The Solution to Expensive Housing Is More Housing

 

Finally, a book by a New York Times reporter who understands the crucial link between restrictions on the supply of housing and the price of housing! Golden Gates, by economics reporter Conor Dougherty, is a tour de force. It’s a rare book that mixes careful, nuanced reporting, painless economics lessons, interesting history of California, and pitch‐​perfect humor, but Dougherty has written one.

Dougherty, who was a housing reporter for the Wall Street Journal for a decade, must have learned a lot in that job. He knows and understands the economics literature on the connection between supply and price, as evidenced by his treatment of the pathbreaking work of Harvard’s Ed Glaeser and Wharton’s Joseph Gyourko. (See “Zoning’s Steep Price,” Fall 2002.) Furthermore, Dougherty understands that when more luxury housing is built, that frees up housing that is then sold to people slightly lower on the wealth scale, and on down. He also understands the negative consequences of rent control.

That’s not to say that I agree with everything in the book. In particular, the author underplays both the bad consequences of rent control and the good that would result from massive housing deregulation. But those defects are way more than offset by his understanding of the harm done by restrictions on building.

This is from David R. Henderson, “The Solution to Expensive Housing Is More Housing,” Regulation, Spring 2021. It’s the lead book review, an honor I rarely get.

Another highlight:

Early in the book, Dougherty introduces a number of important players. First is a colorful character named Sonja Trauss, a teacher in the East Bay who dropped out of the doctoral economics program at Washington University in St. Louis, emerging with a master’s degree. Trauss started San Francisco Bay Area Renters’ Federation, an organization that favors allowing more housing to be built. She was an early advocate of YIMBY (Yes In My Back Yard), the opposite of NIMBY (Not In My Back Yard). As Dougherty puts it, “Sonja was for anything and everything, so long as it was built tall and fast and had people living in it.” Trauss later became a full‐​time activist for the cause of more housing, and Dougherty tracks her movements carefully.

Trauss has a way with words and Dougherty has a keen ear for those words. She understands 19th‐​century writer Frederic Bastiat’s point about the unseen consequences of government regulation. At a hearing in the East Bay city of Lafayette, she pointed out that many of the people who would be affected by a decision to allow more housing “don’t know who they are yet” and that some of them are not even born. It’s Bastiat’s seen versus unseen.

One more highlight:

The book also discusses Harvard labor economist Lawrence Katz. Few people probably know — I didn’t — that when he graduated as Berkeley’s top economics undergrad, Katz devoted his whole 1981 commencement speech to one of the main causes of the high price of housing in the Bay Area: restriction of supply. He pointed out something that few of his classmates probably knew: just 10 years earlier, “California house prices were not much greater than the national median.”

Read the whole thing and read the book.

 

(0 COMMENTS)

Read More

Brookings’ Cliff Winston on Infrastructure

President Joe Biden is planning a multi-trillion-dollar infrastructure and jobs package to spur transformative change to the economy. Unfortunately, the infrastructure component of his plan will fail to significantly improve the nation’s roads, bridges, and the like because it ignores the vast inefficiencies in current transportation policy that greatly reduce benefits from infrastructure spending.

Let me take you on the journey of a dollar of government spending intended to improve, for example, travel conditions on a highway. This dollar will have a long, perilous trip and encounter many dangers enroute that will divert it from its correct destination and take large, wasteful chunks out of it. By the time it reaches the wrong destination, it will fund much less than a dollar’s worth of highway improvements. The dangers it encounters include inefficient road pricing and investment policy, inflated input and project costs, misallocation of highway revenues, and the slow adoption of technological innovations.

This is from Clifford Winston, “How Federal Infrastructure Dollars Get Nickeled and Dimed,” Barron’s, March 24, 2021.

I highly recommend the whole piece. Actually, everything I’ve ever read by Cliff has been at least good and usually great.

(0 COMMENTS)

Read More

The Communist Trabant

In a comment on co-blogger Bryan Caplan’s post this morning, I mentioned the fact that in the 1980s, star East German figure skater Katarina Witt was given a Trabant as a reward for her productivity. Many East Germans were allowed to buy Trabants but, as with most consumer items, there was a lengthy queue.

Here’s a video about the Trabant. Watch it and you get some appreciation for what East Germans thought of as a reward for outstanding performance.

A couple of facts:

The top speed was under 6o mph.

It was a 2-stroke engine that achieved 26 mph.

Watch the video and you’ll learn a lot more about this Communist consumer item.

