DRI-271 for week of 9-21-14: The NFL and Domestic Violence: Too Much Action or Not Enough?

An Access Advertising EconBrief:

The NFL and Domestic Violence: Too Much Action or Not Enough?

Two recent highly publicized cases of domestic violence involving current National Football League players have attracted reams – nowadays, “mega-pixels” might be more apropos – of publicity. In addition to the cases themselves, controversy has swirled around the issue of action taken, or not taken, by the NFL itself in response to the incidents. What is the responsibility of the league in these cases?

As always, economics has much to offer in answer to these questions.

The Bare Facts of the Ray Rice and Adrian Peterson Cases

Both of the cases involve star running backs, All-Americans in college and All-Pro caliber performers during their NFL careers.

Ray Rice was a star rusher who accumulated the second-highest total rushing yardage of any Baltimore Ravens running back during his career. On March 27, 2014, he was indicted for third-degree aggravated assault for punching his fiancée in an elevator and knocking her unconscious. His subsequent conviction and lenient sentencing on this charge actually attracted less publicity than did a videotape of the incident that showed him delivering the punch and dragging the apparently unconscious woman from the elevator. This videotape was delivered to NFL security by a law-enforcement officer and then released by the website TMZ. The resulting adverse publicity had two effects: the NFL changed its “player conduct policy” and Rice’s contract with the Ravens was terminated on September 8, 2014. Meanwhile, Rice’s fiancée had become his wife.

Since leaving college in 2007 and joining the Minnesota Vikings, Adrian Peterson has established himself as one of the NFL’s leading running backs. In 2012, he missed breaking Eric Dickerson’s all-time single-season NFL rushing record by a mere nine yards.

His personal life has been as turbulent as his professional life has been productive. His father was a convicted drug dealer. In 2013, he discovered the existence of his two-year-old son, then living with the boy’s mother and her current boyfriend – only to lose him weeks later after the boy was allegedly assaulted by the boyfriend.

On September 11, 2014, Peterson was indicted by a grand jury for allegedly beating his four-year-old son with a tree branch on May 18 of this year, injuring the boy’s legs, back, ankles, buttocks and genitals. The charge was “negligent injury to a child.” Initially, Peterson was suspended for one game by the Vikings. On September 17, 2014, Peterson was placed on the NFL Commissioner’s Exempt/Permission List, requiring him to “remain away from all team activities.” The Vikings have given indications that he does not fit into their future plans.

The Public Controversy

Some scandals explode out of nowhere like building with a gas leak. Others blow up as the predictable culmination of accumulating circumstances, like a cache of dynamite reaching the end of its lit fuse. Then there are those that accumulate like an avalanche that begins with a boulder and snowballs. The last category fits the domestic violence scenario, in which public condemnation gradually rose to a crescendo. Spokesmen and spokeswomen for various organizations opposing domestic violence serially rose to denounce the actions of Rice and demand that something be done about them and him. Print and broadcast media mouthpieces formed a chorus echoing those sentiments. Politicians put their ears to the wind and sensed a sound-bite opportunity. “If the NFL doesn’t police themselves,” Sen. Kirsten Gillibrand (D-NY) courageously declared, “we will be looking more into it.” “We,” of course, referred to the Senate, sixteen of whose members then forwarded a demand that NFL Commissioner Roger Goodell establish a “zero tolerance” policy toward domestic violence.

Commissioner Goodell proved to be the lightning rod for most of the public criticism, thus reinforcing the suspicion that the doctrine of free will and individual responsibility is a dead letter in contemporary American society. The vocally indignant were apparently alluding to the NFL’s “conduct policy,” instituted on April 10, 2007. It applied to off-field behavior of players, coaches and front-office personnel but excluded illicitdrug and performance enhancement matters, which are covered by a separate policy. Between 2007 and 2011, seven players were disciplined under the policy in eight separate actions. (One player was reprimanded twice.) Five of the actions were taken in response to criminal convictions or allegations, one for general misbehavior and two for unspecified conduct. The stated purpose of the policy was to “improve the league’s image.”

Mr. Goodell addressed Rice’s behavior in a press conference last week. But, as Wall Street Journal columnist Holman Jenkins put it (“Way Beyond the NFL’s Competence,” WSJ, September 24, 2014), Goodell apparently “said the wrong thing, or failed to say the right thing, or said the right thing the wrong way – or something.” According to CBSSports.com: Goodell was guilty of “not nailing the moment.” The Los Angeles Times convicted the Commissioner of not “get[ting] it.” The National Organization of Women escalated the charging contest by demanding Goodell’s resignation. This must represent a new high – or low – in the evolving doctrine of corporate responsibility. The league commissioner is supposed to resign because a player’s spat with his girlfriend cum wife gets out of hand.

Commentators Weigh In

Sober voices eventually began to be heard. Joseph Epstein, arguably America’s leading essayist, rightly accused the finger-shakers and fist-pounders of “moral preening” (“Blitzing the NFL With Moral Preening,” The Wall Street Journal, September 22, 2014). “Politicians…university psychologists…media colleagues…the people [the scandal] will make feel good are those who get to pronounce upon it… expressing shock, moral outrage, dudgeon to the highest power.” It provides them “a splendid opportunity… to exhibit their own high and irreproachable virtue.”

Unfortunately, Mr. Epstein’s analysis of the problem itself exhibits the same shortcomings he displayed with his retrograde, liberal take on the violence in Ferguson, MO. “Should anyone be shocked at the irrefutable evidence of domestic violence in the NFL?” No, he concludes, because the players are “men who make their living through violence, and for whom violence well-executed has made millionaires of nearly all of them… The weekly paycheck of Adrian Peterson… is near $700,000.”

Mr. Epstein’s leftish envy of free-market outcomes was now breaking loose. He gave it free rein. “To be a star athlete in America is to grow up… with no one… ever saying no to you. Fame, money, women come rolling in for these athletes, the favorites, or so it sometimes seems, at least while they are still young, of the gods.” Now Mr. Epstein was positively green with envy. At least he was venting his spleen in the right direction – but with his gall bladder rather than his brain cells.

“When someone does say no… is it all that shocking that the athletes respond with violence? I do not say it is right… only [that] it’s not shocking. What is shocking is that there isn’t a lot more of it.” Now it’s out of his system. It’s the old liberal line – the system is the “root cause” of individual misbehavior, while the miscreants are helpless victims, acted upon rather than independent actors.

Mr. Epstein’s failure to distinguish between uncontrolled domestic violence and limited violence within acceptable and desirable constraints is simply inexcusable. It was once commonplace to equate veterans with out-of-control wackos. 1930s musicals would moan “they gave him a gun” and imply that “society” had only itself to blame for any antecedent fiasco, from bank robbery to murder. Knute Rockne’s view, that college football was invaluable competitive training for a future in a competitive society, seems a lot closer to the mark than Epstein’s nonsense.

Like Mr. Epstein’s “civil rights” analysis of the Ferguson episode and his call for a black leader to soothe the savage breasts of the unruly natives of Ferguson, his domestic-violence explanation is a throwback to the liberal pieties of the 1960s. The “root cause” thinking of that bygone era is as dead as the big-government, welfare-state approach to social policy. Not only is top-down management of human behavior demonstrably ineffective, it is also a recipe for moral nihilism. The failure of an acute social critic like Mr. Epstein measures the depth of our morass.

As is so often the case, Holman Jenkins provided a fresh breeze of thinking on the issue. “It’s been decades since police and courts gave a pass to wife-beaters. Mr. Rice was hauled before a grand jury; given the video evidence he might well have gotten the full five-year sentence…[but the state of New Jersey] seems to have seriously applied the criteria for its first timers’ leniency program, in which the victim, Mr. Rice’s now-wife [emphasis added], was allowed an important say… Obviously, an alleged refusal to face up to domestic violence is not the problem here… Domestic violence is a common form of violence for a reason: People fight with those they know. This creates dilemmas for the justice system absent when stranger assaults stranger – dilemmas even a $40 million-a-year league president might struggle to resolve to the satisfaction of any but the shallowest of media shouters.”

Jenkins notes ironically that virtually every full-length discussion of domestic violence in the NFL “segu[es] to those problems that football faces that actually pertain to football [such as] concussion.” He might have added drug use and performance enhancement as well.

The Economics of the Domestic Violence Scandal

In 1956, Milton Friedman authored a classic article entitled “The Social Responsibility of Business Is to Increase Its Profits.” His thesis seemed to be perfectly encapsulated in the title. As usual, though, it was widely misinterpreted. The political Left accused Friedman of saying that only profit matters and all other human values are and should be irrelevant. But Friedman was arguing the economic case for specialization. Business firms exist for the specific purpose of creating goods and services. Although he did not cite it, Friedman could have referred to the previous classic 1937 article by Ronald Coase, “The Nature of the Firm.” Coase deduced that business firms spring up when something is too costly for a household to produce internally. Extending the principle, a business firm produces those things whose internal cost of production is lower than its external cost of purchase. Virtually everything listed under the heading of the “social responsibility of business” is something too costly for business to produce internally because it does not specialize in doing it. Curing the problem of domestic violence surely fits under this heading.

The frustration shown by the Left toward this laissez-faire stance implies that we are giving up on our problems. But that is far from the truth; indeed, it is the opposite of the truth. By assigning the solution of a problem to the agency best equipped to solve it, we are making the best use of the scarce resources available to solve problems – thereby maximizing problem solution. And the NFL’s domestic-violence conundrum is a case in point.

The NFL is a business. It produces a kind of entertainment product called “professional football competition.” The business form it uses is called franchising, a popular method utilized by many American icons like McDonald’s. The NFL’s franchises are called teams; these include the Baltimore Ravens and Minnesota Vikings for whom Rice and Peterson played and play, respectively.

What should the NFL – the franchisor - “do” about the “problem” of domestic violence among its players? (Or, for that matter, among its coaches or front-office personnel?) Nothing. Domestic violence is not a problem for the NFL, the franchisor. The NFL’s job is to enable its franchises to provide the best possible product to fans, who are the consumers of its product. What about the NFL’s “image?” The NFL’s image depends on how well it does its job of supporting its franchises and how good their product is. In that regard, it is just as important for the NFL to refrain from doing bad things as it is for it to do good things. The NFL should not waste its time and money trying to solve problems that it cannot solve and which are better solved by others.

But the fact that domestic violence committed by players is not a problem for the NFL does not mean that it might not be a problem for the particular team that employs the erring player. The word “might” is the operative one; it reinforces the rationale for excluding action by the league. The NFL does not, and cannot, know whether the particular episode is a problem for the team or not. That is a decision for the team to make, not the league office. The NFL does not run its franchises; it does not make the day-to-day, profit-and-loss, operational decisions for team management. Only the team is legally entitled and circumstantially qualified to make those decisions. This decision is one more operational decision for the team to make. In the case of Ray Rice, the Baltimore Ravens made it by deciding to terminate Rice’s contract.

We can easily envision a player’s union advocate representing Rice objecting to that decision in language like this: “Rice’s actions may have been unfortunate, but he faced legal sanction and paid for his crime. This has nothing to do with his ability to perform on the football field and therefore does not justify the termination of his contract.” That hypothetical case, seductive though it may seem at first hearing, is quite wrong. Ray Rice, and every other professional football player, is not merely an athletic performer. The product he produces is entertainment, and it includes more than mere athletic performance. It also includes a standard of behavior and image acceptable to the public in an athletic performer. The fact that this standard is subjective does not detract a whit from its reality.

O.J. Simpson immediately stopped appearing in movies when he was charged with murdering Nicole Simpson. Had he still been playing football, had he still retained his youthful athletic skill, his football career would nonetheless have reached an immediate close. People do not want to watch a murderer act in movies. In the 1940s and early 50s, a substantial minority of actors and actresses lost the ability to act in motion pictures produced by major U.S. studios, although they still could act on Broadway and abroad. Americans did not want to watch Communists act in movies.

The subjective line with respect to domestic violence is much less clear, but it obviously exists. We are willing to tolerate some measure of violence in domestic relations among athletes, but there are limits to it. Who decides what the limits are? The free market, which means the people directly affected by it. Those people are the consumers of the product athletes produce – the fans – and the producers of that product – the teams. Fans express their views at the ticket office and by direct contact with the team. The team acts in accordance with their view of short- and long-term profit, based on the reactions of fans and the athletic prowess of the player. This is the system calculated to produce the best possible football product for consumers. That will achieve the best outcome not only for the NFL but for consumers and producers as well. The rest of us have no stake in the matter.

Wait a minute – what about Mrs. Rice? She has an obvious stake. But Mrs. Rice’s interests were served by the agency best equipped to serve them – the criminal justice system. She had her day in court and even had her views prevail when Rice was given a lenient sentence. The busybodies of the media are actually arguing to overrule her and impose extra penalties on Rice over and above those dictated by law and the team. In essence, they are applying the “helpless victim” codicil of Joseph Epstein’s “root cause” hypothesis. Here, it is Mrs. Rice who is the helpless victim in need of the all-wise counsel and direction gratuitously provided by the blabbermouth class, who specialize in telling the rest of the world how to run their lives.

Is the Adrian Peterson case special because it involves a child? Well, it is certainly special in the legal sense, since the child’s presumed inability to act as his own advocate in a way analogous to that of Mrs. Rice argues for government involvement. But those special considerations don’t introduce any factors conducing to involvement by the NFL. The need for careful consideration by the team is still present, even enhanced, by the possibility of child abuse.

What about the NFL’s drug and performance-enhancement policy? Does this violate the doctrine of specialization a la Friedman and Coase? No. Here the NFL is arbitrating the issue of competitive balance between teams, an appropriate action for a franchisor. For example, franchisors such as McDonald’s routinely award franchises by providing geographic separation between franchisees to limit competition between them. They want franchisees to compete with other franchisors – Hardees, Burger King and Wendy’s – but not with each other. Similarly, the NFL does not want some teams to gain a competitive edge by employing players who use steroids or human-growth hormone while others feel compelled to respect the wishes of fans by banning use of those substances by their players. Of course, it is still up to the NFL to adopt a wise and effective policy – but the policy is not objectionable a priori.

Domestic Violence Reconsidered

The most recent entry in the domestic violence op-ed derby is revealing. In “A Better Way to Reduce Domestic Violence in the NFL,” author Richard J. Gelles estimates the statistical expectation for acts of substantive domestic violence among 2,016 males between 21 and 39 years of age – the demographic base of NFL players. Assume that 90% of these players are in relationships with women. About 4% of these relationships would produce an act of domestic violence annually. That would be about 80 cases. This would lead to about 20 arrests. But not all of these acts, or arrests, would be perpetrated by the male – maybe 10-20 would be female-caused.

This puts a different face on the current hysteria about domestic violence in the NFL, even if we include the aggravated assault accusation against Jonathan Dwyer of the Arizona Cardinals and the accusation against the Chicago Bears’ Brandon Marshall, which goes all the way back to 2006. Suddenly, we are not confronted with an epidemic demanding emergency action but an age-old problem meriting careful consideration.

