An improvement in a district’s schools will increase house prices in that district. A burger and fries will cost more than a burger. All else the same, cars that get more miles per gallon will sell for higher prices than cars that get fewer miles per gallon. I trust that most people would not find these statements objectionable.

All else equal, an improvement in workplace conditions will reduce wages. Now that looks slightly different than “A burger and fries costs more than a burger” but it’s really not. Think of the worker as buying better working conditions with a lower wage, thus better working conditions (burger plus fries) cost more (lower wage) than worse working conditions (burger alone).

Conceptually the burger story and the workplace story are very similar but the latter causes Henry Farrell to object:

…where you will find me objecting, and quite vociferously too, is to the suggestion that we ought to employ simple econ 101 style analysis in order to figure out the tradeoffs, and the appropriate solutions. This style of analysis has an awful lot of presuppositions built into it, and these presuppositions are politically loaded.

Let’s take the case of labour relations. If, as Matt argues, you ought to start with a model of firms, each of which has a cost function such that the total compensation they can offer is fixed, and any increase in costly rights (such as not having your body searched to stop you smuggling widgets out between your arse-cheeks) is inevitably associated with a proportionate decline in wages, then, indeed, you will end up concluding that compulsory rules forbidding body searches will lower overall choice without really benefitting anyone. But you only get to that result because of what you are assuming in the first place. You are assuming that there isn’t any real distributional action happening within the firm – and in particular, that the firm’s owners don’t have any surplus (that they are able to extract because e.g. of workers’ weaker bargaining position) that could be reallocated through regulation. In other words, you are only ‘refuting’ the people you disagree with, because you assume away the problem that they are worried about.

(FYI, Henry is responding to a smart and devastating post by Matt Yglesias that no doubt rankled because Matt is a liberal.)

Henry gets the economics wrong (the model does not require perfect competition) but let’s ignore that and look to his larger point:

The lesson here is straightforward. Simple economic models can be quite useful, but they should be employed with very considerable caution. In particular, one should always think carefully about whether the assumptions of your model blind you to factors that are important to the debate that you are applying them to. As a secondary matter, you should also look to the empirical support for your model – intuitively appealing models are frequently wrong.

Now. what are you expecting to follow this paragraph? Surely, some empirical evidence that the model is wrong. None follows. Henry seems to think that economists have never thought about their assumptions or tested their models. Nothing could be further from the truth so let me provide some empirical evidence about the model of compensating differentials:

Here is Jonathan Gruber and Alan Krueger (n.b. both of them have worked for Obama) on workers’ compensation:

This paper empirically examines the incidence of the workers’ compensation program to infer the likely consequences of mandated health insurance proposals. In certain industries, such as trucking and carpentry, workers’ compensation insurance costs are quite large, and vary tremendously within states over time, and across states at a moment in time. This variation is used to identify the incidence of the program. Empirical analysis of two data sets suggest that changes in employers’ costs of workers’ compensation insurance are largely shifted to employees in the form of lower wages.

Here is Gruber on mandated maternity leave:

I consider the labor-market effects of mandates which raise the costs of employing a demographically identifiable group. The efficiency of these policies will be largely dependent on the extent to which their costs are shifted to group-specific wages. I study several state and federal mandates which stipulated that childbirth be covered comprehensively in health insurance plans, raising the relative cost of insuring women of childbearing age. I find substantial shifting of the costs of these mandates to the wages of the targeted group. Correspondingly, I find little effect on total labor input for that group.

And, dare I mention it, here is Joni Hersch in a recent paper in the AER on sexual harrasment:

Workplace sexual harassment is illegal, but many workers report that they have been sexually harassed. Exposure to the risk of sexual harassment may decrease productivity, which would reduce wages. Alternatively, workers may receive a compensating differential for exposure to sexual harassment, which would increase wages. Data on claims of sexual harassment filed with the Equal Employment Opportunity Commission are used to calculate the first measures of sexual harassment risks by industry, age group, and sex. Female workers face far higher sexual harassment risks. On balance, workers receive a compensating wage differential for exposure to the risk of sexual harassment.

Henry goes wrong because he doesn’t want to conclude that sexual harassment is ok but he thinks that the only way to deny that conclusion is to deny that wages are higher so he rejects the model, he rejects the assumptions that he thinks (incorrectly!) are driving the model and he assumes without looking for any evidence that wages are in fact not higher. (Talk about being blinded by assumptions!).

Matt Yglesias, by the way, is much smarter on this point, he doesn’t reject the model but gives several extensions, such as externalities, that may change the conclusion.

