Matthew Yglesias Proves My Point

Why has nobody asked this question:

There is a claim afoot (see first comment, and a repeat of the assertion in the second comment on this post at Catallarchy) that Republicans and libertarians (apparently Ron Paul has a lot more influence than I thought) have been starving federal programs in order to make them less effective and make them easy to kill. (Personally, I think Hanlon's Razor is the appropriate framework for thinking about the Brownie/FEMA situation.) Besides the fact that I can't think of any program whose demise has been brought about in this way, and there's also that little problem with the fact that George Bush hasn't vetoed a single spending bill, and the spending on everything from Education to TSA has been increased during his term, I've never actually heard anyone explicitly propose this as an actual strategy. Not that it's impossible that they have, just that I haven't heard of it if they have. I have heard people suggest that taxes be cut (revenues, not just marginal rates) in order to force legislators to make harder decisions, but it doesn't tend to work that way. In fact, spending seems to always rise to match or exceed revenues, so the tax-cutting strategy appears to only result in balanced budgets (at best) or deficits (more likely), not actual spending control. That's been the result with a Democratic Congress and President (Johnson, Carter, and Clinton 93-94), Democratic Congress and Republican President (Nixon, Reagan, Bush I), and Republican Congress and President (Bush II), but not a Republican Congress and Democratic President (Clinton 95-2000). Hmmm, ... split government with Pres. Hillary, anybody?

But on the other hand we now have some evidence that Democrats like to see inflated programs that even they admit result in overly expensive government projects. Matthew Yglesias suggests that Davis-Bacon serves the interests of unions, who favor Democrats, so the fact that fewer things get built in any one period is balanced by the possibility of Democrats getting elected in the future and delivering more (overly expensive) building projects. Interesting. Cynical, sure. Pure power politics, certainly. But interesting.

He makes two bad assumptions. One is that this results in more overall building projects, and the other is that voters benefit from more government buildings. His admission that fewer buildings are built in any one election cycle with D-B implies that fewer buildings are built in all election cycles if "number of projects funded" is independent of "number of Democrats elected". That would seem to be the case if you look at the pork in the recent energy and transportation packages delivered by the Republican Congress. Moreover, unions, like corporations, will always shift their contributions toward the party in power. According to OpenSecrets, building trades unions have shifted their Democratic contributions from 92-95% of their giving back to 83% to Democrats. They apparently agree that pork is not the sole domain of Democrats (sorry, Matt), but of the majority party.

Republicans: that means you. You are now the party of pork. Proud?

His other assumption, that voters benefit from government building projects, is also a mixed bag. The trend in public housing has been away from government-built dens of entrenched poverty (and the associated crime, thanks to misguided antidrug laws) and toward assistance in affording existing, privately built housing. Federal highways reduce the cost of living in suburbs and commuting long distances; Smart Growth people would probably quibble with whether or not that benefits the nation as a whole. Matthew dismisses such intramural arguments by saying that the Public Good is an unobtainable abstraction, so let's just send money to our allies and hope they keep us in power long enough to ... um, send money to our ... allies ... well, you get the point.

Isn't that pretty much what the Bush Administration is accused of when they give no-bid contracts to Halliburton? It's always refreshing to get someone representing a major party to admit that there is no difference between the two major parties' tactics, just in their identities. Y'know, right before they return to claiming their own innocence while claiming that only the other guy does it.

Therefore, if you stipulate to the "cut funding to make a program fail so it can be killed" accusation, I propose that the two simply balance out: Republicans try to starve something the Democrats have already bloated. Thus, the programs are all funded more or less at the "right" level.

Well, "right" if you're a Republican or Democrat.

davis bacon

Gougers? Clap 'em in irons!

At lunch the other day, while listening to Rita coverage, one feller suddenly piped up and said, "I think they oughtta arrest everyone one of them gas station owners that gouges!" Upon further discourse, it appeared that the problem he was addressing was that every gas station in town had raised prices at the same time (it's a small town, so he was probably actually able to check them all). I resisted the urge to ask him to explain the difference between "raising prices" and "gouging" since I doubt whether he uses that pejorative whenever the price on his favorite Lite beer or milk goes up. His reasoning for his agenda was made clear: the gas in their underground storage tanks still cost what it cost when they filled up, "and there ain't no way they all filled up at the same time."

It seems to me that all you have to do is think it out: what happens when one distributor fails to raise his prices when everyone else raises theirs? We don't have to guess: Pacific Biodiesel already tried the experiment and here's what they found out:

"Now, as Hawaii gas prices top $4 a gallon in some areas, the Kings haven't increased their price more than 10 cents a gallon in five years. The price on their Oahu pump is stuck at $2.64 and they don't see it going up much at all because biodiesel is not tied to oil markets."

That's a good point about the decoupling of biodiesel from volatile petroleum markets. However, there are two problems here: the first is that he has been getting his feedstock waste oil from restaurants whose second best alternative was to pay someone to filter or get rid of it. As petrodiesel prices rise, the temptation for others to jump into the market will rise, and there will be competition for that fryer oil. What was once a non-scarce (free) input is going to become scarce (not free). Pacific should raise their prices now so that they can invest in themselves, improve their efficiency, and prepare for the coming competition. The second problem is that as competing prices rise to $4, Pacific's diesel market share should rise to 100%, which they cannot possibly meet with existing capacity. Indeed, that is already the case:

"We've kept prices tied to our costs of production and doing business," said Mrs. King, the company's marketing and communications director. "We started this business because we wanted to prove that we could make a viable alternative ... that eventually could be cheaper."

...

This month, the Kings started registering regular customers so it could control sales.

"It's been nuts the last few weeks," said Mrs. King, who restricted sales on Maui on Sept. 1 to drivers registered with the company and expected a similar restriction on Oahu soon. "We were overselling. We are not taking any new ones."

Production capacity at the two Hawaii plants is 1.2 million gallons of biodiesel a year.

So just as we might have guessed, they had to resort to some non-price mechanism. Registering regular customers was an issue that popped up in biodiesel forums a few months back when prices first started to rise. Many small biodiesel outfits were concerned that they were selling out of fuel to people who had never been customers before, and the regular customers who supported them in the lean years couldn't get any. Lots of regular supporters were angry that biodiesel prices were rising just at the moment they should have been able to say, "See? We were right: biodiesel is a lower cost alternative."

I'm sorry, but I think that raising those prices in accordance with market demand is exactly what the biodiesel producers should do. As I pointed out in my marginal post, the most expensive fuel that must be brought forth to meet the demand determines the minimum market price. The low cost producers reap a profit (a rent, as Ricardo explained). After years of floundering, subsidization, and marginalization, the biodiesel sellers deserve to reap a fortune as the newly minted low cost seller. Furthermore, they can use the money to expand production during this (what I believe to be soon-to-pass, i.e. temporary) price environment. But most of all, by raising their prices, they will be sure of having enough for the regular customers. Given a choice between dino diesel and biodiesel at the same price, most customers will go back to the most convenient station, regardless of what's in the ground. The biodiesel pumps won't run dry faster, so biodiesel regulars can still go out of their way to patronize their favorite producer (and they should!). The enthusiasts ought to be happy that everyone is jumping on the bandwagon: after all, did they want biodiesel to be the fuel of the future only for the enlightened, or for everyone?

To get away from biodiesel for the moment, most gas station operators, especially the independent stations, make very little money on the fuel. The retailers get squeezed in periods of high fuel prices because consumers tend to shop around more when prices are high or rising, so you can't let your price float above your competitors'. If you look at the difference between what you are paying today and current wholesale prices, and compare those figures to 1997 or so (when oil dipped down to ~$11), you will find that the retailers make the same or less per gallon. Accounting for inflation, that means they make less per gallon in real terms, but even if it were the same, they make less profit as a percentage of the purchase price than they did.

Furthermore, those operators typically use gasoline as a loss-leader to get you into the store to buy high margin items like coffee, sodas, snacks, and Lotto tickets. Running out of gasoline effectively kills them off because they still have rent to pay and investments in corn chips that aren't turning over. And one day, they are going to have to pay for the next tank, at a much higher price than "what's in the ground". (And yes, they have to pay that price in California even when the shortage is in the Gulf region, if you believe Jim Hamilton's analysis). Keeping their prices artificially low is a sure-fire way of running out and not being able to afford that next tank. So, yeah, raising their prices is good for them.

But I would go further and argue that higher prices are good for the customers in times of gasoline scarcity. The choice is usually (and falsely) posed as between "gougers" and reasonably priced fuel, but the real choice is between high priced fuel and no fuel. Higher prices force people to decide whether they are choosing the most efficient mode of transportation and whether they are choosing valuable trips. Early indications are that people have been adjusting their behaviors (via Environmental Economics blog, and nice Trek reference, John). If prices had headed skyward in Houston before Rita, there would have been a whole lot more carpooling and less half-empty vehicles leaving the city, and fewer empty cars sitting in empty gas stations. In fact, the lines leaving the city might well have been faster.