Alas, Gelles – a sociologist – offers two “solutions,” neither one within shouting distance of cogency. The first, recourse to a “Case Review Committee” to arbitrate domestic disputes, is best applied by the principals with interposition by agencies like the NFL. The second is even sillier. Gelles wants “professional sports [to] apply sanctions judiciously.” We might call this the “Spike Lee” solution: “Do the right thing.” He helpfully explains that suspending Ray Rice for a third of a season “would be appropriate” without providing the general rule that makes it appropriate. This is worse than useless.

The beginning of wisdom on this issue was broached by Jenkins when he observed that “people fight with those they know.” Consider an example that provides a reasonable parallel to the NFL case.

In the late 1920s and 1930s, contract bridge was a craze in the United States. As inconceivable as it might seem today, bridge was front-page news. The great popularizer of bridge, Ely Culbertson, organized a challenge team match with his principal competitor for public favor, Sidney Lenz. For days, the running tally of the 1931-32 Culbertson-Lenz match was reported in the press, on radio and on neon billboards in Times Square. Over the years, bridge retained its popularity as the nation’s favorite card game, surpassing poker. Culbertson’s successor, Charles Goren, appeared on the cover of Time Magazine in the 1950s.

Throughout this reign of popularity, there was a link between bridge and domestic discord between husbands and wives. This was popularly recognized and wryly treated by humorists and the movies. This good-natured acceptance flew in the face of occasional violent outbursts such as the famous Bennett case in Kansas City, MO, in 1929. Mrs. Bennett was so outraged and frustrated by her husband’s incapable display as her bridge partner that his culminating depredation, failure to land a four-spade contract at their regular bridge game, drove her ballistic – she pulled a pistol and shot him through the door of the bathroom to which he had frantically retreated. It is not clear to what extent Ely Culbertson’s straight-faced analysis of Mr. Bennett’s mistakes as a declarer caused the jury to acquit Mrs. Bennett. This seems to be the precursor of our modern tendency to balance distaste at domestic violence with a demand for competitive excellence.

Women bridge players have vastly outnumbered men. Yet only one husband and wife partnership has represented a country in the Bermuda Bowl, the international world team championship that has been played since 1950. (They were not notably successful.) Traditionally and notoriously, husbands and wives have found it very difficult to sustain a long-running successful partnership in top-level competitive bridge. Carrying the principle that familiarity breeds contempt even further, long-running partnerships in general are historically rare in bridge, despite the demonstrated competitive advantage accruing to established partnerships over short-duration combinations.

In the bridge world, a few experts have legendary reputations for their gentlemanly demeanor and politeness to opponents. (The opposite is more nearly the rule in top-level bridge.) Yet these players have usually found it difficult or impossible to play harmoniously with their wives. One of these world-famous gentlemen was the perpetrator of an explosion at the bridge table in which he astonished hundreds of onlookers by yelling at his wife: “And to think that this woman is the mother of my children!” Their successful and long-running partnerships have been with men. Even these are hard to sustain. Again, it needs to be stressed that this is the rule rather than the exception over some 90 years of stressful high-level competition involving many thousands of competitors around the world.

What are we to make of this?

Holman Jenkins referred pejoratively to a past practice that he called “[giving] a pass to wife beaters.” This might more precisely be called erring on the side of legal inaction when the assault involves married couples. In the old days, there was implicit recognition that the intimate familiarity between married couples created an inherent potential for frustration, discord and violence that, as again noted by Jenkins, simply did not exist between strangers. That does not mean that those were the good old days, because today we wince at casual references to wife beating that crop up in old movies, books and plays. Still, today’s pendulum has swung so far in the opposite direction that husbands and wives are legally treated as exact equivalents to strangers. Mrs. Rice’s decision to marry her husband after he knocked her cold and her plea in his behalf in court illustrates the absurdity of this state of affairs.

The “Solution” to Domestic Violence

Some problems are inherent in the human condition. Domestic violence is one of them. There is no “solution” to it. Its mitigation is not a top-down process administered by bureaucratic organizations like the NFL or through compulsory arbitration by the National Labor Relations Board. What little help can be provided by third parties must be offered on a voluntary basis by the private sector. The people best equipped to solve the problem must be in charge. That means the principals – the husband and wife.

The NFL should stay out of it.

DRI-257 for week of 9-14-14: McClatchy Series is a ‘Contract to Cheat’ Readers of the Truth

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McClatchy Series is a ‘Contract to Cheat’ Readers of the Truth

A recurring theme in this space is the corrupt deterioration of journalism. This process began long before the rise of the Internet and ushered in the industry-wide decline in circulation that has now reached crisis stage. The decay is most evident in investigative journalism, which has abandoned factual research methods in favor of left-wing political advocacy.

The latest proof is supplied by the McClatchy chain’s three-part series entitled “Contract to Cheat,” which appeared in early September. McClatchy reporters spent a year reviewing transactions from construction projects commissioned by the federal government beginning in 2009 as part of the so-called “economic stimulus” program. According to the article appearing in the Kansas City Star, some of whose reporters contributed to the research, the stimulus was negated by dishonest behavior of contractors. This behavior consisted primarily of “misclassification” – the listing of workers as independent contractors rather than employees.

The Allegations

Contractors supposedly engaged in misclassification of workers for economic reasons. First, the misclassification allowed the contractors to avoid paying payroll tax on wages paid to workers. Second, it allowed them to pay lower wages by evading minimum-wage standards for wages paid on federally contracted work. Third, it allowed them to avoid paying workers compensation benefits to workers who were mis-classified as independent contractors. Fourth, it allowed them to avoid an increase in their unemployment “experience rating” when the workers were eventually laid off following completion of the work. Fifth, it facilitated the avoidance of income tax on the wages paid.

In the early installments of the series, stress was placed on losses suffered by taxpayers from contractor cheating. Although the article was long on indignant rhetoric and short on specifics, readers could draw the conclusion that those losses were due to the reduced collection of rightful payroll taxes, the lower level of wages on which taxes were levied and the outright avoidance of tax on income that was never reported. In later installments, greater stress was placed on losses suffered by workers in the form of lower wages received than were due according to statute for work performed, loss of future Social Security benefits from unpaid payroll taxes, loss of unemployment and workers’ compensation and the psychological detriment of insecurity.

A banner proclamation of the series was the claim that contractor cheating thwarted and blunted the effects of federal-government stimulus spending. Despite the headline status of this claim, it was merely asserted and never supported by either logic or evidence. The only economist quoted in the series, former Chairman of the Council of Economic Advisors’ Jared Bernstein, commented (briefly) only on the issue of misclassification and was silent on its interaction with the stimulus program.

In keeping with the contemporary modus operandi of investigative journalism, the series employed interviews, anecdotes and quotations from non-authoritative sources to achieve maximum emotive effect. Despite the reference to economic stimulus, economic theory and logic were nowhere employed or cited.

Needless to say, the lack of economics means that readers of the series were cheated of the truth. In effect, McClatchy operated under an implicit contract with the political Left. The outlines of that contract are clear to anybody with an elementary understanding of economic theory and logic.

John Keynes’ Body Lies A-Spinnin’ In His Grave

The first article in the series quotes President Obama’s grave declaration that the federal government was “the only entity with the resources to act” in the face of economic depression engulfing us in early 2009. This astonishing assertion, somehow swallowed at face value by a bewildered nation, is patently false. The federal government owns no resources other than the assets it commands. These consist mostly of large land holdings, mostly in the western U.S. It did not sell these lands to foreigners in order to finance the stimulus. So the President’s rationale for action was a lie.

The true rationale was the one cited by his economic advisors, who have consistently followed a Keynesian philosophy. John Maynard Keynes legitimized the practice of deficit spending by national governments as a corrective to recession and depression. He rationalized this by positing a chronic lack of effective demand, or spending, as the source of recession and unemployment. Government must increase the volume of total spending on output by increasing its own spending and inducing the private sector to spend more. It increases its own spending by spending more than it withdraws in tax receipts. It induces businesses to spend more by supplying more money (“liquidity”), lowering interest rates and inducing more investment spending. It induces consumers to spend more by reducing taxes, thus increasing their disposable incomes, whence their consumption spending derives. In addition, consumer spending will increase in response to government and investment spending increases due to the so-called “multiplier” effect of the resulting increases in income.

Obama administration economists – and their acolytes, such as Paul Krugman – have mouthed this party line with a straight face, despite the fact that it has been discredited for decades. Books have been written outlining its flaws. We might sum them up by saying that government must acquire the “resources” it commands, and this acquisition (more than) negates any stimulative effect that the spending itself generates. But the worship of spending itself remains sacred within the fraternity of Keynesian economists – which might better be termed a “coven.”

And that is why the McClatchy article is an eyebrow raiser. In so many words, the authors nonchalantly accuse cheating contractors of thwarting the stimulus. It is one thing to accuse them of breaking the law. That may or may not be true, but it is at least consistent with the allegations they make. But the McClatchy authors’ conclusion about the stimulus makes absolutely no sense even if we assume that their every allegation against contractors is the gospel truth.

First of all, consider the authors’ insistence that taxpayers were “cheated” by contractors. Even if we assume this to be true, that can’t have reduced the impact of the stimulus. Keynes himself advocated deficit spending; e.g., increasing government expenditures relative to tax receipts. One way to achieve that is by increasing government spending; another way is by reducing tax receipts. Every elementary macroeconomics textbook published from the 1940s to the 1980s acknowledged this. Contractor cheating, to the extent that it did occur, increased the impact of the stimulus. This applies equally to payroll-tax evasion by employers and income-tax evasion by workers. Indeed, we have been hearing for six years how important it supposedly is to get more income in the hands of those low-income workers who are ostensibly more avid to spend. Well, the series details how the cheating process did just that, by allowing them to evade taxes. That may have been illegal, but there is no doubt whatsoever that it was stimulative according to the dictates of Keynesian economics.

There is no contradiction here in saying simultaneously that behavior is illegal and economically desirable. The series “accuses” contractors of committing these illegal acts in order to lower their bids and beat out competitors for the government contracts. Again, this may be illegal, but it is exactly how the competitive market process works when prices are allowed to fluctuate in accordance with supply and demand and not artificially fixed by government. For years, economists have been complaining that artificially high wages mandated by government laws such as the Davis-Bacon Act were harming workers and consumers by restricting employment, incomes and output. Here is concrete proof – contractors and workers were willing and able to complete government contracts for lower wages than mandated by government. This means that there was money left over to spend on other bridges, dams and “shovel-ready” projects that would stimulate the economy. The so-called harm of the lower wages paid to the “cheating” workers was really a benefit in real economic terms because it allowed more goods and services to be produced using the same total stimulus money. That is exactly how free markets react to economic depression; lower wages stimulate more employment, production and real income. The authors unwittingly hint at this solution when they quote a worker defending his decision to work at a sub-minimum wage: “I was just happy to be working at all.” If producing more stuff with the same amount of money is supposed to be economically harmful, then we are living in Alice’s Wonderland, not reality. Even Keynesians know that more goods are preferable to fewer.

We know realize that the McClatchy series is an affront to general economic theory, not just the left-wing Keynesian theory. Every government mandate cited by the McClatchy authors – payroll taxes, income-tax withholding and the rest – contributes to the “wedge” driven between what the employer pays and what the employee receives. Traditionally, the left wing maintains that this tax burden is worth every penny because the services it finances are so valuable to workers. Paradoxically, the Left also maintains that the burden is trivial to employers and doesn’t discourage much work effort, despite the huge value it creates.

But now the McClatchy authors – apparently without even realizing it – provide empirical evidence that completely refutes the longstanding left-wing position on taxation and work effort. Employers and workers are so anxious to evade this tax burden that they actually break the law. This fully vindicates the longtime supply-side view that lower taxes will call forth more production and work effort. And then the McClatchy authors blithely assert that this is bad for the economy because…because…well, they don’t give a reason other than because it is against the law. Of course it’s against the law; the government has made economically beneficial competition unlawful.

When the Left violates the precepts of Keynes and free-market economics, you know it’s gone off the deep end.

And That’s Not All, Folks

Does this world-class stupidity exhaust the stock of errors committed in the McClatchy series? No. Nobody ever went broke underestimating the economic literacy of metropolitan newspaper staff. The second article in the series is occupied primarily with excoriating contractors, regulators, and politicians for failure to anticipate or correct the misclassification of workers.

Why doesn’t the IRS cross-check data to discover the tax evasion? Workers are assigned fake Social Security numbers. Why can’t workers be interviewed to uncover the falsehoods? They are given phone names and addresses. Everybody agrees that misclassification has been commonplace for many years. And everywhere the investigators went they encountered nonchalance, lethargy and lassitude rather than rage, disbelief and energetic action. Outrageous! Whoever heard of such a thing? Why, anybody would think that we are really governed by a massive, inefficient, insensitive bureaucracy. In fact, the authors quote one observer’s assessment that “you’ve got all these agencies, and this is their fiefdom. They don’t care what the other [agencies'] regulations are.”

Confronted with this massive regulatory ineptitude, what would an alert, inquisitive reporter say? The first thing that would occur to him or her would be this: If the stimulus program really depended for its effectiveness on the efficient operation of this apparatus, then the stimulus program was manifestly unwise and doomed to failure from the outset. (We are not even requiring our alert reporter to be economically knowledgeable, just minimally intelligent.)

The authors go to considerable trouble to document the ambiguity of the “independent contractor” definition, stressing that there is “no one definition” of the distinction between employee and contractor. But assuming this is true, why is it surprising that the law is so difficult to enforce? If so much supposedly rides on accurately classifying workers and the authors themselves find it difficult to explain how to do it, why are contractors villains for failing to accomplish it? Is it really contractors who are cheating us here? Or is it the government, by setting up this arbitrary distinction for its own convenience and then angrily making criminals out of ordinary people for failing to do what it is unable or unwilling to do?

The Tipoff 

The jaundiced view of McClatchy and its motives derives from decades-long experience with newspapers and reporters. It can be verified by consulting the ostensible triumphs of investigative journalism over the last 25 years, which are notable for their lack of factual accuracy and left-wing advocacy. It is on prominent display in the McClatchy series. The tipoff to the authors’ bias is their attitude toward the workers employed by the “cheating contractors.”

The contractors themselves are the villains, the cheaters of the titular “Contract to Cheat.” They are greedy, insensitive, opportunistic scofflaws. Every principal in the contracting process evinced the same attitude when interviewed by the authors. “What? Who? Me? I didn’t know…I didn’t realize…Nobody told me…It wasn’t my job…wasn’t my place.” But these protestations are treated with disdain when made by contractors, who the authors tacitly assume to be lying snakes.

What about the workers? Well, the closest thing to an assessment of blame levied on workers is the authors’ bland acknowledgment that workers “responsible for the reporting of their income to the IRS.”

