DRI-166 for week of 4-19-15: What’s Wrong With the Immigration Laws?

An Access Advertising EconBrief:

What’s Wrong With the Immigration Laws?

One of the perennial items on Washington’s reform agenda is “comprehensive immigration reform.” Everybody claims to favor it, although the two major parties differ radically on the content they assign to the term. Indeed, there is vast intra-party difference as well, particularly among Republicans. And yet economists – the people who supposedly can’t agree among themselves about anything – align very closely on the subject of immigration.

Why does the subject of immigration trigger this startling role reversal? It should come as no surprise that economic logic and theory play a starring role in the explanation. But the co-star is the existing corpus of immigration law, which is a leading contender for the title “worst existing body of law.”

The Four Paths to Legal Immigration

Prior to the 20th century, there were almost no barriers to immigration into the United States of America. The sole exception was the anti-Chinese laws passed to placate fears over the “yellow peril” in the 19th century. But beginning in the 1920s, organizations like the Ku Klux Klan successfully agitated for laws broadly restricting immigration into the country. Thus began a gradual accretion of immigration law that has worked its way into the fiber of American society.

Today, restrictions on immigration are so severe that it is easier to talk about the relaxation of barriers to entry than it is to talk about restrictions on entry. The question isn’t “Is immigration restricted?”; it’s “How can anybody get in legally?” There are basically four paths to legal immigration into the U.S. today. We will discuss each in turn, together with the economic logic (or lack of it) underlying each.

Legal Path #1: The Visa Lottery

Foreigners who reside in the U.S. legally are called aliens. In order to obtain legal status, an alien must be issued a visa, a document that attests to the alien’s fulfillment of one of the conditions for valid entry. Every year, a certain number of visas are issued to applicants on a random basis by means of a visa lottery. This lottery is sometimes referred to colloquially as the “green-card lottery” because the green card is the document attesting to an alien’s status as a permanent resident of the United States. The green card is sometimes mistakenly viewed as a document permitting an alien to enter the country, but it is the stamp affixed to the card by the Bureau of Customs and Border Protection (CBP) at the port of entry that accords this privilege.

The official name of the visa lottery is the “Diversity Immigrant Visa Program.” It is held annually by the State Department in accordance with Section 203c of the Immigration and Nationality Act, as amended by Section 131 of the Immigration Act of 1990. This created a quota of 55,000 visas open to foreign nationals from countries “deemed to have low rates of immigration to the U.S.” in the 5 years previous to the lottery. The purpose of the program is to “diversify the immigrant population” of the U.S.

Residents of countries whose total number of legal immigrants to the U.S. in the preceding 5 years exceed 50,000 are ineligible to apply for participation in the lottery. Among the countries whose residents have recently been ineligible are included Mexico, Canada, the Dominican Republic, El Salvador, India, South Korea, the United Kingdom (but not Northern Ireland) and Vietnam, among many others. The entry period for the 2015 lottery lasted from October 1 to November 3, 2014.

Typically, there are millions of applicants – over 13 million in 2008, for example. Despite the selectivity involved – and the fact that eventual lottery winners withstand scrutiny from various government agencies – at least one notorious terrorist is known to have entered the country legally via the lottery. (One minor technical note: Excluded from the 50,000 five-year exclusion threshold are refugees admitted as legal immigrants, about whom more will be said later.)

Economic evaluation of the visa lottery: The visa lottery illuminates the central significance of the immigration laws; namely, that their purposes are entirely political rather than economic. And since politics all too often runs counter to the logic of economics, we can expect the immigration laws to be economically perverse. So they are.

First, the visa lottery imposes a quota upon visa awards and stringent conditions upon applicants. In contrast, economic logic imposes no quota upon the mobility of individuals in response to economic conditions. Just the opposite, in fact – economic efficiency demands either that people move in response to geographic price and cost differentials or that goods and services move. Sometimes it will be more economic for people to move; sometimes it is more efficient for the goods to move. (Sometimes services can move, too – particularly financial services – but this is less common.)

These days, we are implored to seek “diversity” in all things, particularly in the makeup of populations. But there is no economic reason to “diversify the immigrant population.” In practice, economics will almost surely argue against it. All other things equal, geographic distance should be inversely related to the propensity to emigrate, so we should expect to see more immigration from countries closer to the U.S. But the visa lottery actively discourages this with its five-year/50,000 immigrant disqualifier. Indeed, any factor favorable to immigration – distance, language, cultural congruity, education qualification, et al – will tend to put a country above the 50,000 threshold over time and thereby disqualify its citizens from the lottery. And, as we will see, each of the other three paths to legal immigration has its own limiting factors. So the visa lottery clearly violates the precepts of economic logic.

Why does the quota exist, then? Why, to thwart economic efficiency and protect domestic workers particularly vulnerable to foreign competition. This anti-competitive effect comes at the expense of – well, just about everybody else in the two countries involved. Because it is particularly obvious to the import-competing workers that they gain from the restrictive quota and much less obvious to the rest of the world that they are harmed, the government is not called to account for this egregious behavior. Imagine New York State devising a lottery to determine how many people it will accept from the other states and excluding people in Pennsylvania, New Jersey and New England from participating!

Legal Path #2: Refugee Status Visa

The second means of obtaining a legal immigrant visa is by applying for status as a refugee from harm in the resident country. This protected status is known as “asylum.” Each year, roughly 10% of legal immigrants fall under this rubric. Since 1980, over two million aliens have taken refuge in the United States. That would average out to somewhat fewer than 70,000 per year, but the variance around this average has been substantial. The current system of granting visas to refugees establishes quotas by dividing the world into regions and setting a quota for each one, then including a small additional quota for an “unallocated reserve.” The 5 regions (and their quotas as of 2009) are: Africa (12,000), East Asia (19,000), Europe and Central Asia (3,500), Latin America and the Caribbean (4,500) and the Near East and South Asia (37,000). The unallocated reserve quota is 5,000, bringing the total refugee quota to 80,000. Total refugee admissions in 2010 were 73,293; this is the only case we discuss where a quota was not completely filled.

From the applicant’s perspective, the problem with the application for asylum status is that acceptance is not automatic. There is a veritable laundry list of possible reasons for the denial of that application. This is the official list:

  1. Possession of a communicable disease of public-health significance.
  2. Possession of a serious physical or mental disorder.
  3. Status as a drug abuser or addict.
  4. Status as a former U.S. citizen who renounced citizenship for tax purposes.
  5. Status as a criminal guilty of “moral turpitude.”
  6. Violation of laws pertaining to controlled substances.
  7. Status as a criminal twice convicted of felony crimes.
  8. Having been convicted of prostitution within the previous 10 years.
  9. Having gained immunity from criminal prosecution to avoid penalty.
  10. Having the intention to practice polygamy in the U.S.
  11. Having the intention to violate (or abet the violation of) the immigration laws.
  12. Having been involved in international child abduction in any way.
  13. Having the intention to commit a crime.
  14. Status as someone whose admission would have adverse foreign-policy consequences for the U.S.

By far the most important element of an application for asylum, though, is the showing of a need for protection. There are 3 elements of this need:

  1. The applicant must demonstrate a fear of persecution.
  2. Government must be either the cause of the persecution or shown to be ineffectual in counteracting it.
  3. The basis of the persecution must be race, religion, nationality, political opinion or social group.

Economic evaluation of the refugee status visa: Once again, the particular of this section of the law betray its political intent. While some of the disqualifiers make sense, such as the communicable disease, criminal conviction and child abduction provisions, others seem obviously designed as pretexts for exclusion. The latter include the provision denouncing tax exiles and those referring to the intentions of applicants rather than their past deeds. In the criminal law, the principle of mens rea (literally, a “bad mind” or evil intent) plays a key role. This makes sense because proving commission of a crime will ordinarily involve a showing of intent. But in this case it is not clear exactly how the United States Customs and Immigration Service (USCIS) are to go about determining intent on the part of would-be immigrants. Equally dubious are provisions putting the finger on those with “mental disorders” and those guilty of “moral turpitude.”Then there is the provision excluding would-be refugee polygamists, which inserts a much-needed note of comic relief into the proceedings.

 

The easiest way to visualize the significance of this list would be to apply it to the passenger list of the Mayflower and the other pioneering voyages to the American colonies in the early 1600s. How many would-be colonists in early Virginia and Massachusetts could have passed this test? How many people who settled the American West could have run the above gauntlet unscathed? Throughout mankind’s history, immigration has been the leading means of making a new start in life, getting a second chance. Today, the U.S. immigration laws seem determined to foreclose this option. Just as the age-old saying holds that the best time to apply for a loan is when you don’t need one, the U.S. government apparently holds that people who are already successful are the only people who are genuinely welcome to come to the U.S. But if they’re already successful, what is their motivation to pick up stakes and move to a new country?

The persecution provision of the refugee provision is further proof of the political nature of the immigration laws. It is one thing to say (or imply) that the very nature of “asylum” implies protection from a threat, and that simple economic necessity is not a threat posed by human beings against other humans but rather a fact of nature and scarcity. That much is true enough. But this attitude implies that the immigration laws will have a section – somewhere – specifically devoted to legal immigrants who come to the U.S. solely to make a better life for themselves and their families. Well, this obviously isn’t the lottery visa or the refugee visa. Later, we will see that it doesn’t apply to the H1-b visa or the immediate-relative visa, either. In other words, the motivation spelled out on the Statue of Liberty, the one that impelled most new arrivals to America and made this country what it is today… is now absent from the immigration laws. Is it any wonder that illegal immigration swelled to epidemic proportions until dampened by the onset of the Great Recession?

Legal Path #3: The H1-B “High Skills” Visa

For at least two decades, U.S. employers have complained about the shortage of job-seekers with polished science, technology, engineering and math (STEM) skills. Congress responded to these complaints by creating a category of visa catering to applicants with those specific job-related skills. And once again there is a quota attached to this visa category. There is annual quota of 85,000 visas for this H1-b category, which has a minimum education requirement of a bachelor’s degree or the equivalent in a STEM subject.

Each year, this “high skills visa” attracts an oversupply of applicants. In 2013, there were 124,000 applicants for the 85,000 vacancies. In 2014, the oversupply increased again. And for 2015, some 233,000 applicants have applied. Given this burgeoning response to a crying longtime demand, the question arises: Why not at least bump up the quota? A bit of legislative history suggests that the answer lies exactly where an economist would expect to find it – with politics.

In 2012, a bill sponsored by House of Representatives Lamar Smith proposed increasing the quota by 55,000. But it also proposed to abolish the visa lottery, which many widely view as arbitrary and unfair – indeed, that was precisely how the 55,000 figure was arrived at. At the same time, Democrat Representative Zoe Lofgren has a bill to extend the quota by exactly the same number, 55,000 – but without abolishing the visa lottery. One would expect these bills to be reconciled, given only that single discrepancy. But it wasn’t – and nothing was done. In early 2013, a Senate bill was developed to raise the quota to 300,000. But various Republicans outside Congress, notably Jeb Bush, rejected its provisions in favor of “comprehensive immigration reform.” Either alternative would have had the virtue of doing something to promote legal immigration – but nothing was done. Later in the year, the Senate put together a comprehensive bill in response to the earlier demand for comprehensive reform. Now, though, House Republicans rejected this bill in favor of piecemeal immigration reform, claiming that comprehensive reform was bound to include objectionable features that would compromise security and play politics with the issue. And, predictably, nothing was done.

It is now obvious that the H1-b visa is the economic bait allowing politicians to switch away from action on immigration to politically inspired inaction. If politicians and legislators were really serious about aiding economic efficiency by encouraging immigration of skilled migrants, why have a quota at all? Just allow anybody with the skills to apply for a visa and accept applicants who can demonstrate the relevant skills, either in the form of academic credentials or work experience.

As it now stands, the H1-b visa is merely a blind permitting members of both parties to pretend to narrow – or rather, pretend to be always on the verge of narrowing without ever actually doing it – the yawning gap between the demand for skilled labor and its supply.

Legal Path #4: The K (Immediate Relative) Visa

U.S. citizens may petition the U.S.C.I.S. for a temporary immigrant visa (K visa) for spouse, fiancées and unmarried dependent children of those spouses and fiancées who are currently foreign nationals. (This is done via an I-130 form.) This temporary visa gives the recipient a maximum of 1 year to transform their status into that of a permanent legal resident. For example, fiancées have 90 days to marry the petitioner and apply for adjustment of status to that of legal permanent resident. Failure to comply will “subject them to removal proceedings;” e.g., deportation. (By the way, there are limits on the number of K-visa applications a petitioner can file without seeking a waiver of limitation.)

To obtain a V visa, signifying legal permanent status, a spouse filed an I-485 application for adjustment of status to that of legal permanent resident (LPR). This is accompanied by an I-693 (Medical Examination of an Alien) andG-325A (Biographic Information). These forms verify that the alien relative has not acquired undesirable medical conditions or bad habits (idleness or shiftlessness) since arrival. A date is set for fingerprinting, photographing and signature-gathering by the FBI, which runs a background check on the petitioner. All personal information is introduced into the U.S.C.I.S. database. The final step is an interview with a U.S.C.I.S. officer.

Economic evaluation of the immediate relative (K) visa: If there is anything at the opposite pole from economics, it is emotion – and that is the foundation of this section of immigration law. It exists to counter the specter of families and loved ones torn apart by the exigencies of economic necessity and the toils of bureaucracy. “See?” The K visa is supposed to whisper in the public’s ear. “The government does have a heart after all. When the husband has to labor in foreign vineyards, his wife and children are not left to pine away at home.”

The first thing to notice is that only U.S. citizens can petition for a would-be K visa holder. Thus, illegal immigrants cannot use this section to summon their relatives or loved ones to the U.S. Second, to the degree that the petitioner is an immigrant, this will reinforce the geographic patterns established by the other sections of the immigration laws. Wives, fiancées and children of permanent resident aliens will be predominantly nationals of the same country. Since the other sections of the law are inimical to economic efficiency, this one will be, too. Third, a close reading of the provisions banishes any notion of government as a sympathetic matchmaker who is reuniting spouses and lovers torn apart by cruel circumstance.

The minute the spouse or fiancée steps down from the gangplank or jetway, the government starts the clock ticking on the time available to them. Fiancées have 90 days to get married – or else get moving back where they came from. Wives have a year to get started on the road to full citizenship – or else. And for five years everybody is watched like inmates on parole. Then they get an examination worthy of an astronaut – or an applicant for a top-secret security clearance. And the rewards for enduring this endurance test include membership in one of our great involuntary clubs, a national database chock full of your own personal data. Doesn’t all this just call up strains of “Isn’t It Romantic?”

The Economic Purpose and Value of Immigration

The first thing that college students usually learn in an economics course is that “cost” is a real economic variable, not merely a monetary one, and that it is represented by the highest-valued foregone alternative in any human decision. The second thing is that resources (or inputs, or factors of production) should flow to their highest-valued uses. When economists say this, they do not qualify it by saying, “but this applies only when the resources exist within a household, or a neighborhood, or a city, or a region, or a state, or a country.” The statement is global in scope; it applies worldwide.

How important is it? Well, suppose we applied it in a limited way – only to global labor markets. According to Alex Nowrasteh, the Cato Institute’s specialist in international trade: “What would happen… if we took a radical policy – global open borders – and introduced it tomorrow? What would happen, in other words, if anybody could move to any other country and work legally? The estimate is that global GDP would increase between 50 and 150 percent, which is 35 to 105 trillion dollars in annual extra growth per year.” Nowrasteh estimates the present value to the U.S. specifically over the next 20 years at about 800 trillion dollars.

Ho hum. To paraphrase the late Everett Dirksen: A hundred trillion here, a hundred trillion there. Pretty soon you’re talking about some real money.

The upshot is that we want people to move between countries in response to the signals provided by money prices and costs. These signals are stand-ins for the underlying real tradeoffs in production and consumption. In particular, money wages are a stand-in for real wages, or wages relative to productivity. They affect the production decisions made by firms and the actions of workers – both domestic and foreign. It is vital that workers be allowed to move in response to wage differentials favorable to their interests, because this allows firms to take advantage of potential productivity enhancements. In turn, this enables the productivity enhancement to be passed along to consumers. That is what has happened in America ever since colonial days, when global-high wages first began attracting a steady stream of immigrants. Over time, the burgeoning supply of labor was more-than-counterbalanced by an increasing supply of productive capital goods that made existing labor more productive and kept wages high.

In the U.S. today, people routinely move from one neighborhood to another in search of a better job. People who live near a state line think nothing of crossing it to go to work. They will relocate within a country if the new job is sufficiently remunerative.