From today's Wall Street Journal ($), "Getting a Gallon of Gas In the Energy Capital Is Not So Easy to Do; As Houstonians Return Home, Supplies Run Very Thin; Following the Exxon
Truck" by Gary Macwilliams and Melanie Trottman,

"I've had people making U-turns and getting behind me," he said, beginning to unload his cargo at the Exxon station near Beltway 8. The station was selling gas at $2.65 a gallon, its pre-Rita price. Drivers were clogging the pumps as a line of 25 cars snaked into the station. As one driver plowed over an orange safety cone, Mr. Gonzalez yelled to the driver who merely shrugged before pulling away. "It's unbelievable; they think this is the end of the world," Mr. Gonzalez said. [emphasis added]

Duh! Raise your prices! It's good for the environment!

Anyone want to bet whether or not the station's management is concerned with anti-gouging prosecution? I'd guess that's exactly what is going on, judging by this exchange highlighted at Catallarchy (along my nomination for the best blog post title this month).

GREG ABBOTT, TEXAS ATTORNEY GENERAL: I'm the very first person to step up and believe that our free and open markets here in this country are very effective at setting prices. And that's the way it works all the time except in times of crisis. In times of crisis when people are literally struggling to try to protect and save their lives, it is not a free and open market.

It's a market that is ruled in this case by complete uncertainty and people grabbing the first thing they can. And I might add, it is an artificially created market. In our efforts to go after price gougers, we found one instance down by the Gulf Coast where a gas station had 20 pumps that were available to provide gasoline for customers, but to create artificial demand and to decrease the supply, the gas station shut down half of those pumps until we stumbled upon it.

We found it and we caused them to open back up their pumps and back again the price went to the normal gas price. But we're dealing with a situation where people are having to flee by the millions from the Gulf Coast in order to save their lives. As a result normal market forces don't apply. ... It is only in these exceptional circumstances when law must step in and ensure that people will be protected.

ABRAMS: Dr. Bernstein, your response.

BERNSTEIN: I don't agree. I think that, again, don't hit the American people with more of the poison that has caused the disease. It's governmental restrictions on the market, particularly environmental laws.

ABRAMS: ... That's a nice macro argument. Let's talk specifically about what the attorney general is saying, is he's saying I'm only talking about disasters. I'm talking about a very finite short period of time, period.

BERNSTEIN: Again, what you do by diminishing the price below market levels as you are going ... you're going to increase the demand, more people are going to want the product.

ABRAMS: But everyone wants it ... in a disaster. Everyone wants it, we know that.

BERNSTEIN: First law of economics is the lower the price, the more you increase the demand. ...

ABRAMS: So you're talking broadly and you're saying that there's no merit to the attorney general's argument, which is that in a finite period in a disaster the wake of a hurricane for a short period of time, it's not a good thing for the government to occasionally step in.

BERNSTEIN: Yes, that's right. What you do is cause shortages. What that means is people who want the product and have the means to by the product cannot buy it because you’ve raised the demand ...

ABRAMS: All right, attorney general ... what do you make of that?

ABBOTT: The argument doesn’t make sense. Obviously it's a theory. It's a theory that works in a macro context. It does not work in times of emergency. In times of emergency we as a country have an obligation to help take care of those who are most vulnerable. We are dealing with real-live people, not with theories. We are dealing with people who are trying to flee a very deadly hurricane. ... And they have to get out of the hurricane's way. In order to do so, they should not be bilked by price gougers.

How about a new rule: People who think gougers should be jailed should be ... told to stop making idiots of themselves and to stop providing moral cover to the demagogues.

gas prices
biodiesel

Government standards

Consider this innocuous quote from this article about organic certification:

"Currently, 'certified organic' indicates that the farming methods employed were verified by one of the approximately 40 private or state certification programs nationwide. Genetically engineered foods cannot be currently labeled as 'organic.' [emphasis added]

"Many certifiers are concerned that the proposed USDA federal regulations will make it illegal for them to uphold stricter standards than what the USDA allows. Currently, organic standards vary among certification boards. California and Oregon have tough standards, while several states such as Illinois, have vague or nonexistent standards."[emphasis added]

Government standards have a tendency not only to drive out private standards, many of them tougher and in vigorous and useful competition with one-another, but they also have a tendency to become co-opted by precisely the industry they are attempting to regulate for the purpose of limiting competition. Private standard-makers tend to go broke when they let this happen to themselves. I don't want to spend too much time on this, as it has been adequately covered elsewhere, but I do want to point out a few reasons why I wouldn't want to rely on government standards.

The FDA systematically attempts to limit Type II errors -- errors when a dangerous drug is released as safe -- but in so doing they make more Type I errors, preventing safe drugs from reaching the market. Type II mistakes will kill consumers and damage a company (see Merck's recent experience with FDA-approved drugs), Type I mistakes will allow consumers to die and cost drugs makers money, but neither one has any effect on the FDA. If they make too many of the latter, nobody gets excited but libertarians, and if they make too many of the former, they simply ask for more money and power.

Considering the FDA's long history of errors, they have never seen anything but expansion. Saccharin was once thought to be so dangerous that they were tempted to ban it, but stopped because the dieters of America were too politically powerful. Later, it turned out to be dangerous only to male rats. Silicon breast implants have never been linked to disease by any peer-reviewed study, but the FDA commissioner's word was all it took to kill Dow-Corning and its life-saving hydrocephalic shunts. The FDA has no concern for its own reputation as a reputation provider because it has a legal monopoly on its role. But even more pernicious is the fact that the FDA brooks no competition on its role of information gatekeeper. It doesn't allow, for example, advertisement of off-label uses for drugs, many of which become more important than the original application. You as a consumer are not allowed to consult other, more stringent standards, or other more permissive standards.

The other main problem with government acting as reputation-maker is that the likelihood of it becoming co-opted over time approaches 100%. The FDA and several other agencies are accused of having become too lax all the time, probably because it may sometimes be true. While it's tempting to conclude that this is the result of the current Administration's closeness with business, that is misleading. In fact, the previous administration faced the same accusations with some of its regulatory obligations. 100% of the corporate scandals in recent years occurred during the previous administration's tenure, yet were prosecuted during this one, so both sides are guilty, primarily because career bureaucrats hold the real power.

Of course, co-opting theories make the poor assumption that the standards weren't created for the regulated industry in the first place. Gabriel Kolko has done yeoman's work in documenting the history behind the FDA, the ICC, and other regulatory bodies (see his provocatively-title Triumph of Conservatism and Railroads and Regulation). All you really need to know is the fact that they are granted the power to regulate minimum prices to realize that the regulations are meant to help the regulated industry. That, I think, is exactly the problem when it comes to the government getting involved in establishing and enforcing standards with respect to sweatshops: there are protectionist unions and companies willing to work together to keep foreign competitors out and to keep new domestic competitors from arising.

My solution to sweatshops - certify quality, not compassion

How do you know the UL symbol really means your lamp cord is safe? Do people generally buy computers from the kid up the street, who can make them "cheaper than Dell", or Dell? In a strange town, do you eat at a strange restaurant or a national chain? Pulling off the highway in Kansas City, do you stop at Joe's Garage, or Meineke? These are all examples of the value of reputation. Whether you know it or not, you are relying on the fact that it is in their best interest to make sure you get consistency at national chains. If they are recognized for good food, service, etc., then they get a reputation for quality, but if they are recognized for bad, they suffer from a reputation of low quality. Wendy's suffered a hit when the finger was found, Jack in the Box suffered when outlets in Seattle served tainted meat (1993), and that's why Johnson & Johnson took such a hard line on the Tylenol scare.

Underwriters Laboratory is just one of many companies who earn money by offering assurance to customers that the products and the company meet some minimum standards.

Standards Providers

UL is not the only standards provider. Consumers sometimes need to know not only that they are dealing with a reputable company, but they want to be able to compare one set of products with another, or even use products from several manufacturers together. This is such an important matter that standards have become a cottage industry unto themselves. The following is a partial list of standards providers; some of them not only write standards, but provide inspection and assurance services.