Personal story

In October 1999, I taught an economics course  in the MBA program in Prague run by the Rochester Institute of Technology. Wandering around Prague during my off time, I saw a handful of Trabants on the road. In October 2000, I was back to teach again and I didn’t see a single Trabant on the road.

After Communism, Trabants were replaced largely by Skodas. The comparison between the two is stark.

 

 

(0 COMMENTS)

Read More

Will Walmart Save America?

My question is only partly rhetorical. Just two days after I published my post “Vaccine Adventures,” I read in the Wall Street Journal that the federal and state governments had started allocating vaccines to large pharmacy chains, including Walmart (Sharon Terlep and Jaewon Kang, “CVS and Walmart Decide Who Gets Leftover Covid-19 Vaccine Doses,” February 11). After reading this story in the wee hours of February 12, I went on Walmart’s website and, in just a few minutes, made myself an appointment for six days later. Appointments are available at 20-minute intervals during the whole day.

The efficiency of Walmart is legendary despite its being a behemoth, just as the inefficiency of the government is legendary because it is a behemoth (and other reasons explored by the economics of public choice).

Yesterday, another Wall Street Journal story described the rollout of Walmart’s Covid-19 vaccination (Sarah Nassauer, “Walmart’s Covid-19 Vaccine Rollout Heads to Small Town,” February 14). To get an idea of “what the weather [is] really like on earth” (le vrai temps qu’il fait sur la terre) to borrow an expression from Saint-Exupéry (in his novel Southern Mail or Courrier Sud), a few quotes from this Wall Street Journal story are useful:

Skowhegan, Maine—Pat and John Thomas were watching the news one night last week when they saw that Walmart in this central Maine town of 8,000 people was taking appointments for the Covid-19 vaccination. They had signed up for shots at a hospital about a month ago but still hadn’t heard back. Ms. Thomas, a 74-year-old retiree, jumped on the computer.

On Friday the couple got the Skowhegan Walmart’s first doses …

Walmart Inc., the U.S.’s largest retailer and private employer, is set to become one of the biggest distributors of the Covid-19 vaccine as the federal government enlists retail pharmacies to accelerate what has been a choppy rollout. …

Walmart is likely to benefit in other ways. Many of the people getting the vaccine at the Skowhegan store Friday didn’t previously have patient profiles in Walmart’s system, said [regional Walmart manager] Mr. Tozier. “We are making relationships with new patients,” he said.

Ann Jackson and her husband, Norman Jackson, 73 and 76 years old respectively, arrived for their vaccine appointment midmorning after waiting for weeks to get an appointment at the local hospital, said Ms. Jackson. Later, she added chips, bananas and T-shirts to her cart. “You never want to waste the trip to Walmart,” she said.

Contrary to what I implied in my previous post, there seem to be incentives enough for private pharmacies, at least those with a Walmart sort of efficient logistics, to administer Covid-19 vaccines when Big Brother releases them.

Such recourse to private enterprise could partly protect us from the central planners in DC and the state capitals. But why give the vaccines to some private organizations but not others—say, to Walmart but not to Hannaford? Is it because the central planners know better where demand is most intense or where low-cost distribution is most likely? That would possibly be a first in the history of mankind.

It would have been much more efficient, from the beginning, if the government had sold the vaccines to whoever was willing to buy them in order to make a profit and had given vouchers to whoever wanted to be vaccinated. After this redistribution of purchasing power, the market—that is, individual demands—would have decided where the vaccines should go.

(0 COMMENTS)

Read More

Why Is the Vaccine Distribution So Difficult?

Imagine if food were allocated and distributed by the government. Wouldn’t this prevent hunger and famines, which have certainly killed more people than epidemics in the history of mankind? Most students of economics should have a ready answer. The opposite approach—that government allocation is more efficient than the anarchy of the market—is illustrated by the story of the Russian official who, shortly after the collapse of the Soviet Union, asked British economist Paul Seabright, “Who is in charge of the supply of bread to the population of London?” (recalled by Philip Coggan in his recent book More).

