatory price-setting, in which firms expect higher costs of production in the near future and thus raise prices on the goods they produce today.” Because costs incurred during a recession are “temporarily depressed,” higher prices produce a temporary surge of profits, which then start to decline as an economic recovery takes hold and input costs rise. The report finds this pattern of profits in every U.S. recession going back to 1948 and finds it again in the pandemic recession, with a similar magnitude.

In fact, as shown in figure 3 below, corporate greed—erm, profit—was actually a little lower during the 2021-2022 pandemic recovery than in previous recoveries:

So much for a sudden and novel burst of “greedflation,” huh?

‘Greedflation’ Ignores Consumers Entirely

This historical perspective is useful, but it avoids more important and fundamental points about higher prices and corporate profits during and after the pandemic: Profit-maximizing firms could only raise prices (and earn higher profits) because consumers let them; consumers let them because they were flush with cash; and consumers were flush with cash mainly because of government policy.

The role that consumers play in companies’ pricing decisions isn’t exactly groundbreaking stuff; it’s a standard part of mainstream microeconomics and frequently mentioned in economic analyses and business reporting—even for essentials like food. For example, a Kansas City Fed report from late last year found that consumer spending and behavior (eating more at home, and then shifting back)—not corporate profiteering—were the primary drivers of higher U.S. food prices during the post-pandemic recovery.

In the business press, meanwhile, consumer demand and its role in corporate pricing decisions is a frequent topic. The New York Times in April, for example, reported that multinational food producers and retailers like Unilever, PepsiCo, and McDonald’s had increased prices and earned higher profits over the last couple years but were recently starting to see more resistance from consumers that would decrease future sales and temper further price increases—resistance that wasn’t there earlier in the recovery. A couple months earlier, major beer producers reported much the same thing: According to the CEO of Constellation brands (Corona and Modelo), “prices have gone as far as consumers will tolerate” in California, while nationally “the company will need to be more cautious about raising prices further since consumers are starting to balk.” Meanwhile, CNBC reported that major grocery chains were rapidly rolling out cheaper private label brands because consumers in 2023 were becoming more cost-conscious than they’d been in the two years prior. “Businesses do respond to shoppers,” economist Mark Zandi told CNBC, “If consumers are price-conscious, price-sensitive, that’ll go a long way to convincing businesspeople to stop raising prices and maybe even provide a discount.”

Crazy, I know.

The same dynamics apply beyond food (if not more so), and for the biggest companies. The Wall Street Journal reported late last year, for example, that Walmart, Target, Amazon, and other retail giants were “canceling orders, resisting price increases and in some cases asking suppliers to provide discounts” because of “shifting consumer demand” (which caused inventories to swell) and the retailers’ desire to “attract cash-strapped shoppers.” And even some of the articles that take the greedflation narrative seriously hint at consumers’ role in price-setting. Just this week, for example, the Times’ latest greedflation piece mentions that “[c]ustomers have grumbled, but they have largely kept buying.” The Journal’s piece, meanwhile, humorously noted that “One puzzle is why consumers have played ball.”

This is not, actually, much of a “puzzle” at all: American consumers have “played ball” because they have the money to do so—lots of it. The aforementioned Kansas City Fed paper gets at this when examining why beef prices shot up in recent years, padding Big Meat’s profits along the way: “Although personal income typically declines during recessions, putting downward pressure on meat consumption, household income actually rose during the pandemic-induced recession. So, too, did household consumption of meat (among other products), putting upward pressure on food prices” (emphasis mine). Thus, contrary to the spin from the White House and others, U.S. meat prices didn’t rise because of some sort of Big Meat pricing conspiracy; they rose because suddenly cash-rich consumers wanted to buy more meat.

The aggregate economic data clearly show our national spending spree—both during and after the pandemic. Harvard’s Jason Furman, for example, calculates that Americans’ spending (personal consumption expenditures or PCE) has been well above trend since early 2021, even after accounting for inflation:

The nominal (not-inflation-adjusted) figure, as the Mercatus Center’s David Beckworth shows, is even more dramatic:

Beckworth rightly notes this chart should accompany any and every discussion of “greedflation,” because “those profits do not happen unless we get this surge in nominal demand growth.”