• ISO - International Standards Organization
• IEEE - Institute of Electrical and Electronics Engineers
• ANSI - American National Standards Institute
• EIA/TIA - Electronics Industry Association and Telecommunications IA, the people who bring you such standards as the Cat 5 and RS-232 cable and connector standards.
• IEC - International Engineering Consortium
• ASTM - American Society for Testing and Materials
• UL - Underwriters Laboratories, writes standards and performs inspections
• OUKosher.org - Orthodox Union, performs inspections (the standards are thousands of years old!)
• Good Housekeeping - inspects products
• TRUSTe.org - third party certifiers for online establishments like Intuit, Apple, Allstate, Medicalert, Mercury News, etc.
• ECRI.org - ECRI (formerly the Emergency Care Research Institute) "is a nonprofit health services research agency and a Collaborating Center of the World Health Organization (WHO). It is designated as an Evidence-based Practice Center (EPC) by the U.S. Agency for Healthcare Research and Quality. ECRI's mission is to improve the safety, quality, and cost-effectiveness of healthcare. It is widely recognized as one of the world's leading independent organizations committed to advancing the quality of healthcare."
• American Forest and Paper Association (AFANDPA)
  

Training and 3rd party certification

But setting standards is not the only thing you can get. You can also get third party certification and training. That is, if you want to hire an employee, how do you know he is worth what he says he is? All of the following provide a set of training standards and tests to validate their performance/skill/knowledge. Other companies provide training and even test facilities. There is literally a market in reputation.

• Microsoft
  
• Cisco
  
• Apple
  
• Novell
  
• Adobe
  
• RSA
  
• CompTIA i-Net+, RFID+, Security+, Linux+
  
• LPI Standard

Users

Who uses such standards? Just a few glances at the links provided above will show you that people readily make use of such standards.

• eBay uses Paypal
  
• Intuit, Apple, Allstate, Medicalert, Mercury News, etc. use TRUSTe.org
• QSU Publishing Company "strives to provide accurate, consistent and unbiased reporting with respect to third-party registration of management systems in accordance with international standards such as"
  
• The Plastic Pipe and Fittings Association
  
• etc.
  

Standards Theory

For background on this topic, I heartily recommend anything Daniel Klein has to say about it. Specifically, you can look at the numerous websites to which he contributes as well as his publications. On his own website, look under the heading "Papers on how private, voluntary practices and institutions achieve assurance and trust". Also check out his FDAReview website, or read Reputation, which he edited.

Government failure

If standards are so good, what is wrong with government standards? Consider this innocuous quote from this article about organic certification:

"Currently, 'certified organic' indicates that the farming methods employed were verified by one of the approximately 40 private or state certification programs nationwide. Genetically engineered foods cannot be currently labeled as 'organic.' [emphasis added]

"Many certifiers are concerned that the proposed USDA federal regulations will make it illegal for them to uphold stricter standards than what the USDA allows. Currently, organic standards vary among certification boards. California and Oregon have tough standards, while several states such as Illinois, have vague or nonexistent standards."[emphasis added]

Suffice it to say that I think that the sweatshop solution should not involve standards set by government agencies (more here).

Factory certification (sweatshop-free)

There is a cottage industry in organizations dedicated to providing certification of sweatshop freeness. Furthermore, there is another cottage industry in being a sweatshop-free, politically correct manufacturer.

• Brown, Deardorff, and Stern (NBER 9669) point out that the Clinton Administration established the Apparel Industry Partnership (AIP) in 1996, but after they released their Fair Labor Association (FLA) standards, the Union of Needle Trades, Industrial, and Textile Employees (UNITE) complained that "…the code failed to require payment of a living wage; had weak language with respect to union rights in nondemocratic countries; and had a weak monitoring and verification system."
  
• Subsequently, UNITE and Students Against Sweatshops formed the United Students Against Sweatshops, and the Workers Rights Consortium (WRC). The WRC code is consistently more stringent than the FLA code; no surprise since manufacturers were invited into the FLA in the beginning. A flare-up ensued when several trade scholars (Academic Consortium on International Trade) pointed out that WRC had extorted universities into supporting its protectionist agenda, prompting a response from other academics styling themselves as Scholars Against Sweatshop Workers.

From my standpoint, that's sorta good: at least there's some healthy debate instead of a government monopoly.

• Brown, et al, also list Social Accountability International and its SA8000 code, the Collegiate Licensing Company, Worldwide Responsible Apparel Production, and Verité. Many of these standards are monitored by PriceWaterhouseCooper and Ernst and Young.
  
• Subsequently, I have run across a dozen or so similar organizations such as the Olive Creative Charities' Fair Working Conditions label. FWC is unique in that they require interviews with 100% of the employees and approval of a majority of them (via CSR-Asia).
• There is a historic example of a very effective standards-setter: remember the Union label? It was the trademark of the International Ladies Garment Workers Union (ILGWU). ILGWU has since merged into UNITE, which appears to have devolved into nothing more than a rent-seeking machine.

Finally, those PC factories and labels that are run as "sweatshop free."

• The most prominent example of those was Aaron Feuerstein's Malden Mills, maker of Polartec. Mr. Feuerstein won widespread approval when he kept all 3,000 employees on the payroll after the mills burned down. In so doing, though, he took on so much debt and the mills became so uncompetitive that he was forced out by his creditors.
  
• We also have the recent example of SweatX, the brand of TeamX, a factory run by UNITE. They're out of business now.
  
• Finally, we have American Apparel, the favorite PC t-shirt label, and its fight to keep UNITE out of its operations. See here and here.
  

I think the PC factories tend to fail for two reasons: first, they are based on management's word to share the pie more equally, but that management "philosophy" may actually be marketing in sheep's clothing, and second, serving the employees is no guarantee of the long term success.

My suggestion

My suggestion is to try something nobody seems to have tried: apparel manufacturing standards. Never mind work conditions or pay, a factory that conforms to tough manufacturing standards will probably have to hire the best employees and they won't put up with low pay or bad conditions because they have skills to go somewhere better.

This month's Reason Magazine features a debate with Milton Friedman, T.J. Rodgers, and Whole Foods' John Mackey on corporate social responsibility and the relationship between employees, investors, customers, and community. Milton and John seem to be saying the same things, albeit with different emphasis. T. J. Rodgers, whom I regard in about the same way as Chris Hitchens and a car accident (interesting, but I can't stand to watch), didn't contribute anything substantive. The salient point in that debate with respect to this post is that it is possible to run a profitable company that people want to work for and buy from if you are committed to quality.

Here's my point: incentives matter. The company has to get something out of the standards, and marketing to a few dozen PC consumers and broke-but-concerned college kids just ain't gonna pay the bills. A standard that emphasizes high quality means the company can set higher price points. To pay for those, the customer has to get something out of it, and they do: higher quality. To get the higher quality, the employees need to be trained, but perhaps not nearly so much as management. The entire footwear/textile/apparel (FTA) manufacturing process from conception to design to production to sales must be improved.

The best management practice in existence today is lean manufacturing. ISO 9001 is perhaps more widely known, but it is a documentation system; you can document a non-lean manufacturing process as well as a lean system. As far as I know, there is no lean certification system other than working with a recognized lean company, such as Toyota. That’s a de facto standard, but what I am suggesting is a de (private) jure standard. (I googled "lean certification", but the results were consultants pushing an initial consultation/primer as a certification program, with the possible exception of TC2). You can win awards for your leanness after the fact, e.g. Deming and Baldwin, but that is no reliable gauge. Also, if you google "lean apparel manufacturing", you tend to get lots of references to pseudo-lean, like "just-in-time retailing". From what I can tell, JIT retailing means "software that manages your warehouse and supply chain 'better.'" It doesn't seem to have much to do with certifying suppliers or supply chains as lean in the way Womack, Jones, and Roo describe. For example, see this or this. The sole exception (haha) appears to be shoe manufacturer New Balance, as described here, courtesy of of the Lean Manufacturing Blog here (also here) and blogged here.

What would those standards look like? Lean demands that you analyze your value stream and determine what processes add value, and eliminate everything else. Rework does not add value, it adds cost, and implies a need to fix problems in the development, test/prototype, and/or design stage. A lean manufacturing environment requires standardized work, consistent work practices, materials testing, and documented work practices.

A key lean principle is flow. Flow cannot exist until you understand the value stream and streamline it. Flow cannot exist until everyone is performing standardized work. Flow requires pull-driven system. Flow means no rework (and all that implies, see above).

Another lean principle is pull, meaning that the downstream processes complete their work and pull from upstream, rather than everyone working as fast as possible and piling stock everywhere. It means one piece at a time, produce what is demanded. It means that you only do one thing at a time, but you do it very quickly.

So let's pull a few things out: Eliminating rework means the designs and materials have to be carefully vetted early in the process. That's something that management has to do well. Lean should apply to every process: product development as well as manufacturing. That means standard approaches to pattern making, design testing, and integration of the factory floor and design skills. Even the lowest skilled worker gets exposed to the highest skills in the process. In the FTA industry, the best practice of which I am aware is the Spanish company Zara. They have good products, smart marketing, high price points, but the most obvious sign of lean is the speed of product development and introduction. Zara never has to discount: the constant turnover in demand, small batches, and high integrity mean they drive their own scarcity.

