The Unintended Consequences of Empathy in the Markets

We were struck by the front page of the New York Times business section this past Saturday, September 5th. On display were two examples of how well meaning price subsidies help to distort markets and create conditions exactly the opposite of what they intend to accomplish. Yet the author of neither piece was able to understand this basic economic fact.

We don’t mean to single out the Times. Journalists often don’t grasp the consequences of market interference. Instead they focus on the impulses for fairness that exists inside all of us and thus fail to see the larger picture.

Runaway Teen Unemployment

The headline story was about teen unemployment being over 25%. Since statistics have been kept in 1948 this is the highest teen unemployment has ever been. That arc of over 60 years encompasses the harsh recessions of 1973-4 and the “double dip” of 1981-2.

In an attempt to grasp why the reading is so outsized as compared to other groups the article correctly noted that this is an unskilled group and the last in line to be hired. With little leverage they command low wages and few opportunities.

And the poor state of the economy has narrowed the number of jobs available. The article sites many seasonal jobs as not being filled this year. And with older, more qualified individuals having employment difficulties of their own many are “stepping down” the employment ladder to take positions that are well beneath their skill level to simply have some kind of job. Recent college graduates were specifically cited.

But the author proceeds to twist logic into a pretzel to explain the outsized number by postulating that many qualified older teenagers are attending college to boost their chances of landing a job and younger qualified teens are relying on their well to do parents allowing them to literally turn their noses up at work they’d rather not do, thus leaving the least desirable prospects in the job pool. Employers, she suggests, are balking at hiring them.

The Best Minimum Wage is None at All

The article devotes one sentence to the possibility that the recent rise in the minimum wage might have something to do with the high teen jobless rate. But clearly the author isn’t enamored of this idea. It is included almost as an afterthought with no elaboration or explanation as if an editor insisted it needed to be mentioned.

And indeed it does. The convoluted thinking the author goes through in order to explain high teen unemployment defies the basic law that the shortest distance between two points is a straight line, whether in mathematics or in logic.

There is no doubt a recession would have an outsized impact on employment of the low skilled and the number of jobs available. But raising the price of that labor can only magnify these outcomes.

It’s all the more troubling when you consider that for the most part minimum wage jobs are not lifetime destinations but stepping stones to better opportunities for older unqualified workers and first work experience jobs for teenagers. Few people truly capable of functioning as self sufficient individuals in the society spend any real length of time in these positions. No less than the largest employer in the country, Wal-Mart, the king of low paying jobs, encourages entry level employees to acquire skills on the job, making them more valuable to the company and thus subject to promotion.

Raising the cost to the employer for hiring workers at the margin is a clear disincentive to hire. And doing so in the midst of a significant recession is the work of politicians more worried about their images than the deleterious effects of this policy. It’s easy to brag about increasing the minimum wage but more complicated to explain why the best minimum wage is to not have one at all. This from a political class supposedly so worried about jobs they passed an economically back breaking stimulus.

The minimum wage increased only on July 24th but employers have known for a long time that it was coming and have no doubt factored it into their plans. With the cost of entry level work increasing by over 10% it’s no wonder employers would think twice about expanding their hiring in the most challenging of times.

Why is the best minimum wage none at all? The author unwittingly answers this question in part. If, as she postulates, teenagers will go to college to avoid low skilled work and others simply will refuse to do it, the pool of available workers isn’t as large as she suggests. That means there is a happy medium that will maximize the number of jobs available at a price employers are willing to pay and the unemployed are willing to accept for a job that is a stepping stone to something better if a worker is reliable and willing to learn.

Look first and foremost to a higher minimum wage for the record high 25+% teenage unemployment rate.

The Dizzying Rise of College Tuition Even in “The Great Recession”

Elsewhere on the front business page another author seeks the reasons for the rising cost of college even in a recession but in this instance doesn’t consider a major factor behind the rise.

He consults the president of Lafayette College, who has an MBA and private sector experience, giving him a business perspective that is largely lacking in the academic world. Lafayette, the author feels, is an excellent college to discuss because it is not a “top tier” institution yet it charges $50,000 a year for its programs.

The president suggests they are not good at cutting costs when they increase spending. And why should they be when they have successfully raised tuition at will for decades?

He also suggests a tenured faculty cannot be crossed and thus costly but unpopular majors cannot be trimmed. In addition sabbaticals are offered every seven years to give faculty a chance to further their research and recharge their offerings, although it is not at all clear that a pedestrian institution like Lafayette requires the same type of approach as the cutting edge universities.

He defends the university’s burgeoning administrative staff as necessary for the school to be competitive with others that offer career counseling and other services.

Ultimately the president defends Lafayette’s policies by pointing out the importance of a well rounded liberal arts education and the fact that it is costly in a world where skilled labor, such as professors, only gets more expensive.

And indeed he is correct in that regard. But he misses the point.

Higher Education Isn't The Magic Potion For a Better Life

Politicians are convinced that college is the entry point to a better life for the entire population. They are as convinced of this as they were that everyone should own there own home. The latter was a clearly misconceived idea. We’d argue so is the former.

As much as not everyone is capable of owning their own home a greater percentage of the population is not capable of true college level work. And we’d argue that for many it isn’t necessary. The idea of a liberal arts education is to learn how to think and problem solve, skills necessary to secure many higher paying jobs.

But there are many well paying jobs that can ensconce their holder firmly in the middle class that only require artisan training. You will no doubt be a better rounded person if you read Shakespeare and study the Roman Empire, but you don’t need this knowledge to be a plumber or a dental technician.

Yet our system is designed to subsidize as many people into higher education as possible through government loans. We have a friend that accumulated $50,000 in loans and is paying it off at 2 ½% interest over a 30 year period. And the loan is forgivable upon death. Loans like these make it easier for students to pay college tuitions. But most economists will tell you that prices tend to rise as much as the subsidy that is extended. In other words, these programs are politically popular but tend to be self defeating.

If the government would get out of the subsidy business two things would happen, and rather quickly. First, tuition increases at all but the finest universities would slow as fewer students would venture to pay prevailing prices. Second, second tier institutions like Lafayette would quickly make the hard decisions their business savvy president would rather resist, suddenly preferring to take on overpaid faculty and a bloated bureaucracy than to hike tuition. Tuition levels at a wide variety of schools would become more affordable as colleges try to meet the market rather than meet their fate.

Conclusions

Market subsidies are politically popular but have unintended consequences that ultimately defeat their purpose. The mirage that government can bring things the population covets within reach is a powerful aphrodisiac and the fatal flaw of popularly elected governments.