To some extent higher union wages translate into higher prices for consumer goods.  Over a five year time horizon I’ll guess at 50 percent pass through, adding that most of these goods are bought by other laborers.  Just to be flippant, for each dollar gained by a union member, I’ll guess that labor market "outsiders" lose 50 cents.

Notice we haven’t even counted negative effects on the rate of future economic growth, or for that matter costs to employers.

We already don’t have workers, viewed as a class, coming out ahead.

I would be curious to hear the numbers assumed by those who wish to encourage labor markets by law.  I would be curious to hear how much they think, over say a ten-year time horizon, wages deviate from labor productivity.

Inquiring minds wish to know.

Many of you say paternalism is to protect the very stupid.  Would you support Would-Have-Banned stores with an min IQ rule?  If so, what would that IQ be?

That’s Robin Hanson, advocating stores devoted to selling banned products.

We’re all taught that in a competitive industry price will equal marginal cost.  Well, what is a competitive industry?  There are lots of Chinese restaurants in or near Fairfax, and with a few noble exceptions they have more or less the same menu.  Each could serve an extra diner at essentially zero marginal cost, yet the price of the food is not zero.  Not even marginal meals are given away for free, except perhaps to the staff.  If price is equal to marginal cost, we have to ask equal to which marginal cost?  The marginal cost of one more Kung Pao Chicken?  The marginal cost of being known for giving some meals away?  The marginal cost of possibly setting off destructive price competition with rivals?  The concept of marginal cost relies on a definition of time horizon, strategic assumptions, and the counterfactual against which real world action is being compared.  Yikes.

Armen Alchian and Fischer Black are the guys to read on what cost really means (Buchanan and the Austrians only get you so far).  If you really want to get dizzy read Lester Telser on when there is a core, and wonder whether the industry you have in mind meets his screwy but essentially correct standards for MC, AC, and no coherent equilibrium.  It’s not just the airlines.  So when is price equal to marginal cost, average cost, or some blend of the two?  And which definitions of average and marginal cost? 

What about "reality"?  Toss a bone to social frictions, then ask for some micro-studies of how "competitive" industries price in the short run.  Use interviews and ethnography to supplement the formal models.  In practical terms, you might end up with some understanding of a) why prices can be sticky in apparently competitive industries, and b) why few businessmen — including high IQ types — will admit to pricing at marginal cost or even understand what that means.

The bottom line: I’ll say that MC is flat if truly all inputs are replicated.  But that’s never the case, so MC is usually zero under one set of counterfactuals and sloping upward dramatically under another set.  That’s not the end of the world, live with it.

The second bottom line: When it comes to teaching the students, just tell them that marginal cost slopes upward at some point.  After all, sooner or later they all stop studying.

The third bottom line: #13 out of 50.

Steve Levitt wonders.  My view: in a given WSJ issue, there will be a small number of wonderful bits, and a whole lot most people don’t care about, like the notices of the debentures.  A free web site would make it too easy to cherry-pick the interesting content, strip it down, and reproduce it and circulate it without the ads.  Even if WSJ could enforce a price on the unbundled content, bundling can facilitate price discrimination, especially when the diversity of valuations of bits is high.

The FT, which also has a gated web site, is similar; their best article on a given day is wonderful, but I don’t read most of what they offer.  Many mornings I won’t even open up the second section, who cares about European debentures? 

When your newspaper is more like a "thicket," the best packaged version of that paper is the paper’s website itself and useful unbundling is difficult.  Note that the so-called chaff business notices in the WSJ are in fact intensely interesting to the few people they immediately affect.  That makes it possible to charge for such news, even though it doesn’t contribute to producing a thicket of content for most readers.  We return to the potential dangers of unbundling, and the possibility of picking apart the WSJ until it isn’t a newspaper any more.  An upfront charge makes sure the value is reaped before most of the paper is discarded.

Ezra Klein has an interesting post on union elections, favoring greater unionization; Jane Galt is not persuaded. [Addendum: Mark Thoma has more.] 