There is somebody in charge of the supply of Covid-19 vaccines in the United States, and that is precisely the problem. (That both the federal government and states government are involved is not the basic problem; on the contrary, decentralization prevents the centralization of error and improves the Soviet-inspired distribution system, if only by permitting experimentation.) A Wall Street Journal story sounded the alarm (again) on the dramatic inefficiency of the current distribution system (Elizabeth Findell, Jared S. Hopkins, and Dan Frosh, “Covid-19 Vaccines Are Getting Stuck at the Last Step,” January 17, 2021):

In South Texas, a man slept in his car for two nights straight so he wouldn’t lose his place in a line of hundreds of people at a mass-vaccination event. In Western Kentucky, residents registered for vaccination slots online, only to find when they arrived that their doses had been taken by walk-ins. In New Mexico, state officials scrambled to hire more people to staff a vaccination hotline after it was overwhelmed with callers. …

“It’s crazy that people have to call around to see what different providers have the vaccine, rather than having a central place,” [Texas state REp. Vikky Goodwin Goodwin] said. “People are thinking that we had months and months to prepare for this.”

Isn’t it tragic that such things happen and the same failed government interventions are proposed (like by Ms. Goodwin above) after nearly three centuries of modern economic analysis? When prices don’t clear the market, people wait in line and those at the end of the queue don’t even know if they will get anything when their turn comes. In this respect, the United States is not worse than other regulated countries but it is often not better either.

We should not exaggerate the Sovietization of the American economy. Looking at the throve entrepreneurship deployed by American private businesses during the pandemic suggests that the economy is more resilient than many would have thought. Yet, the trend of the past few decades is unmistakable. Sometimes, it even looks like military Sovietization, from the retired army officer running Operation Warp Speed to president Biden considering deploying the National Guard to set up Covid-19 vaccination clinics.

Even if government intervention is judged necessary in a pandemic, less Sovietized and more efficient ways would be more productive. The federal government could buy enough Covid-19 vaccines from the manufacturers by bidding up prices to obtain enough for the whole population—that is, by bidding high enough to divert enough economic resources to manufacturing and shipping these vaccines. It could then offer the vaccines for free to interested health providers and pay the shipping by Fedex and UPS. Even better,  the government (at the federal or state levels) could offer vouchers to anybody who wants the vaccine and let Amazon (or any retailer) buy the vaccines and sell them in exchange for the vouchers or for ordinary cash from those who are willing to pay. With tens of thousands of intermediaries with incentives to deliver the vaccines because it pays to do so, the distribution would proceed like for food or computer equipment.

The trick is to allow the market to clear as fast as possible. Even the government’s preferred clientèles would be better served by a liberalization of entrepreneurship and a large measure of economic freedom.

It would go less smoothly in states, such as New York State, that have set up their own Soviet-style allocation of vaccines, but individuals could at least cross state lines to buy a vaccine if they want. And competition would, to a certain extent, push state governments not to hamper private distribution.

If ordinary economic markets are not allowed to clear, expect the political market to clear with the help of patronage, random access, and waste. We have seen much of that since the beginning of the pandemic. It would not be surprising if, as recently reported, a large number of vaccines are trashed because not enough government-prioritized recipients are available at any given time or place. (See also Scott Sumner, “Regulation and Vaccines: It’s Much Worse Than You Think,” Econlog, January 17, 2021, who correctly defends a free market in vaccines.)

(0 COMMENTS)

Read More

Henderson WSJ Op/Ed on 2020 Nobel Prize

 

The 30-day period has passed and so I’m now able contractually to post my op/ed on Milgrom and Wilson.

 

Thank These Nobel Laureates for Your Cellphone

Economists Paul Milgrom and Richard Wilson get the prize for devising spectrum auctions.

On Monday the Royal Swedish Academy of Sciences awarded the Nobel Prize in Economic Sciences to two American economists at Stanford, 83-year-old Robert B. Wilson and 72-year-old Paul R. Milgrom. The citation was “for improvements to auction theory and inventions of new auction formats.”

Auction markets range from selling items on eBay to the sale of billion-dollar assets such as radio licenses and electromagnetic spectrum by the Federal Communications Commission. Messrs. Wilson and Milgrom did much of their theoretical work on auctions from the 1960s to the 1980s. In the early 1990s, the FCC decided to stop giving away valuable spectrum and sell it instead. An FCC economist named Evan Kwerel worked with Messrs. Wilson and Milgrom to help design an auction for both licenses and spectrum.

In its technical paper justifying the awards, the Nobel Committee points out a major problem with using taxes to fund government programs: taxation distorts. The term economists use is “deadweight loss,” a loss that is not offset by a gain to anyone. Economists have estimated that raising $1 in taxes doesn’t cost society only $1; it costs somewhere between $1.17 and $1.56. The extra 17 to 56 cents is deadweight loss. The committee notes that by auctioning off major electromagnetic assets, the federal government avoided having to tax as much.

