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One of the ideas that economists are most sure of is that when the price of something rises, other than due to something that shifts the whole demand curve, the quantity demanded falls. Conversely, when the price of something falls, the quantity demanded increases. This is not controversial in economics. Moreover, it’s so clear that it is part of our mutual understanding, even for non-economists. When you hear that Macy’s is having a sale, you don’t say, “Oh, I’d better not shop at Macy’s during the sale because the prices are temporarily higher.” No. You understand that Macy’s is having a sale in order to sell more and that the way to sell more is to lower their prices. Or consider what we all know to be true when strawberries are out of season: their price will be higher than when they’re in season. In other words, a reduction in supply, all else equal, will lead to a higher price; the way to sell the lower amount and have all demanders satisfied is to increase the price.

This is the opening paragraph of my latest Hoover article, “High Minimum Wage Laws Hurt Many Workers,” Defining Ideas, April 25, 2024.

In it, I discuss the effects, some of which have happened already, of the April 1 increase in the minimum wage for fast-food workers in California to $20 an hour. After quoting a news writer named Jack Birle suggesting that the higher minimum wage will make it harder for school cafeterias to compete for labor, I write:

Give Birle a little credit. As least he understood that school districts are competing with fast-food employers. But then he forgot to follow through on what the minimum wage increase is doing to job opportunities in the fast-food industry: it’s reducing them. So the minimum wage increase will make it easier, not harder, for school districts to find employees. There will be a reshuffling of workers. Higher-productivity workers will find it more attractive to work in the fast-food industry. They will displace some less-productive workers who are not producing enough to make it worthwhile for fast-food employers to hire them. But the overall net effect will be fewer jobs in the fast-food industry and, therefore, more workers looking for work in other industries.

I excerpted different parts of my article on my Substack. But if you want to read the whole thing, which is only about 1,800 words, go here.

California has some of the strictest insurance regulations in the country. It is the only state where insurers are not allowed to base their rate hikes on catastrophe models — forward-looking calculations of risk — or the rising cost of reinsurance premiums, according to both Zimmerman and the Department of Insurance.

Under current regulations, insurers are only allowed to use catastrophe models to calculate rates for earthquake insurance. One proposed change under the Sustainable Insurance Strategy would expand that to wildfire risk, as well as the risk of post-earthquake fires and terrorism. Another proposed regulation yet to be released would also allow insurers to incorporate reinsurance costs into rate hikes, the department previously announced.

The above quote is from Megan Fan Munce, “Major California home insurer could resume writing new policies. Here’s what it would take,” San Francisco Chronicle, April 24, 2024.

In case you haven’t heard, price controls on home insurance are causing a number of insurers not to write new homeowners’ insurance policies and, in some cases, to quit the business in California. The two paragraphs above lay out one important way in which prices are controlled. Insurers are not allowed to base rates on expected risks.

While my wife and I are lucky because State Farm has said it will renew our policy, I’m not so lucky in another role. I’m a limited partner who owns approximately 1% of a large apartment complex in Bakersfield. Our insurer has told the general partner that it will not renew our insurance and he has been unable to find any insurer that will.

Wisconsin comedian Charlie Berens has a great routine about 4-way stops in the Midwest. Midwest drivers are so nice and obsequious that they’ll endlessly wave the other guy on at the stop sign, even when they were there first and have the right-of-way. Like all good comedy, it’s funny because it’s at least a little bit true. As a small-town Midwesterner, I can vouch for the authenticity of the joke. In the past month I have had three separate Midwest stop sign incidents, in which the other driver, having the right-of-way, attempts to yield and wave me on, out of turn. Now I’m a proud Midwesterner, but maybe I’m just not that nice, or maybe something just really bothers me about people not following the rules. When this happens to me, I like to point at the stop sign, trying to let the other driver know there’s an established set of rules and I, having aced driver’s education, expect you to follow them. Indeed, one time I actually rolled the window down and shouted “I have a stop sign!” and insisted the other driver proceed (she didn’t even have a stop sign in this case—it’s worse than Berens knows!)

The last time this happened I got so agitated that I had to pause and reflect on why this form of rule-breaking bothers me so much. After all, the other person is just trying to be nice- “Midwest nice.” Doesn’t that reflect well on the folks in my part of the country? I had an epiphany in the car, though—I realized that the attempted “niceness” was actually irritating because it disrupted my strongly-founded expectations about what should happen based on a very clear and well-known set of rules. I felt like Walter Sobchak from The Big Lebowski: “Am I the only one around here who gives a (expletive) about the rules?!” (Don’t worry, I did not come close to threatening the other driver). Simply speaking, the other driver’s action, though well-intentioned, was not nice in its outcome. It was irritating, it led to confusion and delay which, though minor, were nonetheless irritating. Rules are meant to be followed, not arbitrarily set aside on a whim for the perceived benefit of a stranger. We could have a good-faith argument about whether a particular rule is just and proper, but in cases where the rules are obviously fair and designed to generate smooth social interactions among strangers—like stop signs—not following the rules is an anti-social act. 

