Commentary Magazine


Topic: economics

Economics 101 for Bob Beckel

Bob Beckel, the liberal voice on Fox News Channel’s extremely successful The Five, likes to go off on rants regarding Wal-Mart. On Friday he was in rare form, damning the world’s largest retailer (and this country’s largest employer) for having caused more rival businesses to close than any other in history, and for buying most of its merchandise abroad. On other occasions he has complained that Wal-Mart doesn’t pay its employees a “living wage.”

Beckel’s first claim is probably true and the second certainly is. The third claim, however, is economic sophistry.

Wal-Mart is a profit-seeking corporation. It is, in other words, a wealth-creation machine, nothing more, nothing less. Its management, therefore, has a fiduciary duty to the stockholders to maximize the return on their invested capital. It does that in the following three ways.

First, by paying the lowest wages that will supply the company with a satisfactory work force. If Wal-Mart can get a satisfactory worker for a given job at $7.25 an hour, why should it pay more? Bob Beckel never pays more than he has to in order to get what he needs; why should Wal-Mart? Wal-Mart employees are not indentured. They’re perfectly free to search for a job that pays better than the one they have. If they don’t, it’s because they have the best job around for their skill set and particular circumstances. If market forces do not produce a “living wage,”—about as subjective a term as you can find, right up there with “fair”—then it is government’s function to make up the difference through the Earned Income Tax Credit or other mechanism. Corporations are not WPA projects and shouldn’t be used as such by government fiat.

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Bob Beckel, the liberal voice on Fox News Channel’s extremely successful The Five, likes to go off on rants regarding Wal-Mart. On Friday he was in rare form, damning the world’s largest retailer (and this country’s largest employer) for having caused more rival businesses to close than any other in history, and for buying most of its merchandise abroad. On other occasions he has complained that Wal-Mart doesn’t pay its employees a “living wage.”

Beckel’s first claim is probably true and the second certainly is. The third claim, however, is economic sophistry.

Wal-Mart is a profit-seeking corporation. It is, in other words, a wealth-creation machine, nothing more, nothing less. Its management, therefore, has a fiduciary duty to the stockholders to maximize the return on their invested capital. It does that in the following three ways.

First, by paying the lowest wages that will supply the company with a satisfactory work force. If Wal-Mart can get a satisfactory worker for a given job at $7.25 an hour, why should it pay more? Bob Beckel never pays more than he has to in order to get what he needs; why should Wal-Mart? Wal-Mart employees are not indentured. They’re perfectly free to search for a job that pays better than the one they have. If they don’t, it’s because they have the best job around for their skill set and particular circumstances. If market forces do not produce a “living wage,”—about as subjective a term as you can find, right up there with “fair”—then it is government’s function to make up the difference through the Earned Income Tax Credit or other mechanism. Corporations are not WPA projects and shouldn’t be used as such by government fiat.

Second, by paying the lowest amounts for merchandise of satisfactory quality. In a globalized world, that often means buying goods manufactured abroad. The high-wage American economy cannot compete with low-wage third-world countries when it comes to low-tech manufacturing. Most of the cost of a T-shirt or a pair of socks, after all, is the labor. With transportation costs now very low, thanks to containerization, and tariffs at the lowest point in history—a policy pursued by both Democratic and Republican administrations over the last 70 years—buying abroad is the only option for most of the merchandise sold at Wal-Mart. Does Bob Beckel think it’s a good idea for Wal-Mart to buy domestically if that means T-shirts that cost $20 each?

Third, by offering better prices, better quality, and more choices to its customers. Thousands, perhaps tens of thousands, of mom-and-pop, Main-Street retail operations have gone out of business because of Wal-Mart. That is because the customers of those concerns found that they got better deals at Wal-Mart and started shopping there, instead of on Main Street. That was tough, no doubt, on mom and pop, but that’s the “creative destruction” that is an ineluctable aspect of capitalism. Without old-fashion businesses adapting or dying, the economy stagnates and innovation disappears. Just ask anyone who has lived in a socialist economy.

And while it was tough on tens of thousands of moms and pops, it was great for Wal-Mart’s tens of millions of customers, whose standard of living has been raised by Wal-Mart’s low prices, high quality, and convenience.

If Bob Beckel were to have his way—and he won’t—the American standard of living and the size of the American GDP would both decline sharply as prices rose and quality declined. That, of course, would mean fewer total jobs. As with so many liberals, Bob Beckel’s heart is in the right place. But the heart is an organ very ill-suited to economic analysis.