This isn’t to say that the ideal auction is one that maximizes government revenue. One way to maximize auction revenue is for the FCC to act like a monopolist and hold spectrum off the market. But what matters most is that spectrum gets into the hands of the most-productive users. As former FCC chief economist Thomas Hazlett, now at Clemson University, and his co-author Roberto E. Muñoz of the Universidad Técnica Federico Santa María have pointed out, the gains from efficient allocation swamp the gains in government revenue. The 2017 wireless spectrum auction, for example, redirected spectrum from broadcast television to cellphone companies. If you’re reading this on a cellphone, you can thank Messrs. Milgrom and Wilson.

Ronald Coase, who won the Nobel Prize in 1991, advocated auctioning off spectrum in a 1959 article. But governments tend to prefer to hand things out; it makes them popular and gives officials power. One of the few benefits of the large federal budget deficits in the 1980s and early 1990s was that the federal government started looking for ways to raise more money. Auctions were one solution.

But what do you do when some license holders are keeping spectrum from being redeployed to more efficient uses? The FCC asked Mr. Milgrom and a team of economists to design an auction to get over-the-air broadcasters to relinquish their spectrum rights voluntarily. Then the FCC sold the rights. The gain to the federal government was $9.7 billion. The gain to consumers was many times greater.

The two winners will split 10 million Swedish kronor, which is about $1.1 million at today’s exchange rates. But as George Mason University economist Alex Tabarrok notes on his blog Marginal Revolution: “The money won’t mean much to these winners, who have made plenty of money advising firms about how to bid in the auctions that they designed.” Mr. Milgrom advertises that his company saved Comcast and its consortium, SpectrumCo, nearly $1.2 billion. This is a potential conflict of interest.

Still, the auction that Mr. Milgrom helped design is better than an alternative proposed by Microsoft economist Glen Weyl. In a recent critique of Mr. Milgrom’s role in FCC auctions, Mr. Weyl argues that a better way of allocating electromagnetic spectrum “is analogous to the way that urban areas address the ‘complex interference patterns’ that motivate zoning rules, such as that one building may block another’s view.”

Such a method, Mr. Weyl admits, would “involve a complex and messy web of democratic participation in zoning proceedings, legal disputes with associated liability findings adjudicated by courts and quasi-markets operating in the shadow of these legal constraints.” Mr. Weyl doesn’t point out that his method has no real chance of allocating resources to the highest-value uses. And a lot of the value would dissolve during the rough-and-tumble political process. I invite Mr. Weyl to California, where developers deal with this “complex and messy web” almost daily. The result: Very little new housing is built, and middle-income people are priced out of the market.

The Nobel Prize is sometimes given for contributions that are technically interesting but of low value. I argued on these pages last year that the 2019 prize for work on poverty fell into that category. But this year’s winners helped create huge value for producers, consumers and, indirectly, taxpayers.

Mr. Henderson is a research fellow with Stanford University’s Hoover Institution.

(0 COMMENTS)

Read More

Zoom and the Society of Meddlers

One potent argument for free markets is that they make individual liberty and autonomy possible. To use an example from Milton Friedman’s 1962 book Capitalism and Freedom, it is unlikely that both the Wall Street Journal and the Daily Worker would have equal access to newsprint if paper were allocated by government instead of markets. Same for other means of communication. But is it true that free markets always work in the impersonal, non-discriminatory way implied by this argument?

One problem is the following. If society is populated by meddlers—busybodies who are intent on interfering with other people’s preferences and choices—even free markets may fail to respond to some individual preferences. Businesses could be led, by their own self-interest, to obey the meddlers’ mob for fear of being commercially “canceled” (see my Econlog post “The Political Firm”).

We get a taste of this possibility not only with the social networks but also with Zoom’s conferencing service, as documented by the Wall Street Journal (“Zoom Video Tackles Tricky Role of Policing Its Service,” November 3, 2020):

Zoom said users may not use its service to break the law, promote violence, display nudity or commit other infractions. … In cases where Zoom has taken action and blocked a public event, the company has said it acted once it became aware of a virtual gathering that would transgress its rule or local laws. … Zoom in September blocked the use of its service for a webinar at San Francisco State University. The meeting was due to feature Leila Khaled, a member of the Popular Front for the Liberation of Palestine, which the U.S. government has designated a terrorist organization. … Zoom also blocked a series of follow-up Zoom webinars in October organized, in part, by a pro-Palestinian group in conjunction with staff at several U.S. and overseas universities to address what they said was censorship by the company. … The Council on Foreign Relations in September held a virtual meeting with Iran’s foreign minister. The minister was sanctioned by the U.S. last year, so the meeting would have violated Zoom’s rules. It allowed the meeting to take place after the think tank showed it had approval from the U.S. government for a prior meeting with the minister.