So why shouldn’t we cross international boundaries to pursue job opportunities? As a matter of fact, Americans take jobs abroad fairly often. Nobody thinks anything about that, other than to speculate on how much they will miss living here. But when an immigrant crosses the border to take a better job – or look for one – that is somehow… different. The same people who take American emigration completely for granted start looking for reasons to object to foreign immigration into America.

There is a standard list of those objections in every textbook on international economics. All of them are bogus – or rather, they apply with equal force to immigration within a country, just as objections to free international trade in goods and services are exposed as bogus when they are applied to intranational trade within countries. We would be crazy to restrict immigration between Missouri and Kansas, or between Kansas City, MO and Independence, MO, or between different neighborhoods in Kansas City. And it’s just as crazy to restrict immigration between the U.S. and foreign countries.

If anything, it’s crazier. Natural barriers to trade always exist. These include geographic distance, geographic obstacles such as mountains, oceans and climate, and language and culture. On net balance, these natural barriers loom larger between countries than within countries. Such barriers can allow very large productivity differences to arise and temporarily persist between nations. This makes it even more important to allow the natural corrective forces of free markets to overcome them.

When we factor in the artificial barriers created by quotas like those embedded in U.S. immigration law, the inducement to illegal immigration can become irresistible. At various times, estimates have appeared (in The Wall Street Journal and elsewhere) suggesting that low-skilled Mexican labor was worth five times more in the U.S. than in Mexico – that is, its productivity was five times greater here than in its native country. It is no wonder, then, than when economists Stephen Moore and Julian Simon surveyed a roster of economists, almost all of them said that the benefits of illegal immigration were the same as those of legal immigration.

This speaks inferential volumes about the value economists place on the U.S. immigration laws. In Charles Dickens’ Oliver Twist, the character of Mr. Bumble is accused of stealing jewelry belonging to Oliver’s mother. Bumble denies guilt, placing the blame on Mrs. Bumble. He is informed that this would actually increase his liability, “for the law supposes that your wife acts under your direction.” Indignant, Bumble responds that “If the law supposes that, then the law is a ass, a idiot!”

When it comes to the U.S. immigration laws, economists are prone to agree with Mr. Bumble that “the law is a ass.”

DRI-190 for week of 4-12-15: Should Government Subsidize Electric Cars?

An Access Advertising EconBrief:

Should Government Subsidize Electric Cars?

In a 2011 State of the Union address, President Barack Obama announced his intention to have one million electric-powered automobiles operating on American roads by 2015. This followed upon his administration’s decision in 2009 to provide $2.4 billion for electric-car production and research – $1.5 billion in subsidies for battery research and production and the rest in loan guarantees and subsidies for car companies. Ever since President Kennedy declared that American would put a man on the moon by 1970, we have become used to hearing Presidents proclaim national goals. Since the fulfillment of these goals invariably demands the expenditure of time, effort, and materials that have valuable alternative uses, the question naturally arises: Why?

Why should we do these things? Why not do other things instead? Since the President is not proposing to use his own money to achieve his goal, what gives him the right to use ours? Why not let us spend our own money to fulfill our own goals instead?

There is a classical, traditional answer to those questions. Government exists to do certain things that otherwise would go undone. Those things override in importance the ordinary goals of the citizenry. Those things are called public goods, which cannot be produced by private markets and are vital to civilized life.

But the mere existence of public goods as a rationale for government action does not make an ipso facto case for every activity undertaken by government. That case requires that the activity be certified as a public good. And hardly a man is now alive who remembers the famous day and year when that certification last occurred. These days we take it for granted that grandiose and grandiloquent pronouncements about what government will accomplish with our money will and should gush from the font of government in torrents. It is considered gauche to question the bona fides of these goals.

If there is anybody who is occupationally suspicious of this presumption, it is an economist.

Is Automobile Production a Public Good?

A public good cannot be produced profitably by private producers because it is both non-rival and non-exclusive. Non-rivalrous goods can be consumed by one person without reducing the amount available for consumption by another person. Non-excludable goods are those for which a price cannot be charged because a seller could not exclude buyers from consuming them. Air, sunshine and national defense are examples of public goods.

Automobile production meets neither of the criteria of a public good. An auto can be owned and driven by one person, which reduces the supply available for others to drive. Private producers can and do charge prices for the sale of automobiles.

Is an Electric Automobile a Public Good?

For our purposes, we will define “electric automobiles” either as those running exclusively on electric power – obtained from an electric motor powered by a battery recharged by plugging in to a power source – or a “hybrid” automobile utilizing both electric power and conventional internal-combustion motor power obtained from fossil fuel. As necessary, we will distinguish between those two types.

Electric automobiles are neither non-rivalrous nor non-exclusive. Their services cannot be consumed without reducing the available supply and sellers can exclude non-buyers by charging a price for their purchase. While it remains to be seen whether all-electric (“plug-in”) automobiles can be produced profitably, a negative resolution would not stamp them as public goods. There are uncounted numbers of goods and services whose production is not profitable, but it would be fatuous to label them as public goods for that reason.

Is It a Function of Government to Take Our Money and Invest It in Private Firms?

Government does not normally take our money to invest it in private firms. Instead, it allows us to invest our own money in private firms, whether we act as entrepreneurs, managers, active and passive portfolio investors or owners of derivative security instruments.

Throughout the 20th century, American capital markets were the envy of the world. Not only were they a giant magnet for foreign investment, but their efficiency gave rise to the economic theory known as the Efficient Markets hypothesis. Economists have argued about the degree to which it holds true – that is, about the degree to which capital markets incorporate all publicly available information in asset prices. But this argument itself testifies to the relevance of the theory. Economists have long believed that “active” management of portfolio investments is a chimera. They are convinced that the speed of information absorption by capital markets precludes average investors from employing active-management techniques to “beat the market” by regularly besting benchmark market indices like the S&P 500.

Government cannot claim to know anything about electric cars that is unknown to the private sector. Government cannot claim to know anything about investment that is unknown to private capital markets. Government cannot claim to know anything about investing in electric cars that is unknown to analysts of electric cars in the private sector. If government subsidies were distributed to particular companies on the basis on knowledge about (say) regulatory actions known within government but as-yet undisclosed to the public, this would be just as illegal as instances of “insider trading” that are now prosecuted by the SEC. If average investors cannot expect to “beat the market” through active management of (say) stock portfolios, government cannot invest money – in electric-car production or anything else – with any special expectation of success.

Does the High Risk of Investment in Electric Cars Make a Case for Government Subsidies? 

The face that the profitability of electric-car production is problematic means that investment carries a high risk. Private capital markets contain particular individuals who specialize in making high-risk investments in problematic industries. They are called venture capitalists. Venture capitalists are people who have a high tolerance for – indeed, a liking for – risk.

Superficially, it may seem that an individual who takes on a large number of risky investments is inviting disaster. That is a fallacy, at least when the individual is a specialist in both investment and risk-bearing. The principle of risk spreading is utilized successfully by both venture capitalists and insurance companies. Life-insurance companies take on large numbers of risks, each having a small probability of a large loss. The occasional large loss is more than counterbalanced by the many small gains. Venture capitalists take on a large number of risks, each one having a small probability of a very large gain. The occasional huge gain more than counterbalances the frequent losses.

A free, capitalist economy operates on the principle of mutually beneficial, voluntary exchange. In this case, it allows the people best equipped and most willing to bear risk to do it. In contrast, when government takes our money to invest it in electric cars, it brings no special competence to the task. It brings with it no aptitude or eagerness for risk bearing. Then again, government is not bearing the risk of failure. Taxpayers are bearing that risk. Most taxpayers lack both the risk-bearing competence and willingness possessed by venture capitalists. And those few taxpayers who do happen to possess that talent don’t need government to invest their money for them because they are quite capable of doing it for themselves.

If Electric Cars Are Not Public Goods and Government Has No Special Information, Competence, Talent or Incentive to Invest In Them, Then Why is Government Subsidizing Electric Cars?

Most proponents of electric vehicles dislike conventional vehicles and consider them “bads” instead of “goods.” For this reason, they find it fitting and proper to subsidize the production of electric vehicles pending the day when electric-vehicle production will become profitable. Then the production of “good” electric vehicles will supersede the production of “bad” conventional vehicles. The problem with this thesis is that it is not widely shared – to put it mildly. If it were, electric cars would not require subsidies by government. They would be profitable to produce because the demand for them would be much, much higher than it currently is.

In other words, the subsidization of electric cars represents the arbitrary elevation of the will of electric-car proponents over that of the general population. It is not merely that electric-car proponents are assumed to be smarter than other people. If they were really smarter, their policy positions would not require subsidy by government. No, electric-car proponents are assumed to be nobler then other people. Their views are assumed to be more worthy of attention, their will more worthy of deference. They are assumed to be morally superior to other people.

Why Do Electric-Car Proponents Consider Conventional Automobiles to be “Bads?” 

These people have long excoriated automobiles for a long list of reasons. First, the residual by-products of the internal combustion process are emitted as exhaust through automobile tailpipes and produce various kinds of air pollution. The two primary types are gases and particulate matter.

The particulates have long been a source of irritation to the lungs of humans and other species. This irritation is comparatively minor to healthy adults but can have more serious consequences to the very young, the very old and the sick. The gases can combine with particulates to obscure the lower atmosphere with an artificial fog described as “smog.”

While it was once a serious problem, air pollution in Western developed nations is now a comparatively minor problem. The efforts of government – clumsy, inefficient and glacially slow in operation – have reduced gradually air pollution to manageable levels.

Thus, the focus of so-called “environmentalists” – the term is a misnomer since there is no unambiguous definition of “the environment,” no objective set of principles defining adherence to the movement and no objective dicta delineating either adherence or opposition to those principles – has now shifted away from pollution as such to the problem of “climate change.” (This is itself a pivot away from the original issue of “global warming.”) Carbon dioxide admissions contribute to the proliferation of greenhouse gases, which supposedly promote anthropogenic increases in average atmospheric temperatures.

Are Electric-Car Proponents Correct in Their Condemnation of Conventional Vehicles? 

Electric-car proponents do not mention the fact that the fraction of greenhouse gases contributed by automobile emissions is very low. Even those economists who find the climate change/global warming hypothesis plausible – some, but not all economists – would admit that any benefits gained from reducing or even eliminating automobile emissions would correspondingly be very limited.

If conventional vehicles were to be arbitrarily displaced by electric vehicles – that is, if electric vehicles were made artificially viable by government subsidies and then substituted for conventional vehicles by command of the government – the small putative benefits in reduced greenhouse gas emissions achieved would have to be weighed against the costs imposed by the loss of conventional vehicles. Those losses would be gigantic, too enormous to grasp. The principal liability of electric vehicles is their limited range, the tiny travel radius dictated by the inability of the lithium-ion battery to deliver more than about 30-40 miles worth of driving from a fully charged battery. Moreover, a recharge takes hours, not minutes. Thus, electric cars as currently configured are suitable only for people whose range of travel is limited. Forcing them on everybody else would be a devastating loss of real income on the nation.

Battery-related immobility is not the only drawback of electric cars. They would consume vast amounts of electric power. That power must be produced somehow. Today large amounts of power are produced using fossil fuel as the energy source, either from coal, oil or natural gas. Thus, a big chunk of the greenhouse-gas emissions gains at the (non-existent) tailpipes of electric cars would be lost at the power-generation source.

Economics is all about making people better off. Right now, electric cars make a very few people better off and would make the vast majority of people much worse off. Their proponents plead in favor of a cause – reduction of greenhouse gases – that might be aided slightly by forcing people to use electric cars or might not even be aided at all.

Thus far we have trafficked mainly in generalities. Now we will examine actual government subsidies of electric cars to see how this experience tallies with our theoretical generalizations.

Have government subsidies to electric cars been the subject of research or investigation?

Yes. A series of investigative reports by then-CBS News correspondent Sharyl Attkisson and her producer Jennifer Jo Janisch on Obama administration subsidies to “green-energy” projects appeared on the network in 2012. The series was subsequently nominated for an Emmy award in investigative journalism. Parts of the series dealt with subsidies to electric-car production and subsidies to companies producing and researching batteries for electric cars.

Attkisson and Janisch visited Elkhart, IN, in one segment of the series. It was the kickoff site for President Obama’s green-energy initiative in 2009. (The city was chosen because it was so hard-hit by the recession then in progress.) As part of the President’s economic stimulus plan, the Norwegian company Think Global received $17 million in tax credits to build electric cars in Elkhart. The company’s business plan called for it to hire 400 workers and eventually produce 20,000 electric cars per year. But by the August, 2012, air date of the segment, the plant was “near deserted.” It was bankrupt.

The fact that one electric-car firm went bankrupt over a three-year period is not, in and of itself, surprising or evidence of malfeasance or bad judgment by government. After all, this was and still is venture-capital territory. But it is also not surprising for another reason. The firm had sustained three previous bankruptcies. Attkisson writes (in her book Stonewalled: My Fight for Truth Against the Forces of Obstruction, Intimidation and Harassment In Obama’s Washington) that “one of its primary investors, Enerl, had also recently gone belly-up after spending $55 million of a $118.5 million federal grant to manufacture batteries for the Think City cars.”

One of the most famous electric-car companies and another subject of the CBS series was Fisker, maker of the electric Karma sports car. The company was projected to turn out 75,000-100,000 of these per year by 2014. Toward that end, Fisker received a $528.7 million loan that was guaranteed by the federal government. The guarantee proved to be more than merely a formality when that company also went bankrupt in 2012. Fisker’s fate, too, was joined to a company making electric-car batteries. A123 Systems manufactures lithium ion batteries using the $249 in stimulus money ladled out by the federal government in 2009. By now the pattern is becoming clear. Sure enough, A123 declared bankruptcy in 2012 as well.

In 2011, President Obama announced the goal of 1 million electric cars on the road by 2015. It is now 2015. Where do we stand relative to the President’s goal?

In 2014, Attkisson set out to find an answer to that question. Her first move was to find out where the White House originally derived its 1 million figure. Here is her explanation:

“I find out that [the White House] counted on eleven models of electric vehicles to reach specific production figures year by year. All I need to do is to compare those with the actual figures to date. [She explains how she obtained the data in various ways.] What I find out is that six of the eleven models either haven’t made their first delivery, have stopped production, or are already out of business. Others are nowhere near the government’s projections. Only one company, Tesla, is meeting or anticipates it will meet the administration’s production goals. But… a million total by 2015, there’s no way that’ll happen.”

Atkisson estimated that the industry would be able to muster only about 300,000 vehicles by 2015. From today’s perspective, we can see that Attkisson’s estimate of 300,000 was a good one. Figures that date to either Dec., 2014 or Mar., 2015 production have been used to derive an approximate number of 291,000 electric vehicles on U.S. roads currently. That includes sales of over 165,000 by the world’s largest-selling electric vehicle, the Nissan Leaf. The best seller of Tesla’s three Model S electric cars scores nearly 57,000. Various other firms contribute small production numbers to make up the total. Firms no longer producing account for a trickle: Fisker managed to get 1,800 Karma’s on the road before folding, Think City pushed 263 electric vehicles out the door before closing its doors and Ford Transit Connect (another federal-subsidy recipient) produced 500 electric cars before going bankrupt.

Parenthetically, we should note that there is an element of subjectivity involved in this calculation. The spirit behind President Obama’s goal – the drive to replace fossil-fueled cars with electric cars – demands that only all-electric cars be tabulated and that hybrids be excluded. It certainly makes sense to exclude the 3 million in sales by Toyota Prius, the leading American (and world) hybrid, because this car’s electric motor only operates when it is traveling under 25 miles per hour. This limits its operation primarily to trips of less than one mile. At normal speeds, the Prius is just another fossil-fueled, internal combustion car. On the other hand, the Chevy Volt operates purely as an electric vehicle until its battery charge falls below a threshold level. It wouldn’t be unreasonable, therefore, to add the Volt’s 73,000 U.S. sales to the above total.

In true journalistic fashion, Attkisson professes astonishment as these outcomes. “How could the government experts have been so wrong? Were these failed enterprises alone among an overwhelming body of successful green-energy initiatives funded by tax dollars? No.” But as we have already explained, there are no “government experts.” The only experts reside outside of government. While it is true that government sometimes contracts with experts in the private sector, it never does so for purposes of obtaining their investment advice. What would be the purpose? It might as well allow the private capital markets to allocate capital in the first place. And government would have to pay the experts to give advice that it has no intention of following.

At a Congressional hearing in 2012, then-Secretary of Energy Steven Chu was asked “how he would grade himself on managing taxpayer investments.” His answer: “Maybe an A-minus.” According to Attkisson, “he felt he’d had a great deal of success.” It is difficult to say which is more eyebrow-raising – Secretary Chu’s high opinion of his performance or the general acceptance of the term “managing taxpayer investments.”