No spit, Spurlock. According to law, and derelictions committed by employers don’t relieve workers of their legal responsibility. It is just as plausible to posit that employers acted in response to pressure from workers as it is to assume that employers cooked up a scheme to defraud the government.

But the authors treat workers as both dumb and innocent. That is, they tacitly assume that. If (say) a Republican legislator were to characterize America’s workers as too dumb to be responsible for their actions or too dumb to understand a simple employment relationship, he would be castigated and forced to resign. But that is the implicit position of the McClatchy authors. Illegality was rampant, nobody did their due diligence, the system failed completely and workers – well, workers were innocent bystanders who just stumbled into things by accident and did what they were told and never meant to hurt anybody or break any laws and – perdoname, senor; no hablo Ingles. (Yes, immigrants appear in the series as the obligatory exploited, downtrodden mass – acted upon, but not acting in their own behalf.)

McClatchy is an organ of the left wing. Union workers and low-income workers are a leading constituent class of the Democrat Party. They must be absolved of blame. That accounts for the wildly unbalanced portrait of the principal parties in “Contract to Cheat.” Of course, this stance is totally at variance with responsible journalism. And that is further proof that responsible journalism is virtually extinct in America today.

The Truth

The McClatchy series is indeed notable. It has uncovered useful and pertinent information. But the authors of the series have spun the information into a bizarre, distorted pattern that reflects their political (dis)orientation. Their economic illiteracy has produced a laughably inaccurate interpretation of their information, wrong no matter whose economic theory of stimulus one adopts. Their blindness to economic logic allows them to confuse illegality with inefficiency. Their left-wing bias demands that they ignore the obvious implications of the bureaucratic ineptitude and inefficiency they expose. And their pro-labor stance requires that they wash workers clean of all sin. In fact, rigid big government has strapped everybody into a regulatory straitjacket that offers a Hobson’s choice: obey the law and everybody loses or violate it and everybody gains. In that environment, everybody is a lawbreaker but the government is the morally guilty party.

There was indeed a “Contract to Cheat.” But the McClatchy authors were the contractors, bound by their political affiliation to their advocacy position, and their readers were the ones cheated of the truth.

DRI-296 for week of 9-7-14: Airlines Fleecing Consumers? No, Columnist Fleecing Readers

An Access Advertising EconBrief:

Airlines Fleecing Consumers? No, Columnist Fleecing Readers

These days Americans fight fiercely for the coveted status of “victim.” In bygone days, we were rebuked for our headlong pursuit of success at any cost. Today, we compete to construct the best excuse for failure.

The favored tactic in the pursuit of victim status is to blame some malign force that has it in for us. Since something large enough to constitute a malign force will usually take on an impersonal character, it is hard to assign a personal motive to its actions. Consequently, it is convenient to claim membership in a class of people similarly afflicted by the force.

Consumers are a leading victim class because they are numerous and because they deal with large, impersonal institutions. Businesses are often nominated as victimizers precisely because their relations with consumers are usually so impersonal.

A recent example turned up in the Washington Post, August 28, 2014, and was entitled: “Are Domestic Airlines Making Money By Fleecing Consumers?” The byline read “By Christopher Elliott, Columnist.” (Hereinafter, he will be referred to as CEC.)

Using the logic of economics, we will discover that CEC’s column stands as an excellent example of consumers being fleeced by a victimizer who exploits their weakness. But the victimizers are not the airlines, as the column contends. CEC himself is the victimizer. And the victims are not airline consumers. They are the readers of CEC’s column.

Columnist Feeds Readers’ Victimization Fantasies by Demonizing Airlines 

CEC begins with this icebreaker: “Why are airlines raking in record profits?” Not pausing to wait for response to this rhetorical question, he responds by speculating. “Maybe they’re monetizing your personal data… without your explicit consent.” Is he about to reveal an investigative scoop? No, he was apparently flinging some mud on the airlines as a cosmetic prep for his next accusation. “Then again, maybe it’s the fees. Airline add-ons, which cover ‘optional’ services for everything from reserving a seat to changing a ticket, used to be included in the cost of almost every fare. But over time, airlines began separating them from base fares. They sometimes neglected to mention that little detail, helping them earn more money but frustrating customers, critics say.”

Decades ago, a journalism school would have used this sort of opening as a primer on how not to write a story. The word “maybe” is a tipoff to the substitution of the reporter’s personal opinion for fact. In this case, the author is a columnist, not a reporter. Does that give him carte blanche to throw his opinions around as though they were nickels rather than hefting them thoughtfully as if they were manhole covers? At the very least, he should offer some supporting evidence for the speculation that the airlines are committing criminal breaches of privacy. Even columnists do not have the privilege of casually libeling their subjects.

CEC then calls upon the favorite weapon of today’s marauding journalist – the supporting anecdote. A man “didn’t know about the change fees when he booked [airline] tickets.” He had to postpone his trip, and complained that “they charged me $300 to change my tickets” while offering him a $142, limited-duration credit instead of a fee refund. His reaction was classic victim-speak: “Airfares are outlandish, fliers are charged for everything and comfort is a thing of the past? How can that be allowed [emphasis added]?”

 

There ought to be a law! Or so says CEC – and a yet-to-be-determined number of U.S. Senators, whose legislative chamber has launched an investigation of “airline fee transparency and passenger privacy.” The investigation will “determine whether current rules go far enough to protect consumers and, if not, whether new laws are needed.” CEC’s phrasing seems unduly circumspect here; if the Senate finds that current rules don’t go far enough, experience tells us that no power on Earth will stop them from passing more laws.

The Senate, led by Sen. John D. Rockefeller (D-W.Va.), “wants to know exactly how much airlines earn from checked baggage, advance seat selection fees, preferred-seat fees and trip insurance” – data that the Department of Transportation (DOT) now doesn’t obtain to this level of disaggregation. In other words, the Senate demands the kind of information publicly disgorged only by public utilities, even though the airlines have been federally deregulated for over 35 years. The Senate also demands to know the airlines’ privacy policies.

CEC predicts that the inquiry will find “that airlines profit from fees and peddling personal data,” which will probably lead to more “consumer-protection” laws. He is not the only prophet quoted in the column. A “data-privacy advocate” also lauds Congress for “expressing interest in…the absence of any federal law protecting air travelers’ privacy.” Where once newspaper stories reported what happened, we now have columns that predict what will and/or should happen.

CEC dutifully quotes a “spokeswoman for …a trade organization for major U.S. airlines.” She insists that “domestic air carriers are committed to ensuring that customers always know the price of their ticket before they buy” and that airlines are “pledged to protect their custom4ers’ privacy.”

“Charging customers for services they value and are willing to pay for – which is common…globally – has also enabled airlines to provide consumers the ultimate choice and control over what they purchase,” she concludes.

CEC contrasts his predicted (!) Senate bill with one passed by the House, the “so-called Airfare Transparency Act,” which “would allow airlines to disclose taxes and fees separately from the fares they quote. If signed into law, critics say, it would give airlines a license to make money by deceiving customers.” But wait – isn’t the whole premise of this column that airlines are already doing just that – “fleecing” their customers through disclosure? Indeed, in the very next paragraph, CEC predicts that the Senate inquiry will produce “a noisy battle between [those] that believe the airline industry should operate free of consumer regulations and those who think that America’s air carriers are shamelessly fleecing passengers.” Then why do airlines need a “license” to do what they are already doing now without one?

So far, we can see that CEC’s column id dedicated to demonizing the airlines by portraying them as victimizers and their customers as victims. CEC’s fact-free libel of the major airlines is bad enough. But the way it plays on the economic ignorance of readers to stoke their victimization fantasies is even more reprehensible. Economics will show that the airlines are not victimizers; that their customers are not victims; that CEC himself is victimizing his readers by exploiting their ignorance of economic logic.

The Economics of Airline Competition

Marxists have traditionally used the phrase “it is no accident that…” to denote the coincidence of events with the Marxian theory of history. In that same vein, we might say that it is no accident that CEC begins his anti-airline diatribe by excoriating airlines for their “record profits.” The current anti-business vogue relies on a pejorative theory of profit as its foundational argument. Since victimization implies that the victimizer gains at the victim’s expense, some highly visible measure of that gain is a handy tool for exponents to wield. In this view, profit is good for business; business is the evil victimizer and consumers are the helpless, passive victims. So, what is good for business must be bad for consumers. Since everybody is a consumer and there are a lot more consumers than business owners, this is a promising line of attack for left-wing journalists.

The modern welfare state is an inflationist environment. Big government cannot exist and thrive without large – and growing – rates of spending. This is the left-wing, welfare-state equivalent of economic growth, the difference being that economic growth is organic, healthy and sustainable while inflationist, welfare-state spending is inherently artificial, unhealthy and time-limited. There are only three ways for government to get money to spend: by taxing it away from citizens, borrowing it from abroad or creating it in one of various ways. Successively higher taxes will eventually spark peaceful or armed revolution; borrowing will eventually exhaust foreign sources; and money creation will destroy the value of money through inflation. (That value includes not merely the purchasing power of money but, even more important, the ability of the price system and interest rates to efficiently allocate the flow of goods and services now and in the future.)

Continuous inflation causes nominal monetary values to rise continuously. This means that profits appear continuously to be increasing even though their true economic value may not have risen. For example, the purchasing power of profits distributed as income to shareholders may not have risen and may even have fallen even though nominal profits have gone up.

But this doesn’t stop the press from solemnly reporting that a particular business or industry has earned “record profits” in this quarter or year. The oil industry is the favorite target, but this tactic is adaptable to any business. In this case, recent news reports celebrated the record quarterly profits earned by American Airlines, United Airlines and Southwest Airlines, thus giving apparent substance to CEC’s lead. Neither those news stories nor CEC’s column bothered to tell the rest of the story behind these “records.”

First, monetary values rise every year, so there is a tendency toward annual record-setting as long as demand is relatively stable. That means that nominal values should be adjusted for inflation using a price index before any records can be detected. If that were to happen, the whole incidence of business record-setting would change dramatically.

Second, the airline industry is a special case. Reading CEC and other left-wing pseudo-journalists would give you the impression that the major airlines are rolling in profits and that you could have become rich by owning their stock. Uh-uh. Ever since airline deregulation got off the ground in 1978, the industry has been a bloody competitive battleground in which survival, not profits, has been the overriding goal of most members. Exhibit A: That “record profit” hauled in by American Airlines last quarter was its first since emerging from bankruptcy recently. American just paid a dividend to shareholders for the first time since 1980. United Airlines is better off, but not by much. And these are the survivors in an airline industry that once included firms like TWA, US Air and Midwest Express. Still want to travel back in time and own airline stocks?

Airlines are among a class of industries, also including railroads and broadcast media, that share the common features of high fixed costs and low marginal costs. In order to produce any output at all, the business must incur heavy costs of initial investment and setup. Once the business is operational, its marginal cost of producing an incremental unit of output – marching one more passenger onboard, loading one more car with coal or sending out the incremental broadcast – is extremely low. That means that such businesses often must incur a high debt load but can remain in business for a long time while just covering incremental costs with prices that fall short of profitable levels. It is a recipe for fierce price competition, low profits and some firms eking out a bare existence.

Prior to deregulation, the major airlines were fat, dumb and happy under federal-government regulation led by the old Civil Aeronautics Board (CAB). The CAB cartelized the industry, setting fares that allowed everybody a nice profit while keeping prices so high that most people viewed air travel as a luxury. Airlines competed by painting their planes different colors and offering competing snacks and beverages – not by lowering their prices.

After deregulation, the CAB was replaced by the Federal Aviation Administration, which ended controls over pricing and entry. Airfares plummeted. The demand for air travel zoomed skyward. Of course, many airlines had a hard time making ends meet even with this increased demand. The price of oil underwent periodic upward spikes and each one claimed a casualty or two from the airline industry, where oil-intensive aviation gas is a key input. The high union wages enjoyed by employees of the old-line firms like TWA, United and American were a heavy chain around the necks of the business, while Southwest Airlines built a consistently profitable business model based on non-union labor, safety, superior service and efficient management.

People like CEC, and most of his online commenters, never tire of bad-mouthing airline deregulation. Yet the years after deregulation provided a laboratory comparison in real time between regulated and deregulated airlines. Deregulation applied specifically to airlines engaged in interstate commerce; e.g., most of them. But many states still supported an intrastate airline industry of planes that flew only routes within that single state. And the fares of those airlines remained sky high. It wasn’t unusual to find regulated intrastate airfares that were much higher than deregulated interstate airfares for routes traveling longer distances and in higher demand.

Of course, anybody who actually believes CEC can always buy airline stocks and sit back, waiting to get rich. When that doesn’t happen, though, the buyer should blame CEC, not this writer.

In the broader sense, CEC and the political Left are barking up the wrong tree in the wrong forest by demonizing profit. During the last 36 years of deregulation, the sole airline to always turn a profit has been Southwest. And the perennial choice among consumers as the most popular airline has also been Southwest. In a free-market system, profit serves at least two indispensable functions: it identifies the sectors where consumers want additional resources to go and it rewards those firms that best serve consumer wants. In these cases, it is consumers that are in the driver’s seat directing the direction and amount of profit and consumers that ultimately benefit from the goods and services that are produced profitably. Nobody can claim that Southwest Airlines was a monopolist or an oligopolist getting fat by sweating money out of the hides of their customers.

The Economics of Bundled Pricing

Economics says that CEC is the opportunist capitalizing on the ignorance of his customers, not the airlines. Review the comments of the dissatisfied customer quoted by CEC: “Airfares are outlandish, fliers are charged for everything and comfort is a thing of the past. How can that be allowed?”

Airfares are not outlandish but cheap compared to the fares prior to deregulation. That refers not only to airline deregulation but also to energy deregulation, which eventually allowed the technological advanced that drove up domestic supplies of oil and drove down oil prices.

The comment that “fliers are charged for everything” is an obvious reference to the fees referenced by CEC. But the comment itself is inane. Of course consumers are charged for everything – how could they not be? Who else is there to pay for the goods and services consumers receive?

Business firms are not charitable institutions. The economic purpose they serve is to produce things more efficiently than we can ourselves. The firms must place a value on all the goods and services they produce because all of them require the use of scarce resources. Only if consumers are willing to pay the costs of all the resources used in production can we conclude that production is efficient. And we can’t draw that conclusion unless all of those costs are reflected in the price consumers pay. Moreover, businesses can’t remain in business unless consumer payments cover all business costs.

Economic logic tells us that CEC’s disgruntled customer is living in a left-wing fool’s paradise, where goods and services are magically provided free. But wait – CEC himself told us the same thing in the second paragraph of his column, when he said “Airline add-ons, which cover ‘optional’ services for everything from reserving a seat to changing a ticket, used to be included in the cost of almost every fare.” Right! And before deregulation, those costs were inflated by everything from union featherbedding and administered wages to government-imposed high fares to frills that consumers cared little about.