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How to Cut Medical Costs 101

Give consumers an incentive to care about the cost of medical care and the cost of medical care will decline. That’s economics 101 (a course Barack Obama obviously didn’t take), straight out of Adam Smith.

A beautiful illustration of that is reported in today’s Wall Street Journal regarding a new concept called “reference pricing.” With traditional health insurance (which ObamaCare mandates) patients needing a procedure pay a deductible and then the insurance covers the rest of the cost, whatever that might be. This is, of course, an open invitation for care providers to jack up the prices, which they have been doing far in excess of inflation for decades. With reference pricing, the insurance company pays a certain amount and anything above that is the patient’s responsibility, concentrating their minds wonderfully.

Calpers, the giant California state retirement system, handles health insurance for its hundred of thousands of public employees, dependents and retirees and noticed that knee and hip replacements cost anywhere from $20,000 to $120,000 depending on the institution where they were performed but with no difference in outcomes:

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Give consumers an incentive to care about the cost of medical care and the cost of medical care will decline. That’s economics 101 (a course Barack Obama obviously didn’t take), straight out of Adam Smith.

A beautiful illustration of that is reported in today’s Wall Street Journal regarding a new concept called “reference pricing.” With traditional health insurance (which ObamaCare mandates) patients needing a procedure pay a deductible and then the insurance covers the rest of the cost, whatever that might be. This is, of course, an open invitation for care providers to jack up the prices, which they have been doing far in excess of inflation for decades. With reference pricing, the insurance company pays a certain amount and anything above that is the patient’s responsibility, concentrating their minds wonderfully.

Calpers, the giant California state retirement system, handles health insurance for its hundred of thousands of public employees, dependents and retirees and noticed that knee and hip replacements cost anywhere from $20,000 to $120,000 depending on the institution where they were performed but with no difference in outcomes:

In January 2010, the retirement organization established a $30,000 reference-price limit on what it would pay, and the administrators identified 41 hospitals that charged less than the limit while scoring well on quality criteria. Calpers launched an outreach program informing employees that they had their usual coverage at these “value-based” facilities but would have to pay the extra money charged elsewhere.

Well, guess what:

The percentage of Calpers patients selecting low-price hospitals increased to 63% in the year after reference pricing was introduced, from 48% in the year before, and the trend continued into the second year after the introduction.

Even more striking was the effect on pricing strategies. Half of the high-price hospitals cut their rates, many by a considerable amount. (Guess which number they were trying to hit.) Across all hospitals, prices charged to Calpers for joint-replacement surgery declined by 26% in the first year and by even more in the second. The combination of changes in market share and cuts in prices reduced Calpers’ expenditures over two years by $6 million, . . .

The fact is, 315 million consumers of health care saying, “How much is this going to cost” will rein in healthcare expenditures far more effectively than 315,000 government bureaucrats meddling in the marketplace.

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Statistical Garbage in, Poor Journalism Out

For misleading headlines, it’s hard to beat this one from the AP yesterday: “Exclusive: 4 in 5 in US Face Near-Poverty, No Work.” Sounds like a cultural and economic Armageddon in the making. But the Wall Street Journal’s James Taranto demolishes the whole thing in his inimitable style.

It turns out that the headline left out a key phrase: “in their lifetimes.” If you have ever, for even a very short period of time, been out of work or on some sort of assistance program, then you’re in the 80 percent who face near-poverty and no work. “Near-poverty” is defined as having less than 150 percent of a poverty-level income. As Taranto points out, that’s like saying that a man who is 8 feet 9 inches tall is of near average height.

In other words, this headline is on a par with one that reads, “Half of Americans Have Below-Average IQ.”

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For misleading headlines, it’s hard to beat this one from the AP yesterday: “Exclusive: 4 in 5 in US Face Near-Poverty, No Work.” Sounds like a cultural and economic Armageddon in the making. But the Wall Street Journal’s James Taranto demolishes the whole thing in his inimitable style.

It turns out that the headline left out a key phrase: “in their lifetimes.” If you have ever, for even a very short period of time, been out of work or on some sort of assistance program, then you’re in the 80 percent who face near-poverty and no work. “Near-poverty” is defined as having less than 150 percent of a poverty-level income. As Taranto points out, that’s like saying that a man who is 8 feet 9 inches tall is of near average height.