In any case, Secretary Chu’s success is nowhere evident. One of the most heavily publicized and eagerly anticipated electric vehicles was the heavily subsidized Fisker Karma, a trim green sports car. Eagerly anticipated, that is, until its review in the closely watched publication Consumer Reports. “We buy about 80 cars a year and this is the first time in memory that we have had a car that is undriveable before it has finished our check-in process,” wrote the magazine’s reviewer. The Karma, it seems, broke down on its check ride and had to be towed away.

Why is Government Indifferent to the Investment Results of Projects it Subsidizes?

The Norwegians who owned Think Global were willing to build a plant in Elkhart, IN. Elkhart had supposedly lost more jobs than any city in the U.S. in the recession up to that point. This allowed President Obama to pose as a man of compassion for the unfortunate unemployed who was “creating jobs” by redistributing money (away from the rich 1%?) to the poor in Elkhart. The reality that this fantasy never happened only dawned on the few people who saw and understood the CBS series three years later. The Fisker plant was built in Vice-President Joseph Biden’s home state of Delaware. As Attkisson notes in her book, President Obama’s green-energy program is shot through with subsidies given to political cronies and contributors to Democrat causes, some of them being people with little or no experience or records of success in the relevant fields.

The proponentsof electric cars wanted government subsidies because they believed in their cause of greenhouse-gas reduction. But the only cause government supports is the furtherance and perpetuation of government itself. Government has no interest in solving problems per se. Government pretends to solve problems because this provides an ideal pretext for spending money, hiring staff, looking busy and attracting attention – all the things that enables government to absorb money and going on doing so. Actually solving problems would reduce the need for absorbing money and resources and ultimately reduce the need for government, which is counter to every incentive inherent in the bureaucratic structure of government.

Why Do Citizens Who Want Problems Solved Tolerate Government’s Failure to Solve Them?

Citizens want problems solved, but they also want other things. Just as many children accept the burdens of adulthood and responsibility only reluctantly, many adults cherish the fantasy of an outside force that will relieve them of responsibility for their own fate. In childhood, that role was played by one or both parents. In adulthood, that role is now increasingly played by government. This relief comes in two forms. First, government supplies them with an oppressor or oppressors upon whom they can pin the blame for their dissatisfaction with their own station in life. Second, government offers them the lure of all-purpose security against various threats: old age, illness and death, destitution, relative poverty and inferior status due to the prejudices or moral opprobrium of others.

In short, government is now playing the de facto role of Mommy or Daddy for some significant fraction of citizens in the Western world. People who rely on government for their security are not about to fight its redistributive claims on other people – or even, within wide limits, on themselves.

Is It Possible That Electric Cars Have Not Succeeded to Date Because the Government is Not Doing Enough to Subsidize Them? 

On the contrary – so far we have outlined only the subsidies to electric-car production and research. But the consumption of electric cars has also been subsidized at both the federal and state-government level. The federal government has provided a $2,000 tax deduction for purchase of a plug-in electric car. At least 22 individual state governments (and the District of Columbia) have provided various forms of additional subsidy (tax credits, deductions and rebates are examples) for purchase of electric cars. For that matter, so have 22 European countries, Canada, Australia, China, India and Japan. Since the prices of all-electric cars exceed those of all but the most expensive conventional vehicles, it is not surprising that subsidies are necessary to motivate their purchase.

Electric cars have been a failure so far in spite of massive attempts by government to force them on the public. The demand for those cars does not exist do any significant extent despite government’s efforts to create it.

Would Electric-Car Production and Research Cease If Not for Government Subsidies?

The only way to find out with certainty is to stop the subsidies. But the evidence to date suggests that the answer is no. Research on lithium ion batteries would not stop because they are used elsewhere – for example, in airplanes. Electricity is vital to computers and digital communications and batteries are the principal means of storing electricity. There are now about 14 different makes of electric car capable of attaining highway speeds being produced or in various stages of production in the U.S. (Many exist in foreign countries, where over 400,000 electric cars are on the road.) Since Sharyl Attkisson’s original White House list of subsidy recipients consisted of 11 companies, only a few of which are still in business, it is clear that subsidies are not a necessary precondition for production of electric cars.

Should Government Subsidize Electric Cars?

There is no economic case to be made for subsidies of electric cars by government.

DRI-197 for week of 4-5-15: The Political Economy of Pizza Parlors, Flower Shops and Religious Freedom

An Access Advertising EconBrief:

 The Political Economy of Pizza Parlors, Flower Shops and Religious Freedom

This is how bad things are: Political polarization has replaced the weather as the default topic of conversation. A good operational definition of a “baby boomer” is as a person who can remember when “Hot enough for you?” was the popular conversational lubricant. Today, coffee shops are midwiving dialogues on race between their customers – as part of their business plans!

How did we reach the point the public’s pulse rate reads “seething hatred?” An explanation begins with delineation of the controversy du jour – the ongoing debate over “gay marriage,” recently revived by passage of state-level versions of the Religious Freedom Restoration Act in some 20 states.

Concise examination of the issues is best served by a question-and-answer format.

What’s going on here? Wasn’t the question of gay marriage settled by legislation?

In 21st-century America, nothing is settled until the Supreme Court rules – and sometimes not even then. As of this writing, Supreme Court rulings have tended to invalidate the state laws invalidating gay marriage – but in such a way as to leave room for doubt as to the ultimate outcome. Even more exasperating, the term “gay marriage” itself is disturbingly ambiguous, hence the quotation marks.

How can that be true?

 

All of us have a mental picture of marriage that tends to overlook its dual meaning in the different contexts of law and theology. In law, marriage is a contract. As such, it is a voluntary compact between individuals that binds both parties to certain duties and obligations under the law. It is altogether fitting and proper that government have the power to sanction and enforce the terms of contracts; that is one of the inherent purposes of a limited government. That is a key distinction between the state of law and anarchy.

But in theology, marriage is, or tends to be, a holy sacrament. A limited government has no authority to pronounce on the fitness or validity of religious doctrine, provided the doctrine does not infringe upon the legal rights of disciples or outsiders.

What is the relevance of this distinction to the current controversy?

 

Many states have passed laws preventing issuance of marriage licenses to gay couples. Proponents claim to be “protecting” the institution of marriage. Meanwhile, homosexuals of both sexes (as well as those whose sexual identity is undetermined) have organized into a political coalition whose animating spirit is that homosexuals are “discriminated against” by those who are not in sympathy with their sexual practices. This movement strives to enlist the power of government against this “illegal discrimination.”

Needless to say, these two sizable groups of people are in direct conflict with each other. And both groups are in error because they fail to appreciate – or deliberately ignore – the distinction between marriage in law and in theology. Each group wants to use government to impose its views on the other.

Why are the laws opposing gay marriage wrongheaded?

 

It is vital to distinguish between disapproval of homosexual conduct as such and legal refusal to sanction a voluntary contract between consenting adult individuals. A legal marriage contract between two consenting adults is voluntary. It does not infringe on the rights of third parties. Under the Declaration of Independence and the Constitution – the founding documents of our republic – freedom of contract is sacrosanct. Granted, this freedom has been abused at an increasing rate by big government beginning in the 19th century and throughout the 20th century. But there is no doubt that the state laws forbidding gay marriage constitute yet another flagrant abuse of freedom – as flagrant as any yet seen. In effect, they consign homosexuals to inferior legal status. The fact that homosexuals long languished in just that condition doesn’t change matters, any more than the existence of black slavery from 1776 to 1863 constituted an argument against the Emancipation Proclamation.

While proponents of anti-gay-marriage laws don’t tend to cite anti-sodomy laws, they do claim that they are protecting the social institution of marriage against disintegration. How do you reply to that claim?

 

They claim to be protecting marriage – but claiming it doesn’t make it so. When a gay couple marries, this does not affect the ability or proclivity of heterosexuals to marry. The existence of married homosexuals does not impair the ability or proclivity of heterosexuals to marry, any more than the existence of unmarried homosexuals does.

Politically organized homosexuals tend to argue that homosexuality is biologically (e.g., genetically) programmed, hence beyond the scope of individual control. Their opponents tend to argue that homosexual behavior is a matter of individual choice. There is evidence on both sides of the debate, but to the economist the debate is irrelevant. No matter whose view you endorse, homosexuality and heterosexuality are not economically competitive. Therefore, tradition marriage cannot be harmed by the existence of homosexuality, let alone legalization of gay marriage.

The practices would be competitive if an individual found them to be close substitutes for each other; that is, if he or she moved freely from one to the other based on small changes in the relative attraction of the two. To provide a concrete example, suppose a man is contemplating marriage to a girl when his state legalizes gay marriage. At this point, he says “No, I believe I’ll marry my friend, George, instead.” An economist would then say that he regarded homosexuality and heterosexuality as close substitutes, and a sociologist would say that legalized gay marriage had adversely affected the institution of traditional heterosexual marriage.

No scientific study has identified this as the general case, or even an empirically important case. No opponent of gay marriage would lean on bisexuality for support, either. And this should not surprise us, since homosexuality has existed side by side with marriage throughout recorded history. During this time, traditional marriage was born, became popular, reached its zenith and only recently hit the skids.

The evidence strongly supports the benefit of traditional marriage and family for childrearing and social cohesion. But laws nullifying the rights of homosexuals do nothing to improve matters. Neither desperation over the decline of traditional marriage nor disgust over the practice of homosexuality can justify the abrogation of freedom of contract.

You implied dissatisfaction with the stance of organized homosexuals as well. Where have they gone wrong?

 

That is an even longer story. Really, it encompasses not merely the rise of homosexuality as a political movement, but the growth of government as the political left prospered by catering to special-interest blocs. Each bloc became a constituent class of the left wing and the Democrat Party. This is the overarching political narrative of the 20th century. Homosexuals are merely a new addition to this collection of special-interest voting blocs.

The concept of “discrimination” looms large in the vocabulary of any aggrieved or victimized minority group. What part does it play in the claims of organized homosexuals?

 

From the beginning of their organizing activities, homosexuals have sought to hook on to the protected status enjoyed by blacks and women as “minorities” protected from “discrimination” by the majority. (This is particularly piquant in the case of women, who constitute a numerical majority of the population.)

To what extent does the notion of discrimination – as put forward by these groups – entitle them to special treatment by government?

 

To no extent. Indeed, the historic problem of discrimination has been one of securing protection from government. The classic cases were the infamous Jim Crow laws imposed in the American South and the colour-bar (apartheid) laws passed in southern Africa during the 19th century. Jim Crow eventually spread to the North and produced racially segregated schools and considerable segregation in hotels, restaurants and residential housing.

The seminal principle of the Rule of Law, dating back over a century in English common law, is equal treatment of all citizens by government and the absence of privilege. Thus, discrimination by government violates the Rule of Law.

Government occupied a unique place in society. It exists to protect individuals against coercion by others. To accomplish this task, it must be able to coerce those who themselves try to coerce. In economic terms, government must be given a monopoly on the use of force and violence. The existence of this monopoly accounts for our insistence that government obey the Rule of Law, so that government may not become a tool for some people to tyrannize over others.

But this same principle of non-discrimination cannot apply to private individuals.

Why not? Why shouldn’t we be forced by treat everybody alike?

 

The short answer is that only a totalitarian state could even attempt to enforce the principle of non-discrimination applied to all private individuals – and even the strongest dictatorship would fail in its attempt while making its population miserable in the process.

Everybody “discriminates” against the things (and people) they dislike and in favor of the things (and people) they like every day of their lives. We eat at one Italian restaurant instead of another one because we like one style of Italian food better than another. We eat at Chinese restaurants rather than Italian restaurants because we like Chinese food rather than Italian. We become vegetarians because we believe it is healthier – or perhaps morally preferable. It never occurs to us that we are guilty of “discrimination” against Italian restaurants or steakhouses. Before the word “discrimination” became a pejorative, it was a compliment to be called “a man of discriminating taste.”

Over fifty years ago, F.A. Hayek theorized that we form subjective theories about the nature of reality that govern our everyday life because our minds cannot absorb and retain the totality of objective reality. When we act on the basis of our theories, we discriminate as a way of compensating for our unavoidable ignorance. The pretense that government can somehow sort out what forms of discrimination are objectively valid in our private lives is just that – a pretense. Contemporary government adopts this pretense because it allows politicians to cater to special-interest groups by granting them favored status. This is a way of redistributing money and status in their favor; e.g., discriminating against the non-favored, from whom the money is taken.

Because markets collate and transmit so much information that is dispersed in the brains of billions of people and would otherwise never be known in usable form, they greatly improve the quality of our lives. They also punish us when we discriminate wrongly, on the basis of misperceptions or mistaken value judgments. If we refuse to buy from somebody we dislike, we may lose out on the purchase. If we refuse to sell to somebody we distrust or disapprove of, we may lose out on the sale. These disincentives apply because competitive private markets tend to equalize the ex-ante (planned) quantities demanded and supplied of goods and services. Thus, competitive markets have built-in penalties or disincentives for discrimination based on subjective, unfounded criteria.

Consider the matter from the perspective of the victim of discrimination – the person of the refusal. If somebody is turned down for a sale, they can always turn to others in a competitive market. By definition, there are lots of “others.” The same holds true for buyers looking for a seller. Indeed – to apply this concretely to homosexuals – a refusal to sell or cater to homosexuals would have the effect of creating a ready-made market, easy to identify with plenty of ways to reach it through advertising. We would expect entrepreneurs to rush into the breach, drooling with anticipation, at the prospect. Whether they personally approved of homosexuals or not would be beside the point – they would approve of the money to be made from the venture.

In contrast, governments do not face disincentives from practicing discrimination as sellers or buyers because they face no profit motive. Virtually by definition, limited governments face no competition for the services they provide, such as police protection, criminal justice and national defense. When they discriminate against some individuals and in favor of others, victims have nowhere to turn for relief or redress. Governments have no fear of discrimination being exerted against them because they possess a monopoly of force and violence. That is why the principle of non-discrimination must be rigorously enforced against government.

It is logical to wonder whether non-discrimination can be enforced against government when discrimination is ubiquitous in the private sector. It can be when government is rigorously limited in size and scope. That is one more reason why government must be confined to its constitutionally stipulated duties.

If the First Amendment to the U.S. Constitution guarantees the free exercise of religion, why is it necessary for over 20 states to pass laws called “religious freedom restoration” laws?

 

In November, 1993, Congress passed the “Religious Freedom Restoration Act.” (RFRA). In 1997, courts ruled this law invalid when applied to state governments, although valid at the federal level. (Essentially, Congress was allowed to modify or amend federal laws but not state-government laws, which explains the distinction.) Thus, individual states each passed a version of this law that would be valid in their state.

That explains the necessity for state laws, but not the rationale for the original legislation. What was it?

 

The original federal legislation was sponsored in the House of Representatives by Chuck Schumer (D-NY). Its companion version in the Senate was sponsored by Ted Kennedy (D-MA). The legal principle applied by the legislation was to invoke the principle of “strict scrutiny” whenever a law was found to burden adherents of a religion. That principle says that, to pass constitutional muster, the law must satisfy two tests. It must “further a compelling government interest,” which means it must relate to some government purpose specified in the constitution. It must also be the least restrictive means to achieve that purpose.

The general idea behind the law was to allow automatic judicial review of any law that had a link, however tenuous, to religion. Thus, to quote from The Wall Street Journal, “RFRA disputes typically involve Muslim prisoners who are told they cannot wear beards, or the inner-city Chicago churches that zoning laws prohibited from feeding the homeless in 2000, or the Arizona carillon bells that neighbors complained were too loud in 2010. They are about the Sikh who was fired by the Internal Revenue Service in 2005 for carrying a kirpan, the small knife that Sikhs believe is an emblem of justice.” They “very rarely implicate gay rights.”

It seems ironic that a law originated by hard-core liberals like Chuck Schumer and Ted Kennedy should now form the basis for laws used by conservatives as a tool to protect religious freedom – and demonized by liberals as a conservative plot to discriminate against homosexuals. How do you account for that?

 

Mostly, it is accounted for by the common desire of all politicians to recruit voters. Of course, the state most associated with anti-gay-rights rhetoric, Indiana, was at pains to pass a “revision [that] clarifies that [its] RFRA does not authorize a business to refuse to offer ‘services, facilities, use of public accommodations, goods, employment, or housing’ on the basis of sexual orientation or gender identity.” Why? “Indiana’s Republicans felt they had little choice lest the state suffer economic damage.” This is practical confirmation of the theory outlined above; politicians believe so strongly in that theory that they couldn’t wait to act lest it be confirmed.