This case suggests many reflections. This is another example showing how a government’s “international sanctions” are in fact bans against its own subjects (see my posts “New Sanctions Against Americans” and “American Sanctions: Why Foreigners Obey”). Note that American spies may not be happy, for what is a better way to learn about threats to “national security” than to let the authors of the threats discuss them openly?

To justify its discrimination against some customers, Zoom invokes “local laws,” as it does in China. But it is not only laws that count; the meddlers’ mob is visible behind “nudity,” “other infractions,” or wokism. A century or two ago, if not more recently, Zoom’s services might not have been made available for meetings of individuals among the despised minorities of the times. Which brings us back to our original question: Can free markets help solve the social-meddling problem? The question is particularly pregnant since we cannot undermine the property rights of private owners of medias or other companies without dire future consequences.

Against the claim that free markets cannot prevent meddling by opinion mobs, a counter-argument is that as long as market entry is not forbidden by law, entrepreneurs with minority tastes or simply armed with naked self-interest will come to the rescue of socially oppressed people. At the limit, even if the state enforces the meddling mob’s tastes, smuggling and black markets (including their virtual forms) will offer needed alternatives. As Étienne de la Boétie would say, private vices are public virtues, the limit being in behaviors that are unanimously (or perhaps nearly unanimously) rejected such as murder and theft.

It is true that when private entrepreneurs cater to minority tastes and values, the beneficiaries may have to pay a supplement for that. Alternatives to Zoom may not, for a while, be as cost-effective. People discriminated against under McCarthyism might have found themselves in lower-paying jobs (another Friedman example) than they would otherwise have. Another way to see this is that if a large number of people show a “taste for meddling” (analogous to Gary Becker‘s “taste for discrimination“), that is, if we live in a society of meddlers, free markets will not completely eliminate the handicap of individuals who don’t share the preferences of the meddling majority. Entrepreneurs must choose between the cost for them of shunning the untouchables and the cost of “canceling” by the meddlers.

However, for the social eccentrics or pariahs–whoever they are as discriminatory fashions come and go–the cost of satisfying their preferences is still higher if, instead of social pressures, they have to deal with government bans and punishments. Markets are not perfect but political processes are even more imperfect. Overcoming private discrimination is not easy but fighting official discrimination (called “apartheid” in race relations) is more difficult. It is surprising how many people think that the government will protect minorities against majority prejudice while, during nearly all of mankind’s history, political authorities have amplified mob prejudice instead.

Economic theory suggests that a society of meddlers, like ours looks like, cannot be as economically efficient as a society of free-minded individuals and free enterprise. The reason is that economic efficiency is defined in terms of the satisfaction of individual preferences.

(0 COMMENTS)

Read More

Illinois Restaurants Collude to Expand Output

 

Seventy local businesses met Thursday night, agreeing to keep serving customers indoors despite a new state order, a Bradley restaurant owner said.

Thomas Spellman, owner of Hoppy Pig, said his restaurant will continue serving patrons inside, defying Gov. J.B. Pritzker’s new order on some regions to cease indoor dining to lessen the spread of the coronavirus.

“We have families. I have forty employees, you know, they have families, they have houses and they have kids and they have to pay for school,” Spellman said. “The government’s not paying for them. We don’t want the government to pay for us. We just want to do business the way we do business.”

This is from Chris Coffey, “70 Suburban Businesses Meet, Agree to Continue Serving Customers Indoors Despite State Order,” nbc chicago, October 23, 2020.

(0 COMMENTS)

Read More

Henderson on Nobel Winners in Wall Street Journal

In its technical paper justifying the awards, the Nobel Committee points out a major problem with using taxes to fund government programs: taxation distorts. The term economists use is “deadweight loss,” a loss that is not offset by a gain to anyone. Economists have estimated that raising $1 in taxes doesn’t cost society only $1; it costs somewhere between $1.17 and $1.56. The extra 17 to 56 cents is deadweight loss. The committee notes that by auctioning off major electromagnetic assets, the federal government avoided having to tax as much.