The main drivers of that surge in demand (spending) are similarly unsurprising and well-understood today: highly expansionary U.S. fiscal and monetary policy enacted during 2020 and 2021. On the fiscal side, federal spending as a share of GDP skyrocketed in 2020, and will remain elevated—even after the current debt limit deal is enacted.

This spending was not, however, just about cutting checks to Americans during the pandemic. New research shows, for example, that federal aid to states during the pandemic was way too generous, thus resulting in “a range of targeted tax cuts and spending measures” at the state-level and “adding to inflationary pressure.” Federal pandemic-era policy also induced consumer spending in other ways. Thanks to the student loan debt moratorium, for example, “borrowers used the new liquidity to increase borrowing on credit cards, mortgages, and auto loans rather than avoid delinquencies.” As we’ve discussed previously, many other state and federal programs provided similar forms of temporary debt relief, giving Americans more money to spend at that time and—as we’ll discuss in a second—in the future.

Given this massive fiscal jolt, numerous academic analyses have found—per my Cato colleague Norbert Michel—that “the inflation problem we’re experiencing was indeed fiscally induced, though “perhaps the Fed could have been less accommodative of Congress’s fiscal spending, and it surely could have started tightening a bit sooner.” Other studies show much the same. As the Journal’s Greg Ip admitted earlier this month, “in retrospect, fiscal policy overdid it.”

(Ya think?)

Speaking of Fed policy, it too was highly expansionary over the same period, further encouraging Americans consumption (via mortgages, car loans, etc.). Here, for example, is the spike in the money supply (M2) during 2020-21:

Comparing total economic output (nominal gross domestic product) versus a “neutral” benchmark growth rate also indicates that monetary policy has been very expansionary since early 2021 and, at least through Q1 2023, continues to be that way:

Fiscal and monetary expansion has waned in recent months, but Americans are still spending at elevated levels because, as Furman shows, they’re using the savings they built up during the pandemic when government support was so generous:

Economist Joey Politano thus provides a good rundown of where things now stand and how we got there (emphasis mine):

At the start of the pandemic, Americans accumulated trillions of dollars in excess savings—workers dramatically cut back on their consumption, households received generous relief payments from the Federal government, and borrowers refinanced their debt at newly-lowered interest rates, so people were earning significantly more in aggregate than they were spending. The end result was more than $2T in total savings above what would be expected in a hypothetical no-pandemic world, with the bulk of those assets concentrated among high earners. However, by 2022 the script had completely flipped—Americans were spending much more than they would normally, drawing down on their excess savings, and re-engaging in debt amidst a consumption boom partially caused by and partially enabling ongoing inflation. Today, most of those excess savings have been spent down, with households only having an extra $750B remaining (or about $650B accounting for inflation).

In short, you can debate whether highly expansionary U.S. fiscal and monetary policy was the right way to quickly escape the pandemic recession, but you can’t ignore it—and its obvious effects—altogether. “Greedflation” seemingly does just that.

As Beckworth put it to the New York Times this week, “Many telling the profit [greedflation] story forget that households have to actually spend money for the story to hold. And once you look at the huge surge in spending, it becomes inescapable to me where the causality lies." Indeed.

‘Greedflation’ Forgets What Inflation Actually Is

Other facts further confound the greedflation story. For starters, inflationary pressures have shifted a lot between 2021 and today, moving from goods to services:

As Furman recently noted on Twitter, the greedflation thesis requires us to believe that goods companies had (and abused) market power in 2021-22 but then passed the baton to totally different services companies in totally different industries sometime last year. That is some seriously impressive, economy-wide collusion!

Also, as several folks have recently noted, corporate profits are now falling and have been for three straight quarters (two if you exclude financial companies), even as inflation has persisted.

Even sectors with relatively high levels of concentration, such as meatpacking and shipping, have seen their profits drop in recent months. Did all these companies—including ones with “market power”—suddenly stop getting greedy?

C’mon, man.