Side note #1: Eiji Toyoda started in the textile business

Flow and standardized means that the value of piecework is deterministic. It essentially wipes out the distinction between hourly wage rates and piece rates, making it easier for the employee to compare this job to another. Flow also means that the factory runs at the pace of the slowest worker, not the fastest. Since they are all doing standardized work, it means that you have to enhance the productivity of the least productive worker by training them and solving all of the problems they have with designs, rework, and other distractions. As Womack, Jones, and Roo describe it, the Japanese system leads to lots of factory-oriented training because the system is constantly undergoing improvement and it becomes very much a competitive advantage. Knowing "how Toyota does it" doesn’t in and of itself mean that you will be an asset to Nissan, because you don’t know "how Nissan does it." This therefore avoids the free rider problem that Rothstein runs into. In fact, Womack et al criticized the Japanese system because it led to too little specialization and too much identification with the company. As I recall, they said that Japanese tend to describe themselves as "Toyota employee" or "Honda employee", whereas Americans tend to describe themselves as "electrical engineer" or "mechanical engineer". There was therefore little emphasis on development as an engineer and therefore little development of those trades (Japan produces far less original and "pure science" research than the US, but far more industrial efficiency of existing products). Again, I see this as advantageous to low-skilled workers: after all, learning to be a "men's coat development team member" is likely to carry more prestige, employability, and pay than "low-skilled laborer" (their second-best alternative). Team members are likely to learn a little about design, a little about pattern-making, a little about materials, a lot about manufacturing, and a little about marketing/retailing, whereas now they learn a lot about the one small part of manufacture in which they participate. Specialization like that makes them vulnerable to shifts in industrial organization and consumer tastes.

Comments

• Well-managed companies with bad employees may occasionally put out a bad product, but (a) those are usually caught before they get out the door, and (b) the "problem" is generally fixed, one way or the other.
• Badly managed companies with bad employees don't tend to stay in business long.
• Badly managed companies with good employees may stay in business for a while, but the products are always bad. Bad designs means bad execution, no matter how talented or dedicated the employees are. Look at the performance of the US Basketball team in the last Olympics; arguably, they were the best players in the tournament when compared head-to-head against any other team, but their design was badly suited to the task. Badly managed companies make products that are either too expensive to sustain market share, or so bad that they always command low prices. That’s the problem with the Rothstein approach: it is to force prices up in order to force management to solve one of its problems, but that approach doesn’t force bad management to address the main problem: itself. If prices everywhere are driven up by forcing wage hikes everywhere, as Rothstein demands, then it only provides cover for bad management everywhere, including here in the US.
  

The solution is to demand higher quality, not higher levels of PC. I don't know how you impress that on consumers, though. Consumers have grown cynical about apparel. As Kathleen puts it, as long as the only products available are shit, then at least give me cheap shit. Some consumers are willing to pay for slightly more expensive shit as long as it’s PC shit, but it's still shit.

Instead of "campus" activists (UNITE workers and socialists) extorting universities into feel-good solutions, we ought to demand that our universities subject the athletic apparel to an engineering review. Get the engineering department and the business management people to get together in a Lean Activist club. Only buy good stuff from lean suppliers. Note, too, that the Rothstein approach is to insist that consumers simply give up more of their wealth out of the goodness of their hearts, whether or not they can afford it, with no compensation. There are consumers who will do that, but relying on the kindness of others and the wisdom and coercion of governments is no path to utopia. High quality goods command high prices because they are worth the extra value to the consumer. There is no transfer required because it is an equal exchange. In the marginal article, I mentioned that you would only buy something whose utility is equal to or greater than the price: most people assume it is always "equal to", but that is only true for consumers and sellers at the margin. For all other trades, the utility of the good is "greater than" the price; Marshall called this "consumer surplus". It is directly analogous to the better known and more widely maligned seller surplus, better known as the profit (the difference between the price and the cost to the seller).

Side note #2: the ILGWU established an industrial engineering department in the 1930s (from the NAS paper cited above).

Technorati tags: sweatshop

Radley beat me to it

Here's a petition I tried to get the local paper to print after all the noise everyone was making about banning fattening foods a coupla years ago. I see Radley had the same idea.

Now that other groups are coming out to protest their pet injustices like high calorie foods, the Ban Ultraviolet Ray Knowledge Alliance is ready to stand up and fight against another harmful, dangerous, expensive, and greed-driven threat to our children. In 2003, 54,200 new melanomas and 7,400 deaths are expected in the US. We need to stand up to the Big Sun-tanning Industry. Tanning salons, tanning beds, suntan lotion, resorts, public pools, manufacturers of shorts and short-sleeved shirts, golf courses, softball leagues, and a thousand other associates of this syndicate are addicting our children to a dangerous outdoor lifestyle. The cost to our healthcare programs is enormous.

We can follow the simple formulas so successfully exploited by anti-tobacco and anti-food advocates. We need to convince the public that petty considerations like adult responsibility, common sense, property rights, privacy, and the Constitution must not stand in our way: this is simply too important. With a tone of moral righteousness and some old-fashioned populist industry-bashing, our job is to vilify deep-pocketed companies or industries, laying the foundation for their future treatment. The ball won't really get rolling, though, until Trial Lawyers, Inc. start filing one nuisance suit after another, hoping to hit a big jackpot by exploiting the groundwork we lay now.

Then, when some Congressman or bureaucrat sees that there may be some money and political points to be made, the floodgates will open. One of the highly politicized offices like NIH, OSHA, or the EPA can fund a program like ASSIST, which sends federal money out to the states and into local communities to set up "grassroots" front groups. Masquerading as "concerned citizens", but actually comprised of health bureaucrats and grant program beneficiaries, they will build on our work with professional lobbying, demagoguery, and slick ad campaigns. We must be sure that they don't hijack the true agenda -- confronting the Solar Cartel and eliminating melanoma -- as happened with tobacco, where the new agenda is to lobby for taxes that are funneled straight back to the same public health bureaucrats. Those poor fools watched as the State Attorneys General agreed to a settlement that effectively cartelized the tobacco industry, while child tobacco addicts are still dying!

For the good of decent, patriotic, hard-working, tax-paying, American children, please support the Ban Ultraviolet Ray Knowledge Alliance in our efforts to stop the expensive, tragic, heartbreaking, evil, greedy, child-killing devastation caused by Big Sun.

Great minds, and all that. Oh, and great big hat tip to the French Genius.

Average wages and average consumers: a mistake

This is the fourth in a series of articles: sweatshops (intro), sweatshop definition, and sweatshop pay. The previous post on the importance of the marginal concept in price theory is also relevant; I would have used a better article, but the wiki entry on marginalism is uncharacteristically bad.

In the essay, "Defending Sweatshops: Too Much Logic, Too Little Evidence," Rothstein fails to understand the same principles of economics as O'Reilly in my marginal post, especially the importance of the marginal cost and subjective value (marginal utility). He and other writers on the sweatshop front make frequent statements such as, "wouldn't you willingly pay a little more for a t-shirt so that sweatshop workers can be paid a 'decent' wage?" You and I may, but that completely misses the mark.

Let's go back to the marginal cost of labor (the cost of one more unit, be it man-hour, piece, whatever). What we need to see is that margin, not the average. The factory is humming along, selling everything they make. Now, you raise wages. On the margin, you have to decide if the selling price for that t-shirt is going to equal or exceed the cost of labor to make it. At some point, as you raise wages, the answer is no, the cost of one more unit of work exceeds the benefit the factory can gain from it. This is the margin.

Downstream, there are similar considerations. Consumers have other uses of their money, including mortgage, fuel, and groceries. The value they can gain from one more pair of jeans has to compete with those other uses of their money. When the cost of those jeans exceeds the benefit of them (measured in terms of rent, groceries, or fuel foregone), then you stop buying jeans. This is the margin. What consumers spend more time "at the margin"? Those with less disposable income, aka, the poor. The wealthy and the middle class aren't forced to confront tradeoffs as often. Of course, if we are talking about $100 designer jeans, that's not a decision the poor should be facing (though I'd appreciate it if someone can explain why high-dollar Nikes are so popular among urban utes).

Marginal analysis determines whether one more pair of jeans will be made or sold at a given price. If jeans go unsold, the price is too high (storage costs, too, so there is a time limit). If people line up to wait for deliveries, the price is too low (waiting in line costs, too, so there is a time limit). The analysis of whether people will buy at a higher price, and therefore whether increases in labor costs can be passed on, depends on people right at the margin of deciding to buy or not.

You are a factory, selling all the jeans you can make for $10/each. Your competitor sells them for $10.05. Your customer buys all they can from you, then all they can from your competitor, and then maybe a few more from another, more expensive competitor ($10.10). Their marginal cost is $10.10, but their average costs are between $10 and $10.10 (depending on the mix they buy). If your costs drift upwards to $10.10 and higher, you may not be able to sell all you can make with all these well-paid workers unless the prices downstream also go up, correspondingly.

There are competing theories on how significant the impact of raising wages by mandate is on the labor pool.