How did Indiana come to be identified with anti-gay rhetoric?

 

A television news reporter solicited the opinion of a pizza-parlor owner about Indiana’s RFRA law. The owner said that, while she cheerfully served gay customers in her restaurant, she would prefer not to cater a gay wedding. The adverse public reaction to the statement coaxed from her led to threats and the closure of her business. (In turn, that has prompted donations from people sympathetic to her stance.) Despite the fact that Connecticut has its own RFRA, the state legislature there banned taxpayer-funded travel to Indiana to protest the alleged discrimination against homosexuals embodied in Indiana’s version. The President of the NCAA chimed in with a denunciation of the Indiana law, as did Wal-Mart in an official statement. Curiously, as the Journal noted, these reactions won the approval of the same liberals who customarily censure corporations for engaging in political speech.

Aside from the considerations you already adduced – citing economic theory and political philosophy – are then any legal considerations that argue in favor of enforcing anti-discrimination laws against people who – unlike the Indiana pizza-parlor owner – actually refuse to serve homosexuals?

 

If the people are private individuals working in the private economy, the answer is no. Andrew McCarthy wrote an excellent piece on the National Review website that cited the longtime common-law refusal to require what is called “specific performance” in contract law. In cases, where a defendant can show damage from a refusal to perform – that is, to honor an explicit or implied contract – a court will normally grant monetary damages as a way of making the defendant “whole” or righting the wrong. But requiring somebody to do something they find offensive is itself a wrong; it is characteristic of a totalitarian state.

The wording of your answer implies a role for anti-discrimination law. What is it?

In line with the earlier distinction between competitive markets and government, we should contemplate the case in which a service provided solely by government – rapid transit, perhaps – refuses to serve certain customers or deliberately degrades the quality of service provided. Now the case for requiring government to provide service to all is very strong. First of all, the monopoly status of the service means that the customer(s) lack competitive alternatives. Second, government as an entity is an abstraction, not a person with tastes and moral sensitivities that must be respected in the same way as those of a private individual. Of course, government employees are individuals, but there is no case for granting them leeway to discriminate since they are not required to work for the government – they have competitive employment alternatives in the private sector should they object to obliging the people served by government.

What about public utilities? In most of the world, goods and services produced by public utilities are provided by firms owned and run by government. Those firms are staffed by government employees and operated by government, so your previous answer would cover them. But in the U.S. and Canada, public utilities are private owned and operated as profit-regulated, privately owned firms that are regulated by public-utility commissions. Where do they fall on your anti-discrimination spectrum?

 

That is a very interesting question. Superficially, it might seem that since North American public utilities often exist in the private sector, we should rely on the market to discipline them for discriminatory behavior. But the fact that they are profit-regulated means that the profit motive no longer acts as a check on their behavior. If the utility were to discriminate against certain customers by (say) refusing service, it would not lose profits because the law allows it to recover sufficient revenue to cover its cost of capital; it could just raise rates on the remaining customers to compensate for the lost sales. The same government regulation that ostensibly protects the public against corporate rapacity actually subjects it to greater risk.

No doubt that is one reason why the doctrine of “universal service” was adopted as a regulatory mantra in such utility industries as telephone and electricity. This required utilities to cover all classes of customers provided they paid their bills. (If not, they would be unceremoniously dropped.)

But the great black economist Thomas Sowell has observed the historical tendency of public utilities to discriminate against blacks in their hiring practices. Again, a private firm would pay a penalty for discriminating against any class of people containing productive workers, because the reduction in productivity would hurt its bottom line. But a profit-regulated public utility can’t suffer a sustained loss of profit because it can raise rates as needed should its profit fall below the regulated level. Because it is a monopoly and there are no close substitutes for what it produces, customers will not drop its product or service in favor of an alternative provider when its rates rise. Its sales volume may fall slightly, but by a smaller percentage than the percentage increase in its rates.

Once again, we see the logic underlying the economic theory of discrimination confirmed.

Could you summarize the correct approach to the problem of discrimination?

 

The problem of discrimination exists when practiced by government against its citizens. The solution is to limit the size and scope of government and make it adhere to a constitutional Rule of Law stipulating equal treatment of all citizens.

Free competitive markets punish unfounded discrimination practiced by consumers or producers. This does not eradicate discrimination but it does provide the strongest possible disincentive to it. And after all, government regulation cannot hope to eradicate discrimination, either.

Does anybody agree with your solution?

 

Only Richard Epstein, who is described by The Wall Street Journal as “arguably America’s leading libertarian law professor.” His arguments on the issue of discrimination run parallel with mine. Otherwise, defenders of free markets seem intimidated by the assault on liberty. Even die-hard defenders of free markets like Reason Magazine and The Wall Street Journal’s editorial staff seem aghast as the virulence of the left-wing attack on freedom, religious and otherwise. The Journal’s editors assumed that the “speech and conduct… of sole proprietors in wedding industry, such as florists, bakers, photographers and singers” was “protected by the First Amendment.” Columnist William McGurn has discovered that political backlash from the homosexual movement “can mean an end to your small business; it can mean your church institutions – from schools to adoption agencies – can no longer run themselves according to their principles, and if you are a Silicon Valley CEO, it can mean you lose your job. Whatever else this is, it certainly isn’t live-and-let-live.”

Surprise, surprise. But the editors are reduced to tut-tutting that supporters of same-sex marriage will “lose… good will” by “illiberal[ly…] stomping on religious liberty.” People who seek government discrimination in their favor have long since ceased to care about good will.

Sooner or later, we must learn that there is no compromise in the defense of freedom.

How are we actually handling the problem of discrimination?

 

We are pretending to solve a problem that does not really exist; namely, the problem of discrimination in private markets. This pretense occurs through the medium of statutory and regulatory law administered by the federal government. This means that the federal government is running a massive system of discrimination against private citizens in the name of fighting discrimination. It is doing this to curry favor with the various voter blocs who have attained protected status under the anti-discrimination laws – blacks, women and now homosexuals.

Didn’t you say earlier that the federal government couldn’t operate such a system without creating a totalitarian state?

 

Correct. And so it has. As it stands, there is strong resistance to this conclusion because everybody knows that the United States are not governed by a dictator. How can we be living under totalitarianism if there is no dictator?

The great economist and social theorist F.A. Hayek developed the concept of “absolute democracy” in the 1970s. This is the form of totalitarianism he foresaw for the welfare states of the Western industrialized world, and this is what we have today in the U.S. It is a democracy because we vote on the leaders who govern us. But it is a form of absolutism because those leaders and the government mechanism they administer have virtually absolute power over us. The constitutional checks on the power of government have shriveled nearly to insignificance. The debate over discrimination is just the latest evidence of this fact.

Given this state of affairs, the extreme polarization afflicting the body politic is entirely understandable and predictable. Enormous sums of money are spent electing our leaders because nobody wants the “other side” to exert total power over them. Money has invaded and pervaded the realm of government as never before because everybody fears a government that has the power to do anything to anybody. Everybody is trying to curry favor with government and buy it off because everybody sees a binary choice – either government will discriminate in your favor or against you.

The only remedy for this “war of all against all” is a limited government in which competitive markets substitute for government whenever and wherever possible. That is the only regime mankind has invented that combines freedom with prosperity.

DRI-211 for week of 3-29-15: Which First – Self-Driving Cars or Self-Flying Planes?

An Access Advertising EconBrief: 

Which First – Self-Driving Cars or Self-Flying Planes?

As details of the grisly demise of Lufthansa’s Germanwings flight 9525 gradually emerged, the truth became inescapable. The airliner had descended 10,000 feet in a quick but controlled manner, not the dead drop or death spiral of a disabled plane. No distress calls were sent. It became clear that the airplane had been deliberately steered into a mountainside. The recovery of the plane’s flight data recorder – the “black box” – provided the anticlimactic evidence of a mass murder wrapped around an apparent suicide: the sound of a chair scraping the floor as the flight crew’s captain excused himself from the cabin, followed by the sound of the cabin door closing, followed by the steady breathing of the co-pilot until the captain’s return. The sounds of the captain’s knocks and increasingly frantic demands to be readmitted to the cabin were finally accompanied by the last-minute screams and shrieks of the passengers as they saw the French Alps looming up before them.

The steady breathing inside the cabin showed that the copilot remained awake until the crash.

As we would expect, the reaction of the airline, Lufthansa, and government officials is now one of shock and disbelief. Brice Robin, Marseille public prosecutor, was asked if the copilot, Andreas Lubitz, had – to all intents and purposes – committed suicide. “I haven’t used the word suicide,” Robin demurred, while acknowledging the validity of the question. Carsten Spohr, Lufthansa’s CEO and himself a former pilot, begged to differ: “If a person takes 149 other people to their deaths with him, there is another word than suicide.” The obvious implication was that the other people were innocent bystanders, making this an act of mass murder that dwarfed the significance of the suicide.

This particular mass murder caught the news media off guard. We are inured to the customary form of mass murder, committed by a lone killer with handgun or rifle. He is using murder and the occasion of his death to attain the sense of personal empowerment he never realized in life. The news media reacts in stylized fashion with pious moralizing and calls for more and stronger laws against whatever weapon the killer happened to be using.

In the case of the airline industry, the last spasm of government regulation is still fresh in all our minds. It followed in response to the mass murder of 3,000 people on September 11, 2001 when terrorists hijacked commercial airliners and crashed them into the World Trade Center and the Pentagon. Regulation has marred airline travel with the pain of searches, scans, delays and tedium. Beyond that, the cabins of airliners have been hardened to make them impenetrable from the outside – in order to provide absolute security against another deliberately managed crash by madmen.

Oops. What about the madmen within?

But, after a few days of stunned disbelief, the chorus found its voice again. That voice sounded like Strother Martin’s in the movie Cool Hand Luke. What we have here is a failure to regulate. We’ll simply have to find a way to regulate the mental health of pilots. Obviously, the private sector is failing in its clear duty to protect the public, so government will have to step in.

Now if it were really possible for government to regulate mental health, wouldn’t the first priority be to regulate the mental health of politicians? Followed closely by bureaucrats? The likely annual deaths attributable to government run to six figures, far beyond any mayhem suicidal airline pilots might cause. Asking government to regulate the mental health of others is a little like giving the job to the inmates of a psychiatric hospital – perhaps on the theory that only somebody with mental illness can recognize and treat it in others.

Is this all we can muster in the face of this bizarre tragedy? No, tragedy sometimes gives us license to say things that wouldn’t resonate at other times. Now is the time to reorganize our system of air-traffic control, making it not only safer but better, faster and cheaper as well.

The Risk of Airline Travel Today: The State of the Art

Wall Street Journal Holman Jenkins goes straight to the heart of the matter in his recent column (03/29-29/2015, “Germanwings 9525 and the Future of Flight Safety”). The apparent mass-murder-by-pilot “highlights one way the technology has failed to advance as it should have.” Even though the commercial airline cockpit is “the most automated workplace in the world,” the sad fact is that “we are further along in planning for the autonomous car than for the autonomous airliner.”

How has the self-flying plane become not merely a theoretical possibility but a practical imperative? What stands in the way of its realization?

The answer to the first question lies in comparing the antiquated status quo in airline traffic control with the potential inherent in a system updated to current technological standards. The second answer lies in the recognition of the incentives posed by political economy.

Today’s “Horse and Buggy” System of Air-Traffic Control

For almost a century, air-traffic control throughout the world has operated under a “corridor system.” This has been accurately compared to the system of roads and lanes that governs vehicle transport on land, the obvious difference being that it incorporates additional vertical dimensions not present in the latter. Planes file flight plans that notify air-traffic controllers of their origin and ultimate destination. The planes are required to travel within specified flight corridors that are analogous to the lanes of a roadway. Controllers enforce distance limits between each plane, analogous to the “car-lengths” distance between the cars on roadways. Controllers regulate the order and sequence of takeoffs and landings at airports to prevent collisions.

Unfortunately, the corridor system is pockmarked with gross inefficiencies. Rather than being organized purely by function, it is instead governed primarily by political jurisdiction. This is jarringly evident in Europe, home to many countries in close physical proximity. An airline flight from one end of Europe to another may pass through dozens of different political jurisdictions, each time undergoing a “handoff” of radio contact for air-traffic control between plane and ground control.

In the U.S., centralized administration by the Federal Aviation Administration (FAA) surmounts some of this difficulty, but the antiquated reliance on radar for geographic positioning still demands that commercial aircraft report their positions periodically for handoff to a new air-traffic control boss. And the air corridors in the U.S. are little changed from the dawn of air-mail delivery in the 1920s and 30s, when hillside beacons provided vital navigational aids to pilots. Instead of regular, geometric air corridors, we have irregular, zigzag patterns that cause built-in delays in travel and waste of fuel. Meanwhile, the slightest glitch in weather or airport procedure can stack up planes on the ground or in the air and lead to rolling delays and mounting frustration among passengers.

Why Didn’t Airline Deregulation Solve or Ameliorate These Problems? 

Throughout the 20th century, the demand for airline travel grew like Topsy. But the system of air-traffic control remained antiquated. The only way that system could adjust to increased demand was by building more airports and hiring more air-traffic controllers. Building airports was complicated because major airports were constructed with public funds, not private investment. The rights-of-way, land acquisition costs, and advantages of sovereign immunity all militated against privatization. When air-traffic controllers became unionized, this guaranteed that the union would strive to restrict union membership in order to raise wages. This, too, made it difficult to cope with increases in passenger demand.

The deregulation of commercial airline entry and pricing that began in 1978 was an enormous boon to consumers. It ushered in a boom in airline travel. Paradoxically, this worsened the quality of the product consumers were offered because the federal government retained control over airline safety. This guaranteed that airport capacity and air-safety technology would not increase pari passu with consumer demand for airline travel. As Holman Jenkins puts it, the U.S. air-traffic-control system is “a government-run monopoly, astonishingly slow to upgrade its technology.” He cites the view of the leading expert on government regulation of transportation, Robert Poole of the Reason Foundation, that the system operates “as if Congress is its main customer.”

Private, profit-maximizing airlines have every incentive to insure the safe operation of their planes and the timely provision of service. Product quality is just as important to consumers as the price paid for service; indeed, it may well be more important. History shows that airline crashes have highly adverse effects on the business of the companies affected. At the margin, an airline that offers a lower price for a given flight or provides safer transportation to its customers or gives its customers less aggravation during their trip rates to make more money through its actions.

In contrast, government regulators have no occupational incentive to improve airline safety. To be sure, they have an incentive to regulate – hire staff, pass rules, impose directives and generally look as busy as possible in their everyday operations. When a crash occurs, they have a strong incentive to assume a grave demeanor, rush investigators to the scene, issue daily updates on results of investigations and eventually issue reports. These activities are the kinds of things that increase regulatory staffs and budgets, which in turn increase salaries of bureaucrats. They serve the public-relations interests of Congress, which controls regulatory budgets. But government regulators have no marginal incentive whatsoever to reduce the incidence of crashes or flight delays or passenger inconvenience – their bureaucratic compensation is not increased by improved productivity in these areas despite the fact that THIS IS REALLY WHAT WE WANT GOVERNMENT TO DO.

Thus, government regulators really have no incentive to modernize the air-traffic control system. And guess what? They haven’t done it; nor have they modernized the operation of airports. Indeed, the current system meets the needs of government well. It guarantees that accidents will continue to happen – this will continue to require investigation by government, thus providing a rationale for the FAA’s accident-investigation apparatus. Consumers will continue to complain about delays and airline misbehavior – this will require a government bureau to handle complaints and pretend to rectify mistakes made by airlines. And results of accident investigations will continue to show that something went wrong – after all, that is the definition of an accident, isn’t it? Well, the FAA’s job is to pretend to put that something right, whatever it might be.

The FAA and the Federal Transportation Safety Board (FTSB) are delighted with the status quo – it justifies their current existence. The last thing they want is a transition to a new, more efficient system that would eliminate accidents, errors and mistakes. That would weaken the rationale for big government. It would threaten the rationale for their jobs and their salaries.

Is there such a system on the horizon? Yes, there is.

Free Flight and the Future of Fully Automatic Airline Travel

A 09/06/2014 article in The Economist (“Free Flight”) is subtitled “As more aircraft take to the sky, new technology will allow pilots to pick their own routes but still avoid each other.” The article describes the activities of a Spanish technology company, Indra, involved in training a new breed of air-traffic controllers. The controllers do not shepherd planes to their destinations like leashed animals. Instead, they merely supervise autonomous pilots to make sure that their decisions harmonize with each other. The controllers are analogous to the auctioneers in the general equilibrium models of pricing developed by the 19th century economist Vilfredo Pareto.