So what in the world is all this complaining over fees? Are the complainants really, truly saying “before the fee imposition I paid $X and now I’m paying $X plus the cost of the fee, therefore I’m worse off by the amount of the fee”? But that can scarcely be right, can it? Otherwise, airlines would have the business equivalent of a perpetual motion machine; all they’d have to do is arbitrarily pick something else to charge the customer for in order to inflate the cost of the ticket. (Charge the passenger for putting up the jetway, for taking the boarding pass, for delivering the safety lecture, ad infinitum.) In the fool’s paradise, airlines can arbitrarily charge any price they want when there is no government regulation to protect consumers. But as we now realize, it is competition that protects consumers, not government regulation.

Today’s fee increases are not arbitrary price increases. Instead, airlines are partially unbundling the elements of the airline flight in order to earn more revenue by allowing some customers to pay less by excluding elements that they don’t find desirable. They do the same thing now with beverage service when they offer alcoholic beverages for a price. By serving alcohol only to those few people who want a drink badly enough to pay for it, they allow the rest of us to fly cheaper than would be the case if they had to add on the cost of alcohol to the ticket price. This is not a strategy for raising prices but a strategy for avoiding price increases.

 

Why should the airlines want to avoid price increases? Deregulation has proved that the overwhelming bulk of the American public wants to fly from point A to point B as cheaply as possible – period. But there is a minority of the public that is willing to pay for amenities in the air. Airlines desperate to survive in the Darwinian struggle of the fittest that is today’s airline business are now trying to serve both classes of customers by keeping base fares as low as possible while charging the minority fees for those amenities that can be separately priced.

The political Left may find this competitive desperation unseemly but the one thing airlines shouldn’t be accused of is victimizing their customers. Unfortunately, that is how CEC

and his ilk make their living – by trashing free markets and their practitioners and victimizing readers.

When CEC’s Grumpy Old Man grouses that “comfort is a thing of the past… how can that be allowed?” he is apparently unaware that he is the one allowing it and that calling for government intervention is asking for the government to substitute its arbitrary dictates for his freedom of choice.

The reason “comfort is a thing of the past” is that consumers value comfort less than the cost of providing it. But if CEC or Mr. Grumpy objects, all they have to do is start their own airline and sell it to the public by advertising its comfortable amenities. If there is really a market for a Plush Air or Lavish Skies, lenders will pony up the cash, just as numerous lenders have done over the last 36 years to finance one failed start-up airline after another.

Full Disclosure? 

Is there the hint of a scintilla of a point anywhere in CEC’s disgraceful flight of fancy? Well, his consumer advocate (Sally Greenberg of the National Consumers League) punctuates her own silly diatribe against airline profits with the point that “many of the fees are poorly disclosed.” This is the only shot worth taking against the airlines among all those fired by the hand-held missile launchers of contemporary journalism.

A passenger who wants to change a flight should know in advance that a fee is being charged for the change. “In advance” means at the time of original purchase. Formerly that sort of notification was handled mostly by travel agents. But the same Internet revolution that has lowered the cost of term insurance by decimating the ranks of insurance agents and lowered the brokerage cost of stock transactions by eviscerating the ranks of stockbrokers has also winnowed the ranks of travel agents. And it is not too hard to imagine the relevant notifications falling between the cracks of the system. But a consumer can only fall victim to that kind of informational glitch once before being put on notice. That is not exactly like having your net worth confiscated by an airline.

Free markets are not perfect. But they work vastly better than anything else mankind has yet devised. Eventually the free market will even catch up with people like CEC, whose consumers are really the ones being fleeced.

DRI-287 for week of 8-31-14: The Hollywood Blacklist as an Economic Phenomenon

An Access Advertising EconBrief:

The Hollywood Blacklist as an Economic Phenomenon

Very few people will ever develop an econometric model. Even fewer will use abstruse mathematics to formulate economic theory. A larger subset of the population is called upon to interpret the output of these economic tools, but this group is still microscopically small. To pinpoint the practical value of an economic education, we will have to look elsewhere.

Economics should enable us to understand the “blooming, buzzing confusion” of our daily life, to borrow the characterization of a 19th-century historian. Indeed, the great historical questions of yesterday should yield their mysteries to basic economic logic.

No economic exercise is as deeply satisfying as the parsing of a great historical dispute or debate using economics. When this exercise overturns the conventional thinking, it is one of life’s most exhilarating moments.

The famous Hollywood Blacklist is a ripe subject for this economic treatment.

The Blacklist as Portrayed by the Political Left

The stylized portrayal of the Blacklist by the political Left begins in the 1930s, when numerous actors, actresses, screenwriters and other rank-and-file motion-picture personnel were strongly attracted by the tenets of socialism and Communism. Indeed, for many Communism was the practical embodiment of socialism. This attraction led them to participate in rallies, join organizations and make contributions in kind and in cash to the socialist and Communist movements. Some even joined the Communist Party, but these were mere flirtations, more emotional than intellectual. Almost all of these Party memberships were short, transitory affairs that, however, would later come back to haunt the participant.

Even the biggest movie stars were contractual employees of the big movie studios. The operational heads of the studios, moguls like Louis B. Mayer of Metro Goldwyn Mayer, Darryl F. Zanuck of Twentieth Century Fox and Harry Cohn of Columbia Pictures, were fanatically dedicated to the profits returned by their movies. This led them to take an unseemly interest in the private lives of their actors and actresses, even to the point of influencing the stars’ marital, pre-marital and extra-marital pursuits. The moguls feared that unfavorable publicity about a star would destroy his or her box-office value.

After World War II, American attitudes toward the Soviet Union underwent a reversal. The public became inordinately fearful of Russia and of Communism. This wave of emotion was typical of a country that was governed by a chaotic, competitive spirit rather than by a tightly regulated bureaucracy run by left-wing intellectuals, or what the radical economist Thorstein Veblen had called a “Soviet of engineers.” The same spirit had made America society racist (anti-black, anti-immigrant) and sexist (anti-woman). Now it had become “anti-Communist,” which was the same thing as anti-intellectual, anti-democratic and fascist. After all, the Fascists and Communists had opposed each other in the Spanish Civil War prior to World War II, hadn’t they?

This inordinate fear was exploited by Senator Joseph McCarthy of Wisconsin, who used his government investigative committee as a tool to further his political career by pretending to expose Communists operating in government and virtually every other nook and cranny of institutional America. The Left originated the term “McCarthyism” and used it as shorthand for the Cold War anti-Communist mentality and all its representations.

The moguls were less interested in anti-Communism as a political project than for its financial implications on their industry. They feared that the public would associate the left-wing sympathies of their actors, actresses and screenwriters with Russian Communism. This potential linkage threatened studio profits.

Thus was born the Blacklist. The moguls commissioned their sycophantic underlings and outside organizations, such as the newsletter Red Channels, to provide lists of Hollywood artists who were current or former Communist Party members. Those on the list were blacklisted – they could no longer work. The lists were compiled partly by offering an inducement: Those “naming names” of other current or former Party members would be spared punishment. The question “Are you now or have you ever been a member of the Communist Party?” became associated with the House Committee on Un-American Activities and McCarthyism in general.

The Left saw the dilemma faced by witnesses testifying before security hearings as a Catch 22. A witness admitting current or former Communist Party membership would subsequently be blacklisted. A witness refusing to “inform” on his friends and/or colleagues would also be blacklisted. A witness citing his or her Fifth Amendment right against self-incrimination as justification for a refusal to testify would be blacklisted. But a witness who testified and named names could work only at the cost of eternal damnation – by universal understanding, the most despised and despicable of all human beings is an Informer.

Thus, the Blacklist is pictured as an intellectual Dark Age, a dark night of the American soul. Some blacklistees (John Garfield, J. Edward Bromberg) were so traumatized by their plight that they died from the stress. Others (Larry Parks) suffered permanent destruction of their careers. Most (Lee Grant, Dalton Trumbo, Carl Foreman, Marsha Hunt, Michael Wilson, Jules Dassin) lived in literal or figurative exile for one or two decades, suffering financial reverses and emotional isolation. A few (Edward G. Robinson) coped with a quasi-blacklist (“greylist”) that produced similar but less severe effects.

The Blacklist hovered like a great plague over the land for many years until it finally ended suddenly in the early 1960s. The heroic Kirk Douglas (or, in some retellings, the heroic Otto Preminger) openly hired long-blacklisted screenwriter Dalton Trumbo, thus breaking the back of the Blacklist.

The Blacklist as Seen Through the Lens of Economics

If the left-wing tale of the Blacklist has a fairy-tale quality, that is apt. Despite the acceptance and even reverence with which it is treated, it makes little sense. The principals behave in unreal ways, unlike actual human beings impelled by rational motives. The portions of the story that are correct are woefully incomplete. The rest is inaccurate. Most misleading of all is the complete absence of economic logic from the tale.

America’s “inordinate” fear of Communism. To be sure, fear is a prime mover of human action. But fear is conditioned and shaped by our rational understanding of the world around us. After World War II, the Soviet Union’s public face was rapidly transformed. Russia blockaded Berlin. It invaded or formally occupied Eastern Europe. After a few years, it acquired nuclear weapons that it pointed at the U.S. It aided its client states in the export of Communism throughout the world and indirectly fought the U.S. by aiding North Korea against South Korea. Eventually, the confluence of all these actions resulted in the term “Cold War.”

We know now what we strongly suspected then – that the Soviet Union had unleashed the worst campaign of mass murder in human history during the 20th-century’s first half. Joseph Stalin supervised the killing of more Jews than did Adolf Hitler and killed more of his own citizens than did the Nazis in wartime. We also know that the America Communist Party was the Soviet espionage apparatus in the U.S.

Given all this, the fear of Soviet Russia does not seem “inordinate.” Moreover, the actions of the Communist Chinese subsequent to the fall of Nationalist China in the late 1940s validate the fear of Communism generally. Red China did not export terror and death to the extent that Soviet Russia did. But their murderous reign within China itself surpassed even Stalin’s butchery.

In this light, the American reaction against Communism seems mild and tentative. And indeed we know that prior to the accession of Ronald Reagan to the Presidency in 1980, the Cold War was all but lost. While the American public displayed a well-founded a prophetic fear of Communism, our intellectual elites showed a shocking indifference to it. This began with the attempts by the Truman administration to cover up the discovery of high-level Communist penetration of the U.S. State Department and continued with the friendliness shown to Communist dictators by the American intelligentsia and to Marxist ideology by the American academy. Marxist economics has long exceeded free-market economics in popularity at American universities. Mainstream economics textbooks, notably the best-selling Economics by Nobel laureate Paul Samuelson, touted the superiority of Communist central planning to American free markets in promoting economic growth right up to the day when the Soviet Union collapsed.

Time after time, the American public’s fear of Communism was validated while the American elites’ acceptance of it was not.

The Moguls and the Blacklist. The Left portrays the Hollywood Moguls as craven cowards because they were profit-motivated. Of course, when those same moguls occasionally dabbled in politics without a business rationale, the Left excoriated them for that as well. This leads us to suspect that the Left simply approved of the Communist sympathies of the blacklistees.

Left-wing intellectuals criticized corporations in the 1930s for putting the interests of executives ahead of shareholder and consumer interests. Yet here the moguls are criticized for doing just the opposite. Using the Left’s own premise – but applying it within the model of economic logic – the moguls were safeguarding the interests of consumers and shareholders when they instituted the Blacklist.

The movie moguls developed – or, more accurately, stumbled upon – the “star system” of moviemaking as a way of stimulating movie attendance by focusing their attention on movie stars. This system worked so well that in the 1930s and 40s, average weekly movie-theater attendance approached the population of the entire country. (Today it languishes at 10-15% of U.S. population.) The leading actors and actresses may have been salaried employees, but they were the best-paid people in the nation – behind only the moguls themselves.

The appeal of the stars rested on the image they projected. Of course, audiences knew that Clark Gable was not really a reporter or a British naval officer and Errol Flynn was not really a pirate or a medieval aristocrat-turned-rebel-bandit. But they believed that the roles were extensions of the stars’ true personalities – Gable’s as a straightforward, aggressive male and Flynn’s as an irresistible cavalier. Ditto for Gary Cooper as a man of few words and James Stewart as hesitant and bashful.

In order to keep their profit machine humming, the moguls inserted morals clauses in studio contracts allowing termination for “moral turpitude” or anything that would destroy the good will vested in those personalities. From the standpoint of consumers – and therefore from the standpoint of shareholders and the moguls as well – a movie star was a product consisting not wholly but largely of image. A mogul that ignored the image projected by a star would have been derelict in professional duty.

Communism was a label that threatened a studio’s brand just as (for example) genetic modifications affect the brand of certain foods today. The comparison is apt. Communism was a genuine threat, regardless of whether or not any actor or actress really ever espoused Communist doctrine. Genetic modification, on the other hand, is a bogeyman whose dangers are illusory. But in both cases, the relevant consideration was and is what consumers think rather than objective truth. Consumer beliefs, truth aside, will govern their actions and the marketplace outcome. Consequently, moguls must act on their perception of what consumers perceive.

The moguls accurately judged that any actor or actress linked to Communism would be box-office poison, as would any writer whose words were being spoken on screen. Therefore, they had to purge their industry of Communists and suspected Communists – and do so in the most visible way possible. After all, any executive could, and presumably would, say that there were no Communists working for him. But the Blacklist was an exercise in product labeling – just the sort of thing that the political Left likes and even demands from corporations. The moguls were trying to obtain independent certification that their motion-picture product was “Communist -free.” Audiences could safely admire the actors and actresses appearing in it; they could safely consume the spoken and visual content contained within it. If the moguls had been selling apples, the Left would surely have admired the energy and determination devoted to preserving the purity and wholesomeness of the product.

But since we were talking movies, the Left was outraged by the Blacklist.

The Blacklist helped usher in an undemocratic reign of terror in America. Nothing prevented the dozens of competing movie studios and independent movie producers from advertising their movies by saying “we employ Communists and former Communists” or “we cast Fifth-Amendment-takers in our productions.” If the public was indifferent to this or even pleased by the idea, they could have flocked to these competing movies and enriched the maverick studios and producers. Of course, that didn’t happen because the public held no such beliefs. The moguls were neither craven cowards nor undemocratic tyrants. They were doing exactly what producers are supposed to do in a free market and what the Left criticizes producers for not doing: catering to consumers by insuring the quality of their product, thereby catering to shareholders by safeguarding profits.

The Blacklist was undemocratic and unfair because it denied blacklistees the means of earning a living. This is completely untrue. At worst, blacklistees were denied the ability to work in Hollywood productions. That is, they were denied the same thing that actors and actresses are denied when they are not cast and writers are denied when their scripts are rejected – which is the fate of the overwhelming majority of all actors, actresses and writers. In this case, the denial was figuratively stamped “unsuitable due to Communism.” This was a subjective evaluation, just as all rejections are subjective. Of course, the particular artist involved will take the blow hard and view it as unfair – just as all rejects do when consumers prefer the work of somebody else.