• Standard answer - raise prices of labor, decrease quantity of labor bought
  
• No impact - This was the finding of David Card and Alan Krueger's 1994 empirical study, “Minimum Wages and Employment: A Case Study of the Fast-Food
  Industry in New Jersey and Pennsylvania.” American Economic Review, Vol. 84, No. 4, pp. 772-93. Unfortunately, I couldn't find a free version, so see Bryan Caplan's post for an explanation and discussion, especially Dsquared's exahnge with James.
  
• Differentiated impact
• A higher minimum wage encourages more dropouts because it makes not going to school a better use of their time
• A higher minimum wage favors people with more skills, i.e. against dropouts and minorities (note the contradiction with the previous point)
  
• Gordon Tullock (via Tyler at MR): "the government can make an employer raise nominal money wages, but can't stop him from turning off the air conditioner."
  

I favor the Card/Krueger answer and some mix of the other two. That is, no impact in markets where the demand is vertical, but over time, it draws more people into this from other uses of their time which would be more valuable to society, and more impact on lower skilled workers. Johan Norberg says this about Nike in Viet Nam: "If there is a problem, it is that the wages are too high, so that they are almost luring doctors and teachers away from their important jobs [emphasis added]."

As to the impact on lower skilled workers, the key to understanding how much a firm is willing to pay for a worker is productivity: if the worker creates $X worth of marginal value, then pay him $X.

I once saw this exchange on usenet:

#1) I own a restaurant. I'm not stingy or rich; my waitresses make more than I do. I pay busboys minimum. I can't afford a raise in the minimum.

#2) Then get rid of the waitress.

That doesn't make sense. If you get rid of waitress, someone else has to do that work, probably the owner. Now someone has to do his work (cook?), probably someone not as skilled. The result: lower quality of food, lower quality of service at given price; or the same quality, but lower price (because you have to wait longer); or same quality, same price, but fewer customers served (because you have to wait longer). The benefit to owner is down, benefit to customers is unchanged or down, benefit to the waitress is down. The ostensible benefit to the busboy (assumes no resulting change in busboy working conditions, up to and including layoff) is up. Net benefit to society: down. The problem here is that the owner has saved the cost of the waitress, but the average productivity in his restaurant has plummeted. The change in the wage did nothing to help it, either.

Try this pop quiz: wich of the following result in higher productivity?

• Educate workers
• Replace workers with capital (automation)
• Turn down the air conditioner and cut back on other compensation
• In a high-turnover environment, allow workers to leave through attrition and replace with more experienced workers
• Lay off less experienced or less capable workers

The answer, of course, is all of the above.

• Educating them makes them more productive, but education costs. There is a break-even point.
  
• Introducing machinery makes them more productive, but machinery costs. There is a break-even point.
• Cutting costs in other areas increases total (mulifactor) productivity, but there is a break-even point. Hot, sweaty, dissatisfied workers aren't as productive.
  
• Replacing lower productivity workers with higher productivity workers raises the average workforce productivity. It doesn't help the workers who leave.
  
• Removing lower productivity workers raises the average workforce productivity.

Rothstein assumes that employers will freely engage in #1, education. However, besides overlooking the fact that they are just as if not more likely to engage in the other approaches, they also face another problem. That is, one firm may invest in education, producing more educated workers, but also raising their cost of production. It is raised by the cost of the education, not the increased wage which is now justified by increased productivity. Another firm may keep its production costs level, hire the educated, more productive workers from firm 1, and begin to take market share. They are getting the same cost/benefit from the workers, but the other firm is absorbing the costs of education. Firm 2 is free-riding. Knowing this, Firm 1 will probably not invest as much in education.

Free riding doesn't necessarily mean that firm 2 is immoral, cheating, or suffering from some other dire malady. Consider the example of the collection plate (from Tom Tietenberg's excellent Environmental Economics and Policy). You may firmly believe that your church needs $25/week to operate (it is worth $25 to you). You shouldn't overspend, since after all you also need to give to Habitat for Humanity, Nature Conservancy, etc. Your ethics require you to maximize the benefit you get from every investment, including (or perhaps, especially) your charity. So the collection plate comes to you, you see that there is already $20 in it (from someone else who believes as you do, but can only afford $20), so you put in $5. When you add up both utilities, you see that the aggregate utility of church is $45 (or perhaps more), but the total contributed is $25. Church is going to be underproduced, even though everyone believes they are doing their best to fund it.

Likewise with any public good: it is likely to be underproduced, and that fact doesn't change even if you fund it through taxation. Education has both a private and public component; we as a society benefit from literate citizens, but each individual benefits from that part of their education that increases their productivity and therefore pay. If Rothstein really believes that improving productivity through education is a good thing, he needs to find a better way of funding education than forcing employers to raise wages. To me, that is just like saying that we need to fund NASA on the hopes that they will invent something useful to us, like Tang. Without any prompting from us, factories will determine the proper amount of training necessary because they will adequately fund the training that benefits them, and underfund education that benefits the public, including their competitors. Conceptually, I usually differentiate between education (general knowledge like reading and writing) and training (specific knowledge/skills like operating a particular machine).

I am ready to concede that there is some slop in the cracks and that management may not be as efficient as we sometimes assume, at least in the footwear, textiles, and apparel (FTA) industry where actual sweatshops may exist (but not in the way and not to the degree that many activists claim). As I have observed before, I believe that the historical trends that brought about the present state of FTA (low tech, family ownership, generational transfer) have made them insular, resistant to change, and impervious to modern management methods. I'm not the only one. By "modern management", I mean actual management, not using "offshoring" as a crutch. By resorting to this one-tool toolbox, the MBAs have reduced apparel to a boring commodity using the same technique as every one of their competitors, yet they still can't figure out why they aren't making money (actually, several are highly profitable). I also believe that Kathleen is correct when she says that they will never invent a way to handle material except by human hands, and that this is the reason it is so hard to improve productivity in the industry by automation, the technique that has revolutionized so many other industries (though I would say, "not for a very, very long time" instead of "never"). So what is my counter-proposal for improving productivity and pay in this industry? See my next post on the subject.

Sweatshop

Begging for parody

After reading the Best Page in the Universe all day, now I see (via CSR-Asia.com) that workers at Disney Hong Kong are going to unionize. Over what?

"The main complaint of the staff is not low salary or staff benefits," he said. "It is more about Disney not respecting them."

How so?

• According to Lee, the staff are not allowed to use their cellphones inside the theme park, even during breaks.

• Female workers must wear a skirt and tights, whereas trousers are allowed in the US parks, he said.

• Also, staff complain they are prohibited from drinking water outside of breaks and the intervals between breaks and meals are too long.

• Employees have also complained that they are barred from dying their hair, growing it long or sporting a beard, Lee said.

  "I have to wait for four hours to drink water. We cannot even sip any water while working because Disney said we cannot let the guests see bottles of water. But is this more important than our health?" a Disney worker interviewed on Commercial Radio said.

• Staff also say there is an inadequate number of staff washrooms

I am showing great restraint, am I not?

Marginal

What is the importance of marginal cost?

Let's examine this by use of an analogy: Let's say you want to fill a natural basin with water. If you want the level to be high without having to completely fill the basin, you can't do it. Or if you want a certain volume without having so much height (depth), you can't have that either. The volume of water is related to the height (depth) of the water by the shape of the edge of the basin. You could get more height (depth) by building an artificial wall, but all you have done is replace the natural container with an artificial shore. Or maybe you want to get a certain volume without increasing the depth: you could do this by digging out the shore, but again all you have done is artificially changed the shoreline. You are still constrained by the container.

In the analogy, water depth and volume substitute for price and quantity. Let's say you are trying to deliver a volume of something like oil. It would be nice if you could fulfill the demand at any given price with $4 oil from Saudi Arabia, but you can't. You have to pump the $10, $20, and $30 oil, too. Couldn't you sell the $4 oil to people who need it but can't afford the other, while selling the $30 oil to people who can afford it? Unfortunately, no. It may be illegal (price fixing), but it's definitely hard to pull off. How do you determine who is whom? Everyone will claim to be the $4 oil buyer, so you have to come up with some other mechanism. And even if you do manage to work it out, some or perhaps even all of the $4 oil buyers will buy their oil, sell it at market rates (above $30), then turn around and try to buy the $10, $20, or $30 oil for their own needs, pocketing the difference. The same thing happens if you try to auction it: consumers will bid the price of the first, middle, and last gallon up to the market rate of $30 or more. You could try to come up with other schemes, but the problem remains the same: the cost of producing the very last barrel will determine the sales price of all barrels sold. The lucky few who own wells that produce $4 oil will reap a larger reward than the poor chap who owns the $30 well.