The basic concept of free flight is that the pilot submits a flight plan allowing him or her to fly directly from origin to destination, without having to queue up in a travel corridor behind other planes and travel the comparatively indirect route dictated by the air-traffic control system. This allows closer spacing of planes in the air. Upon arrival, it also allows “continuous descent” rather than the more circuitous approach method that is now standard. This saves both time and fuel. For the European system, the average time saved has been estimated at ten minutes per flight. For the U. S., this would undoubtedly be greater. Translated into fuel, this would be a huge saving. For those concerned about the carbon dioxide emissions of airliners, this would be a boon.

The obvious question is: How are collisions to be avoided under the system of free flight? Technology provides the answer. Flight plans are submitted no less than 25 minutes in advance. Today’s high-speed computing power allows reconciliation of conflicts and any necessary adjustments in flight-paths to be made prior to takeoff. “Pilots” need only stick to their flight plan.

Streamlining of flight paths is only the beginning of the benefits of free flight. Technology now exists to replace the current system of radar and radio positioning of flights with satellite navigation. This would enable the exact positioning of a flight by controllers at a given moment. The European air-traffic control system is set to transition to satellite navigation by 2017; the U.S. system by 2020.

The upshot of all these advances is that the travel delays that currently have the public up in arms would be gone under the free flight system. It is estimated that the average error in flight arrivals would be no more than one minute.

Why must we wait another five years to reap the gains from a technology so manifestly beneficial? Older readers may recall the series of commercials in which Orson Welles promoted a wine with the slogan “We sell no wine before its time.” The motto of government regulation should be “we save no life before its time.”

The combination of free flight and satellite navigation is incredibly potent. As Jenkins notes, “the networking technology required to make [free flight] work [lends] itself naturally and almost inevitably to computerized aircraft controllable from the ground.” In other words, the human piloting of commercial aircraft has become obsolete – and has been so for years. The only thing standing between us and self-flying airliners has been the open opposition of commercial pilots and their union and the tacit opposition of the regulatory bureaucracy.

Virtually all airline crashes that occur now are the result of human error – or human deliberation. The publication Aviation Safety Network listed 8 crashes since 1994 that are believed to have been deliberately caused by the pilot. The fatalities involved were (in ascending order) 1, 1, 4, 12, 33, 44, 104 and 217. Three cases involved military planes stolen and crashed by unstable pilots, but of the rest, four were commercial flights whose pilots or copilots managed to crash their plane and take the passengers with them.

Jenkins resurrects the case of a Japanese pilot who crashed hid DC-8 into Tokyo Bay in 1982. He cites the case of the Air Force pilot who crashed his A-10 into a Colorado mountain in 1997. He states what so far nobody else has been willing to say, namely that “last March’s disappearance of Malaysia Airlines 370 appears to have been a criminal act by a member of the crew, though no wreckage has been recovered.”

The possibility of human error and human criminal actions is eliminated when the human element is removed. That is the clincher – if one were needed – in the case for free flight to replace our present antiquated system of air-traffic organization and control.

The case for free flight is analogous to the case for free markets and against the system of central planning and government regulation.

What if… 

Holman Jenkins reveals that as long ago as 1993 (!) no less a personage than Al Gore (!!) unveiled a proposal to partially privatize the air-traffic control system. This would have paved the way for free flight and automation to take over. As Jenkins observes retrospectively, “there likely would have been no 9/11. There would have been no Helios 522, which ran out of fuel and crashed in 2005 when its crew was incapacitated. There would have been no MH 370, no Germanwings 9525.” He is omitting the spillover effects on private aviation, such as the accident that claimed the life of golfer Payne Stewart.

The biggest “what if” of all is the effect on self-driving cars. Jenkins may be the most prominent skeptic about the feasibility – both technical and economic – of autonomous vehicles in the near term. But he is honest enough to acknowledge the truth. “Today we’d have decades of experience with autonomous planes to inform our thinking about autonomous cars. And disasters like the intentional crashing of the Germanwings plane would be hard to conceive of.”

What actually happened was that Gore’s proposal was poured through the legislative and regulatory cheesecloth. What emerged was funding to “study” it within the FAA – a guaranteed ticket to the cemetery. As long as commercial demand for air travel was increasing, pressure on the agency to do something about travel delays and the strain on airport capacity kept the idea alive. But after 9/11, the volume of air travel plummeted for years and the FAA was able to keep the lid on reform by patching up the aging, rickety structure.

And pilots continued to err. On very, very rare occasions, they continued to murder. Passengers continued to die. The air-traveling public continued to fume about delays. As always, they continued to blame the airlines instead of placing blame where it belonged – on the federal government. Now air travel is projected to more-than-double by 2030. How long will we continue to indulge the fantasy of government regulation as protector and savior?

Free markets solve problems because their participants can only achieve their aims by solving the problems of their customers. Governments perpetuate problems because the aims of politicians, bureaucrats and government employees are served by the existence of problems, not by their solution.

DRI-223 for week of 3-22-15: The Truth About Black Actors in Hollywood Under the Studio System

An Access Advertising EconBrief:

The Truth About Black Actors in Hollywood Under the Studio System

In a recent (03/09/2015) National Review magazine, author Jay Nordlinger laments the American propensity for “race rows.” He relates the insistence of a friend that last year’s movie Selma had been shut out of Academy Award contention. In fact the movie had received two Oscar nominations, including the coveted nod for Best Picture.

Nordlinger knew why his friend had been deceived. She was reacting to the latest in a seemingly never-ending series of stylized eruptions of race-motivated indignation. As Nordlinger noted, this year’s row followed the nine Oscar nominations and three Oscars (including Best Picture) awarded last year to 12 Years a Slave, last year’s black-experience blockbuster. “The academy must have rediscovered its inner racism in twelve months’ time,” Nordlinger observed drily.

Nordlinger has realized that for the black left wing, historical victimization is a key economic good that they cannot afford to be without. They must keep its history continually alive in order to continue reaping its benefits. He is skeptical about the thesis that Hollywood is dead set on victimizing black artists, but despairs of ever seeing his viewpoint vindicated. “An academy voter cannot acquit himself of a charge of racism – not if he preferred another movie, he can’t,” Nordlinger concludes.

The study of economics is uniquely positioned to inform us about the subject of Hollywood’s treatment of blacks. Suppose we begin at the beginning, by investigating the dawn of blacks in Hollywood under the studio system. We will begin our analysis in the late 1920s, during the waning days of silent movies.

Before doing that, though, we should quickly review economic fundamentals pertaining to the effects of free markets on minorities, particularly those disfavored or discriminated against politically and legally. framework against the conventional stylized portrait of black actors as a victimized class within Hollywood since its inception.

Free Markets and Minorities 

Many great economists have grappled with the economic issues raised by discrimination against minorities of all types – political, social, racial and ethnic. Free markets do not promise the eradication of discrimination – indeed, all of us discriminate against things and people we prefer to avoid without giving it conscious thought. But free markets make discrimination an economic choice in which the chooser evaluates benefits and costs. When discrimination is too costly, it will be foregone.

That is why persecuted minorities throughout history – Chinese in Asia, Jews throughout the world, blacks in South Africa and America – have found refuge under the banner of free markets. Free markets protect their economic productivity by preserving the incentive to employ or patronize them. Free markets protect their welfare by giving them real income when it might be denied them by political authorities.

The Hollywood Victimization Thesis

Conventional thinking has long stressed what we will call the “Hollywood Victimization Thesis” (hereinafter abbreviated HVT for convenience). We view HVT through the lens of a speech made by the then-President of the National Association of the Advancement of Colored People (NAACP) in March, 1942. This speech and accompanying remarks by NAACP counsel Wendell Wilkie marked “the beginning of a new awareness in Hollywood towards the portrayal of blacks in films” (author Champ Clark in his book Shuffling to Ignominy: The Tragedy of Stepin Fetchit). Thomas Cripps, film historian (Slow Fade to Black: the Negro in American Film) said that “March, 1942, became a date by which to measure the future against the past.”

White spoke to Hollywood filmmakers, telling them that they had projected an image of “the Negro as a barbaric dolt, a superstition-ridden ninny… a race of intellectual inferiors, cowardly, benighted, different from the superior group.” He urged them to reject them image, instead choosing to portray “the Negro as a normal human being and an integral part of human life and activity.” Wilkie – the same Wendell Wilkie who had been Republican Presidential candidate in 1940 – was also a board member of 20th Century Fox, one of the “Big Five” Hollywood studios, so we might expect his statements to carry weight with that studio. He not only condemned racial stereotypes per se but made the practical case that they were harmful to the war effort, which demanded that all segments of society pull together for the common good.

All of the major Hollywood studio heads were in the audience for this speech. Later they signed a pledge in which they agreed to avoid the projection of negative racial stereotypes in their films.

What is particularly interesting about this speech, and the watershed it represents, is the difference between its viewpoint and the HVT as typically represented today. The contemporary version goes roughly as follows: The Hollywood studios victimized black actors by consigning them to insignificant parts as railroad porters, servants, maids, butlers, slaves, laborers, tramps and miscellaneous menials – always subservient to whites.

Walter White’s original version of the HVT was distinctly different from this. Take literally, it implied that portrayals of Negroes onscreen were not insignificant, since a character possessing traits so markedly unfavorable and a station removed from normal life could hardly be unimportant to, or unnoticed by, the viewer – the viewer musttake notice of the Negro character in order for this unfavorable impression to register. As we shall see later, this difference is vital.

What accounts for the difference in these two versions? In his 1942 speech, Walter White provided an illustration to back up his claim of negative stereotyping by Hollywood studios. He mentioned one actor by name. This mention had devastating consequences for the actor, because even though White was referring to the roles played by the actor, the stigma from the speech never left the actor. It began a chain reaction that sent the actor’s career spiraling downward. And it made the actor synonymous with the HVT.

The actor’s name was Stepin Fetchit. His story is the real story of the early black experience in Hollywood.

The Story of Stepin Fetchit

Who was Stepin Fetchit? Stepin Fetchit was the first black actor ever to receive a featured credit in a Hollywood movie, In Old Kentucky. He was the first black actor to sign a long-term contract with a major Hollywood studio, Metro Goldwyn Mayer. According to his biographer, “he was the first black actor to drive through the front gates of a Hollywood studio – with a chauffer [sic] at the wheel.” He was, in his own words, “the first black actor universally acclaimed a star by the public.” According to a Ripley “Believe It Or Not” feature, Stepin Fetchit became a millionaire by portraying one kind of character in Hollywood movies. According to a 1968 documentary (“Black History – Lost, Stolen or Strayed”) narrated by Bill Cosby, “the cat [Fetchit] made $2,000,000 in five years in the middle 30s.” In 1960, Stepin Fetchit became the first black actor to get a star on the Hollywood Walk of Fame.

Does this sound like a man who was victimized by the Hollywood studios? As John Wayne might say, not hardly. And it is not out of place to invoke John Wayne as authority here, because John Wayne was Stepin Fetchit’s dresser. As Marion “Duke” Morrison, freshly arrived in Hollywood while still in college at USC in 1927, Wayne held down every existing menial job on the movie sets of directors like John Ford, whom he adopted as his mentor. In 1976, the year in which John Wayne made his last movie, The Shootist, Stepin Fetchit lay in a Los Angeles hospital suffering the effects of a stroke. Wayne himself was in the throes of his last series of illnesses, but he was not too infirm to cheer up his old friend with a visit. And never was a man more in need of cheering up. Between 1927 and 1975, when Stepin Fetchit last appeared in a movie, a tidal wave of change engulfed America and Stepin Fetchit all but drowned in it.

What was Stepin Fetchit’s unforgivable sin? Well, his venial sins were many. Mostly they were the garden variety sins of Hollywood movie stars – wine, women and a tendency to arrogance. But his unforgivable sin was that he was funny.

This is not an eccentric personal opinion. In 1929, at the time that talking pictures were staging a hostile takeover of silent movies in Hollywood, Robert Benchley said, “I see no reason for even hesitating in saying that Stepin Fetchit is the best actor that the movies have produced. His voice, his manner, his timing, everything that he does is as near to perfection as one could hope. He is one of the great comedians of the screen.” Robert Benchley was an Oscar-winning actor, one of the great American humorists and a leading scriptwriter in Hollywood. He knew humor as well as anybody then or now.

Or listen to another expert – Bill Cosby, whose criticism of Stepin Fetchit in 1968 echoed Walter White’s in 1942. “Fetchit’s one of the greatest comedians who ever lived. There was no intent on my part to ridicule him.”

Stepin Fetchit was born Lincoln Theodore Monroe Perry in 1902. He was baptized a Catholic and remained one all his life. In the early 1920s, he entered show business via the “chitlin’ circuit” – an informal chain of over 100 Southern vaudeville theaters catering to black audiences. It was here that he perfected his classic shtick: a “somnolent southern boy, all slow-motion hesitation and mumbles… almost terminally lazy” (Clark). Eventually, this laziness became his trademark. He developed himself into a theatrical act that he advertised as “the laziest man in the world.” And it was his own patented character, honed to physical and verbal perfection, that he took to the movies.

In 1927, Fetchit answered a general casting call for black performers for the silent MGM movie In Old Kentucky. When hired, he proceeded to astonish director John Stahl with his comedic skills. The director created a featured part for him as a plantation boy, and even inserted him into a romantic subplot in the script involving black actress Carolyn Snowden. The movie was a hit. MGM offered Fetchit a six-month contract. But when the studio found no further roles for him, Fetchit broke with MGM and signed with Stahl’s Tiffany-Stahl Productions for more than double the money MGM had paid him. He appeared in featured parts in several more silent pictures before his next breakthrough picture came along.

It was Universal Pictures’ talking version of the famous Edna Ferber stage play Show Boat, the seminal production of the American musical theater. Unfortunately, the studio could not acquire the rights to the Jerome Kern-Oscar Hammerstein score, but Fetchit performed one of the studio-composed songs for the film.

In 1929, Fetchit notched another “first” by starring in Hearts in Dixie, the first Hollywood film with an all-black cast. This was also a musical and it cemented Fetchit’s star status. The importance of those two words – “star status” – cannot be overstressed.

The Breakthrough of Black Actors in Hollywood

Prior to Stein Fetchit, black actors were virtually absent from Hollywood. It would easy to ascribe this to the presence of Jim Crow laws and white racism, but that would be false. To understand why this is so, consider the case of Paul Robeson.

Paul Robeson was born in New Jersey in 1898 as the son of a former slave who had become a minister. He grew up singing to help support his family and help out his father in church. He was valedictorian of his high-school class and lettered in four sports. He became only the third black person to attend Rutgers University up to that point. At Rutgers, he captained the debate team. He twice became first-team All-American in football. Walter Camp called him the greatest end ever to play the game to that point. Upon graduation, he attended law school while working on the side – helping to pioneer a fledgling organization called the National Football League, playing opposite the likes of Jim Thorpe.

After a few years, Robeson quit to become an opera star and theater performer. He played to packed houses in London and on Broadway. But when Paul Robeson first performed in movies, he worked for director Oscar Micheaux, who made “race movies” shown only to black audiences. His first film was 1925’s Body and Soul. At that point, despite Robeson’s fame and popularity in the U.S., there was no audience for Robeson as a movie star. He was much too important to play a minor role, and the kind of hybrid character/star part played by Fetchit did not yet exist. Therefore Robeson did not work in Hollywood until the 1930s – after Stepin Fetchit had carved out a place for black actors by revealing the existence of a demand for blacks in high-visibility, featured roles. In 1936, Robeson sang the famous “Old Man River” in the 1936 version of Show Boat, supporting Irene Dunne and Allan Jones. He co-starred in the first sound version of King Solomon’s Mines opposite Sir Cedric Hardwicke and starring in the English film Proud Valley as a coal miner who traveled to Wales and performed with a male voice choir. There is every reason to believe that Robeson might have become an earlier version of Sidney Poitier had not World War II and his own misguided Stalinist politics not intervened to thwart him.

Was Stepin Fetchit a true movie star? In one sense, yes. He attained fame, wealth and high visibility. These are the superficial attributes of stardom. But in the truest sense, no. The Hollywood studios carefully selected and groomed leading actors for their productions. Those actors were always performers with whom audiences could identify and about whom they could fantasize. Pure talent and dramatic success were not enough to qualify an actor for the position of star.