At all events, the so-called “victims” of the Blacklist were not denied the “right to work.” Movie actors went abroad and worked. Michael Wilson and Dalton Trumbo wrote Oscar-winning scripts submitted under false names while working and earning income abroad. Other blacklistees worked on Broadway or on television. And of course, nothing prevented them from – hold on to your seats here – getting an ordinary job and earning an ordinary living instead of earning thousands of dollars per week in Hollywood while the average American wage was less than five thousand dollars per year. Indeed, from among the few hundred documented Blacklist cases, it is often difficult to sort out those people whose Hollywood careers were ended by the Blacklist from those whose careers petered out naturally. In Hollywood as in professional sports, the average career is short though often sweet.

Among the victims of the so-called “greylist,” Edward G. Robinson made 13 movies during the short time period when he was allegedly greylisted. All but one of these was for American studios, mostly major ones. Of course, his roles were not necessarily plum ones, but that was certainly because his career was declining both before and after the Blacklist. For those whose career proved disappointing, claiming victimization by the Blacklist has provided compensation for the recognition fate denied them and an excuse for failing to justify their own expectations of success.

The Blacklist was evil because McCarthyism itself was evil and threatened America with dictatorship. We have shown that, far from being evil, the Blacklist was a product of free-market economics at work. The Left excoriates free-market economics when it fails – or supposedly fails – then turns around and excoriates it for succeeding while correcting its supposed errors. But even more ridiculous is the fact that the Hollywood Blacklist – today almost always linked with McCarthy and McCarthyism even by those caught in its toils – had nothing whatever to do with Joe McCarthy.

Senator Joseph McCarthy was elected to the Senate from Wisconsin in 1946. But he was virtually unknown to most of America until he made a speech in Wheeling, West Virginia in 1950. The speech concerned Communists that McCarthy alleged to reside in the U.S. State Department, not in Hollywood. And throughout McCarthy’s subsequent career, Communists in Hollywood were not an issue raised by McCarthy. McCarthy’s Senate Committee was Government Operations, not too surprisingly in view of his preoccupation with Communists in government. The government committee most often concerned with Communists in Hollywood was not even in the Senate – it was the notorious House Committee on Un-American Activities (HUAC).

Hollywood Communism made national headlines in 1947 when the so-called Hollywood Ten were called to testify before HUAC. These were a group of actors, writers and directors who were known to be current or former members of the Communist Party. They included now-famous names like writer Dalton Trumbo and director Edward Dmytryk. In his memoir Odd Man Out, Dmytryk confirms that all of the Hollywood Ten were indeed current or former Party members. He recounts how the appearance of the Ten before Congress was orchestrated by the Party and how non-Communist Hollywood liberals like Humphrey Bogart, Lauren Bacall, Gene Kelly and Danny Kaye were duped into supporting the Ten. The Party line was that the Ten were exercising their First Amendment rights of free speech and free association. After all, Communist Party membership was legal.

But when the hearings began, Dmytryk was astonished to find that the Ten uniformly pleaded their Fifth Amendment right against self-incrimination to avoid answering questions and having to name names. Their testimony consisted of diatribes against the Committee in a Communist-Party vein. This episode reinforced Dmytryk’s resolve to quit the Party and sever his ties with his Leftist colleagues. His refusal to name names led to a prison sentence for contempt of Congress, after which Dmytryk emerged one year later to testify again and salvage his career by naming the names of his Party colleagues.

In 1947, McCarthy sat in Congress but was uninvolved in the Hollywood Ten episode. He played no part in the Hollywood Blacklist. By the time McCarthy delivered his Wheeling speech, the Blacklist had already been established. McCarthy played no part in it; he was concerned with security risks in government (the State Department) and the military (the Army). McCarthyism, whatever it was or meant, was a phenomenon of the 1950s, while the Blacklist was the outgrowth of the Cold War security debates that began in the 1940s.

McCarthy is notorious today for claiming that large numbers of Communists were employed in government without naming any names. (“He never produced a single Communist.”) As is usually the case, the Left is wrong. McCarthy did name names and was usually right about those he named, such as Owen Lattimore. He also named numbers, but the numbers did not refer to those currently employed but rather Communists known to have operated within government. We know now that substantial numbers of Communist agents operated within the State Department, for example, and the exact number is not of paramount importance today because we are still uncovering more. All this is irrelevant to the Hollywood Blacklist.

The Blacklist was evil because (a) the blacklistees were never Communists (b )the blacklistees had every right to be Communists and still remain employed in Hollywood (c)anti-Communism was evil by definition (d) choose any one or all of the above. Perhaps the most amazing facet of the Left’s portrayal is its fuzziness. When discussing blacklistees like Larry Parks, the Left implies that all blacklistees were innocent victims who were selected at random by Red Channels or victimized by John Wayne, Ward Bond or an anonymous grudgeholder. It is true that fellow actors at the Motion Picture Alliance, including stars like Wayne, were involved in the interviews prepatory to blacklisting. By blacklisting a fellow performer, MPA officials might leave themselves open to a charge of thinning the ranks of their competition. But every blacklistee was a potential employee of the studio; this was the opportunity cost incurred by the moguls. They had no incentive to be randomly vicious or inaccurate, since they were cutting their own throats by doing so – and the object of the exercise was to preserve their profits, not squander them. Presumably, this is why prospective blacklistees were always given an out, either by naming names or by pleading innocence with sufficient eloquence. This latter course was taken by various stars, including Lucille Ball and James Cagney.

The Left has gotten a lot of mileage out of the implication that the blacklistees were all, or mostly, innocent. But the problem is that this does not imply that the investigations of Communist infiltration of Hollywood were wrong; it implies that there was not enough investigation. Even if the moguls had done nothing, if Red Channels and the MPAA had never existed, the American public’s well-founded fear of Communism would have remained. The investigations did not convict innocent people of being Communists; they gave people under suspicion the opportunity to absolve themselves. Those who seized the opportunity – e.g., most people involved – emerged better for the process.

When the subject changes to avowed Communists like Dalton Trumbo, the Left abruptly changes its tune to focus on the unfairness of denying the writer his right to write, to earn income, support his family, etc. But what the Left is defending is not a right but rather Trumbo’s power to force people to hire him when his qualifications for hire no longer pass muster. While Trumbo would have protested that he was still the same writer he always was, the truth was that his qualifications did not consist solely of his writing talent. He also had to be free of moral taint. Would the Left defend O. J. Simpson’s “right” to work as an actor today even after a civil conviction for murder? Would they have defended Lord Haw Haw’s right to remain employed as an announcer after he worked for the Nazis in World War II?

Indeed, suppose the word “Communist” in the entire Blacklist controversy were to be replaced by the word “Nazi” – would the Left still take the same anti-blacklist position? Of course, we all know that the answer to that question is “no.” Right-wing writers like Ayn Rand and Morrie Ryskind were subjected to the Left’s own Blacklist after they objected to the Communist penetration of Hollywood. In the ensuing years, nobody on the Left has come to their defense.

The Blacklist killed blacklistees. The few blacklistees who died, including John Garfield and J. Edward Bromberg, had pre-existing medical conditions. (Garfield’s heart condition exempted him from military service in World War II.) Medical science lacks the capability of assigning causation to an external event like the Blacklist, which is one of many potential stressful events that might or might not contribute to death.

The overarching question, though, is why any moral opprobrium should attach to the Blacklist. The moguls had no incentive to kill Garfield or Bromberg. If nobody intended to cause the deaths, then the Blacklist is like any other stressful event. All kinds of morally innocuous actions might conceivably result in a death without adversely transforming the character of the action.

The Blacklist was an anti-competitive cartel. Intriguingly, this argument was advanced not by the Left but by free-market economist Milton Friedman in his book Capitalism and Freedom. Its problem is that it fails to distinguish between actions taken simultaneously and those taken in concert. To use the O.J. Simpson case again, it is obvious that Simpson became unemployable the moment he killed Nicole Simpson. Hollywood moguls did not need to collude to achieve that outcome. The same is true of the Hollywood Blacklist. If simultaneous actions taken to insure product quality are “collusion,” then the word has been distorted beyond all semblance of meaning.

The Blacklist was not destroyed by the heroic actions of Kirk Douglas or Otto Preminger in hiring Dalton Trumbo (to write Spartacus or Exodus, respectively). The Blacklist was already a dead letter by 1960, then these movies were produced. It was killed by the death of anti-Communism, which died when Joe McCarthy was discredited during the Army-McCarthy hearings in 1956. If Douglas or Preminger had hired Trumbo in 1953, that would have been courageous. But they didn’t because – at that point – it would also have been suicidal.

Forcing witnesses to inform to keep their jobs is immoral. The injunction against informing is the heart of the criminal code. (It is even the title of a cult-movie classic from 1931, Howard Hawks’ The Criminal Code.) Without informing, police would be unable to solve most criminal cases; even with the sophisticated technology aired on television shows like CSI, the solution of most crimes depends on confession and prying information out of witnesses. The technique of threatening knowledgeable parties with sanctions in order to induce testimony is perhaps the most venerable – and successful – of all police techniques.

The position taken by the Left aligns it perfectly with the criminal element, which tries to preserve collusion between criminals against the substantial inducements for confession. It is those economic incentives that persuaded Dmytryk and others, such as director Elia Kazan and actor Lee J. Cobb, to relent and name names.

It is unfair that people should be held accountable for past actions that led to unforeseeable consequences such as blacklisting. When people publish embarrassing photos or posts about themselves on the Internet, they give hostages to fortune. Yet the prevailing sentiment today seems to be that they should have known better. If anybody should have known better, it was Hollywood actors with morals clauses in their lucrative contracts. Communism was both controversial and popular in the 1920s and 30s. During World War I, the “Palmer Raids” had set a precedent for government interference with the exercise of a right to practice Communism. Yet an illusion of invulnerability and messianic notions of social responsibility persuaded countless Hollywood figures that their moral duty lay in following the red star of Communism.

If people choose to offer sympathy for former Communists, that is their business. Most of the original editors of the conservative magazine National Review were former Communists. They rebuilt their lives despite this youthful misstep by forcefully changing direction and repudiating their past. That is exactly what too many Hollywood Communists were unwilling to doand that is why we owe them no sympathy, just as we owe their arguments no respect.

DRI-275 for week of 8-24-14: The Movie Law of Inverse Relevance

An Access Advertising EconBrief:

The Movie Law of Inverse Relevance

Beginning in the late 1940s and early 50s, more Hollywood movies were made to push a polemical agenda or send a political message. Prior to that, the major Hollywood studios followed “Mayer’s Maxim.” Metro Goldwyn Mayer’s boss Louis B. Mayer is credited with the dictum: “When I want to send a message, I’ll call Western Union.” Mayer objected to “message movies” because he didn’t think they were good box office.

This space has taken a different tack, objecting to Hollywood message movies a posteriori, doubting not their entertainment value but rather their veracity. The problem is that Hollywood producers, directors and screenwriters cannot keep their thumbs off the scales. Since reality stubbornly refuses to accommodate itself to their warped vision, they film their “true stories” by lying about the facts in order to satisfy the audience and themselves simultaneously. The problem is so endemic that the only safe approach is for viewers to assume that filmmakers are lying until proven otherwise.

This tempts us to the conclusion that truth and movies are mutually exclusive. We’re congenitally suspicious of entertainment-oriented Hollywood films. For example, we know that action movies defy the laws of physics and suspense movies end happily whereas real-life suspense often does not. If movies that advertise “This is a true story” are almost certainly lying to us, where can we hope to find a semblance of reality?

The surprising answer is that some of the most entertaining movies from Hollywood’s Golden Age, movies made with no apparent thought for social relevance, occasionally offer stunningly accurate illustrations of history and economics. This forms the basis for an empirical dictum called the Movie Law of Inverse Relevance: The more entertaining the movie, the greater the likelihood of encountering truth within it; the more socially conscious the movie, the less likely it is to be true.

Boom Town: More Than Just Another Hollywood Potboiler

Oil has been the lifeblood of life on Earth for over a century. You’d never know it from depictions of the oil business on screen, which have tended to treat petroleum as a commodity freighted with tragedy and the oil business as populated by psychotics. Yet it was not ever thus.

The 1940 movie Boom Townwas one of the biggest box-office movies in the year after Hollywood’s legendary year of 1939. It starred Clark Gable, the “King of Hollywood,” and Spencer Tracy, winner to consecutive Best Actor Academy Awards in 1937 and 1938. The female lead, Claudette Colbert, had teamed with Gable in 1934’s It Happened One Night, the first film ever to win Academy Awards in the five major categories – Best Picture, Best Actor, Best Actress, Best Director and Best Screenplay. This was their “reunion” film, long-awaited by movie audiences throughout America. As if this blockbuster combination of stars weren’t enough to assure the film’s success, they were joined by Hedy Lamarr, perhaps the most beautiful woman in the world, and Frank Morgan, a scene-stealing character actor and eventual Oscar nominee in both the Best Actor and Best Supporting Actor categories.

The movie’s formidable assemblage of talent was enough to lure people into the theaters and keep them in their seats. But the script, by Gable’s favorite screenwriter, John Lee Mahin – based on a story by another Gable favorite, James Edward Grant – told more than the usual Hollywood tall tale. It told a true story of the oil business and the men who made it work – and a government that tried to torpedo it.

The Plot

The time is 1912. The place is a dusty Texas town called Burkburnett, which some spring rains have turned into a mudhole. Two men are crossing the muddy street from opposite directions on a narrow, rickety bridge of planks built from two-by-fours. They meet in the middle. The tall one (Gable) addresses the other (Tracy) as “Shorty” and cordially invites him to stand aside, knowing this would entail a side trip into the mud. This meets with a stony refusal. The two trade insults and the impasse is about to escalate into fisticuffs – then gunfire splits the air when a man flees the nearby saloon with a deputy sheriff in hot pursuit. The two men abandon their dignity and leap head-first into the mud rather than risk meeting a stray bullet.

Thus is born a famous friendship between “Big John” McMasters and “Square John” Sand. The two share more than a first name. They are both wildcat oil prospectors, freshly arrived in town thanks to the discovery of oil that has turned a tiny Texas fly-speck into a legendary boom town. They have both staked out a likely looking stretch of ground outside of town. They pool their meager assets and find they lack sufficient funds to purchase drilling equipment and supplies. McMasters allows Sand to choose the precise spot to “sput in” (drill) but promises to produce the necessary materiel. At his urging, the two stage a skit to deceive a local equipment dealer, Luther Aldrich (Frank Morgan) into supplying the necessary stuff in exchange for a small share in their well which, they assure him confidently, is a sure thing to succeed.

The well fails. Sand reluctantly admits that McMasters’ choice of drilling location would have been better. Now the pair must raise their roll again – after first fleeing town one jump ahead of that same sheriff’s deputy whose bullets they had earlier dodged, one Harmony Jones (character actor Chill Wills). The film skillfully uses montage to concisely depict the succession of odd jobs and travails that eventually takes them back to Burkburnett. They have enough money to pay for tools and equipment now, but not enough to pay off the debt for their previous dry hole.