But the price is equally set by the subjective value of the last barrel purchased, too. Not everyone values oil the same, nor does any one person value all barrels the same way. You need a gallon of gas to get to work, and another to get back. Beyond that, you can put your purchase off until tomorrow. Plus, you have other expenses that require your attention, like rent and groceries. At some point, another dollar spent on oil will be of less value to you then a dollar spent on other things. So that first barrel might be worth $60 to you, then the next $45, then $30, $20, $10, $5, $2.50 and so on. You will never spend a penny on the 10th barrel, much less the millionth - for one thing, where will you put them? In this way, you will buy two barrels of oil if the selling price is $30 or less. Note that price acts as the coordinating agent between how many barrels may be produced and purchased: if it rises, more may be produced, but less purchased, and if it falls, more would be purchased, but fewer produced. Hence, price determines the equilibrium point.

Just as you might want the water level to be high without having to supply a large quantity, the oil producers want oil prices to be high. They may try to construct artificial tanks, but these also have a cost. For example, many oil producers might try to create a restrictive cartel. Each cartel member has a common desire for high prices, but each also has a conflicting desire for larger market share. Therefore, they will all put holes in their tanks and cheat by selling on the side. The system is thus driven back to the original container/shoreline. Or they may want to produce more at the same price level: technology is a way of digging out the shoreline, but it requires R&D investment.

Lately, Bill O'Reilly has been demonstrating how poorly he understands not only the marginal concept, but how many bad economic cliches he can make when bloveating in full populist mode. Last week, he was telling us that they are obviously price fixing because oil only costs $4.50 for the Saudis to pump. That's the low cost oil, but we can't have all of it at that price. Last night, he advocated the "don't pump on Sunday" meme, exploded here. He didn't see how the hurricane in Louisiana has an effect on prices elsewhere, a problem exploded here. He seems to think that oil is different than any other commodity because, "I have to (heat my house, drive my car, etc.)." Have to. Apparently, neither O'Reilly nor the people he is looking out for own sweaters, have the ability to add insulation to their houses, couldn't live closer to work, can't carpool, can't buy smaller vehicles, can't buy smaller houses, couldn't prepay their gas last year, etc.

Bill: you and other people made those choices on the basis of cheap oil. Oil isn't cheap, anymore. That isn't the fault of oil companies; they haven't been forgoing returns on their investment for dozens of years in the hopes of hooking you and reaping the profits today. You still have oil to burn in your big house and your big road hog, even if you don't like the price. You should just thank them and be on your way. Besides, you call yourself an environmentalist: the high gas prices are a sure way of getting people to change their habits.

You know how you can tell if gasoline is still extremely cheap? Look at sales of SUVs. Note how many large vehicles pass you at 65, 75, or even faster on the highway.

Hayekian response

For background on what I have to say here, I recommend Hayek's essay, "The Use of Knowledge in Society," American Economic Review, XXXV, No. 4, September, 1945, pp. 519-530.

Taking these accounts into view:

• By way of MarginalRevolution, the Washington Times reports that Walmart had 45 trucks full of food and water before Katrina made landfall, "$20 million in cash donations, 1,500 truckloads of free merchandise, food for 100,000 meals and the promise of a job for every one of its displaced workers," and "mini-Wal-Marts in storm-ravaged areas, handing out clothing, diapers, baby wipes, toothbrushes and food. With police escorts, it delivered two truckloads of ice and water into New Orleans. It is shipping 150 Internet-ready computers to shelters caring for evacuees." Why weren't these guys in charge instead of a failed horse association chief?
  
• There is this story about Canadian Frank Stronach from Kevin Drum.
  

  "This improbable dream involves airlifting evacuees from the devastation of New Orleans to the pampered world of Palm Beach, Fla. -- a vision that involves rich American whites from gated communities opening up to desperately poor American blacks and even includes the construction of a new mobile-home community in Louisiana for more than 300 victims of hurricane Katrina.

  "And so far, he's pulling it off."

• Finally, by way of Crooked Timber, we have this story about Hyatt.

  "A convoy of food and supplies provided by Hyatt hotels in Atlanta and Houston arrived at Hyatt Regency New Orleans on Wednesday of this week."

The comments at Crooked Timber include a claim that you can't scale this up. But of course you can! How do they think the people of New Orleans get their food every other day of the year? Seriously, the problem is that you can't scale a mass exodus up very well, and that is one of the problems with over-reliance on a big, overarching, grand planning agency like FEMA was reputed to be. Keep in mind that there is probably no perfect solution to a problem like this, since (A) some people were bound to die anyhow, and (B) by the time you have enough resources to respond perfectly, you need to have something like a standing army whose sole purpose is to sit around and wait and then respond, but the last thing I would recommend to anyone is to empower bureaucrats with a charter like, "Make sure you have enough wasted reserve manpower and materiel." The scale of waste would be breathtaking.

There is, however, one off-base comment at CT that claims they are underfunding FEMA in order to undermine it in order to shut it down. How does underfunding lead to bad decision-making such as this? Or turning back the Red Cross. Or the Democratic Congressman's story I heard on NPR about how he couldn't get through with water and Florida Troopers? Or the local government's failure to use buses? Or turning down use of Chicago fire and rescue? It's not like people don't know about these decisions. The problem wasn't with underfunding, it was with poor management at every level from federal to ward.

In fairness, FEMA had become an entitlement program ... for the wealthy! And it displaced local spending. And it was headed by political appointees - no surprise there. In contrast, though, Clinton's FEMA head James Witt was a construction company owner, then an elected judge, then tapped to be director of Arkansas Office of Emergency Services by then-gov. Clinton, then FEMA head, then made cabinet member (because people liked getting money from FEMA, so it seemed like a government program that "works") seems to have been competent though prodigal.

FEMA, like many federal "solutions", displaces local problem-solving by absorbing resources to itself, denying resources and authority to others (taxpayers, local and state government), claiming to be the dependable solution of last resort, failing to deliver, and then exerting arbitrary regulatory power to protect itself from criticism, blame, and liability, and using its failure as proof of its lack of power and funding. Of course they claim to be underfunded - is there a single agency which doesn't? And of course advocates repeat this claim - especially for an agency whose task is to respond to disaster and whose proactive mission is to mitigate risk: there will never be a 0 risk situation, so they will always claim FEMA is underfunded.

A hurricane is a great big problem. If Hayek is right, lots of people working on small pieces of the puzzle will solve it more efficiently than a central authority. From that standpoint, FEMA is an idiotic idea. On the other hand, lots of people working the puzzle without coordination are likely to duplicate effort and overlook some problems. In a market, the price mechanism solves this coordination problem, but there is no price mechanism here.

Let me suggest this, though. I know that some insurance companies offer kidnapping insurance for South-bound travellers. I also know that some search and rescue operations are starting to charge wayward hikers for their services, and you can get rescue insurance. Is anyone providing disaster insurance that includes rescue attempts?

Knowing I have insurance, I may want to stay inside the evacuation area. That creates a moral hazard problem that they may be able to solve by requiring that you follow the instructions of authorities. Then there is the problem that I may be with a lot of other people who want aid or rescue. On first glance, I think that they should rescue the others, too, in the interest of marketing themselves. On the other hand, that may lead to free riding. So maybe you present bills to everyone and sue them according to the likelihood of collecting a settlement (in other words, poor people get a free one).

Conceptually, I don't think this is much different than bounty hunting. I buy insurance; maybe I buy a lifetime policy at $1/month (especially if I live in San Francisco), or maybe I pony up $1000 at the beginning of hurricane season for term insurance if I live on the Gulf Coast. They equip me with a transmitter. When a hurricane is predicted to hit my area, or when an earthquake hits, they fly in immediately after the storm passes and look for me and all of their other customers. Now multiply this by thousands of insurees and insurers. Exit FEMA.

UPDATE: Don't know why I hadn't thought of this earlier, seeing as how I was on the verge of it. There's no need for the insurance company to come looking: they need only put out a bounty on the insured, and professional bounty hunters will come looking. Who do you think is more motivated to find you, a deputy at $50k per year, or Dog at $50k per head?

Prevailing wage a sham

At least tacit proof that someone admits that "prevailing wage" is a sham (I recommend BugMeNot if you don't have a subscription and wish to keep your privacy). If the prevailing wage was representative of the local, average wage, there should be no difference if someone switches to using it, but these politicians are only claiming "minor". It will surprise you to know that these politicians think that adding a solar collector to your house is considered to be a "large installation project".

It is well known among construction workers that Davis-Bacon "prevailing" wages are worth up to three times the actual local wages. In fact, historically, enforcing higher-than-average wages was the goal of Davis-Bacon. How else could they keep black workers out of lucrative federal contracts?

More recently, there was a scandal during the Clinton years that local union officials were working in collusion with local DoL bureaucrats to jawbone-up the prevailing wage, but that story died quickly and mysteriously. Anybody know what happened?

Reject the assumptions

I'm sorry, but I reject the entire premise. If I have a choice between paying $50 to go see Eric Clapton, who at one time deserved to be compared to God, or getting paid $50 to go listen to a tone-deaf, harmonica-mangling, overhyped blowhard named Bob Zimmerman Dylan, I'd take Clapton. Sorry to be a smart ass, but I find the choice to be distracting.