Stepin Fetchit could not achieve the highest level of movie stardom in the 1920s and 1930s – lead actor in major productions. Neither could Paul Robeson. There were an incredibly small number of men and women who could. Not all of them were Americans and not all of them were Caucasians. Not all of them were humans, either; Rin Tin Tin was an authentic movie star for years. Shirley Temple attained stardom at age five, but lost it in her teens. Sidney Poitier was finally able to reach that elevated pinnacle twenty five years after Fetchit and Robeson strove for it. His movie career began in 1950, before the era of civil-rights legislation, marches or demonstrations. Why was he the first to succeed?

Anybody who really knows the answer to that question could earn vast wealth as a talent scout for Hollywood casting companies today. But it is absurd to stigmatize white Americans as racists when they embraced Stepin Fetchit, Paul Robeson and the complement of black actors in the 1930s – as if a totalitarian government should somehow have utilized thought control to force Americans to confer full stardom upon blacks earlier in history.

Stepin Fetchit’s Peak – and Fall From Grace

Stepin Fetchit claimed that his first run of success in Hollywood was cut short when he refused to perform a scene in the movie The Southerner in 1930. Fetchit said that the scene implied, without saying so directly, that his character was guilty of rape. The director complained to the studio about Fetchit’s recalcitrance, and Fetchit’s contract was terminated.

It was commonplace back then even for big stars to be fined or suspended by the studio -even to be fired in extreme cases. But the biggest stars were always rehired or found work elsewhere. Stepin Fetchit had to rehabilitate his career all over again. And he did.

 

He appealed to actor-humorist Will Rogers, with whom he had worked briefly in silent films. Rogers knew Fetchit’s work and appreciated it. Despite his great fame in the theater and on Broadway, Rogers had been only a marginal success in silent films. He desperately needed to succeed in talking pictures. So he approved Fetchit’s hiring as a supporting character in his films.

This move was a spectacular success. In 1934 and 1935, before his untimely death in a plane crash, Will Rogers was the leading box-office star in Hollywood, ahead of Shirley Temple (with whom Fetchit also appeared). The four films he made with Stepin Fetchit established the two as the movies’ leading comedy team.

Fetchit’s biographer, Champ Clark, quotes columnist James Bacon about a conversation between Darryl Zanuck, head of 20th Century Fox studio, and Will Rogers. Zanuck tells Rogers “My God, he’s so funny, he steals the show from you.” Rogers responds, “I don’t care, he makes the movie better.” Rogers demanded that Stepin Fetchit be cast in all his movies.

The peak of Rogers’ career coincided with Fetchit’s career peak as well. With Roger’s death, Stepin Fetchit’s career started to wane. He had to compete for parts with other black actors. Some of them were imitating him. Fetchit drank, got into scrapes with the law and showed flashes of temperament at work. When he wasn’t working on movies, he polished his skills with his stage act. He wrote a newspaper column for the black newspaper, the Chicago Defender.

Eventually Stepin Fetchit fell victim to his high style of living – a problem once summarized neatly by Errol Flynn as follows: “My problem is reconciling my net income with my gross habits.” He fell into arrears with the IRS, his ex-wife and various other creditors. Movie work dried up.

At the point of Walter White’s NAACP speech in 1942, Stepin Fetchit was down. That speech put him out – out of Hollywood for a decade. His old friend, John Ford, wanted to hire him for the post-war film, My Darling Clementine, in 1946. Darryl Zanuck wouldn’t hear of it. “…To put him on the screen at this time would… raise terrible objections from the colored people. Walter White … singled out Stepin Fetchit… as an example of the humiliation of the colored race. Stepin Fetchit always plays the lazy, stupid half-wit and this is the thing that the colored people are furious about.”

Stepin Fetchit hung around the fringes of show business, working in nightclubs, developing his song and dance talents, branching out into stand-up comedy. He made a few “race movies.” In 1952, he returned to Hollywood for the movie, Bend of the River, playing a straight, non-comedic supporting part. He worked for John Ford in 1953’s Steamboat Round the Bend. White movie critics like the New York Times’ Bosley Crowther savaged him, wondering why the movie was made and why Fetchit was cast in it. Once more, Stepin Fetchit’s career was in tatters.

Still he soldiered on, working in cheap theaters and clubs and cadging a living off friends. The critic and film author, Joseph McBride, wrote of admiring his work as a stand-up comedian under harrowing circumstances.

In the early 1960s, Fetchit became a hanger-on of Cassius Clay, soon to morph into Muhammad Ali. Ali claimed that Fetchit taught him the “secret punch” with which Ali dispatched Sony Liston in their second meeting. Once again, Stepin Fetchit was up. Then, in 1968, came the CBS special, “Black History – Lost, Stolen or Strayed,” narrated by Bill Cosby. It was the Walter White speech all over again. For the fourth time, Stepin Fetchit was down. But still not out.

In 1974, Stepin Fetchit joined Moms Mabley and other black show-business veterans to make a movie fittingly entitled Amazing Grace. It was a touching exit for all the old troupers, but especially for him. Fetchit’s last film came in 1975. And in 1976, the NAACP – clearly suffering a bad case of institutional guilt – gave him an award for opening up the frontiers of entertainment to blacks. In 1978, Stepin Fetchit was admitted into the Black Filmmakers’ Hall of Fame. He died in 1985.

Was Stepin Fetchit Victimized by Hollywood?

Stepin Fetchit was not victimized by Hollywood. He seized the opportunity provided by Hollywood to gain fame and wealth hitherto undreamt of by a black actor in the movies. In so doing, he kicked open the door of opportunity for other black actors.

Stepin Fetchit’s character was assassinated by left-wing blacks in the NAACP and white liberals. They used him as a tool for their purposes – which were to portray blacks as oppressed victims of white society who needed saving by the NAACP and the federal government. In so doing, they falsified the history of the black experience in Hollywood.

Fetchit claimed that his name derived from a race horse. That name has since come to be synonymous with black subservience. That is unjust, because there is no doubt that his movie shtick was invented by Fetchit out of whole cloth. It was not devised by a white scriptwriter or producer in order to stigmatize blacks. Moreover, this screen character had nothing to do with Stepin Fetchit’s real personality. On this point there is unanimity. Stepin Fetchit the man was a highly intelligent businessman who liked classical music and was conversant with the fine points of moviemaking. He bore no resemblance to his movie persona.

Stepin Fetchit’s Imitators and the Rise of Black Character Actors in Hollywood

With the rise of Stepin Fetchit to quasi-stardom, the studio bosses of Hollywood realized two things: there was a market for black audiences in character roles in movies, and their leading candidate to fill that role was a temperamental handful. They had long made it a practice to find and cultivate competitive substitutes for their stars anyway. So it was natural for them to seek out other black actors, not only to keep their new discovery from getting too cocksure but also to meet this newfound demand. In Hollywood, imitation has always been the sincerest form of plagiarism; the new crop of black actors bore a strong occupational resemblance to Stepin Fetchit.

The most blatant of these Fetchit imitators was Willie Best (1916-1962), who drove to Hollywood in 1930 while working as a chauffeur and wound up often playing one onscreen. Best worked with the Marx Brothers, Laurel and Hardy and Shirley Temple. His most famous role came in 1940’s The Ghost Breakers, whose star, Bob Hope, called him “the best actor I know.” Comedy producer Hal Roach considered him one of the best comedy talents in show business. Before a drug arrest ended his movie career in 1950 and cancer ended his life in 1962, Best made 113 appearances in movies and a handful in short films and television.

Mantan Moreland (1902-1973) followed Best to Hollywood in 1933 and made some 125 movie appearances over the next 40 years. While Best was almost a Stepin Fetchit clone whose shtick was his sleepy-eyed appearance and skill at alternating lassitude with fright, Moreland specialized in pop-eyed expressions and a growling bass dialect. His most famous appearances were as Charlie Chan’s sidekick, Birmingham Brown, in pictures produced by the bottom-feeding studio, Monogram Pictures.

Fred Toones (1906-1962) may have been the busiest of all black character actors. Between 1931 and 1947, he appeared in over 200 films using the professional name “Snowflake.” In over 140 of them, he received no screen credit, although he was sometimes referred to with a character name onscreen. Toones’ best work was a hilarious turn as Fred MacMurray’s valet in the memorable romantic comedy Remember the Night (1940), costarring Barbara Stanwyck. He also appeared in other classic comedies like Twentieth Century (1934). Christmas in July (1940) and The Palm Beach Story (1942).

Does it seem pedantic to mention arcana like movie appearances, screen credits and character names? These details were not trivial to the actors, because an actor got paid extra for a screen credit and for speaking lines. Assignment of a character name meant that the actor was considered important by the script writer, the director and the producer. This information proves that these black actors were favored, not victimized, by the Hollywood studio system.

The great character actor, Walter Brennan, won three Academy Awards as Best Supporting Actor between 1936 and 1940. But before that, between 1925 and 1935, he received screen credit for only 33 of his first 118 movies. Pat Flaherty was known as the “King of the Uncredited Actors” because his face and voice were so familiar to audiences who didn’t know his name; he received a screen credit in only 29 of his 197 films. Robert Dudley gave an unforgettable performance as the “Wienie King” in Preston Sturges’ Palm Beach Story, but he received a screen credit for only 34 of his 123 film appearances. Long before she became immortal as a television star on I Love Lucy, Lucille Ball began her career in movies. But she did not receive a screen credit until her 25th film. “Bit” parts seldom gave screen credit or assigned character names in the days of the studio system. Today, a favorite parlor game among classic movie fans is to “spot a star” playing an uncredited bit part before attaining stardom.

Compare the status of the black actors mentioned here. Stepin Fetchit received a screen credit in all but 2 of his 49 movies and 6 shorts, and a character name in all but 11. This was unheard of; indeed, Fetchit’s case is so special that he should be considered in a class by himself as a kind of star/character actor/bit player. Willie Best was credited in 73 of his 117 appearances and named in 79 of them, which made him the aristocrat of bit players. Mantan Moreland got 70 screen credits and nearly as many character-named appearances out of his 125 screen appearances, which put him nearly on a par with Best. Toones had many more uncredited appearances, but this was because he packed so many movies (over 200) into such a comparatively short career, which still numbered over 60 credited appearances including notable performances and movies.

We have not just recounted a history of victimization. This is a distinguished record of achievement in one of America’s leading industries – for which these men were well paid.

For the sake of brevity, we have considered only those actors who were directly comparable in style and status to Stepin Fetchit; that is, comic bit players. Left out of account was the comic genius Hattie McDaniel, whose specialty of playing maids earned her the first Academy Award given to a black actor in Gone With the Wind (1939). Actors like Louise Beavers, Ernest Whitman, Rex Ingram and James Edwards were also delivering distinguished performances before Sidney Poitier came along, thanks to the trail blazed by Stepin Fetchit.

And thanks to the free markets that allowed the Hollywood studio system to arise and flourish in the first half of the 20th century.

DRI-191 for week of 3-15-15: More Ghastly than Beheadings! More Dangerous than Nuclear Proliferation! Its…Cheap Foreign Steel!

An Access Advertising EconBrief:

More Ghastly than Beheadings! More Dangerous than Nuclear Proliferation! Its…Cheap Foreign Steel!

The economic way to view news is as a product called information. Its value is enhanced by adding qualities that make it more desirable. One of these is danger. Humans react to threats and instinctively weigh the threat-potential of any problematic situation. That is why headlines of print newspapers, radio-news updates, TV evening-news broadcasts and Internet websites and blogs all focus disproportionately on dangers.

This obsession with danger does not jibe with the fact that human life expectancy had doubled over the last century and that violence has never been less threatening to mankind than today. Why do we suffer this cognitive dissonance? Our advanced state of knowledge allows us to identify and categorize threats that passed unrecognized for centuries. Today’s degraded journalistic product, more poorly written, edited and produced than formerly, plays on our neuroscientific weaknesses.

Economists are acutely sensitive to this phenomenon. Our profession made its bones by exposing the bogey of “the evil other” – foreign trade, foreign goods, foreign labor and foreign investment as ipso facto evil and threatening. Yet in spite of the best efforts of economists from Adam Smith to Milton Friedman, there is no more dependable pejorative than “foreign” in public discourse. (The word “racist” is a contender for the title, but overuse has triggered a backlash among the public.)

Thus, we shouldn’t be surprised by this headline in The Wall Street Journal: “Ire Rises at China Over Glut of Steel” (03/16/2015, By Biman Mukerji in Hong Kong, John W. Miller in Pittsburgh and Chuin-Wei Yap in Beijing). Surprised, no; outraged, yes.

The Big Scare 

The alleged facts of the article seem deceptively straightforward. “China produces as much steel as the rest of the world combined – more than four times as much as the peak U.S. production in the 1970s.” Well, inasmuch as (a) the purpose of all economic activity is to produce goods for consumption; and (b) steel is a key input in producing countless consumption goods and capital goods, ranging from vehicles to buildings to weapons to cutlery to parts, this would seem to be cause for celebration rather than condemnation. Unfortunately…

“China’s massive steel-making engine, determined to keep humming as growth cools at home, is flooding the world with exports, spurring steel producers around the globe to seek government protection from falling prices. From the European Union to Korea and India, China’s excess metal supply is upending trade patterns and heating up turf battles among local steelmakers. In the U.S., the world’s second-biggest steel consumer, a fresh wave of layoffs is fueling appeals for tariffs. U.S. steel producers such as U.S. Steel Corp. and Nucor Corp. are starting to seek political support for trade action.”

Hmmm. Since this article occupies the place of honor on the world’s foremost financial publication, we expect it to be authoritative. China has a “massive steel-making engine” – well, that stands to reason, since it’s turning out as much steel as everybody else put together. It is “determined to keep humming.” The article’s three (!) authors characterize the Chinese steelmaking establishment as a machine, which seems apropos. They then endow the metaphoric machine with the human quality of determination – bad writing comes naturally to poor journalists.

This determination is linked with “cooling” growth. Well, the only cooling growth that Journal readers can be expected to infer at this point is the slowing of the Chinese government’s official rate of annual GDP growth from 7.5% to 7%. Leaving aside the fact that the rest of the industrialized world is pining for growth of this magnitude, the authors are not only mixing their metaphors but mixing their markets as well. The only growth directly relevant to the points raised here – exports by the Chinese and imports by the rest of the world – is growth in the steel market specifically. The status of the Chinese steel market is hardly common knowledge to the general public. (Later, the authors eventually get around to the steel market itself.)

So the determined machine is reacting to cooling growth by “flooding the world with exports,” throwing said world into turmoil. The authors don’t treat this as any sort of anomaly, so we’re apparently expected to nod our heads grimly at this unfolding danger. But why? What is credible about this story? And what is dangerous about it?

Those of us who remember the 1980s recall that the monster threatening the world economy then was Japan, the unstoppable industrial machine that was “flooding the world” with imports. (Yes, that’s right – the same Japan whose economy has been lying comatose for twenty years.) The term of art was “export-led growth.” Now these authors are telling us that massive exports are a reaction to weakness rather than a symptom of growth.

“Unstoppable” Japan suddenly stopped in its tracks. No country has ever ascended an economic throne based on its ability to subsidize the consumption of other nations. Nor has the world ever died of economic indigestion caused by too many imports produced by one country. The story told at the beginning of this article lacks any vestige of economic sense or credibility. It is pure journalistic scare-mongering. Nowhere do the authors employ the basic tools of international economic analysis. Instead, they employ the basic tools of scarifying yellow journalism.

The Oxymoron of “Dumping” 

The authors have set up their readers with a menacing specter described in threatening language. A menace must have victims. So the authors identify the victims. Victims must be saved, so the authors bring the savior into their story. Naturally, the savior is government.

The victims are “steel producers around the globe.” They are victimized by “falling prices.” The authors are well aware that they have a credibility problem here, since their readers are bound to wonder why they should view falling steel prices as a threat to them. As consumers, they see falling prices as a good thing. As prices fall, their real incomes rise. Falling prices allow consumers to buy more goods and services with their money incomes. Businesses buy steel. Falling steel prices allow businesses to buy more steel. So why are falling steel prices a threat?

Well, it turns out that falling steel prices are a threat to “chief executives of leading American steel producers,” who will “testify later this month at a Congressional Steel Caucus hearing.” This is “the prelude to launching at least one anti-dumping complaint with the International Trade Commission.” And what is “dumping?” “‘Dumping,’ or selling abroad below the cost of production to gain market share, is illegal under World Trade Organization law and is punishable with tariffs.”

After this operatic buildup, it turns out that the foreign threat to America spearheaded by a gigantic, menacing foreign power is… low prices. Really low prices. Visualize buying steel at Costco or Wal Mart.

Oh, no! Not that. Head for the bomb shelters! Break out the bug-out bags! Get ready to live off the grid!