In general, all of this stuff seems to reflect a fundamental misunderstanding about what “inflation” really is—an increase in the general price level, as opposed to, say, a nefarious exercise in discrete pricing power by a handful of companies or industries, even highly concentrated ones. Akiva Malamet put this well in a column last year:

While a corporation might have a great deal of market power, it cannot affect the entire Consumer Price Index. Inflation is also unrelated to corporate concentration. Further, prices reflect decisions by a multitude of sellers with competing interests. Sellers are too numerous to collude and fix prices, because transaction costs rise as the number of colluding actors increases. The number of people who would need to be aware of each other, meet, and agree on a price is huge. Further, price-fixing agreements tend to break down due to defectors trying to beat out the competition by lowering their prices against the majority.  More generally, prices do not result from the will of specific actors. Prices are emergent products of supply and demand. They reflect the myriad decisions of producers and consumers with a variety of preferences and differing opportunity costs. Inflation (a general rise in the price level) tends to derive from an excess amount of liquid currency available, relative to the amount of real goods and services being produced at a given moment. In simple terms, inflation is a problem of “too much money chasing too few goods”.

The charts above reinforce this simple lesson, and forgetting it produces a host of absurdities. As my Cato colleague Ryan Bourne pointed out in a recent column, for example, the Greedflation World requires corporations to somehow shift, en masse, from generous to “greedy” and back again over the course of a few years. (See the Charts of the Week for how this apparently worked for Big Egg.) It requires one company’s price increases to somehow not lead to lower-cost rivals gaining any market share. And, perhaps most damningly, it requires price increases by companies with supposed “market power” to somehow not leave consumers with less money to spend elsewhere in the economy (because that would reduce price pressures for other goods and services and thus keep inflation tame overall). Greedflation demands we believe in these and other mysterious tales, while handwaving away not only the economics textbooks but also very clear data on national supply and demand since 2020.

Or, if you prefer your mental gymnastics in meme form, economist Bryan Albrecht has you covered:

As Bourne rightly notes, “Corporate greed primarily affects relative goods’ prices, not the overall price level and inflation. Loose money driving excess spending does that.”

It’s a simple point. It’d be nice if the media remembered it."

California's higher minimum wage will raise cost of using goats to control wild fires

See California has money to burn by Scott Sumner.

"Some economists worry that minimum wage laws will lead to higher unemployment. But there are many other pernicious side effects when governments intervene in the labor market. Here’s one example:

Targeted grazing is part of California’s strategy to reduce wildfire risk because goats can eat a wide variety of vegetation and graze in steep, rocky terrain that’s hard to access. Backers say they’re an eco-friendly alternative to chemical herbicides or weed-whacking machines that are make noise and pollution.

So what does this have to do with minimum wage laws?  Consider the following:

Companies have historically been allowed to pay goat and sheepherders a monthly minimum salary rather than an hourly minimum wage, because their jobs require them to be on-call 24 hours a day, seven days a week. But legislation signed in 2016 also entitles them to overtime pay. It effectively boosted the herders’ minimum monthly pay from $1,955 in 2019 to $3,730 this year. . . .

But in January, those labor costs are set to jump sharply again. Goatherders and sheepherders have always followed the same set of labor rules last year. But a state agency has ruled that’s no longer allowed, meaning goatherders would be subject to the same labor laws as other farmworkers.

That would mean goatherders would be entitled to ever higher pay — up to $14,000 a month. . . .

Arrowsmith employs seven goatherders from Peru under the H-2A visa program for temporary farmworkers. He said the herders are paid about $4,000 a month and don’t have to pay for food, housing or phones.

“I can’t pay $14,000 a month to an employee starting Jan. 1. . . . “What’s at stake for the public is your house could burn up because we can’t fire-mitigate.”

A wage of $3730/month probably doesn’t sound very generous to the average reader of Econlog.  But it’s worth keeping in mind that many of these goatherders are from low or middle income countries.  Because employers pay their living expenses, they can save a sum of money that would give them some upward mobility (perhaps opening their own business) when they return to their home country.  The state labor regulators in California are working to deny them this opportunity.

This is not a zero sum game.  Minimum wage laws have all sorts of negative side effects, such as worsening working conditions.  Were this law to take effect, many workers would probably lose jobs.  But that’s just the beginning:

1. More California homeowners would lose their homes to wildfires.

2. For the few remaining jobs, Peruvians would engage in fierce non-price competition as a way of securing a position paying $140,000.  This might involve massive bribes to those who control the process, perhaps funded by loans that will be repaid out of the high salary.  Or perhaps higher queuing costs.  One way or another, much of the potential welfare gain to Peruvian workers will be dissipated in non-price competition for the now highly lucrative jobs.

Again, it’s not a zero sum game.  Regulations that make society less efficient generally make most people worse off."