Undaunted, the two bluff their way past Luther Aldrich a second time. They’d be crazy to try the same routine on him again, wouldn’t they? This time they’ve really got a sure thing, and they’ll increase his stake as an incentive to agree to an ownership share against what they owe. Luther is imprudent enough to agree, but not completely crazy; he dispatches Harmony as a security guard over their claim to make sure they don’t run out on him a second time. McMasters gives Sand the naming rights over their claim and Sand chooses “Beautiful Betsy” in honor of the girl he left behind back East.

As the drilling progresses, the restless McMasters leaves Sand on duty at the rig one Saturday night and goes into town to relieve the monotony. He bumps into a proper Eastern girl (Claudette Colbert) who has journeyed to Burkburnett to meet a friend. She and McMasters experience the classic Hollywood “love at first sight” evening. By morning, they are married. Sand returns to their boarding house to break the news that their gusher has come in and the time-honored plot device of unknown identity unfolds – Colbert is Betsy Bartlett, the woman Sand is expecting to marry, while Sand is Betsy’s best-friend-who-she-doesn’t-feel-that-way-about. McMasters, in true Gable fashion, steps forward and invites Sand to take a poke at him. But Sand quietly asks Betsy if McMasters is the man she really wants. Upon verifying the truth, he calmly leaves the scene, implicitly giving the two his blessing. “Honey,” McMasters concludes admiringly, “that is a man.”

The movie’s next few minutes set the scene for the rest of the film. The audience learns that McMasters’ love for Betsy is true but equaled by his love of the chase and conquest. Betsy’s real rival is not other women but oil; women only tempt McMasters when he is tied down and prevented from exercising his talent for serial exploration and exploitation of oil. And Sand remains faithful to Betsy, his romantic ardor now sublimated into friendship. The movie resolves into the kind of romantic triangle that only Hollywood could dream up. McMasters and Sand make and lose a succession of fortunes and their friendship is broken and mended repeatedly. The cause of these episodes is Betsy; Sand will not allow McMasters to abuse Betsy’s love.

When McMasters meets the illegally lovely Karen Vanmeer (Hedy Lamarr), the two are drawn to each other. Vanmeer is a skilled business analyst who wants to acquire McMasters in a hostile takeover from his wife. Sand won’t permit it. He proposes marriage to Vanmeer and offers her lavish financial terms including a draconian divorce settlement that would enrich her. Astonished, she mutters, “I see. Greater love hath no man than…”

Eventually, the long-delayed fisticuffs between McMasters and Sand explode. The movie culminates in a battle over control of the oil business.

The plot summary highlights the entertainment value of Boom Town. It says nothing about the movie’s contributions to our understanding of history and economics.

Boom Townas History

There is no narrative or visual prelude assuring us that “this is a true story.” Nevertheless, there is no movie that tells the story of wildcat oil exploration and drilling in the early 20th century as vividly and truthfully as Boom Town. Burkburnett was a real Texas boom town where oil was discovered in 1912. The discovery turned the town upside down in just the manner portrayed in the movie.

How many movies shown today are as relevant to life today? The Burkburnett of 1912 is uncannily like parts of Texas and North Dakota today – scruffy, muddy, starved of infrastructure, crowded with roughnecks, troubled with petty crime but bursting at the seams with opportunity and unbridled vitality. Both today and a century ago, this was a frontier region – not in the geographic sense but in an economic sense. This was entrepreneurship at its most raw and visceral, not something out of business school.

Perhaps the most neglected feature of Boom Townis the role played by this scenic backdrop. The movie is so dominated by its multiple stars and impeccable supporting cast that the audience is unconscious of the background. We feel it acutely nonetheless. The critic James Shelley Hamilton wrote long ago of the elements that make up “the feet a movie walks on.” Boom Town owes its jaunty strut to its brilliantly observed picture of the life of an oil town, whether in Texas, Oklahoma, Pennsylvania, California or Central America.

Boom Town as Economic Theory and Logic

Boom Townshould be shown in university courses on economic history and theory. We could leaf diligently through reference sources like Halliwell’s Film and Video Guide or Leonard Maltin’s Movie Guide without encountering another movie so rich in economic meaning.

The physical, geologic circumstances of petroleum evolution and extraction create an age-old problem of economic investment and consumption. In the movie’s final third, McMasters discovers that the refining of oil offers even more scope for entrepreneurial skill and profit than does exploration and production. Characteristically, he charges into the market full-bore, determined to risk going down in flames in order to become a leader. He forms a partnership with wily veteran Harry Compton (character actor Lionel Atwill). But when Sand and McMasters feud over the latter’s treatment of Betsy, Sand enlists Compton in an effort to break McMasters by double-crossing him. In retaliation, McMasters calls on his countless contacts among the country’s small wildcatters, persuading them to forsake the partnership of Compton and Sand and sell their oil to him instead.

McMasters uses an argument that must have seemed obscure to most movie audiences – and probably still does. But knowledgeable industry observers and economists will recognize within it a time-honored conundrum. “Sand will make you force-pump your wells,” he insists to the wildcatters. “Pretty soon you’ll be looking at dry holes. Go with me and I’ll keep you pumping years longer.” Hollywood was – and still is – famous for dishing out all manner of baloney in the service of its plots. But this wasn’t the usual nonsense.

According to orthodox geological theory, petroleum is created by fossilized deposits that crystallize in the ground over many millennia. These deposits eventually liquefy and congregate in underground reservoirs called “traps.” That term is particularly apt when the liquid is literally trapped within rocks like the shale or sandstone that now supplies much of the oil being produced in the northern United States and Canada. Oil exploration has traditionally consisted of the location, identification and confirmation of these traps.

But just locating oil isn’t enough; that’s just the beginning of the process. Getting the oil out of the ground was no picnic in the early 20th century. Drilling holes in the ground using percussive methods – e.g.; knocking holes with heavy machines – enables the oil to be reached and exhumed. Raising it to the surface isn’t like dropping a dipper in a pail of water lifting it to your lips. It takes great physical persuasion to accomplish. McMasters’ use of the term “force-pumping” referred to the practice of pumping compressed air down the drilling shaft to force the oil to the surface. This term involved a certain amount of time, trouble and danger. But the worst thing about it was the tradeoff it implied. Its use eventually made the trap unproductive – not because the oil was fully extracted but instead because the remaining oil could no longer be withdrawn from the ground. Given the technology currently in use, it was stuck there. We know it was there, or at least those in the know did. But it didn’t count as “reserves,” because “proven reserves” only consisted of oil that was actually extractable. Depending on particular circumstances, this might be anywhere from 30% to 60% of the original petroleum deposit in the trap.

These facts of geologic and economic life are particularly germane today. The U.S. economy today is getting a shot in the arm from oil exploration and production in Texas and North Dakota, not to mention the oil coming from our longtime leading supplier to the north, Canada. Strictly speaking, this oil comes not from “new” discoveries but from long-existing fields and rigs that only recently became economically useful. New techniques of “enhanced recovery” like horizontal drilling (over fifty years old but newly profitable) and “fracking” have given these sources a new lease on life – which aptly describes the effect the oil has had on the America economy.

The wildcatters McMasters and Sand fought over faced a classic economic dilemma. They could pump more oil now and a lot less later or pump somewhat less now and somewhat more in the future. Sand himself alludes to this in courtroom testimony by calling McMasters a “conservationist… although he didn’t know it.” We are taught – conditioned is a better word – to view “conservation” as a good thing, as the antonym of “waste.” That is simply not true, though. There is no inherent, technological logic of efficiency that allows us to prefer consumption in the future to consumption now; only human preferences and purposes can resolve this issue.

That is where the interest rate enters the picture. Interest rates balance the supply of saving funds and the demand for investment funds – that is, the desires of those who want to consume more in the future and those who want to produce things to be consumed in the future. In pure theory, there is an optimal rate of extraction for natural resources such as petroleum that depends on the level of interest rates. Relatively low interest rates suggest that people want to consume lots in the future and that we should economize on consumption now and concentrate on production for the future. High interest rates encourage current consumption and discourage saving and investment geared toward the future.

The movie presents conservation in a whole new lightas governed by economics. Boom Towndoesn’t present this relatively sophisticated analysis explicitly; it just treats McMasters as a hero for promoting “conservation.” The implications of this, however, are unprecedented.

For one thing, Sand suggests that McMasters is acting entirely in pursuit of his own profit, yet his actions promote the general interest. That is, he is providing an operational definition of Adam Smith’s famous invisible hand at work. Celebrations of Adam Smith in Hollywood movies occur roughly as often as Halley’s Comet visits our solar system. For another, conservation in the movies is practiced by environmentalists or mavericks or nut jobs that are portrayed as really smarter than successful people – but never by successful businessmen. In 1940 as today, businessmen weren’t allowed to act nobly or altruistically within the framework of a movie unless they were portrayed as deliberately scorning profit.

Compton matter-of-factly uses the antitrust laws as a tool to harm his competitor, McMasters, thus serving his own business advantage. When Compton (Atwill) muses, “I wonder what the federal government would say about McMasters’ activities…,” and we then witness McMasters’ trial for violating the provisions of the Sherman Antitrust Act, it is a seminal movie moment. It would be over twenty years before radical historian Gabriel Kolko would advance his famous theory of “regulatory capture,” which was eventually co-opted by the right wing as a key plank in its opposition to the regulatory state. Kolko’s research showed that the first great regulatory initiative, the Interstate Commerce Commission (ICC) in 1887, was ushered in by the corporate railroad interests it ostensibly was created to regulate. The railroad business was beset by the age-old bugbear of industries with high fixed costs and low variable costs: price wars among competitors. The ICC cartelized the industry by raising prices and ending the price wars. Subsequent research has shown that antitrust enforcement has specialized in suppressing competition by concentrating on protecting competitors from competitive damage rather than safeguarding the competitive process itself.

McMasters successfully persuades wildcatters to forsake Compton and Sand in his favor. Yet his actions are criminalized as “monopolization.” It is true that orthodox economic theory describes a monopolist as one who “restricts” output in his own interest. But his ability to do that derives from restrictions on entry into the industry. The oil business is legendary for the absence of just those restrictions; indeed, that is what Boom Town is all about. Even the smallest wildcatter, whose fraction of total oil output is so tiny as to foreclose any influence on the market price of oil, still faces a problem of optimizing the time structure of oil extraction and sale. This problem is absent from orthodox theory only because that theory is timeless; it foolishly treats production and consumption as though occurring simultaneously in a single timeless instant.

In the event, the movie and the jury both vindicate McMasters by finding him innocent of monopolization. Unfortunately, he has spent so much money in his legal defense that he is now broke again, for what seems the umpteenth time. And this is yet another sophisticated economics lesson: somebody can be right and win in court, yet still be defeated by the magnitude of legal expenses.

Entertainment Wins Out in the End – as Usual

We are seemingly set up for a downbeat ending. But not in 1940, not when Clark Gable, Spencer Tracy and Claudette Colbert are heading the cast. At the fadeout, we find ourselves on a California hillside, overlooking a valley. McMasters, Betsy and Harmony and broke but happy, living out of a trailer and working the one small section of oil property that McMasters has left after his devastating brush with antitrust law. Who should come wandering over the hill but Luther Aldrich and John Sand? Aldrich has persuaded Sand to invest in the property as a devious scheme to reunite the old partners. Grudging at first, they spar over where the oil structure is located and where the rig will sput in. They turn their aggressive humor on their old target; Aldrich will naturally float them the tools and equipment in exchange for an ownership share in the property, in lieu of cash payment. “Oh, no!” Aldrich exclaims. “You two go broke on your own this time. There’s a dry hole in every foot of this place.”

As the background music score swells, the four principals stroll arm in arm toward the camera, grinning happily. “What’s the name of this sucker’s paradise?” demands Aldrich. “They named it after some old guy called Kettelman,” McMasters explains nonchalantly. “They call it ‘Kettleman Hills.'”

“Kettleman Hills?” Aldrich scoffs. “Doesn’t even sound like oil.”

The 1940 movie audience knew what today’s audience, for whom American history is a lost pastime, never learned. The gigantic Kettleman Hills discovery was one of the greatest oil booms of its day. McMasters, Sand, Aldrich and Betsy will soon be richer than ever. It’s happy-ending time for the cast of Boom Town.

The Moral

Metro Goldwyn Mayer never set out to make Boom Town a “relevant” movie, slake an executive’s social conscience or satisfy a star’s altruistic longings. If anybody associated with the project sensed its historical or economic uniqueness, it was a well-guarded secret. Its singular goal was entertainment, one that it fulfilled admirably.

The bleached bones of failed socially conscious and message movies litter the pages of Variety and other trade publications. The lies told by the numerous “true stories” and exposes await exposure by an investigator with the intestinal and anatomical fortitude for the job. Buried within the boundless entertainment of gems like Boom Town are the real lessons Hollywood can teach us about economic history and theory, freedom and free enterprise.

The relationship between socially relevant pretension and truth in movies is inverse. The more relevance, the less value; the less relevance and the more entertainment, the more truth.

DRI-303 for week of 8-17-14: When Fighting Fire With Fire Just Makes a Bigger Blaze

An Access Advertising EconBrief:

When Fighting Fire With Fire Just Makes a Bigger Blaze

Fans of the classic television series Get Smart will recall the snappy comeback of secret agent Maxwell Smart to a malefactor indignant at the prospect of detention: “You’re not going to arrest me on this flimsy evidence, are you?” “No,” Smart replied confidently, “I’ve got some more flimsy evidence.”

The quality of empirical debate over public policy has deteriorated to this level. Just as politicians are now compelled to act virtually any time something goes wrong, no matter what it is or how slim the likelihood of successful intervention, no exchange of opposing views is complete without quantitative citation. As soon as one side unveils its numbers, the other side must respond with numbers of its own – no matter how far-fetched or badly compiled. It is a Newtonian law of equal and opposite polemical reaction.

As a result, public discourse is now debased to the point of decadence. The long-running debate over the minimum wage has plumbed these depths of intellectual degradation. In the August 21 Wall Street Journal op-ed, “Do Higher Minimum Wages Create More Jobs?” authors Liya Palagashvili and Rachel Mace probe for the bottom. It is as if they have rewritten Mel Brooks’ script: “You don’t expect me to believe this flimsy evidence, do you?” “Well, my flimsy evidence is a lot better than your flimsy evidence!”

The Left Wing’s Flimsy Evidence

Op-ed authors Palagashvili and Mace (hereinafter, P&M) correctly relate that the left-wing Center for Economic and Policy Research (CEPR) released a report purporting to demonstrate the success of state-level minimum-wage increases in increasing relative employment growth among states. The report was released in June, 2014, and used data compiled by the federal Bureau of Labor Statistics. It examined 13 states that increased their individual minimum wage (as distinct from the federal minimum wage) that month and compared them to the other 37 states whose minimum wage did not rise. The report claimed that the average overall employment growth among the 13 states exceeded that of the 37 states for the five-month comparison period.