The inherent implication of dumping is oxymoronic because the end-in-view behind all economic activity is consumption. A seller who sells for an abnormally low price is enhancing the buyer’s capability to consume, not damaging it. If anybody is “damaged” here, it is the seller, not the buyer. And that begs the question, why would a seller do something so foolish?

More often than not, proponents of the dumping thesis don’t take their case beyond the point of claiming damage to domestic import-competing firms. (The three Journal reporters make no attempt whatsoever to prove that the Chinese are selling below cost; they rely entirely on the allegation to pull their story’s freight.) Proponents rely on the economic ignorance of their audience. They paint an emotive picture of an economic world that functions like a giant Olympics. Each country is like a great big economic team, with its firms being the players. We are supposed to root for “our” firms, just as we root for our athletes in the Summer and Winter Olympics. After all, don’t those menacing firms threaten the jobs of “our” firms? Aren’t those jobs “ours?” Won’t that threaten “our” incomes, too?

This sports motif is way off base. U.S. producers and foreign producers have one thing in common – they both produce goods and services that we can consume, either now or in the future. And that gives them equal economic status as far as we are concerned. The ones “on our team” are the ones that produce the best products for our needs – period.

Wait a minute – what if the producers facing those low prices happen to be the ones employing us? Doesn’t that change the picture?

Yes, it does. In that case, we would be better off if our particular employer faced no foreign competition. But that doesn’t make a case for restricting or preventing foreign competition in general. Even people who lose their jobs owing to foreign competition faced by their employer may still gain more income from the lower prices brought by foreign competition in general than they lose by having to take another job at a lower income.

There’s another pertinent reason for not treating foreign firms as antagonistic to consumer interests. Foreign firms can, and do, locate in America and employ Americans to produce their products here. Years ago, Toyota was viewed as an interloper for daring to compete successfully with the “Big 3″ U.S. automakers. Now the majority of Toyota automobiles sold in the U.S. are assembled on America soil in Toyota plants located here.

Predatory Pricing in International Markets

Dumping proponents have a last-ditch argument that they haul out when pressed with the behavioral contradictions stressed above. Sure, those foreign prices may be low now, import-competing producers warn darkly, but just wait until those devious foreigners succeed in driving all their competitors out of business. Then watch those prices zoom sky-high! The foreigners will have us in their monopoly clutches.

That loud groan you heard from the sidelines came from veteran economists, who would no sooner believe this than ask a zookeeper where to find the unicorns. The thesis summarized in the preceding paragraph is known as the “predatory pricing” hypothesis. The behavior was notoriously ascribed to John D. Rockefeller by the muckraking journalist Ida Tarbell. It was famously disproved by the research of economist John McGee. And ever since, economists have stopped taking the concept seriously even in the limited market context of a single country.

But when propounded in the global context of international trade, the whole idea becomes truly laughable. Steel is a worldwide industry because its uses are so varied and numerous. A firm that employed this strategy would have to sacrifice trillions of dollars in order to reduce all its global rivals to insolvency. This would take years. These staggering losses would be accounted in current outflows. They would be weighed against putative gains that would begin sometime in the uncertain future – a fact that would make any lender blanch at the prospect of financing the venture.

As if the concept weren’t already absurd, what makes it completely ridiculous is the fact that even if it succeeded, it would still fail. The assets of all those firms wouldn’t vaporize; they could be bought up cheaply and held against the day when prices rose again. Firms like the American steel company Nucor have demonstrated the possibility of compact and efficient production, so competition would be sure to emerge whenever monopoly became a real prospect.

The likelihood of any commercial steel firm undertaking a global predatory-pricing scheme is nil. At this point, opponents of foreign trade are, in poker parlance, reduced to “a chip and a chair” in the debate. So they go all in on their last hand of cards.

How Do We Defend Against Government-Subsidized Foreign Trade?

Jiming Zou, analyst at Moody’s Investor Service, is the designated spokesman of last resort in the article. “Many Chinese steelmakers are government-owned or closely linked to local governments [and] major state-owned steelmakers continue to have their loans rolled over or refinanced.”

Ordinary commercial firms might cavil at the prospect of predatory pricing, but a government can’t go broke. After all, it can always print money. Or, in the case of the Chinese government, it can always “manipulate the currency” – another charge leveled against the Chinese with tiresome frequency. “The weakening renminbi was also a factor in encouraging exports,” contributed another Chinese analyst quoted by the Journal.

One would think that a government with the awesome powers attributed to China’s wouldn’t have to retrench in all the ways mentioned in the article – reduce spending, lower interest rates, and cut subsidies to state-owned firms including steel producers. Zou is doubtless correct that “given their important role as employers and providers of tax revenue, the mills are unlikely to close or cut production even if running losses,” but that cuts both ways. How can mills “provide tax revenue” if they’re running huge losses indefinitely?

There is no actual evidence that the Chinese government is behaving in the manner alleged; the evidence is all the other way. Indeed, the only actual recipients of long-term government subsidies to firms operating internationally are creatures of government like Airbus and Boeing – firms that produce most or all of their output for purchase by government and are quasi-public in nature, anyway. But that doesn’t silence the protectionist chorus. Government-subsidized foreign competition is their hole card and they’re playing it for all it’s worth.

The ultimate answer to the question “how do we defend against government-subsidized foreign trade?” is: We don’t. There’s no need to. If a foreign government is dead set on subsidizing American consumption, the only thing to do is let them.

If the Chinese government is enabling below-cost production and sale by its firms, it must be doing it with money. There are only three ways it can get money: taxation, borrowing or money creation. Taxation bleeds Chinese consumers directly; money creation does it indirectly via inflation. Borrowing does it, too, when the bill comes due at repayment time. So foreign exports to America subsidized by the foreign government benefit American consumers at the expense of foreign consumers. No government in the world can subsidize the world’s largest consumer nation for long. But the only thing more foolish than doing it is wasting money trying to prevent it.

What Does “Trade Protection” Accomplish?

Textbooks in international economics spell out in meticulous detail – using either carefully drawn diagrams or differential and integral calculus – the adverse effects of tariffs and quotas on consumers. Generally speaking, tariffs have the same effects on consumers as taxes in general – they drive a wedge between the price paid by the consumer and received by the seller, provide revenue to the government and create a “deadweight loss” of value that accrues to nobody. Quotas are, if anything, even more deleterious. (The relative harm depends on circumstances too complex to enumerate.)

This leads to a painfully obvious question: If tariffs hurt consumers in the import-competing country, why in the world do we penalize alleged misbehavior by exporters by imposing tariffs? This is analogous to imposing a fine on a convicted burglar along with a permanent tax on the victimized homeowner.

Viewed in this light, trade protection seems downright crazy. And in purely economic terms, it is. But in terms of political economy, we have left a crucial factor out of our reckoning. What about the import-competing producers? In the Wall Street Journal article, these are the complainants at the bar of the International Trade Commission. They are also the people economists have been observing ever since the days of Adam Smith in the late 18th century, bellied up at the government-subsidy bar.

In Smith’s day, the economic philosophy of Mercantilism reigned supreme. Specie – that is, gold and silver – was considered the repository of real wealth. By sending more goods abroad via export than returned in the form of imports, a nation could produce a net inflow of specie payments – or so the conventional thinking ran. This philosophy made it natural to favor local producers and inconvenience foreigners.

Today, the raison d’etre of the modern state is to take money from people in general and give it to particular blocs to create voting constituencies. This creates a ready-made case for trade protection. So what if it reduces the real wealth of the country – the goods and services available for consumption? It increases electoral prospects of the politicians responsible and appears to increase the real wealth of the beneficiary blocs, which is sufficient to for legislative purposes.

This is corruption, pure and simple. The authors of the Journal article present this corrupt process with a straight face because their aim is to present cheap Chinese steel as a danger to the American people. Thus, their aims dovetail perfectly with the corrupt aims of government.

And this explains the front-page article on the 03/16/2015 Wall Street Journal. It reflects the news value of posing a danger where none exists – that is, the corruption of journalism – combined with the corruption of the political process.

The “Effective Rate of Protection”

No doubt the more temperate readers will object to the harshness of this language. Surely “corruption” is too harsh a word to apply to the actions of legislators. They have a great big government to run. They must try to be fair to everybody. If everybody is not happy with their efforts, that is only to be expected, isn’t it? That doesn’t mean that legislators aren’t trying to be fair, does it?

Consider the economic concept known as the effective rate of protection. It is unknown to the general public, but is appears in every textbook on international economics. It arises from the conjunction of two facts: first, that a majority of goods and services are composed of raw materials, intermediate goods and final-stage (consumer) goods; and second, that governments have an irresistible impulse to levy taxes on goods that travel across international borders.

To keep things starkly simple and promote basic understanding, take the simplest kind of numerical example. Assume the existence of a fictional textile company. It takes a raw material, cotton, and spin, weaves and processes that cotton into a cloth that it sells commercially to its final consumers. This consumer cloth competes with the product of domestic producers as well as with cotton cloth produced by foreign textile producers. We assume that the prevailing world price of each unit of cloth is $1.00. We assume further that domestic producers obtain one textile unit’s worth of cotton for $.50 and add a further $.50 worth of value to the cloth by spinning, weaving and processing it into the cloth.

We have a basic commodity being produced globally by multiple firms, indicated the presence of competitive conditions. But legislators, perhaps possessing some exalted concept of fairness denied to the rabble, decide to impose a tariff on the importation of cotton. Not wishing to appear excessive or injudicious, the solons set this ad valorem tariff at 15%. Given the competitive nature of the industry, this will soon elevate the domestic price of textiles above the world price by the amount of the tariff; e.g., by $.15, to $1.15. Meanwhile, there is no tariff levied on cotton, the raw material. (Perhaps cotton is grown domestically and not imported into the country or, alternatively, perhaps cotton growers lack the political clout enjoyed by textile producers.)

The insight gained from the effective rate of protection begins with the realization that the net income of producers in general derives from the value they add to any raw materials and/or intermediate products they utilize in the production process. Initially, textile producers added $.50 worth of value for every unit of cotton cloth they produced. Imposition of the tariff allows the domestic textile price to rise from $1.00 to $1.15, which causes textile producers’ value added to rise from $.50 to $.65.

Legislators judiciously and benevolently decided that the proper amount of “protection” to give domestic textile producers from foreign competition was 15%. They announced this finding amid fanfare and solemnity. But it is wrong. The tariff has the explicit purpose of “protecting” the domestic industry, of giving it leeway it would not otherwise get under the supposedly harsh and unrelenting regime of global competition. But this tariff does not give domestic producers 15% worth of protection. $15 divided by $.50 – that is, the increase in value added divided by the original value added – is .30, or 30%. The effective rate of protection is double the size of the “nominal” (statutory) level of protection. In general, think of the statutory tariff rate as the surface appearance and the effective rate as the underlying truth.

Like oh-so-many economic principles, the effective rate of protection is a relatively simple concept that can be illustrated with simple examples, but that rapidly becomes complex in reality. Two complications need mention. When tariffs are also levied on raw materials and/or intermediate products, this affects the relationship between the effective and nominal rate of protection. The rule of thumb is that higher tariff rates on raw materials and intermediate goods relative to tariffs on final goods tend to lower effective rates of protection on the final goods – and vice-versa.

The other complication is the percentage of total value added comprised by the raw materials and intermediate goods prior to, and subsequent to, imposition of the tariff. This is a particularly knotty problem because tariffs affect prices faced by buyers, which in turn affect purchases, which in turn can change that percentage. When tariffs on final products exceed those on raw materials and intermediate goods – and this has usually been the case in American history – an increase in this percentage will increase the effective rate.

But for our immediate purposes, it is sufficient to realize that appearance does not equal reality where tariff rates are concerned. And this is the smoking gun in our indictment of the motives of legislators who promote tariffs and restrictive foreign-trade legislation.

 

Corrupt Legislators and Self-Interested Reporting are the Real Danger to America

In the U.S., the Commercial Code includes thousands of tariffs of widely varying sizes. These not only allow legislators to pose as saviors of numerous business constituent classes. They also allow them to lie about the degree of protection being provided, the real locus of the benefits and the reasons behind them.

Legislators claim that the size of tariff protection being provided is modest, both in absolute and relative terms. This is a lie. Effective rates of protection are higher than they appear for the reasons explained above. They unceasingly claim that foreign competitors behave “unfairly.” This is also a lie, because there is no objective standard by which to judge fairness in this context – there is only the economic standard of efficiency. Legislators deliberately create bogus standards of fairness to give themselves the excuse to provide benefits to constituent blocs – benefits that take money from the rest of us. International trade bodies are created to further the ends of domestic governments in this ongoing deception.

Readers should ask themselves how many times they have read the term “effective rate of protection” in The Wall Street Journal, The Financial Times of London, Barron’s, Forbes or any of the major financial publications. That is an index of the honesty and reputability of financial journalism today. The term was nowhere to be found in the Journal piece of 03/16/2015.

Instead, the three Journal authors busied themselves flacking for a few American steel companies. They showed bar graphs of increasing Chinese steel production and steel exports. They criticized the Chinese because the country’s steel production has “yet to slow in lockstep” with growth in demand for steel. They quoted self-styled experts on China’s supposed “problem [with] hold[ing] down exports” – without every explaining what rule or standard or economic principle of logic would require a nation to withhold exports from willing buyers. They cited year-over-year increases in exports between January, 2013, 2014 and 2015 as evidence of China’s guilt, along with the fact that the Chinese were on pace to export more steel than any other country “in this century.”

The reporters quoted the whining of a U.S. steel vice-president that demonstrating damage from Chinese exports is just “too difficult” to satisfy trade commissioners. Not content with this, they threw in complaints by an Indian steel executive and South Koreans as well. They neglect to tell their readers that Chinese, Indian and South Korean steels tend to be lower grades – a datum that helps to explain their lower prices. U.S. and Japanese steels tend to be higher grade, and that helps to explain why companies like Nucor have been able to keep prices and profit margins high for years. The authors cite one layoff at U.S. steel but forget to cite the recent article in their own Wall Street Journal lauding the history of Nucor, which has never laid off an employee despite the pressure of Chinese competition.

That same article quoted complaints by steel buyers in this country about the “competitive disadvantage” imposed by the higher-priced U.S. steel. Why are the complaints about cheap Chinese exports front-page news while the complaints about high-priced American steel buried in back pages – and not even mentioned by a subsequent banner article boasting input by no fewer than three Journal reporters? Why did the reporters forget to cite the benefits accruing to American steel users from low prices for steel imports? Don’t these reporters read their own newspaper? Or do they report only what comports with their own agenda?

DRI-204 for week of 3-8-15: The West-Coast Port Lockout: Causes and Consequences

An Access Advertising EconBrief:

The West-Coast Port Lockout: Causes and Consequences

When unions make news in the U.S. these days, chances are they are public-employee unions. The days of high-profile strikes, high-visibility picket lines and high voltage tension between labor and corporate management are long gone. Or so we thought until the last nine months, when 29 ports in California, Oregon and Washington were crippled by a maritime lockout staged by the Pacific Maritime Association (PMA) against the International Longshore Warehouse Union (ILWU). As the lockout lengthened, unloaded cargo ships dotted the coastline of cities like Long Beach and Los Angeles. Predictably, President Obama eventually intervened by dispatching Secretary of Labor Thomas Perez westward with a threatening message to the principals.

The lockout ended with a settlement on Friday evening, February 21, 2015. The lockout may be over, but we are left to make sense of it. In an age when private-sector unionism is dying on the vine, why is one specimen healthy enough to produce this job action? What actual role – if any – did the President play in settling the dispute? And, as always, what general principles of economic logic emerge to enlighten us?

In this case, the background to the dispute is voluminous and wide-ranging in history and subject. But it is vital to understanding.

The Economic Importance of the West Coast Trade

The West Coast ports host the Trans-Pacific trade between China and the United States. This international trade connection, linking ports like Shanghai and Los Angeles, is by far the most lucrative of the nine major global trade routes. In value terms, about half of all U.S. maritime cargo docks there. It is the jewel in the crown of globalism.

The U.S. is the world’s leading consumer nation. China is the world’s leading supplier of human labor and, consequently, a contender with the U.S. for the world lead in production of goods and services. As the U.S. has increasingly developed a comparative advantage in services – particularly finance – China has produced an increasing share of the world’s manufactured goods. These goods are shipped to their ultimate consumers primarily by sea.