In other words, this headline is on a par with one that reads, “Half of Americans Have Below-Average IQ.”

But Fox News’s normally sensible Special Report with Brett Baier led with this story last evening and never questioned its statistics.

What scientists call “confirmation bias”—the tendency to unquestioningly accept results that confirm one’s hypothesis—lead us to not question statistics that support our political philosophy. Politicians (and far too many editorial and op-ed writers) fall victim to confirmation bias. Others know that such statistics are rarely challenged and use them to lie to the public.

So I have a suggestion. Every serious newsroom in the country should have on staff someone whose job is to vet statistics for intellectual honesty and statistical rigor. Do they compare apples with oranges? Do they use a misleading baseline? Do they manipulate the shape of a graph to make things look good or bad? Are the definitions valid? Was the poll sample properly chosen?

Such automatic second guessing would greatly improve the level of public discourse. But I won’t hold my breath waiting for it to become standard journalistic procedure. Misleading headlines can sell a lot of newspapers.

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The Obama Campaign’s False Premise

In my critique of President Obama’s 17-minute campaign documentary, “The Road We’ve Traveled,” I took issue with the claim, now taken as a truism by Obama supporters, that he inherited the worst economy since the Great Depression.

I argued that the economy Ronald Reagan inherited was sicker, and I want to elaborate on that assertion.

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In my critique of President Obama’s 17-minute campaign documentary, “The Road We’ve Traveled,” I took issue with the claim, now taken as a truism by Obama supporters, that he inherited the worst economy since the Great Depression.

I argued that the economy Ronald Reagan inherited was sicker, and I want to elaborate on that assertion.

In his superb biography of the Reagan presidency The Age of Reagan, Steven Hayward reminds us that the nation’s economic conditions “began slipping toward near panic in the two weeks after the 1980 election.”

Prime interest rates were around 19 percent. Inflation was in double digits, with forecasts that food prices would rise by more than 10 percent in the coming year and energy prices by 20-40 percent. Unemployment stood at 7.4 percent (it would eventually rise to 10.8 percent in the early years of Reagan’s presidency). Housing starts were in free fall. And auto sales were down 10 percent from the previous year.

I remind people of this only because the narrative that no president has faced more daunting challenges than Mr. Obama is false. That doesn’t mean that Obama didn’t face substantial problems when he took the oath of office. He did; but they were not unprecedented by any means.

Moreover, unlike Reagan, the economy Obama inherited was in large part an economy of his (and his party’s) own making. I say that because, in the words of AEI’s Peter Wallison, the “sine qua non of the financial crisis was U.S. government housing policy” — and that “far from being a marginal player, Fannie Mae was the source of the decline in mortgage underwriting standards that eventually brought down the financial system.”

Would it be too indecorous to point out that the Bush administration warned as early as April 2001 that Fannie and Freddie were too large and overleveraged and that their failure “could cause strong repercussions in financial markets, affecting federally insured entities and economic activity” well beyond housing?

In fact, President Bush’s plan for reform would have subjected Fannie and Freddie to the kinds of federal regulation that banks, credit unions, and savings and loans have to comply with. In addition, Republican Richard Shelby, then chairman of the Senate Banking Committee, pushed for comprehensive GSE (government-sponsored enterprises) reform in 2005. And who blocked these efforts at reforming Fannie and Freddie? Democrats such as Senator Christopher Dodd and Representative Barney Frank, along with the then-junior senator from Illinois, Barack Obama, who backed Dodd’s threat of a filibuster (Obama was the third-largest recipient of campaign gifts from Fannie and Freddie employees in 2004).

In other words, Democrats bear the majority of the blame for blocking reforms that could have mitigated the effects of the housing crisis, which in turn led to the broader financial crisis. So Mr. Obama and his party bear a substantial (though not exclusive) responsibility in creating the economic crisis that Obama himself inherited.

Just for the record.

Oh, and one other point: When Ronald Reagan inherited what really was the worst economy since the Great Depression, he actually took steps to revive it; and his efforts led to an extraordinary period of sustained economic growth. That allowed Reagan to run on his “Morning in America” theme and win re-election while carrying 49 states.

Mr. Obama, on the other hand, has helped produce the weakest recovery since the Great Depression, with many economic indicators getting worse, not better, under his watch. Which is why Obama, unlike Reagan, should lose his bid for re-election.

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