The Obama administration appropriated these conclusions with the alacrity of a police department confiscating drug-dealer assets. As P&M note, there was the little matter of “why [the] firms [would] hire more workers when the government raises the cost of hiring workers?” The straight-faced answer was that “hiking the minimum wage raises the incomes of poor workers, causing them to spend more. This additional spending, in turn, is so great that firms hire even more workers.” No less a personage than Barack Obama himself got into this act. “That [worker spending] gets churned back into the economy. And the whole economy does better, including the businesses.”

A priori, this “theory” of economic development is so ludicrous that it would qualify for an evening comedy skit at an American Economic Association convention. “Ludicrous” means ludicrous a priori; its theoretical underpinnings are so completely lacking that nobody would take it seriously enough to investigate. Well, nobody should – these days, no premise is too ridiculous if it can backstop a political point. Our Economist-in-Chief in the White House needs to bolster his standing with the public and shore up two key constituencies. One of those is obvious – the poor, downtrodden low-skilled workers who allegedly benefit from the minimum wage. The other is hidden – the higher-skilled workers, particularly union members, who substitute for the low-skilled workers laid off after the minimum-wage increase.

The “spending rescue” thesis is the culmination of two decades’ worth of left-wing attempts to promote the minimum wage as the salvation of the poor. This crusade began in the early 1990s, when economists David Card and Alan Krueger published a now-legendary study purporting to show that imposition of a minimum wage in New Jersey increased employment there relative to Pennsylvania. The defects of this study have since become almost as legendary as its conclusions. It utilized phone surveys to gather data – a technique heretofore shunned within the profession but thereupon praised as innovative and groundbreaking. But when other economists attempted to confirm the results using payroll data, this change instead reversed the results of Card and Krueger. The study’s econometrics has been panned by expert econometricians. Card and Krueger themselves were unable to supply a theoretical rationale for their result. Ordinarily, this would have been a fatal defect, but the policy implications of the study’s results were so delicious to the left wing that Card and Krueger were lionized and have gone on to professional fame and fortune. The only valid theory that would support their result does not comport with the reality of labor markets.

Why is the left so desperate to validate such a worthless policy measure? Their anxiety derives from the unique qualities of the minimum wage: it hides the benefits to their treasured constituency (unions), masquerades as a godsend to the poor while actually screwing them, and visibly appears to screw the rich (business owners, all of whom are assumed “rich” by definition) while actually doing so only in the short run. What a deal! The “optics” of the minimum wage are ideal for the left; that is, its visible or apparent effects are politically beneficial to them. Of course, its actual effects are harmful to everybody except the special-interest monopolists who comprise the left wing’s leading constituency these days, but that is jake with the left. Their ultimate goal is power - increasing real incomes for special interests are only a means to that end.

The Traditional Economic View of the Minimum Wage

Until Card and Krueger came along, the minimum wage vied with tariffs and quotas on foreign goods for the title of “most unpopular policy measure” among professional economists. Nearly a half-century of empirical examination reaffirmed the verdict of a priori theory: minimum wages redistribute jobs and real income from some poor and low-skilled workers to other poor and low-skilled workers by reducing employment, closing some businesses and temporarily reducing profits earned by businesses utilizing low-skilled labor.

These results are the outgrowth of the impact felt by business upon imposition of the minimum wage. Formally, it acts like a tax on the employment of low-skilled labor, which is the kind of labor directly affected by the minimum wage. That tax has three kinds of impact: a substitution effect, an output effect and a profit effect. (The first two of these are analogous to the substitution and income effect of a price change in consumer demand theory.) The substitution effect causes firms to employ less low-skilled labor and more of other inputs, including the higher-skilled labor previously mentioned as well as machinery that substitutes for labor. The output effect causes businesses employing low-skilled labor to produce less output, thereby employing fewer inputs of all kinds including labor. The profit effect reduces the profits earned by firms employing low-skilled labor. This third effect is only temporary, because the exit of some firms from the industry due to insolvency or better opportunities elsewhere will eventually raise the rate of return back to its previous, competitive level. That is why so-called rich business owners are adversely affected only transitorily by the minimum wage. The “permanent” gains go to workers who retain their jobs at the higher minimum wage. The “permanent” losses are suffered by workers who lose their jobs, some of whom may leave the labor force altogether. This phenomenon of exit from the labor force is by now well-known to most Americans; it has reached its highest level in over thirty years.

This is a formidable a priori case against the minimum wage. Economists never doubted that the minimum wage adversely affected employment of poor and low-skilled workers; they only doubted the degree to which this was true. Empirical studies of this issue began in the late 1940s, conducted by luminaries like future Nobel laureate George Stigler. Over the succeeding decades, economists used formal statistics to enforce the conditions necessary for a valid empirical examination of the issue.

One common defense of the minimum wage made by newspaper editorialists and readers over the years is that “the minimum wage went up but the U.S. unemployment rate did not go up; in fact, it went down, which proves that the minimum wage does not adversely affect employment.” This argument is invalid for several reasons. First, the minimum wage only affects employment within firms and industries that hire low-skilled labor. That does not begin to comprise the entire U.S. economy. Second, even within those industries directly affected by the minimum wage, the overall effects on employment of labor are equivocal. The substitution effect causes employment of less low-skilled labor but more higher-skilled labor, while the output and profit effects cause less employment of all inputs. It is not unusual at all to find that a liberal administration increases both the minimum wage and the money supply, with the latter causing temporary gains in income and employment that can swamp job losses associated with the minimum wage. This is not only ironic – since it harms the very people purportedly highest among the concerns of the left – but fully compatible with a condition in which the minimum wage causes job losses while the overall unemployment rate falls.

To avoid being fooled by effects outside the scope of the minimum wage, economists confined their studies to low-skilled workers and corrected their statistical methods to correct for trends and outside influences. That has been the traditional focus of econometrics, to compensate for the ways in which social sciences differ from the laboratory experiments common to the physical sciences.

Now, though, traditional econometrics has taken a back seat to raw political desire. And this corrupting influence has infected both sides of the political spectrum.

The Right Wing Retaliates With Its Own Flimsy Evidence

P&M disdain virtually all of the history and a priori theory cited above. They have their own flimsy evidence to present against the minimum wage. Their case is purely quantitative; clearly they believe in fighting fire with fire. They begin by finding the portion of the labor force comprised of low-skilled labor, which is roughly 2%, insufficient to generate the high-powered spending necessary to outweigh the minimum wage’s disincentives.

While no doubt true, this leaves room for counterargument by the left. Minimum-wage proponents will respond by accusing P&M of “overlooking” the greater propensity to spend by the poorest families. This is a feeble rebuttal, but the average person won’t know the difference and will probably rule the point a draw at best.

P&M then make a stronger point – that the logic of proponents’ case should mean that bigger minimum-wage boosts should have bigger effects on employment. In fact, the opposite was the case in January-May, 2014. The three substantial minimum-wage increases took place in Connecticut, New Jersey and New York, the three falling between 5% and 14%. Yet these three states had the worst job growth of the 13 increase-states, an average of 0.3% compared to the 1.28% average increase in the other 10 states. “Indeed, job growth was worse in each of these three states than it was, on average, in the 37 states that did not raise their minimum wage at all,” P&M report. And “in New Jersey, the state that hiked [the] minimum wage the most – to $8.25 an hour from $7.25 – employment actually fell by about 0.56%.” In the state with the largest job growth, WashingtonState’s 2.1%, the minimum wage went up by a whopping 13 cents per hour, or almost $24 per month for a full-time employee.

If P&M had rested content with this demonstration, they could have escaped criticism. Up to this point, they were merely using the left’s own evidence against it without accepting its methods. They were showing that the left’s argument wasn’t consistent even in its own terms, albeit without demonstrating how hopelessly confused those terms really were.

But P&M couldn’t stand prosperity. To a roll of drums, they unwrapped the crown jewel in their collection. “We conducted a statistical analysis of the Bureau of Labor Statistics’ data called a two-sample “t” test for comparing two means. We found, for this time period, no difference in the job-growth trend in the states that raised their minimum wages from states that did not. In other words, the correlation cited as debunking the economic case against the minimum wage is not statistically significant.”

Ta-daaaaaaa!!! Too bad there are no bows taken in print media; P&M would surely rate a round of applause in a run-of-the-mill graduate school economics seminar for their performance. It is surely no coincidence that “Ms. Mace studies economics at GeorgeMasonUniversity” while Ms. Palagashvili is a law-school fellow at NYU. Alas, they have displayed academia at its worst.

That is not to say that P&M flubbed their econometric dubs by conventional standards. We don’t know because we can’t see their results and have only their word as to their findings. But taking their comments at face value, it seems that they followed what have become standard econometric procedures. The t statistic is the standard one for small-sample tests of statistical significance. A comparison of sample means is a basic econometric procedure. Almost certainly, they assumed the standard “null hypothesis” of no difference between average job growth in the 13 states as compared to job growth in the 37 states. In this context, “no difference” does not mean that the two averages are exactly the same, which they obviously aren’t. It means that the degree of correspondence between the two is not sufficient as to enable us to be confident that the correspondence was not due to random chance. And just what does “confident” mean? The standard meaning for it is that we must be at least 90% certain. Lacking that degree of confidence, we enter a finding of “statistically insignificant” – which means that the minimum-wage increase did not “cause” the increases in job growth.

It is overwhelmingly likely that the readers of this op-ed – who undoubtedly make up a sample of Americans that is far more intelligent than any randomly chosen sample – fall into two categories: those who have no idea what P&M’s “statistical significance” paragraph meant and those who think they know but are wrong. Those who correctly understand it probably represent a statistically invisible sliver of its readership. And a majority of economists and statisticians are excluded from that sliver.

P&M thought that they were “one up” on the minimum-wage proponents at CEPR because they (P&M) were using the tool of statistical significance as it has been used for decades in academia and government. That statement would be correct only if the word “misusing” were substituted for “using” in two places. That is why they were fighting fire with fire – they were responding to CEPR’s misuse of numbers with their own misuse of statistical inference. Their mistakes were just fancier than CEPR’s, that’s all.

The Flaws of Statistical Significance

Various authors have expounded the flaws of statistical significance as developed by the late statistician Sir Ronald Fisher. The most comprehensive treatment is probably that of Deirdre McCloskey and Stephen Ziliak, The Cult of Statistical Significance: How the Standard Error Costs Us Jobs, Justice and Lives. For our purposes, it is sufficient to summarize how one of the two groups referred to above views the notion of statistical significance and compare it with the truth.

Ask readers of the Wall Street Journal op-ed to explain the meaning of P&M’s statistical significance paragraph in layman’s terms. Those who think they know the answer will probably say something like the following: “Well, it means that the effect of an increase in the minimum wage on overall job growth is insignificant, the opposite of significant. That means it is “too small to matter.” It’s so small we can’t be confident that something else might not be causing what we’re seeing in job growth.” That’s an intuitively appealing explication for at least two reasons. First, it incorporates the familiar meaning of the words “significant” and “insignificant.” Second, it incorporates the kind of answer we are looking for when we do empirical research on issues like this. Typically, we want “how big” or “how much” kinds of answers rather than “yes or no” types of answers.

Unfortunately, the concept of statistical significance is not what most people think it is. Its findings do not convey any quantitative sense of how big an effect is or how much influence one variable (such as an increase in the minimum wage) has on another (such as state-level growth in employment). Rather, it is a binary, “yes-no” type of concept. It registers the likelihood that the influence of one variable on another is random, as compared to systematic or non-random. Because the variables involved are invariably derived from sample data, it can be viewed as a verdict on the representativeness of a chosen sample.

This is useful information, to be sure. But it is not the most useful information we could wish to obtain. And that is a crying shame because the obsession with statistical significance has pretty much overshadowed everything else in empirical research in the social sciences and even in much of the physical sciences today. This has reached such epidemic proportions that McCloskey, a leading economic historian and econometrician, declares that most statistical work in economics done over the last thirty years is useless and must be done over. That is tantamount to saying that we might as well junk the leading academic journals published during that interval.

Fighting Fire With Fire

The proper reaction to P&M’s reaction to the CEPR study and the left-wing minimum-wage ballyhoo is a polite yawn and a “So what?” This should be followed by a trip to the woodshed and back to the drawing board for P&M, where they would be schooled in proper econometric practice. Alternatively, they can do what true free-market economists have done while their colleagues were practicing pretend-Science: spend the time honing their understanding of concepts like the time-structure of production and capital theory. That will better inform their grasp of reality than the most esoteric econometric model.

Fighting fire with fire can work in specialized cases like oil-well fires. But in today’s debates over economic theory and policy, fighting fire with fire does not extinguish the original fire. It does not even provide intellectual illumination. It merely makes the blaze bigger.

DRI-284 for week of 8-10-14: All Sides Go Off Half-Cocked in the Ferguson, MO Shooting

An Access Advertising EconBrief:

All Sides Go Off Half-Cocked in the Ferguson, MO Shooting

By now most of America must wonder secretly whether the door to race relations is marked “Abandon all hope, ye who enter here.” Blacks – mostly teenagers and young adults, except for those caught in the crossfire – are shot dead every day throughout the country by other blacks in private quarrels, drug deals gone bad and various attempted crimes. Murder is the leading cause of death for young black males in America. We are inured to this. But the relative exception of a black youth killed by a white man causes all hell to break loose – purely on the basis of the racial identities of the principals.

The latest chilling proof of this racial theorem comes from Ferguson, MO, the St. Louis suburb where a policeman shot and killed an unarmed 18-year-old black man on Monday. The fact that the shooter is a policeman reinforces the need for careful investigation and unflinching analysis of the issues involved. The constant intrusion of racial identity is a mountainous obstacle to this process.

The Two Sides to the Story, As Originally Told

The shooting occurred on Saturday afternoon, August 9, 2014, in Ferguson, MO, where 14,000 of the 21,000 inhabitants are black and 50 of 53 assigned St. Louis County Police officers are white. The two sides of the story are summarized in an Associated Press story carrying the byline of Jim Suhr and carried on MSN News 08/13/2014. “Police have said the shooting happened after an [then-unnamed] officer encountered 18-year-old Michael Brown and another man on the street. They say one of the men pushed the officer into his squad car, then physically assaulted him in the vehicle and struggled with the officer over the officer’s weapon. At least one shot was fired inside the car. The struggle then spilled onto the street, where Brown was shot multiple times. In their initial news conference about the shooting, police didn’t specify whether Brown was the person who scuffled with the officer in the car and have refused to clarify their account.”

“Jackson said Wednesday that the officer involved sustained swelling facial injuries.”