Then the larger revelation struck me: we are living in an age of excessive “niceness” and attempts by well-meaning people to just be nice are increasingly leading to rule-breaking and societal decay. The stop sign thing is emblematic of a larger problem. True, stop sign yielders are generally harmless, so maybe I should calm down about it. But in other cases, when people choose to not follow the rules in an attempt to be nice, the consequences can be more than merely annoying, they can be downright dangerous.

Examples of excessive niceness are all around us and range from mundane and mildly annoying, to potentially deadly. Here’s a brief list, I’m sure you can think of some yourself:

This last example is most worrisome, and is cropping up in DEI-inspired programs that water down or eliminate competency requirements for the sake of increasing representation of disadvantaged groups. Many commentators on the right are raising alarm about such efforts afoot in the airline industry to “diversify” their pilot corps. If the easing of competency standards is happening, and there’s ample evidence to back up the stories, we could be looking at deadly consequences when under-trained, under-qualified “diversity hires” make fatal errors at the controls of a passenger jet. 

So yeah, maybe we should rethink “niceness.” Don’t get me wrong—I’m not against niceness, I’m just against taking a good thing too far. In statistics there’s a categorization of errors that may be helpful in explaining the “too nice” problem. A Type I error is a false positive—establishing causal effect when it’s not true, for example assigning effectiveness to a drug when it really had none, and the clinical trial results were just random chance. A Type II error is a false negative—finding that the drug was not effective when it actually is, but perhaps the clinical trial was improperly calibrated to capture its true impact. 

Being needlessly mean—acting the jerk—is a Type I error.  You lash out at your wife or kids for a harmless mistake. The bad attitude and angry outburst is not warranted, you should not have ruled in favor of your anger. This problem is usually easy to spot and remediation is seldom controversial—no one likes a jerk, and we all know one when we see him. Being too nice, though, is tricky—it’s a Type II error. You are in the right to yell, or maybe just use harsh language, because the other person misbehaved and deserved a social sanction. But most of us don’t like confrontation, and it’s often easier to just put on the nice face, not call out the other guy’s bad behavior, and just slink away. This is the path of least resistance. I’ll admit that I’m guilty—I am non-confrontational and probably have let too many bad actions slide.  

So what’s to be done about the excessive niceness epidemic? I’m thinking about setting up seminars on optimal anger: “Hi, I’m Tyler and my love language is tough love. Don’t like it? Get over it!” Kidding aside, it’s tricky. There are no easy answers, and as the greatest living economist Thomas Sowell has so eloquently stated, “There are no solutions, only tradeoffs.” All I can ask as an economist is that people acknowledge the problem—it’s just as possible to be too nice, as it is to be too mean. To paraphrase Martin Luther, you can fall off both sides of the horse. It can be bad to be not nice; it can be bad to be too nice. The trick is to find an optimum, to balance the tradeoffs between the problems. Too mean (Type I error) is usually obvious, so the key is to critically assess all our actions and strive to recognize when we might be sliding into the “too nice” Type II error. Sternness has its place. If insisting on following the rules makes me appear jerky to my Midwest cohorts, so be it. If that’s the price of living in a world where the rules work to the benefit of all, I’m willing to pay it.  

Tyler Watts is a professor of economics and management at Ferris State University.

The Financial Times has an interesting interview with Esther Duflo, who was awarded the Nobel Prize in Economics in 2019. She argues that developed nations have a moral duty to compensate poor countries for the damage done by carbon emissions:

If you combine these three numbers, you get basically the money value of the cost of carbon in the air. [University of Chicago economist] Michael Greenstone and his team estimated it to be $37 a tonne. So, take $37 a tonne, multiply by 14bn tonnes a year of carbon emissions — that’s the total footprint, including consumption, of Europe and the US. And you get about a little over $500bn a year. That’s the damage that we impose on poor countries, just the mortality damage. Just from the rich part of the world to the poor part of the world.

So that’s what I call a moral debt. This is not what it would cost to adapt; this is not what it would cost to mitigate. This is what we owe.

She advocates raising these funds by taxing the rich:

The minimum tax on corporations has been fixed at 15 per cent [under an international agreement]. But originally, the number that was proposed was 25. So I’m thinking, well, there is maybe a bit of margin. And if you went from 15 to 18 per cent, you could raise about $200bn a year.

And then, in February, the G20 discussed the proposal of Gabriel Zucman and the EU Tax Observatory of a tax on the super-rich — a tax of 2 per cent yearly on the wealth of the 3,000 richest billionaires. That would raise $300bn. So if you combine these two, you get to your $500bn.

I am sympathetic to her claim that Western carbon emissions have hurt poor countries, although as a utilitarian I don’t think in terms of “moral debts”.  What does that phrase actually mean?  Does it mean that transferring $500 billion from the rich world to the poor world would make the world a better place?  If so, then why not say so?  Why speak in terms of moral debts?

By now I may have antagonized both sides, supporters of Duflo’s proposal and conservatives that are skeptical of utilitarianism.  So let’s examine some specific flaws in Duflo’s approach to public policy.