To use the original numbers, let's say that I'd pay $50 to see Dylan, but can get the tickets for $40. And let's say I can get the Clapton tickets for free, but I'd pay $30 for them. By the logic of the "correct" answer, even though I'm up net $30 going to Clapton, and net $10 for going to Dylan, my opportunity cost for going to Clapton is $10? I answered $50 the first time around, so I'm with Tyler in rationalizing this. Semantics, it is.

[Oh, I see someone already used this approach in the comments to Tyler's response. Geez, and with the same numbers, too.]

Surely that's not all Katrina means?

Travel tip: Find out where I'm going and avoid it. Last year, as I finalized the details of my trip to Madrid, they bombed trains there. Earlier this year, several hours after I passed through the area, mud slides in California wiped out my return path. And last week, I had a flight to Orlando that was scheduled to stop in New Orleans. They cancelled the stop.

On the plane to Houston, I sat next to a man who was trying to get back. I recalled, vaguely, something about Nawlens being below sea level. He confirmed it, told me his car was parked out on the street. He was planning to land in Houston, rent a car, and drive home. Best wishes, sir, but I doubt that went well.

As the media started its blitz, I realized that one thing that might reduce the amount of aid and sympathy to those people was that accent - it always makes people think that you are less educated and maybe just a little slower than you are. Sure enough, listening to them chant "We want help" on NPR, it sounded like, "We won't he-p!" Anyone not paying attention might be tempted to think, well, f$&k you, too! I was a little too busy to watch much TV, but I did see the looting. First few things that popped into my head: (1) the camera only tells the part of the story that the photographer and the editors want you to see, (2) uh-oh, here comes the race card (from both sides), (3) what about the people in Mississippi? Later, after listening to a man talk about how neighbors in the Superdome ripped each other off, and another story that said the people that stayed behind did so because they didn't want to miss their welfare checks (ahem, people on welfare don't have the means to leave, and a retort that there were buses, and today's story that the emergency plan called for using school buses but they didn't, ... what a @(*&^$ mess, huh?), and watching the looters, listening to how people were shooting at helicopters, hearing about cops involved in the looting, that rioters were taking the opportunity to go about raping women, etc., etc., etc. ... something occurred to me: there is a severe morality problem in NO, isn't there? I mean, you heard about how New Yorkers suddenly changed their attitudes for a few days, looking out for each other after 9/11, but apparently when tragedy strikes NO, you look for ways to screw everyone. I guess the epitome of this attitude was the man who said, "There's no food or water or help anywhere, we're ready to burn this city down!"

One the race card: yes, 66% of NO is black. Now remove all of the people who can afford to leave, and I'd guess a very large portion of the remainder is black. Of those, the looters got most of the attention, but I guarantee you that most of the victims of crimes were black. After everything calms down and people think about reopening their businesses, a few are going to take the insurance and head inland, leaving the law-abiding, but poor, black citizens of New Orleans without any infrastructure. Great - they should stand in line to lynch the looters, who - by the way - included a few whites that I saw. But the perpetually indignant - what were they doing? Oh, right, nothing ... followed by indignation.

The wife points out that the looting and the nastiness is going to make people less inclined to contribute. I'm concerned that the attention focused on a city where they'd screw each other for entertainment instead of doing something for themselves is depriving the neighboring areas of the attention they need. Apparently, the citizens of those areas agree with us:

Richard Gibbs was disgusted by reports of looting in New Orleans and upset at the lack of attention hurricane victims in his state were getting.

"I say burn the bridges and let 'em all rot there," he said. "We're suffering over here too, but we're not killing each other. We've got to help each other. We need gas and food and water and medical supplies."

If there was any way I could contribute to Relieve Miss and not Nawlens, I would double my contribution.

As to the blame being laid around, I listened to Michael Medved Friday and thought his defense was silly.

• Does the mission in Iraq detract from our ability to help our own citizens? You bet it does. Medved points out that 80% of the National Guard troops are here. Perhaps, but the burden isn't evenly spread. Air Force NG fighter jets aren't much help in NO, but troop transports would be. I don't know what percentage of the Louisiana NG is deployed.
• He kept referring to a New York Times article, as if that alone trumped all argument (I understand his motivation for appealing to the left with their own publication, but an appeal to authority is still a logical fallacy). One part of it excused the NG tardiness because some general claimed the freeways had been reduced to goat paths. Okay, a HMMWV travelling on a 4 lane highway with water and debris can travel how fast? Because you know that's what their built for.
• The president says that nobody expected the levees to break. Apparently, that's technically correct, but logically, it leaves a lot to be desired. Heck, even I knew the place relied on levees, so surely the local emergency response personnel, the Corps of Engineers, and others knew? Also, according to the FactCheck.Org article just referenced, the feds have been underfunding levee work for years. I have some reservations about that because I know that bureaucrats always overestimate everything in order to get some money that they apply to their pet projects regardless of Congress' intent.
• What the hell has FEMA been doing with the money they've been getting all these years? It is hardly a "gutted" agency, having seen its budget raised at something like 10% per year over the last decade, but it doesn't help to have an incompetent, inexperienced chief like Michael Brown. I used to wonder what happened to shame as Clinton appointee after Clinton appointee was indicted for taking bribes and other shenanigans, but I think the Bush Administration is catching up, if not on the corruption front, then at least on the incompetence front. Not only were they slow to respond,but they are turning down aid from The Red Cross and the mayor of Chicago (who wants to send firemen and other personnel).
• Furthermore, what the heck have the state of Louisiana, the county of Orleans, and the city of New Orleans been doing to prepare for this? Apparently, everyone has been predicting this as the most likely disaster to hit, but the response was incredibly slow. Not only were they slow to evacuate, didn't enforce the total evacuation,but apparently they didn't even follow their own emergency planning tasks.
  
• Medved claimed that these riots were just as predictable as the Rodney King riots. I don't think so, since the King jury could have gone either way. These riots (and the proximate cause) were entirely predictable. Hurricane, shortages, riots, QED.
• Global warming has nothing to do with this disaster. Compliance with Kyoto (which Bill Clinton never submitted for ratification to the Senate because they would have rejected it in a bipartisan landslide) would have yielded some incredibly paltry decrease in global temperatures, and so on. NO is below sea level, get it? It was bound to happen. Or would somebody like to say it wasn't bound to happen and thereby exhonerate the Bush Administration?
  

If the news coverage is anything to go by, I'm shocked to find out what a bunch of predators live in New Orleans, but surely that's not all we can learn from this, is it? Politicians and bureaucrats are inept? Really?! Better to send our money to The Red Cross and other private agencies because they don't have to deal with this, but I think this debate is worthy of consideration.

Various facts by way of Cafe Hayek, Reason, Coyote Blog (excellent), NPR, Drudge, Brad Delong (also quite excellent on this topic), and a few others I can't recall.

Pat Robertson, ... Christian?

You know what's really funny? The fact that God specifically made reference to Pat Robertson (one of the hosts of the 700 club) when clarifying the Thou Shalt Not Kill rule in this press conference. I think God more or less implied that Pat Robertson is a true Christian in the sense that Mohammad Atta is a true Muslim.

At least, that was my interpretation of His comments. But go read the Press Release and tell me if I got it wrong.

Sweatshops & Pay

What is pay that is so poor it warrants protest from third parties?
What is a "living wage"?

In the last post, I cited these two definitions

• A manufacturing workplace that treats its workers inhumanely, paying low wages, imposing harsh and unsafe working conditions, and demanding levels of performance that are harmful to the workers. (www-personal.umich.edu/~alandear/glossary/s.html)
  
• a factory where workers do piecework for poor pay and are prevented from forming unions; common in the clothing industry (wordnet.princeton.edu/perl/webwn)

I have a few questions about those definitions:

• Is "low pay" pay which is lower than the national average (or median, or GDP per capita) in the country of the factory? If so, then are factories which pay at or above the national average not sweatshops, ever?
  
• Why compare to the national average? Is it because of local living expense?
  
• Why not to some international average? And specify an international living expense? Isn't that what activists mean when they protest that they want wages in all countries raised, in counterpoint to the observation that raising wages in any one country will drive multinationals to another country?
  
• The "living wage" is frequently substituted, but that doesn't help much (see below).
  
• If pay is by piece, and if some workers are able to make a "decent wage" because they are bigger, stronger, or faster, should we ban less able workers from that trade because we don't agree with the effective hourly wage they are making?

A note about average and median: median means that half of the people make more, and half make less. If you use median wages as your yardstick, half of the people will always make less than that, no matter how high you set minimum wages. Average means that you add the wages up and divide by the number of workers; this statistic can be skewed upward by a few large outliers. For example, say you have workers making (in pisets per yarblek) 100, 200, 300, 400, and 1000. The median is 300 (2 workers make more, 2 make less, and 1 makes 300 exactly), the average is 400 (the worker making 1000 skews it upward). If that last worker made much more, like 9000, the median would remain the same, but the average would go up to 2000. Only 1 worker makes more than the average in that case, so it could be extremely misleading. That is why the more conservative "median" is preferred to the "average" in such discussions.