Here is another way to think about sexual harassment and the model. What the theory and the empirical results are saying is that people exposed to a higher risk of sexual harassment are paid more, just as people exposed to a higher risk of death are paid more. In the case of risk, however, the firm’s owners (shareholders) are paying higher wages but also getting the benefits of risky work. But in the case of sexual harassment the shareholders are paying higher wages but not getting the benefits of sexual harassment. In other words, from the firm’s point of view sexual harassment is a bit like employee theft – with the stealing being done by the harassers. (I alluded to this point in my original post and Miles Kimball made it as well.) Thus, shareholders may benefit if the government can reduce sexual harassment at low cost, precisely because they would then be able to pay lower wages without losing productive workers.

Now this analysis is not complete or the only way to frame the issue (again see Yglesias for other approaches). It may bother some people that in this version the biggest gainers from sexual harassment law may well be the firm owners rather than the previously harassed (but does it bother you that the among the biggest gainers from better schools may be property owners without children?) Nevertheless, the principle here is clear, the way to think about these issues is not to throw out economic reasoning but to apply the reasoning ever more deeply.

High speed rail, especially California’s project, looks to me to be monorail economics, a costly boondoggle whose appeal lies not in rational calculation (also here) but in the desire of some politicians (and voters) to feel visionary and sexy. In theory, CA HSR  might work but the inevitable reviews, delays, lawsuits and special interest payoffs make the prospects of a beneficial project look dim, demosclerosis kills.

Slow speed rail, however, i.e. freight transport, isn’t sexy but Warren Buffett is investing in rail and maybe we should as well. In particular, there are basic infrastructure projects with potentially high payoffs. Congestion in Chicago, for example, is so bad that freight passing through Chicago often slows down to less than the pace of an electric wheel chair. Improvements are sometimes as simple as replacing 19th century technology with 20th century (not even 21st century!) technology. Even today, for example:

…engineers at some points have to get out of their cabins, walk the length of the train back to the switch — a mile or more — operate the switch, and then trudge back to their place at the head of the train before setting out again.

In a useful article Phillip Longman points out that there are choke points on the Eastern Seaboard which severely reduce the potential for rail:

…railroads can capture only 2 percent of the container traffic traveling up and down the eastern seaboard because of obscure choke points, such as the Howard Street Tunnel in downtown Baltimore. The tunnel is too small to allow double-stack container trains through, and so antiquated it’s been listed on the National Register of Historic Places since 1973. When it shut down in 2001 due to a fire, trains had to divert as far as Cincinnati to get around it. Owner CSX has big plans for capturing more truck traffic from I-95, and for creating room for more passenger trains as well, but can’t do any of this until it finds the financing to fix or bypass this tunnel and make other infrastructure improvements down the line. In 2007, it submitted a detailed plan to the U.S. Department of Transportation to build a steel wheel interstate from Washington to Miami, but no federal funding has been forthcoming.

Longman points out that:

Railroads have gone from having too much track to having not enough. Today, the nation’s rail network is just 94,942 miles, less than half of what it was in 1970, yet it is hauling 137 percent more freight, making for extreme congestion and longer shipping times.

I believe that there are valuable infrastructure projects but I am dispirited by the fact that these projects have been valuable for a long time and progress is very slow. Why haven’t the gains from better infrastructure already been taken? Why haven’t the $500 bills been picked up? It’s worrying that the bullet boondoggles get all the attention while simple things like updating 19th century technology is ignored. And it’s not just rail, sewers and the water supply are another example. Consider:

The average D.C. water pipe is 77 years old, but a great many were laid in the 19th century. Sewers are even older. Most should have been replaced decades ago.

Does that sound like the infrastructure of an advanced nation?

We need better, more trustworthy, institutions for infrastructure investment. As I said in Launching:

Our ancestors were bold and industrious–they built a significant portion of our energy and road infrastructure more than half a century ago. It would be almost impossible to build the system today. Unfortunately, we cannot rely on the infrastructure of our past to travel to our future.

Hat tip: Mark at Observation Epidemiology.

As suggested by earlier rulings, Posner has thrown out the entire Apple-Motorola case. As I argued in Launching the Innovation Renaissance our patent system has became a weapon wielded by large corporations against competitor innovations. Posner’s ruling is complex but one point is clear he thinks that the courts should not act as a second in these corporate battles:

…The danger that Apple’s goal in obtaining an injunction is harassment of its bitter rival, requiring particularly watchful supervision by the court should it issue the injunction, is suggested by the fact that while a delayed injunction would in principle render no benefit to Apple besides harming its competitor by forcing it to waste time and money finding a new way of performing the functions now performed in an allegedly infringing manner, an ongoing royalty would yield significant income to Apple—yet which it wants to forgo in favor of imposing costs and litigation burdens on its adversary.

The notion that these minor-seeming infringements have cost Apple market share and consumer goodwill is implausible, has virtually no support in the record, and so fails to indicate that the benefits to Apple from an injunction would exceed the costs to Motorola. An injunction that imposes greater costs on the defendant than it confers benefits on the plaintiff reduces net social welfare. That is the insight behind the “balance of hard-ships” component of the eBay standard for injunctive relief in patent cases.

Hat tip: @postlibertarian.