The vessels carrying Chinese manufactured goods are highly specialized for this purpose. They resemble nautical skyscrapers much more than oceangoing vessels of old. The goods are mostly held in gigantic containers. A standard container’s dimensions are twenty feet long, eight-foot six-inches high and eight feet wide. That is 6.09 meters by 2.6 meters by 2.4 meters. These containers are stacked in the mammoth cargo hold of the ship – seven or eight high and fourteen across. That is not all. Cargo is even placed on the top deck of the vessel in 45-foot, 48-foot and 53-foot boxes. The size and tonnage of one of these modern-day arks is wondrous to behold. Each ship holds roughly three warehouses full of goods. Of course, bulkier and more specialized merchandise like cars, trucks and agricultural machinery is carried in vessels specifically tailored to the purpose – but still mind-numbingly capacious.

Now envision the ports of Los Angeles and Long Beach shortly after settlement of the lockout. Some 29 of these ships were still bobbing at anchor, unloaded, in those waters. The value of the merchandise being stalled by this dispute was enormous – undoubtedly larger than the GDP of many a country.

So far, we have posited a commercial dispute that has slowed and frustrated business affecting roughly half of international trade traveling by sea in the U.S. Given the zeitgeist, it is not hard to anticipate the next chapter in the story. It is government intervention – and given the nature of the current political administration, can Presidential interference be far behind?

Presidential Intervention

The Taft-Hartley law was passed in 1947 by the overwhelmingly Republican-dominated Congress in response to countless pro-labor, big-government measures adopted by Franklin Roosevelt’s New Deal. These included the Wagner Act. Taft-Hartley was widely viewed as a re-balancing of the scales back toward “business” in the field of labor negotiations. Among its provisions was a clause allowing the U.S. President to intervene in strikes or lockouts that adversely affected the “national interest.” The intervention could take various forms, including a call for compulsory arbitration as a means of breaking a negotiating deadlock. The general philosophy behind the provision was something like this: Each side in the negotiations is selfishly pursuing its own interests while consumers are being harmed by the goods and services not produced and work not performed as the strike lingered on. So, the President – who, it is presumed, has only the “national interest” at heart, will nobly step in and discipline the selfish adults who are acting like unruly children.

Readers should take special note of the overarching logic here: Market participants are selfish, immature and short-sighted, while the government in general and the President in particular are far-sighted, benevolent and noble. We, the general public, are dumb. The government is smart and must rule us for our own good. Of course, the government patiently allows us the freedom to live our own lives for a while – but when we get out of hand, the government steps in firmly and decisively, in no uncertain terms and corrects our foolish and careless mistakes.

As noted above, the lockout was resolved with a settlement between PMA and ILWU on February 21, 2015. At the eleventh hour, President Barack Obama intervened in the dispute by sending his Secretary of Labor, Thomas Perez, to California. Perez’s mandate was as follows: “Get this done now – if necessary, in Washington.” Was this the decisive measure in achieving resolution of the dispute?

No. This was classic political theater. The President was undoubtedly following the progress of the negotiations. When it seemed agreement was near, he sensed that his chance for seizing credit for ending the dispute was slipping away, so he did what politicians do – he looked as busy as possible while pretending to solve the problem. He had to act fast to get his response on the public record before the disputants settled their disagreement without him. If he did, he knew that when the two sides reached agreement, many people would assume that they were prodded into action by his tough talk.

Although President Obama’s career specialty is high-handed, unilateral, unprecedented executive action, his dispatching Secretary Perez to the West Coast does not fit into that category. Obama’s predecessor, George W. Bush, intervened in a similar manner in 2002. Indeed, the principals were the same – the PMA and the ILWU – and the basic scenario was identical – a lockout staged by the PMA. That lockout was motivated by a “work slowdown” called by the ILWU when contract negotiations between the two groups were deadlocked. President Bush threatened both groups with a court injunction that would have forced them to abandon their respective stances and reach agreement. The President’s threatened injunction would have nullified the PMA’s lockout; meanwhile, the Bush administration threatened to reclassify the dock workers as “railway workers.” This odd-seeming bureaucratic step would have had profound repercussions for the union, since railway workers were legally treated as essential to national safety and forbidden to strike. The threat had its desired effect when the parties ratified a new contract without requiring the prod of an injunction. Since Obama was not about to threaten a radical left-wing union whose members were a key voting bloc for his party, his admonition to Secretary Perez was the emptiest of threats.

Very well. If President Obama’s threat did not bring the recalcitrant disputants to heel, what did? Why was the lockout settled? And what incentives operate in these cases to persuade the parties to settle and limit the damage to consumers?

Trade-Route Competition

The true story is a familiar one. Government perennially poses as the savior of first, last and customary resort for consumers. But this is just a pose; it’s for show, not for go. Government can’t help consumers because government doesn’t organize resources to produce output, doesn’t possess entrepreneurial skills necessary to find out what consumers want, doesn’t possess the incentives and motivation imparted by the profit motive and lacks the information necessary to utilize the price system the way market participants do.

In other words, government lacks just about every concrete attribute necessary to actually help consumers. Where can that help be found? In competitive markets, that’s where. 

Let’s apply that generalization to the West Coast port lockout. For over nine months, roughly half of the tangible cargo entering the United States has been funneled through the 29 bottlenecked West Coast ports, producing costly time delays and increasingly frustrated transporters, wholesalers and retailers. Do all these frustrated people have to suffer in silence?

No. There is more than one way to move goods from China to North America. The Trans-Pacific route from Shanghai to the West Coast is the shortest route, taking 12-14 days. But the port lockout has encouraged shippers to experiment with alternative routes. These alternatives may be longer – up to twice as long, in fact – but the cargo can be unloaded immediately upon arrival rather than waiting in the West Coast queue for an indeterminate time. The most common of these alternatives is to circle around the West Coast and continue southward down the California coast and past the Mexican Panhandle. The ships can stop off at a Mexican port, or reach Central America and cross the Panama Canal before turning north towards the Atlantic Coast, reaching New York City in 25 days.

The travel itinerary of any particular ship will depend on the composition of its freight. As reported by The Wall Street Journal (“Ports Gridlock Reshapes Trade,” 03/06/2015, by Laura Stevens and Paul Ziobro), “the biggest shippers, including Wal-Mart Stores, Inc., Home Depot Inc. and Target Corp., have employed for years what is known in the industry as a four-corner strategy, in which networks are expanded to include warehouses at northern and southern ports on both coasts and the Gulf of Mexico. Now even smaller companies are diversifying.” A Journal survey found that 65% of U.S. shippers planned to reduce shipments routed through the West Coast during the remainder of this year and next year. Inevitably, some of those re-routing decisions will become permanent.

A shorthand way of describing this changeover is to say that the Trans-Pacific trade route faces competition from the alternative route to the East Coast – which is really a combination of multiple routes with a terminal route ending in New York City. More precisely, each of the 29 ports served by the Trans-Pacific route competes with the many port-terminal facilities in Mexico, the Gulf Coast, the Atlantic Coast and New York City. In January, according to the Journal, the port of Oakland suffered a 32% drop in volume while the port of Virginia picked up a 15% increase. Toymaker Hasbro stopped splitting its shipments between coasts and routed its full, lucrative complement of toys to Savannah, GA by way of the Panama Canal. It was the hot breath of this kind of competitive pressure that the members of the PMA felt on their necks during negotiations with ILWU. It was the threat of losing business to other ports that finally drove them to settle with ILWU. (As it happens, the final matter at issue was the details of an arbitration agreement between the two bodies, rather than wages or working conditions.)

There is still another maritime trade route from China to North America. It is less important for the U.S. because the route passes through Southeast Asia, Africa and Europe via the South China Sea, the Indian Ocean, the Mediterranean, the Suez Canal and Gibraltar. Ships will drop off cargo in all these locations and only the residual will remain to continue across the Atlantic to the East Coast. But the ports lockout has redirected some cargo to this route as well.

Like many economic questions, trade-route optimality becomes more complicated the closer it is examined. Larger companies are more apt to change their route, either temporarily or permanently, because they have the resources and flexibility to take advantage of any potential advantage. They can utilize economies of scale, size and time beyond the reach of smaller companies.

The West Coast ports are not the only ones grappling with the problem of bottlenecks. The Panama Canal has been a key trade connection for over a century. It was constructed at the dawn of the 20th century and wasn’t built for the supersized vessels that careen across today’s maritime superhighways. It is now undergoing enlargement, a process scheduled for completion in 2016. The anticipation of this upgrade was a factor influencing the PMA to hold out longer rather than settle with the ILWU. Why? The port owners knew that they were bound to lose some business to the East Coast next year, when the Panama Canal revamp was complete. Thus, if that business switched early – this year instead of next year – only this year’s lost business would be attributable to their negotiating stance, not the full discounted present value of all future business lost, because future business was slated to transfer away anyway.

It is evident that competition from other trade routes – that is, from other ports – was the real motivation for settlement of the West Coast port lockout. The PMA faced a complicated tradeoff – weighing the gains from further negotiation against the net loss of business to other ports. Having disposed of the shibboleth that Presidential intervention under Taft-Hartley was the instrument of salvation, we should next turn the argument around. Why were port operators intent on locking out the ILWU in the first place? What did the PMA have to gain?

The Gains from the Lockout

The most fruitful way to examine the issue of gains from the lockout ordered by PMA is to look backward to the previous lockout in 2002. This was the one in which President George Bush intervened, after the PMA ordered a lockout in response to the ILWU’s work slowdown. The key issue from PMA’s standpoint, on which they finally prevailed, was the employment of new technology. The technique of “containerization” as outlined above was becoming the efficient production technique for transporting ocean cargo. In order to move and stack large containers inside gigantic ships, port personnel had to use the latest mechanized technology. The ILWU resisted this strenuously, but finally conceded.

For a century and a half, labor unions have portrayed technology as the enemy of labor. That is ironic. Machines make labor more productive, thereby increasing the marginal-value product of labor, which is defined as the amount of output produced by an additional increment of labor multiplied by the price of that output. The increase in marginal-value product increases the demand for labor by business firms, thereby driving up wages. Essentially, this is the process by which wages have increased in America ever since colonial times. These increases have been broad-based across industries ranging from agriculture to manufacturing to extractive industries to service industries like warehousing.

Unions have instead painted technology as the enemy of labor because it substitutes for labor instead of complementing it. It should be obvious that this process of substitution has severe limits. Indeed, it is only now, after a few centuries of technological progress, that we are reaching the point where robots can really substitute for people to any significant degree. While this does have the effect of actually eliminating some jobs, its effect on productivity is so tremendous that remaining jobholders – those whose work is complemented by the machines – see huge increases in income.

Unions must provide gains to their members that cannot be had without union participation. Obviously, workers can have the benefits of technology without joining a union, since employers are willing and even anxious to adopt technological innovations that promise to increase the rate of output per unit of input expended. That is why unions have always sought to force workers to join unions. Next, unions must find a way to raise the wage of members higher than that prevailing in the marketplace. Once unions have forced workers to join unions, they then restrict union membership in order to restrict the supply of labor to the marketplace. The restriction in supply doesn’t restrict the number of workers willing to work, only the number able to work. This increases wages by creating an artificial surplus of labor. That labor surplus is what we call unemployment. Various sources estimate that thousands of people occupy waiting lists for membership in the ILWU. Tens of thousands of applicants apply whenever a union vacancy pops up.

Labor unions are cartels. In many ways, they are analogous to business cartels organized to raise prices paid by consumers above the prevailing market price. (Unlike labor cartels, business cartels don’t produce surpluses of goods; instead, the business combination reduces output in accordance with the higher price contrived by the cartel. The essential difference between the two cases is that business cartels theoretically control the total supply of output to the market but unions do not control the total supply of labor to the labor market.) But while business cartels have been forbidden by the antitrust laws, labor cartels are actively encouraged by government labor laws like the Wagner Act. In particular, government encourages labor unions to compel membership and compel payment of dues by workers who do not belong to unions.

The 14,000 members of ILWU who work in the West Coast ports have been described by the San Francisco Chronicle as “the aristocrat[s] of the working class,” who “can earn well over $100,000 a year with excellent benefits.” Partly, this is owed to the decades of exclusionary policies followed by ILWU, which has studiously restricted membership in the union. The union employs the ancient “hiring hall” method of allocating the drastically restricted number of jobs. Union members – including thousands of part-time “casual” workers – show up at hiring halls where bosses inform them what work is available for them. Movie fans recall the Oscar-winning film On the Waterfront, which graphically portrayed this system.

But the living standard enjoyed by ILWU members today is also the result of the contract negotiated in 2002 at the insistence of the PMA. That was the year in which the new technology was finally adopted by the West Coast ports. The result of this was that in succeeding years employment at West Coast ports increased by 32%. This was the measure of the increased productivity caused by technological innovation.

For years, the ILWU reacted to technological progress by instituting job cuts. The union watched while black union members were laid off because they were junior to their white brothers. Today, this would be called “disparate impact,” but during the ILWU Presidency of the Communist sympathizer Harry Bridges (1937-1977), his political influence precluded any criticism. Similarly, Bridges managed to exclude women from union membership without attracting attention as a sexist. The ILWU’s restrictive and exclusionary policies kept thousands from working in West Coast ports. In contrast, the PMA’s lockout won a concession for technological adoption that spurred productivity and added thousands of jobs to port payrolls.

The Real Story and Consequences of the Port Lockout, as Told by Economic Logic

Our analysis of the West Coast port lockout, using the tools of history and economic logic, paints a completely different picture than the one drawn by the news media, left-wing academics and union propagandists. The lockout was indeed the action of two sides, each pursuing their own joint interests; that much is true. But Presidential intervention was neither necessary nor sufficient to end it, either in the current instance or in the past. Market participants are not immature children governed by passions over which they have no control. They are adults who make rational choices based on the limited information at their disposal. In this case, market forces – specifically, the competition embodies in alternative global trade routes – put limits on the amount of time that the PMA would be willing to negotiate for their ends.

Presidents are not noble men governed by altruistic motives foreign to market participants. Presidents are politicians. Presidents act to achieve their political ends. Political ends typically involve persuading a bloc of people that you will provide the largest possible benefit to them at little or no cost. This is never economically logical or feasible, so political action and economics are constantly at odds. Thus, it is not surprising that neither President Bush nor President Obama would rely on market forces to handle their respective West Coast port lockouts, nor is it surprising that their tough talk designed to bring the disputants up short and break the negotiating deadlock was not meaningful.

Ending the deadlock by force majeure was not economically beneficial to American consumers because it was not required. Market forces would do that anyway. The measures ancillary to achieving that coercive end were not beneficial, either. Forcing people to do things against their will is only justified to prevent crimes and loss of rights. In this case, the PMA and ILWU were harming only themselves. Shippers have alternative ways to get their goods to consumers and were, in fact, making use of those alternatives.

The central fact of the West Coast port lockouts is illuminated by the aftermath of the 2002 agreement: The adoption of productivity-enhancing technology demanded by the PMA ushered in a 32% increase in employment on the West Coast docks. This benefitted America’s consumers, the PMA and several thousand workers who previously had been shut out of jobs by the exclusionary policies of the ILWU. The PMA’s lockout was the force working for the public good – not the actions of the President and certainly not the actions of the ILWU. The PMA was the beneficial force not because its members were inherently more noble or altruistic than everybody else, but because they were the only ones directly associated with the case who were responding to market forces. This was a contemporary instance of Adam Smith’s “invisible hand” at work. It was so invisible that nobody else has noticed it until now.

To be sure, this isn’t the way that competition is supposed to work. Firms are supposed to introduce productivity-enhancing technology as it becomes available. They shouldn’t need to ask permission from anybody – not government regulators, Presidents or labor unions. But the fact that federal-government labor policy allowed a union like the ILWU to gain a stranglehold on the maritime labor market put port owners and operators in a bind. They had to form their own organization just to negotiate with the ILWU. They had to risk losing business to other ports during negotiations in order win the right to adopt the technology that allowed them to compete successfully with those ports. This is no way to run a railroad – or a maritime cargo terminal – but that’s the hand of cards they were dealt. They played it out to the best of their ability. For their trouble, they have been vilified.

And the ILWU? In 2001, they celebrated the centenary of the founding President of their union, the Communist Harry Bridges. Fittingly, they celebrated it with a work stoppage. They shut down the port of San Pedro, CA, for eight hours.

The PMA negotiated tenaciously for the right to create jobs – and did so. The ILWU negotiated for the right to restrict employment. They celebrated the birth of their founder by organizing labor to waste of a day’s worth of work. In a nutshell, that sums up the contending sides in the West Coast port lockout. The lockout itself was not a pointless waste of time, a threat to consumers, and a danger to national welfare that demanded Presidential intervention. It was the only way that the interests of consumers could be served, given the powers placed in the hands of a labor union determined to thwart progress and benefit a small number of incumbent union members at the expense of job seekers, consumers and everybody else. In short, the reality of the West Coast port lockout is diametrically opposed to the conventional narrative.