I propose a deal.  I’ll agree that unions, in the best natural experiments we have, boost wages by about 10 to 20 percent.  On the other hand, will Ezra (and others) agree that unions are mostly detrimental to the rate of economic growth?

If so, the utilitarian evaluation will boil down to the choice of discount rate, keeping in mind that under the left-wing account the gains follow mostly from redistribution more than from wealth creation.

Admittedly the empirical literature on unions and economic growth is murky.  But it does seem that in non-socialist societies, more unionization lowers the growth rate.  (In socialist societies, it may be that economy-wide unions internalize some poliitical externalities and lead to better policy, a’la Mancur Olson.)  These papers are easy enough to criticize, so I’ll admit I am more convinced by simple theory here than by any empirics.  Unionization raises the cost of many growth-enhancing business decisions, such as layoffs or implementing technical progress.

Union supporters?  Do we have an epistemic deal about how you are willing to lower the growth rate?  And can we pull your true discount rate from the Stern/global warming debates?  (I recall Jane once writing that a zero discount rate would require her to revise everything she believed, but I think the opposite is sooner true.)

Oh, did I mention that the union wage premium, especially for private sector employees, has been declining and may be disappearing altogether?

And no, I will not be moved by sarcastic attempted reductios which pretend that enslaving the workers would raise the growth rate too.  Figure out yourself what is wrong with that.

Addendum: Johan Richter asked for: "Your preferred policy towards unions," so I’m calling this #12 out of 50.  My preferred policy is laissez-faire, noting I have never been a right-wing, union basher, Morgan Reynolds sort of guy.  But I see encouraging unions through the law as a relatively short-sighted solution to the problems of labor and the desire to raise living standards.

A loyal MR reader asks:

What is currency and what are the potential implications of a
completely digital currency that could have unlimited meta information
attached to it? [Some obvious implications would be tracking
transactions and the government’s ability to enforce taxes, etc., some
more esoteric stuff would be attaching conditions much like covenants,
say that a particular payment could only be used to buy products that
were carbon neutral, possibly down the road having policy implications.]

Higher taxes and carbon offsets we’ve already covered.  More generally, the use of "covenant currency," as I shall call it, would raise prices.  Restricted money simply isn’t worth as much.  It also would lead to a secondary market in currency.  Say you paid with me with money that can only be used to buy corn from Africa.  I’ll try to resell that money to the people who were going to buy corn in Africa anyway.  Of course the supply of targeted covenant money for that end may exceed the demand for it, and then price will adjust; think of this as an extreme form of legal tender laws.

Would it ever be efficient to use covenant money?  I doubt it.  It is a tax — on the holding and use of cash balances — when a simple transfer would do.  Use regular money for your transactions and, if you wish, send some cash to the corn sellers of Africa.

Inflation is also a tax on cash balances, and few people think that is the right or the best fiscal way to finance subsidies to various worthy groups.

#11 in a series of 50.

A loyal MR reader asks:

What are your thoughts on the new dynamic optimal public finance policy models being built and simulated?  Will they yield any new insights applicable for the real world, or are they a fad?

Real insights maybe, real measurements for sure.  I take this paper by Mankiw to be a paradigmatic example.  Through this body of literature we learn, or confirm our previous intuitions, that:

1. Cutting U.S. income tax rates is not, in general, self-financing.  We also get a rough idea of how much revenue we can make up in the long run.

2. Many forms of corporate and capital income taxation are, in the long or even medium run, inefficient.

3. Ideally we should move to a consumption tax.  (NB: Moving outside the models, I am scared that this kind of tax reform will just turn into another tax increase.  We’ll add a VAT to income taxation rather than shift to the VAT.  Yikes.)

These results are the bread and butter of applied public finance.  You can complain all you want about the assumptions, the artificiality, and the use of intuition to throw out unacceptable calibrations, but at the end of the day there is not a better way to do the work. 

A fad, perhaps, but there is nothing wrong with that.  The Beatles were a fad too.

By the way, here is an interesting paper on a different frontier in public finance, namely field experiments.

#10 in a series of 50.