“Dorian Johnson, who says he was with Brown when the shooting happened, has told a much different story. He has told media outlets that the officer ordered them out of the street, then tried to open his door so close to the men that it ‘ricocheted’ back, apparently upsetting the officer. Johnson says the officer grabbed his friend’s neck, then tried to pull him into the car before brandishing his weapon and firing. He says Brown started to run and the officer pursued him, firing multiple times. Johnson and another witness both say Brown was on the street with his hands raised when the officer fired at him repeatedly.”

The Reaction by Local Blacks: Protests and Violence

When a white citizen is shot by police under questionable circumstances – an occurrence that is happening with disturbing frequency – the incident is not ignored. But the consequent public alarm is subdued and contained within prescribed channels. Newspapers editorialize. Public figures express concern. Private citizens protest by writing or proclaiming their discontent.

The stylized reaction to a white-on-black incident like the one in Ferguson is quite different. Ever since the civil-rights era that began in the 1950s, these incidents are treated as presumptive civil-rights violations; that is, they are treated as crimes committed because the victim was black. Black “leaders” bemoan the continuing victim status of blacks, viewing the incident as more proof of same – the latest in an ongoing, presumably never-ending, saga of brutalization of blacks by whites. “Some civil-rights leaders have drawn comparisons between Brown’s death and that of 17-year-old Trayvon Martin.”

Rank-and-file blacks gather and march in protest, holding placards and chanting slogans tailored to the occasion. “Some protestors… raised their arms above their heads as they faced the police… The most popular chant has been ‘Hands up! Don’t shoot!'”

Most striking of all is the contrast struck by headlines like “Protests Turn Violent in St. Louis Suburb.” There is no non-black analogue to behavior like this: “Protests in the St. Louis suburb turned violent Wednesday night, with people lobbing Molotov cocktails at police, who responded with smoke bombs and tear gas to disperse the crowd.” This is a repetition of behavior begun in the 1960s, when massive riots set the urban ghettos of Harlem, Philadelphia and Detroit afire.

Joseph Epstein Weighs In

The critic and essayist Joseph Epstein belongs on the short list of the most trenchant thinkers and writers in the English language. His pellucid prose has illumined subjects ranging from American education to gossip political correctness to Fred Astaire. The utter intractability of race in America is demonstrated irrefutably by the fact that the subject reduced Epstein to feeble pastiche.

In his Wall Street Journal op-ed “What’s Missing in Ferguson, MO.”(The Wall Street Journal, Wednesday, August 13, 2014), Epstein notes the stylized character of the episode: “…the inconsolable mother, the testimony of the dead teenager’s friends to his innocence, the aunts and cousins chiming in, the police chief’s promise of a thorough investigation… The same lawyer who represented the [Trayvon] Martin family, it was announced, is going to take this case.”

But according to Epstein, the big problem is that it isn’t stylized enough. “Missing… was the calming voice of a national civil-rights leader of the kind that was so impressive during the 1950s and ’60s. In those days there was Martin Luther King Jr…. Roy Wilkins… Whitney Young… Bayard Rustin…. – all solid, serious men, each impressive in different ways, who through dignified forbearance and strategic action, brought down a body of unequivocally immoral laws aimed at America’s black population.”

But they are long dead. “None has been replaced by men of anywhere near the same caliber. In their place today there is only Jesse Jackson and Al Sharpton…One of the small accomplishments of President Obama has been to keep both of these men from becoming associated with the White House.” Today, the overriding problem facing blacks is that “no black leader has come forth to set out a program for progress for the substantial part of the black population that has remained for generations in the slough of poverty, crime and despair.”

Wait just a minute here. What about President Obama? He is, after all, a black man himself. That was ostensibly the great, momentous breakthrough of his election – the elevation of a black man to the Presidency of the United States. This was supposed to break the racial logjam once and for all. If a black man occupying the Presidency couldn’t lead the black underclass to the Promised Land, who could?

No, according to Epstein, it turns out that “President Obama, as leader of all the people, is not well positioned for the job of leading the black population that finds itself mired in despond.” Oh. Why not? “Someone is needed who commands the respect of his or her people, and the admiration of that vast – I would argue preponderate [sic] – number of middle-class whites who understand that progress for blacks means progress for the entire country.”

To be sure, Epstein appreciates the surrealism of the status quo. “In Chicago, where I live, much of the murder and crime… is black-on-black, and cannot be chalked up to racism, except secondarily by blaming that old hobgoblin, ‘the system.’ People march with signs reading ‘Stop the Killing,’ but everyone knows that the marching and the signs and the sweet sentiments of local clergy aren’t likely to change anything. Better education… a longer school day… more and better jobs… get the guns off the street… the absence of [black] fathers – … the old dead analyses, the pretty panaceas, are paraded. Yet nothing new is up for discussion… when Bill Cosby, Thomas Sowell or Shelby Steele… have dared to speak up about the pathologies at work… these black figures are castigated.”

The Dead Hand of “Civil Rights Movement” Thinking

When no less an eminence than Joseph Epstein sinks under the waves of cliché and outmoded rhetoric, it is a sign of rhetorical emergency: we need to burn away the deadwood of habitual thinking.

Epstein is caught in a time warp, still living out the decline and fall of Jim Crow. But that system is long gone, the men who destroyed it and those who desperately sought to preserve it alike. The Kings and Youngs and Wilkins’ and Rustins are gone just as the Pattons and Rommels and Ridgeways and MacArthurs and Montgomerys are gone. Leaders suit themselves to their times. Epstein is lamenting the fact that the generals of the last war are not around to fight this one.

Reflexively, Epstein hearkens back to the old days because they were days of triumph and progress. He is thinking about the Civil Rights Movement in exactly the same way that the political left thinks about World War II. What glorious days, when the federal government controlled every aspect of our lives and we had such a wonderful feeling of solidarity! Let’s recreate that feeling in peacetime! But those feelings were unique to wartime, when everybody subordinates their personal goals to the one common goal of winning the war. In peacetime, there is no such unitary goal because we all have our personal goals to fulfill. We may be willing to subordinate those goals temporarily to win a war but nobody wants to live that way perpetually. And the mechanisms of big government – unwieldy agencies, price and wage controls, tight security controls, etc. – may suffice to win a war against other big governments but cannot achieve prosperity and freedom in a normal peacetime environment.

In the days of Civil Rights, blacks were a collective, a clan, a tribe. This made practical, logistical sense because the Jim Crow laws treated blacks as a unit. It was a successful strategic move to close ranks in solidarity and choose leaders to speak for all. In effect, blacks were forming a political cartel to counter the political setbacks they had been dealt. That is to say, they were bargaining with government as a unit and consenting to be assigned rights as a collective (a “minority”) rather than as free individuals. In social science terms, they were what F. A. Hayek called a “social whole,” whose constituent individual parts were obliterated and amalgamated into the opaque unitary aggregate. This dangerous strategy has since come back to haunt them by obscuring the reality of black individualism.

Consider Epstein’s position. Indian tribes once sent their chief – one who earned respect as an elder, religious leader or military captain, what anthropologists called a “big man” – to Washington for meetings with the Great White Father. Now, Epstein wants to restore the Civil Rights days when black leaders analogously spoke out for their tribal flock. Traditionally, the fate of individuals in aboriginal societies is governed largely by the wishes of the “big man” or leader, not by their own independent actions. This would be unthinkable for (say) whites; when was the last time you heard a call for a George Washington, Henry Ford or Bill Gates to lead the white underclass out of its malaise?

In fact, this kind of thinking was already anachronistic in Epstein’s Golden Age, the heyday of Civil Rights. Many blacks recognized the trap they were headed towards, but took the path of least resistance because it seemed the shortest route to killing off Jim Crow. Now we can see the pitiful result of this sort of collective thinking.

An 18-year-old black male is killed by a police officer under highly suspicious circumstances. Is the focus on criminal justice, on the veracity of the police account, on the evidence of a crime? Is the inherent danger of a monopoly bureaucracy investigating itself and exercising military powers over its constituency highlighted? Not at all.

Instead, the same old racial demons are summoned from the closet using the same ritual incantations. Local blacks quickly turn a candlelight protest vigil into a violent riot. Uh oh – it looks like the natives are getting restless; too much firewater at the vigil, probably. Joseph Epstein bemoans the lack of a chieftain who can speak for them. No, wait – the Great Black Father in Washington has come forward to chastise the violent and exalt the meek and the humble. His lieutenant Nixon has sent a black chief to comfort his brothers. (On Thursday, Missouri Governor Jay Nixon sent Missouri Highway Patrol Captain Ron Johnson, a black man, heading a delegation of troopers to take over security duties in Ferguson.) The natives are mollified; the savage breast is soothed. “All the police did was look at us and shoot tear gas. Now we’re being treated with respect,” a native exults happily. “Now it’s up to us to ride that feeling,” another concludes. “The scene [after the Missouri Highway Patrol took over] was almost festive, with people celebrating and honking horns.” The black chief intones majestically: “We’re here to serve and protect… not to instill fear.” All is peaceful again in the village.

Is this the response Joseph Epstein was calling for? No, this is the phony-baloney, feel-good pretense that he decried, the same methods he recognized from his hometown of Chicago and now being deployed there by Obama confidant Rahm Emmanuel. The restless natives got the attention they sought. Meanwhile, lost in the festive party atmosphere was the case of Michael Brown, which wasn’t nearly as important as the rioters’ egos that needed stroking.

But the Highway Patrol will go home and the St. Louis County Police will be back in charge and the Michael Brown case will have to be resolved. Some six days after the event, the police finally got around to revealing pertinent details of the case; namely, that Michael Brown was suspected of robbing a convenience store of $48.99 worth of boxed cigars earlier that day in a “strong-arm robbery.” Six-year veteran policeman Darren Wilson, now finally identified by authorities, was one of several officers dispatched to the scene.

Of course, the blacks in Ferguson, MO, and throughout America aren’t Indian tribesmen or rebellious children – they are nominally free American individuals with natural rights protected by the U.S. Constitution. But if they expect to be treated with respect 365 days a year they will have to stop acting like juvenile delinquents, stop delegating the protection of their rights to self-serving politicians and hustlers and start asserting the individuality they possess.

The irony of this particular case is that it affords them just that opportunity. But it demands that they shed what Epstein calls “the too-comfortable robes of victimhood.” And they will have to step out from behind the shield of the collective. The Michael Brown case is not important because “blacks” are affronted. It is important because Michael Brown was an individual American just like the whites who get shot down by police every year. If Dorian Johnson is telling the truth, Brown’s individual rights were violated just as surely whether he was black, white, yellow or chartreuse.

Policing in America Today – and the Michael Brown Case

For at least two decades, policing in America has followed two clearly discernible trends. The first of these is the deployment of paramilitary equipment, techniques and thinking. The second is a philosophy is placing the police officer’s well-being above all other considerations. Both of these trends place the welfare of police bureaucrats, employees and officers above that of their constituents in the public.

To an economist, this is a striking datum. Owners or managers of competitive firms cannot place their welfare above that of their customers; if they do, the firm will go bankrupt and cease to exist, depriving the owners of an asset (wealth) and real income and the managers of a job and real income. So what allows a police force (more specifically, the Chief of Police and his lieutenants) to do what a competitive firm cannot do? Answer: The police have a monopoly on the use of force to enforce the law. In the words of a well-known lawyer, the response to the generic question “Can the police do that?” is always “Sure they can. They have guns.”

All bureaucracies tend to be inefficient, even corrupt. But corporate bureaucracies must respond to the public and they must earn profits. So they cannot afford to ignore consumer demand. The only factor to which government bureaucracies respond is variations in their budget, which are functions of political rather than economic variables.

All of these truths are on display in this case. The police have chosen to release only a limited, self-serving account of the incident. Their version of the facts is dubious to say the least, although it could conceivably be correct. Their suppression of rioting protestors employed large, tank-like vehicles carrying officers armed with military gear, weapons and tear gas. Dorian Johnson’s account of the incident is redolent of the modern police philosophy of “self-protection first;” at the first hint of trouble, the officer’s focus is on downing anybody who might conceivable offer resistance, armed or not, dangerous or not.

What does all this have to do with the racial identities of the principals? Absolutely nothing. Oh, it’s barely possible that officer Wilson might have harbored some racial animosity toward Brown or blacks in general. But it’s really quite irrelevant because white-on-black, white-on-white and black-on-white police incidents have cropped up from sea to shining sea in recent years. Indeed, this is an issue that should unite the races rather than dividing them since police are not reluctant to dispatch whites (or Hispanics or Asians, for that matter). While some observers claim the apparent increase in frequency of these cases is only because of the prevalence of cell phones and video cameras, this is also irrelevant; the fact that we may be noticing more abuses now would not be a reason to decry the new technology. As always, the pertinent question is whether or not an abuse of power took place. And those interested in the answer to that question, which should be every American, will have to contend with the unpromising prospect of a police department – a monopoly bureaucracy – investigating itself.

That is the very real national problem festering in Ferguson, MO – not a civil-rights problem, but a civil-wrongs problem.

The Battle Lines

Traditionally, ever since the left-wing counterculture demonized police as “pigs” in the 1960s, the right wing has reflexively supported the police and opposed those who criticized them. Indeed, some of this opposition to the police has been politically tendentious. But the right wing’s general stance is wrongheaded for two powerful reasons.

First, support for law enforcement itself has become progressively less equated to support for the Rule of Law. The number and scope of laws has become so large and excessive that support for the Rule of Law would actually require opposition to the existing body of statutory law.

Second, the monopoly status of the police has enabled them to become so abusive that they now threaten everybody, not merely the politically powerless. Considering the general decrease in crime rates driven by demographic factors, it is an open question whether most people are more threatened by criminals or by abusive police.

Even a bastion of neo-conservatism like The Wall Street Journal is becoming restive at the rampant exercise of monopoly power by police. Consider these excerpts from the unsigned editorial, “The Ferguson Exception,” on Friday, August 15, 2014: “One irony of Ferguson is that liberals have discovered an exercise of government power that they don’t support. Plenary police powers are vast, and law enforcement holds a public trust to use them in proportion to the threats. The Ferguson police must prevent rioting and looting and protect their own safety, though it is reasonable to wonder when law enforcement became a paramilitary operation [emphasis added]. The sniper rifles, black armored convoys and waves of tear gas deployed across Ferguson neighborhoods are jarring in a free society…Police contracts also build in bureaucratic privileges that would never be extended to other suspects. The Ferguson police department has refused to… supply basic information about the circumstances and status of the investigation [that], if it hasn’t been botched already, might help cool passions… how is anyone supposed to draw a conclusion one way or the other without any knowledge of what happened that afternoon?”

The Tunnel… and the Crack of Light at the End

The pair of editorial reactions in The Wall Street Journal typifies the alternatives open to those caught in the toils of America’s racial strife. We can play the same loop over and over again in such august company as Joseph Epstein. Or we can dunk ourselves in ice water, wake up and smell the coffee – and find ourselves rubbing shoulders with the Journal editors.