War on Prices Latest: JD Vance, Yglesias on Corporate Greed, and the Political Consequences of Inflation

Senator J.D. Vance on the Minimum Wage

Senator J.D. Vance, a "national conservative," had a peculiar take on labor economics in a New York Times interview this week:

You raise the minimum wage to $20 an hour, and you will sometimes hear libertarians say this is a bad thing. 'Well, isn’t McDonald’s just going to replace some of the workers with kiosks?' That’s a good thing, because then the workers who are still there are going to make higher wages; the kiosks will perform a useful function; and that’s the kind of rising tide that actually lifts all boats.

It's true that free markets incentivize firms to invest in machinery that substitutes for labor if it boosts profits. This type of capital investment, when genuinely economic, can indeed improve firm productivity and raise wages for the remaining workers.

Yet artificially raising the price of labor through a government-mandated wage floor is different. It is a price control, incentivizing otherwise uneconomic investments that firms would spurn. The price control is, in effect, lying about the state of factor availability in the market, pushing businesses away from the optimal capital-labor mix based on the actual relative scarcities of those production factors.

Yes, the workers who remain employed might again see higher pay when firms purchase kiosks, though businesses may shift towards hiring higher-skilled labor to work alongside the machines, meaning the particular workers employed may change. What's more certain is that fewer low-skilled workers would find jobs, and by raising the marginal cost of production, these uneconomic investments would reduce the overall scale of the firm's operations. Hardly a route to "lifting all boats."

Indeed, if this was a worthy investment that made economic sense - a “good thing” - then why wouldn’t the business have made it already? The fact that they have not shows that, for those businesses, it’s more efficient to use more labor combined with relatively little capital to begin with.

Don Boudreaux has previously used a Walter Williams example to make this point more clearly. Suppose the government introduced a minimum sale price of $25,000 for used cars. Many cars worth $10,000 or $5,000 would simply not get sold at all. What might happen, however, is that some used car owners would face incentives to "invest" in upgrading their vehicles so that they justify the new $25,000 price.

Would anyone claim such investments were worthy because it resulted in some better cars? Would we celebrate that investment as a route to prosperity?

New Research on Minimum Wage Inefficiencies

A forthcoming American Economic Review paper suggests that monopsony power is a bad justification for high minimum wages too. It calculates that a federal minimum wage would improve efficiency only up to a wage floor of $8 per hour - not far above where it is today.

Beyond that, a higher minimum wage would lead to the Econ 101 result of escalating net job losses, it suggests, especially for less-educated workers. This result arises because less productive, lower wage paying firms have less monopsony power to begin with.

Ryan wrote about this effect before in the context of the “Fight for $15”

…even if monopsony power did exist in certain markets, it would differ in degree by location and industry. The level at which the minimum wage was set would therefore matter a great deal, lending itself to favoring policy at the very local level. It would be incredibly convenient if a $15 federal minimum wage could perfectly correct for the monopsony power of businesses in all sectors and locations. A crude application of a $15 minimum wage across all states and regions would instead likely raise the level of the minimum wage beyond the level associated with competitive markets in many areas and industries. Again, this would lead to the usual reduction in worker demand in lots of places.

The War on Prices documents further inefficiencies that come from minimum wage hikes.

Yglesias on “Greedflation”

This week, Matt Yglesias had a good piece pushing back on the idea that corporate greed or new fancy business pricing strategies are **causing**​ inflation. As Ryan wrote recently while introducing The War on Prices, discussions of the microeconomics of firms' decisions miss the big picture: broad inflation ultimately requires an increase in total spending growth in the economy relative to the growth in real output.

Unfortunately, reasoning about inflation by analyzing micro-decisions leads us to misguided policies - subsidies, antitrust, targeted price controls - that usually alter relative prices but not the overall price level. It also leads to blaming the wrong people for inflation - supposedly greedy businesses, most recently, rather than monetary authorities.

Though Yglesias supports President Biden attacking companies as a political strategy, he makes clear that, intellectually, Democrats need to understand that it was the public's inflated money balances, not businesses suddenly obtaining more market power or adopting fancy new algorithms, that drove inflation:

Even though spending plummeted during Covid, personal income went up thanks to multiple rounds of relief spending. As a result, people re-entered the world with higher net worth, better bank account balances, and less debt than they had before the pandemic. That laid the groundwork for a robust economic recovery and a rapid return to full employment.

But it also meant that, yes, if McDonald’s raised prices, most people would just pay what it cost — especially if they also preserved a lower-cost option through the app.

The big story here, though, is not the implementation details of how companies raised prices. The story is that companies raised prices because people had money in their pockets and were able to pay.

Exactly. How could consumers afford to pay all these greedy firms’ higher prices at the same time? In the absence of the extra money, they wouldn’t have been able to.

Inflation and the UK Conservative implosion

Ryan's column for The Times this week explained that inflation is an underrated cause of the Conservatives' polling woes in the UK. A slice:

Food prices have shot up by 30 per cent, clothes by 20 per cent, rents by 19 per cent and utilities by a staggering 53 per cent [since January 2020]. Any government would struggle given these outcomes, even if a collective hush now surrounds inflation as an election topic.

From late 2021, as headline inflation crept above 3 per cent, Ipsos-Mori polls began to show a sharp rise in public concern about “inflation” as an important issue facing the country. This concern peaked at 54 per cent of the public in August 2022. 

Economic angst was certainly then exacerbated by Truss’s ill-fated mini-budget in September 2022, but concern about inflation was more deeply rooted. Even with inflation now back near its target, in fact, 25 per cent of the public still list it as a major issue — levels comparable to 1990, when inflation was as high as 7 per cent. The public remains livid at the permanent surge in their cost of living.

Inflation has thus been a clear vote-loser for the Conservatives. YouGov’s regular polling on how well the government is handling inflation has been damning: in late October 2022, 86 per cent said it was dealing with it “badly” versus a mere 7 per cent “well”. Though these numbers have improved for the government as inflation has fallen, last week’s figures of 58 per cent “badly” to 32 per cent “well” still indicate strong dissatisfaction — to the undoubted benefit of the Labour opposition.

You might say: Isn’t this public assessment unfair? After all, inflation was primarily driven by supply shocks and excessive monetary stimulus from the Bank of England, not government action. Yet vast fiscal relief from the Conservative government during the pandemic probably didn't help. And governments will always get judged by macroeconomic outcomes outside of their control. Indeed, UK Prime Minister Rishi Sunak has attempted to claim undue credit for the past year’s decline in inflation, illustrating how governments exploit this association when it suits them.

Although it’s obvious that the mini-budget, scandals and incompetence, and Rishi Sunak’s leadership are big factors in the Tory woes, inflation therefore remains *underrated* as a cause of their impending defeat.

Other Links

If you've read The War on Prices: How Popular Misconceptions about Inflation, Prices, and Value Create Bad Policy please consider leaving a review on Amazon and/or Goodreads.

• The Scottish government's own economic agency warns rent control will drive landlords out of the market.

• Ryan was featured on the Show-Me Institute podcast with Susan Pendergrass. 

• The House passed a bill this week that would crack down on hotel resort fees.

• Shrinkflation seems an overblown worry.

• Paul Krugman has offered a weak case for being relaxed about the federal debt.