This isn’t to say that the ideal auction is one that maximizes government revenue. One way to maximize auction revenue is for the FCC to act like a monopolist and hold spectrum off the market. But what matters most is that spectrum gets into the hands of the most-productive users. As former FCC chief economist Thomas Hazlett, now at Clemson University, and his co-author Roberto E. Muñoz of the Universidad Técnica Federico Santa María have pointed out, the gains from efficient allocation swamp the gains in government revenue. The 2017 wireless spectrum auction, for example, redirected spectrum from broadcast television to cellphone companies. If you’re reading this on a cellphone, you can thank Messrs. Milgrom and Wilson.

This is from David R. Henderson, “Thank These Nobel Laureates for Your Cellphone,” Wall Street Journal, October 12, 2020 (October 13 print edition.)

Under my contract, I’m allowed to quote 2 paragraphs from my article.  I’ll post the whole thing in 30 days.

By the way, as an economist friend pointed out on Facebook, I was one of the few to note the potential conflict of interest in Milgrom both helping design the auction and consulting to a company that bid in the auction. I responded that I wouldn’t be a good card-carrying economist if I hadn’t noted that. Economics is all about incentives. As I wrote in “Hooked on Economics,” Chapter 2 of The Joy of Freedom: An Economist’s Odyssey, I noted in all my reading of economics while a math major and then in all of my reading post-Bachelor of Science and pre-UCLA graduate school that the unifying theme was incentives.

 

Here’s the article on “Auctions” in David R. Henderson, ed., The Concise Encyclopedia of Economics.

HT to Alex Tabarrok and Lynne Kiesling for giving a quick read to my draft before I sent it to the Wall Street Journal. Also to my wife, Rena Henderson, for a quick edit. All of them turned it around in less than 25 minutes. Also thanks to Tom Hazlett for checking the paragraph on his findings. He did so while waiting to board a flight.

(0 COMMENTS)

Read More

More Capital Per Worker Makes Workers More Productive

 

In a recent blog post, I wrote:

Aside for non-economists: Why would reductions in income tax rates on corporations and on high-income individuals even be expected, at a theoretical level, to increase real wages? By increasing the incentive to invest in capital. The greater the capital to labor ratio, the higher are real wages.

Commenter Robert asked:

Could someone expand on this a bit for me? Does investing in capital, mean investing in capital goods (i.e., land, machinery, tools, etc)? I don’t understand why that would necessarily lead to higher real wages.

Commenter Laron gave a nice succinct answer:

The capital goods like machinery increase labor’s productivity, which increases wages. Others can chime in with more detail or to correct me tho.

Here’s what the article on “Capital Gains Taxes” in The Concise Encyclopedia of Economics says about the issue:

Between 1900 and 2000, real wages in the United States quintupled from around fifteen cents an hour (worth three dollars in 2000 dollars) to more than fifteen dollars an hour. In other words, a worker in 2000 earned as much, adjusted for inflation, in twelve minutes as a worker in 1900 earned in an hour. That surge in the living standard of the American worker is explained, in part, by the increase in capital over that period. The main reason U.S. farmers and manufacturing workers are more productive, and their real wages higher, than those of most other industrial nations is that America has one of the highest ratios of capital to worker in the world. Even Americans working in the service sector are highly paid relative to workers in other nations as a result of the capital they work with. In their textbook, Nobel laureate Paul Samuelson and William D. Nordhaus noted: “Because each worker has more capital to work with, his or her marginal product rises. Therefore, the competitive real wage rises as workers become worth more to capitalists and meet with spirited bidding up of their market wage rates.” The capital-to-labor ratio explains roughly 95 percent of the fluctuation in wages over the past forty years. When the ratio rises, wages rise; when the ratio stays constant, wages stagnate.

The quintupling in the above is certainly an underestimate because the Consumer Price Index, used to adjust for inflation, overstates inflation.

A way to think about it is with a person on a desert island catching fish. If he does it with his bare hands, he can catch, say 2 fish a day, enough to keep from starving. But if he fashions a stick that can spear the fish, he can catch, say 4 fish a day. So that one piece of capital, the spear, has doubled his productivity. His real wage has doubled.

Then Robert followed up:

Thanks Laron. That was kind of what I was assuming was meant in the quote. I don’t know if I fully trust a business to return higher productivity back to workers in the form of higher salaries, but I can see how and why that could happen.

Here’s why it would happen. A worker becomes more productive, not just with his current employer but also with other potential employers. So if an employer does not pay the employee an increased wage for increased productivity, another employer will offer more than the current employer. That will happen until the marginal revenue product (the marginal revenue produced by the employee’s marginal product) equals the wage.

(0 COMMENTS)

Read More