Duflo is correct that rich countries have imposed large negative externalities on poor countries, by warming the Earth’s climate.  But she overlooks the fact that rich countries have also imposed large positive externalities on poor countries, or that these positive externalities are an order of magnitude larger than the negative externalities.  Here are three obvious examples:

1.  Western technology has caused the population of poor countries to be vastly larger than it would have been without contact with the West.

2. Western technology has caused life expectancy in poor countries to be much longer than it was before being exposed to this technology.

3.  Western technology has caused per capita GDP in poor countries to be far higher than it would have been without this technology.

So if we were to take seriously the idea that externalities cause moral debt, then we would be forced to conclude that the poor world should pay vast reparations to the rich world.  To me, this idea seems absurd.  To be sure, many people I speak with favor forcing China to pay far more for technology they have taken from Western firms. But these people are often silent on the West’s “moral debt” for paper, the compass, gunpowder, the printing press, and all the other Chinese inventions that helped to shape the modern world. 

History is almost infinitely complex, and thus any attempt to develop a ledger of net moral debits and credits based on positive and negative externalities will end up foundering on a host of arbitrary judgments.

A second problem is that Duflo’s proposed tax makes no sense if the underlying problem is externalities.  Economic theory suggests the optimal remedy for negative externalities is to impose a tax equal to the external cost—in this case a carbon tax.  (This is assuming that transactions costs prevent a voluntary solution.)  Instead, Duflo proposes a tax on the rich, which would do little or nothing to address the problem of global warming.

In my view, Duflo’s proposal is an illustration of what can go wrong when you replace utilitarian reasoning with deontological reasoning.  When it comes to public policy, it is not useful to think in terms of “moral debts”.  Rather there are policies that boost aggregate global utility and policies that reduce aggregate global utility.  A policy that slows capital accumulation while doing nothing to address global warming is not likely to boost global utility.

PS.  I am not arguing that victims should never be compensated for damages they receive.  Rather I am suggesting that compensation schemes should be judged on utilitarian grounds.  Thus our legal system is based on the premise that people and companies are generally liable for specific damages imposed on others.

PPS.  I suppose a wealth tax on billionaires sounds “progressive”, especially if the money is given to “poor countries”.  But people like Bill Gates donate a larger share of their wealth to poor countries than do rich governments, and it’s likely that (dollar for dollar) his donations are more effective than those of governments.  In fairness, Duflo suggests donating the money directly to the people in poor countries (which is much better than the approach used in many government run foreign aid programs), but I suspect that once governments become involved the money will end up moving from one government to another.

Thomas Sowell frequently emphasizes the importance of thinking beyond the immediate and obvious impact of some economic policy and thinking through the larger implications. He actually wrote an entire book dedicated to this idea – Applied Economics: Thinking Beyond Stage One. A similar and useful exercise to evaluate an idea is to really try to work out not what will unfold next, but what that idea, if true, should imply for the present situation. Here are two common examples where this would come in handy.

First, some people believe that all the value a business generates for consumers and stockholders is generated by the workers. Meanwhile, the owners of the business don’t create or contribute value – they merely siphon off the value created by the workers, while paying the workers less than the value they generate. If this was true, this has a pretty clear implication – business owners should be incentivized to hire as many workers as possible! After all, by this understanding, workers generate more value than they are paid, which means maximizing the size of your workforce is a surefire way to maximize the money you can make. The very last thing a greedy business owner would want to do is fire his workers – because if workers generate more value than they paid, cutting jobs means the business owner will necessarily lose more than he gains. Yet, we’re often told that cutting jobs is itself motivated by greedy business owners trying to increase their profits – which would be mathematically impossible in a world where all value is created by workers. The idea that greedy business owners pay workers less than the value they generate and the idea that greedy business owners cut jobs to increase their profits contradict each other – yet both ideas seem to fit comfortably into many heads at the same time. 

Another common belief is that some particular groups of people are discriminated against when trying to get auto loans or mortgages. Sometimes this is buttressed with references to studies that say, in effect, “We used our data and controlled for these seventeen different confounding variables, and found that all else equal, freckled people with identical financial credentials were less likely to get approved for a mortgage than non-freckled people.” Does this mean that freckled people are being discriminated against? Maybe. Or maybe there are other relevant confounding variables the study fails to take into account. But if you hold the belief that freckled people are being discriminated against, there’s a clear implication for the present situation. We should expect to find that freckled people have unusually low rates of payment delinquency or default. After all, the claim is that freckled people need to be disproportionately financially secure compared to non-freckled people to be approved for equivalent loans, which necessarily means the loans granted to freckled people should be at a disproportionately low risk of delinquency. Meanwhile, if there’s a group that reliably has a disproportionately high risk of delinquency or default, that would imply getting approved for a loan is actually disproportionately easy for that group, all else equal. The idea that there are groups of people who must be disproportionately well-qualified to get a loan but are also at disproportionately high risk of default are also contradictory to each other. Yet these ideas, too, are often held in tandem by people. 

What are some other examples you can think of?