Posted on 10/22/2014 5:24:01 AM PDT by Kaslin
So as to give some perspective, I'm going to ask readers for their guesses about human behavior before explaining my embarrassment by some of my fellow economists.
Suppose the prices of ladies jewelry rose by 100 percent. What would you predict would happen to sales? What about a 25 or 50 percent price increase? I'm going to guess that the average person would predict that sales would fall.
Would you make the same prediction about auto sales if cars' prices rose by 100 percent or 25 or 50 percent? Suppose that you're the CEO of General Motors and your sales manager tells you the company could increase auto sales by advertising a 100 percent or 50 percent price increase. I'm guessing that you'd fire the sales manager for both lunacy and incompetency.
Let's try one more. What would you predict would happen to housing sales if prices rose by 50 percent? I'm guessing you'd predict a decline in sales. You say, "OK, Williams, you're really trying our patience with these obvious questions. What's your point?"
It turns out that there's a law in economics known as the first fundamental law of demand, to which there are no known real-world exceptions. The law states that the higher the price of something the less people will take of it and vice versa. Another way of stating this very simple law is: There exists a price whereby people can be induced to take more of something, and there exists a price whereby people will take less of something.
Some people suggest that if the price of something is raised, buyers will take more or the same amount. That's silly because there'd be no limit to the price that sellers would charge. For example, if a grocer knew he would sell more -- or the same amount of -- milk at $8 a gallon than at $4 a gallon, why in the world would he sell it at $4? Then the question becomes: Why would he sell it at $8 if people would buy the same amount at a higher price?
There are economists, most notably Nobel Prize-winning economist Paul Krugman, who suggest that the law of demand applies to everything except labor prices (wages) of low-skilled workers. Krugman says that paying fast-food workers $15 an hour wouldn't cause big companies such as McDonald's to cut jobs. In other words, Krugman argues that raising the minimum wage doesn't change employer behavior.
Before we address Krugman's fallacious argument, think about this: One of Galileo's laws says the influence of gravity on a falling body in a vacuum is to cause it to accelerate at a rate of 32 feet per second per second. That applies to a falling rock, steel ball or feather. What would you think of the reasoning capacity of a Nobel Prize-winning physicist who'd argue that because human beings are not rocks, steel balls or feathers, Galileo's law of falling bodies doesn't apply to them?
Krugman says that most minimum-wage workers are employed in what he calls non-tradable industries -- industries that can't move to China. He says that there are few mechanization opportunities where minimum-wage workers are employed -- for example, fast-food restaurants, hotels, etc. That being the case, he contends, seeing as there aren't good substitutes for minimum-wage workers, they won't suffer unemployment from increases in the minimum wage. In other words, the law of demand doesn't apply to them.
Let's look at some of the history of some of Krugman's non-tradable industries. During the 1940s and '50s, there were very few self-serve gasoline stations. There were also theater ushers to show patrons to their seats. In 1900, 41 percent of the U.S. labor force was employed in agriculture. Now most gas stations are self-serve. Theater ushers disappeared. And only 2 percent of today's labor force works in agricultural jobs. There are many other examples of buyers of labor services seeking and ultimately finding substitutes when labor prices rise. It's economic malpractice for economists to suggest that they don't.
Where did all the elevator operators and gas pump workers go?
Every Krugman arguement begins w/ a false premise
“aren’t good substitutes for minimum-wage workers, they won’t suffer unemployment from increases in the minimum wage”
What he’s missing is that it takes customers coming in to buy to fund those higher wages.
If a burger or coffee gets too expensive, folks eat/drink something else or make their own.
The reduced customer traffic requires reduced service level by the company.
Idiots like Krugman keep thinking that business is like govt. Govt gets it’s money through taxes meaning participation is forced. The public has to “buy” the product. Not so for business. Customers can walk.
Walter is conflating two separate, though no doubt related, issues.
The first is people buying less of an item that costs more. The other is price competition between sellers.
If a retailer were to raise his price for milk to $8, his sales would instantly drop to very near zero. Because the store across the street is still selling milk for $4.
OTOH, if a virus decimated the dairy industry, and the price of milk went to $8 across the country because of reduced supply, the sales of any one retailer would drop, but not nearly as much as in the A scenario.
Krugman is talking about the B scenario, because government edict would impose higher costs on all employers, taking competition out of play.
But I go to McDonald's a lot less than I used to.
Both of our political parties are completely asleep about the real economic issue which America is facing.
We have sold off far too much of what was just one generation ago, American businesses.
Now we import everything in every store, in every town, in every state, from overseas.
America became great because we made stuff right here.
America needs to produce things in America again.
That is the issue. American production. Yet neither political party, is saying or doing one single thing about what is in fact the biggest issue facing America.
GOP stand up.
America needs jobs once again.
America needs to produce once again.
We will not grow, or even survive long-term, by importing everything from everywhere else. Particularly by financing a massive communist COMPETITOR.
GOP change paths. Stand up for American jobs.
Krugman is an idiot and like every liberal his logic is upside down or is totally missing.
That's true, but the consumer is not the automaton that Kruggie & his pals think he/she is.
A quart and a half of coffee costs me 30 cents for the coffee, 2 cents for the creamer, 2 cents for the natural gas, and 0bama cents for my time. I just have to devote an extra 20 minutes in the morning around getting ready in the morning. Once you've interpolated the activity, you're golden.