According to the BLS, the median weekly income in the US for 2004 was $638. That works out to about $15.95/hour on a 40 hour week. Do we really need to raise everyone to that, no matter how much experience, skill, or other desirable qualities they possess? If so, where is the motivation to actually acquire difficult skills? Incentives matter.

The phrase "living wage" is bandied about, but this is a rhetorical flourish intended to imply that below this people must be dying. It therefore makes no sense to say that someone is surviving on a wage below a "living wage". The counterargument is usually that the below-living wage doesn't provide for their needs. What are "needs"? Needs, properly understood, are those things which cannot be done without. If people are living without the things without which they cannot live, then they must not be needs -- strong "wants" perhaps, but not needs.

What then is an acceptable compensation? This depends on place and time. $15.95/hour would have made you the King of New York 200 years ago, might barely pay your bills in Manhattan but would be quite nice in El Paso today, and would make you a wealthy man in Indonesia at any time. Your compensation -- which includes all of the things you receive, including benefits -- must be worth to you at least the value of the time you spent at the second best option. Your cost to the employer -- the compensation plus the cost of complying with other requirements like administrators, payroll tax, etc. -- must be worth to your employer at least what you add to the firm's value. Does that sound harsh? If the employer pays everyone more than they earn, he goes out of business. Eventually, everyone must be employed by someone who earns what they receive because all other employers seem to disappear. It's like ... magic. In between your minimum and the employer's maximum, there may be room for negotiation, and it is within those two constraints that successful negotiations must conclude.

Let's suppose that you have a job where the pay is such that there are approximately as many people as these kinds of jobs. The pool of people who consider those particular jobs is a well-defined, steady set of people. Now, double or triple the pay -- don't you suppose that there will be new people lining up for those jobs who never considered them before? So just guess what it means when workers are lined up for these jobs that don't pay a living wage -- what does that say about the relative pay and availability of alternatives? It says, to me, that this kind of job is paying enough to draw workers away from other possible means of earning a living. What does it mean when workers go on strike over overtime, not because management is cutting overtime wages, but because management is cutting back on overtime hours? (Via MarginalRevolution) It says, to me, that the workers believe their time is better spent working in the factory than in any other pursuit open to them.

The real problem in developing countries is that there aren't enough jobs to go around for the people there. I suspect that many of those countries are in the transitional period from an agricultural society where 50% or more are farmers, to one in which modern farming methods have freed up most of that workforce for other pursuits ... but they haven't developed "other pursuits" yet. What they need is capital, both physical and human. They need an environment in which capital will flow freely to its highest valued use, not one in which capital might suddenly be grabbed by politicians and declared to be for public use or national security.

Another note: you will frequently come across the claim that workers need to be able to afford the product they are building. Really? Does Boeing underpay their engineers? After all, not a single one of them could afford a 747 - and they are unionized! I doubt most Ferrari artisans could afford a new, top-of-the line Ferrari. What about mansions? This dictum is obviously silly, even as a universal goal. At best, I think you could say that garment workers should be able to afford some garments, though not necessarily the garments they happen to be making if they happen to be high end garments, and certainly not at the prices they will bring in the target market. Worker nudity is not a problem which I have ever heard anyone protest. And no, I don't know why anyone would pay $100 for a pair of Nikes -- but that price is driven by demand in a country where we can afford to pay it, so it makes no sense to point out that they aren't affordable in a country where everything else -- everything! -- costs less than it does here, sometimes by orders of magnitude.

The key measure here is purchasing power parity (PPP) to convert between host country currency and US currency instead of the all too common market rate. The PPP of the renminbi is three times the market exchange rate, meaning that exchanging $1 into renminbi at the market rate would yield about 3x the amount of goods as it would in the US.

Not only do activists rely on readers' ignorance of purchasing power parity to dramatize the plight of workers, but they also rely on the average reader's ignorance of apparel manufacturing processes. I found an article in which it was lamented that Nicaraguan workers were only making $0.66 in piece-rate-plus-benefits to sew a pair of jeans. That sounds bad, right? However, I have it on good authority that you should be able to sew a pair of jeans in between 11 and 17 minutes. That works out to between $2.33 and $3.60 per hour. Not so bad, now, eh? And given that Nicaragua's PPP is about 5x its market rate of exchange, this translates into about $11.65-$18 per hour. Now how bad does it sound?

Here are some definitions I came across for "living wage":

• A wage sufficient to meet the basic needs of a worker and their dependents (www.web.net/rain/glossary.htm).
• a wage sufficient for a worker and family to subsist comfortably (wordnet.princeton.edu/perl/webwn)
• Living wage refers to the hourly wage that one deems necessary for a person to achieve a basic standard of living. In the context of developed countries such as the United Kingdom or Switzerland, this standard is generally considered to require that a person working forty hours a week, with no additional income, should be able to afford housing, food, utilities, transport, health care and a certain amount of recreation. This concept differs from the minimum wage because the latter is set by law (en.wikipedia.org/wiki/Living_wage)

Note that a wage is different than piecework, so already we have a problem with these definitions and the sweatshop definitions above. Piecework is the rate paid per task or piece of work (per pair of pants, for example), as opposed to an hourly rate, or wage.

• Why must a factory pay enough for the worker and his/her dependents? Even the American middle class raises its families on two wage earners, but not all jobs can let all people lead middle class lives. If so, why would you want to become a supervisor when part-time clerk is mandated by law to pay just as well?
• How many dependents? Do we include spouse and children, or siblings and parents? Do we look at a worker's family and decide what to pay him/her? Incidentally, it's currently illegal to ask a potential employee if he is married or how many children he has. Do you figure out the worst case and then pay everyone according to that? If so, what effect do you think this will have on family and career planning? In the first case, we can predict that people will maximize the number of people they claim are dependents, maybe they even have more children if the wages provide for more than the child actually costs (not a bad assumption since actual third-world laborers manage to live despite what activists tell us). In the second case, I think we can safely predict that single men will lack ambition compared to their family-rearing co-workers, since they will, after all, be making just as much money, but will have a lot more disposable income. In any case, we can agree that mandating wages that allow a family to be supported leads to family planning by central authorities. Just as in China, we can foresee that this will mean increasing government involvement in personal decisions such as mandatory fertility controls. On the other hand, if activists simply want corporations to be responsible without government mandates, then they are effectively asking for corporations to involve themselves in workers' family planning decisions. Social planning busybodies such as Henry Ford and the author of this would be proud: "Our absurd way of regulating salaries, which concerns itself much too little with the question of the family and its sustenance, is one more reason that makes many an early marriage impossible."
  

According to the calculator at this website, a family of 2 parents and one child must make at least $29,244 to live above the povery line here. That includes $479/month in child care. That comes to $14. 06/hour on a 40 hour/week basis if only one person works, but in that case they wouldn't need the child care, so they really only need earn $11.29/hr. If both parents work, they only need make $7.03/hr each. So which is the living wage: $14.06, $11.29, or $7.03?

• What is "comfortably"? What if the worker and his family share a house with another family? Two families? Sharing housing is an age-old trick, employed by college students everywhere to save on expenses. Is there a specific minimum amount of floorspace they need? I heard about a man in California who sells complete houses that take up less than 100 square feet - how does that sound (thanks, Morning Edition)? Does the government or employer need to take housing into consideration when determining pay?
• Why 40 hours per week, especially when farmers work much more? In England circa 1832, Parliament formed the Sadler's Committee to consider the Ten Hours' Bill, and one Tory press editor exclaimed that his staff put in 15-17 hours per day to agitate for the bill (The Factory System of Early Nineteenth Century, W. H. Hutt, in Capitalism and the Historians, F. A. Hayek, ed.). Is 10 hours a day for 4 days okay? How about 14 for one and 13 for 2? Don't laugh -- that's how medical students, Emergency Room workers (including physicians), and lawyers work, except they may do it for a lot longer than 3-4 days.
• What kind of utilities? Water, obviously. Sewer, okay, though subsidizing central sewage systems supports the non-sustainable society that many activists loathe. Electricity, maybe, but same caveat about sustainability. Telephone? I don't think so; there are plenty of alternatives, and talking to people a long ways away is not a need, as I understand "need". Cable TV? No. Broadband? No. In the future, people are probably going to perceive cable and broadband as identical, and as ubiquitous and indispensable as the phone. Heat and cooling? How much? In other words, there is a trade-off between the thermostat and another sweater (as Jimmy Carter reminded us).
• How much recreation, especially when playing in the park is free? Also, I would have included enough for education before I included recreation.
  

These definitions, to me, appear silly. The authors are not serious because they appear to have never thought about