I can save the 5-10 dollars I'd spend at a fast-food place. That changes behavior. People WILL start cutting out the middle-fast-food-worker, and pay themselves.
Gas pumpers went to NJ...the last state I think...maybe Oregon...to require a pump attendant pump gas...no self serve.
Unbleebable...
Quite true.
However, a lot of this activity is due to the sticker shock effect. IOW, people change their behavior when the price goes up significantly, then tend to gradually drift back towards their old consumption patterns.
IOW, the effect of price increases on consumption diminishes over time.
Major reason for price increase at McD’s: food prices. You may have noticed beef and other meats have gone up a bunch.
This is at least partly due to corn price increases associated largely with idiotic government policies with regard to ethanol.
But you’re quite right about prices. I very seldom eat at fast food places, just too cheap. In a hurry last week, I went thru the McD drive-thru. Cost me very nearly $10. Quite a shock.
“Where did all the elevator operators and gas pump workers go?”
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To law school?
One of the reasons the government’s official CPI inflation adjustment is so absurdly understated is that they take the position that if the price of porterhouse steak goes up and you stop buying it and buy potted meat in a can instead then your cost of living has not gone up. Apparently if you can hold your cost constant by lowering your standards that is not inflation. If you stop going to Mickey D’s because of price increases what do you do then? I could not go to McDonald’s any LESS often than I do now.
If necessary they will go back to the way things used to be. When I was a child there were very few eating places and I don’t think any were open on Sunday anywhere within a hundred miles of here. People ate at home. They carried lunch to work and that included most of those who had white collar jobs. People who had ten thousand dollars in the bank (the equivalent of two hundred thousand now) still carried their lunch to work, they thought more of their money then because it did not lose half its value in five years. It was actually possible to save up money for major purchases.
Not really. If a Burger King Whopper costs 3-4 dollars I will probably buy it because it is convenient and quick. If that Whopper costs 8 bucks I will make a better sandwich at home and take it with me in my little sandwich cooler, thus Burger King will be competing with my kitchen. I will be undercutting Burger King by several dollars.
It is uncanny how ethanol gets blamed when food prices spike up, but the cone of silence descends when the price of agricultural commodities falls sharply and food prices ... just keep going up.
The last time I checked, the farmgate price of the food items in the average American grocery cart was about 14 cents on the dollar. Even big swings in commodity prices have only a marginal impact on the cost in the grocery store. The biggest cost factor is labor, and then energy (refrigeration, plus transportation, manufacturing, etc.). I don't begrudge those added costs, btw; they are the price of a global food chain that gives me 24/7 access to an astonishing array of foods from around the world. But I do grow tired of ethanol being blamed whenever food prices tick up.
I have changed my mind several times about ethanol over the past 30 years. But I have been pro-ethanol since the mid-1990's, for one primary reason. I want to bankrupt OPEC. I want the palaces to crumble to dust, the repo man to claim the gold plated limos, and for the Saudi's to be forced to close their global network of hate academies. And for the jihadis to have to fight with sticks and stones because they can't afford bullets.
If someone can figure out how to run cars on pixie dust, I will be in favor of pixie dust. But in the meantime, ethanol is the most cost effective alternative fuel we have. Corn ethanol is now viable without subsidy (but we are hitting the blend wall, which is a regulatory obstacle), and if I had to bet, I would bet that third generation feedstocks will become cost effective within the next 5-10 years. That is a game changer. When it happens, the sheiks can go pound sand.
And yes, I am all in favor of fracking, and drilling on the White House lawn, and building the Keystone pipeline as well.
Every leftist begins his analysis from a false starting point.
Is it any wonder that they always always always arrive at the wrong conclusion?
Part of Williams’ devastating point:
“...During the 1940s and ‘50s, there were very few self-serve gasoline stations...”
Exactly. There are already mechanized alternatives to fast food. Vending machines: soda machines, snack machines, and even machines that heat food prior to dispensing. If minimal wage goes up, there will be less hands-on cooking. Restaurant quality will drop, and so will tourism to the US. On the flip side, foreign tourism FROM the US will increase to any ebola-free nations that have better restaurants. That has probably occurred all ready.
Intellectuals are clueless about the ‘nitty-gritty’ of fast food.
Nuisance suits already hurt food quality. Most people can recall how lukewarm food was for a while when restaurants feared nuisance suits. Thank God it’s not as bad anymore. But there are other problems which hurt US restaurant quality, and labor cost is a big part of the problem [as well as regulations and lawsuits].
I know of a food chain that tried to drastically improve the quality of its burgers, but health department regs required so much overkill in cleaning that the grill could never be properly ‘seasoned’. Even worse, the grill needed labor-intensive cooking — ‘sight-cooking’ [rather than reliance on a timer]. But labor costs were such that cooks left too many raw spots in the meat. This was before the latest hike in minimal wage BTW.
The restaurant chain then had no choice but to over-cook its meat until it could replace the superior grill with a standard ‘chain link’ grill similar to the one used by Burger King. Fine burgers, but not even close in quality.
Beef prices also went up because of the 2013 drought and because of all the beef killed in the early snow storm, October 2013. The snow storm alone supposedly killed over 100,000 cows. After an unexpected loss like that, takes a while to build up the stock again.
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