Politics & Policy

Here Comes the Sun

The price of a product is a function of the demand for it — or should be.

Prices are a mystery, and why that is is a mystery. People often talk about prices as though they were set by conspiracy in some corporate boardroom, or as though the real-world marketplace worked like a cost-plus government contract, with firms totaling up the expense of all their inputs and then adding some percentage to it. Prices are in an important sense arbitrary, which is why, paradoxical though it may sound, they are meaningful.

Take the case of a round-trip flight between New York City’s horrible LaGuardia Airport and Miami’s horrible Miami airport. From the airline’s point of view, the cost of providing round-trip service from New York to Miami — fuel, flight hours, crew wages, etc. — is precisely the same as the cost of providing round-trip service from Miami to New York. In fact, each leg of the flight will in all likelihood contain both MIA–LGA and LGA–MIA passengers, some on their outbound journeys and some on their return flights.

#ad#But, if it happens to be February, it will generally be the case that the LGA–MIA round-trip flight is significantly more expensive than the MIA–LGA round-trip flight, because New York City is a cold, miserable, wet, depressing place, where your stay will be nasty and brutish even if short, whereas Miami will be only wet, assuming you don’t go too far the wrong way on North River Drive. There is more demand for LGA–MIA than MIA–LGA, thus the higher prices. Nothing at work but supply and demand mediated by prices. Everybody seems to get that, until it comes to a commodity that they have a stake in.

The United States passed its first sugar tariff in 1789, before Rhode Island got around to ratifying the Constitution. We’ve had some major public-policy changes over the years — abolishing slavery, women’s suffrage, direct election of senators, gay marriage here and there — but the sugar tariff stays and stays, the economic version of drug-resistant syphilis. It is a matter of pure political power: The sugar producers believe that the price that Americans are willing to pay for sugar is not the right price — which is to say, it’s a lower price than the one they would prefer — and so we pay more thanks to the cowardice of Congress and the predictable victory of the producers’ concentrated benefits over the consumers’ dispersed costs. As Willi Schlamm said, the problem with capitalism is capitalists, a motto that should be engraved in marble above the entrance to the U.S. Department of Agriculture.

Similarly, the United States passed its first minimum-wage law in 1933. It was thrown out as unconstitutional, and then reestablished in 1938, at which point it became constitutional via the magic of the infinitely flexible Commerce Clause. (There’s a reason Supreme Court justices and fairy-tale wizards wear the same outfits, with the nine-member national super-legislature missing only those awesome conical hats, which we, a freedom-loving people, should insist they adopt immediately.) Why? Because, as with the case of the sugar producers, somebody with sufficient political power decided that the price wasn’t right — and a wage is nothing but a price, the price of labor. The same people who understand why LGA–MIA costs more in the winter than MIA–LGA cannot understand — or refuse to accept — that wages work in precisely the same way. I hear fairly regularly from public-school teachers who insist that they should be paid more because they have a master’s degree, from MFA holders who insist that they should be paid more than Starbucks is paying them, and from people who insist that people working in fast-food jobs should be paid $10.10 an hour, or whatever it is that the Democrats are proposing this week. But there is no should when it comes to prices. Nobody cares what it costs Delta to get them to Miami in February; they care that it’s warm there and that other airlines might be offering a better deal. They could, in theory, even fly U.S. Airways if they were cheap enough and sufficiently masochistic, and flexible about arriving eight hours after they’re supposed to.

#page#Economics is hard, and it gets harder the deeper you go into it. But there are some economic truths that are both pretty easy to understand and necessary to understand. Supply and demand don’t always move in smooth, predictable curves, but the relationship between them is not optional, because consumers and producers are real people, not imaginary constructs in somebody’s policy model. Interfere with the supply of sugar and prices will go up. Raise the price of labor and demand for it will go down. That is reality, and reality is not optional.

The minimum wage is almost always presented by the Left as a moral question rather than an economic one, mainly because the economics are pretty plainly against the Left on the question, while it’s always easy to cook up a plausible moral rationale for whatever economic interference seems good at the moment, which is why our economic policy is such a swamp of contradictions and special-interest rent-seeking. (“Morass” is not a contraction of the phrase “moralizing asses,” but it should be.) I’m sure that those sugar barons and ethanol parasites could come up with a compelling moral case for the government’s shunting great roaring streams of money into their bank accounts.

#ad#Which is not to say that there are no moral questions attached to, e.g., the status of the working poor, or the non-working poor, for that matter. But the moral questions are separate from the economic questions. If you want to make the lives of the poor better in material terms, there are many ways to do that: You can write them monthly checks, give them lump-sum payments, institute a negative income tax (my own preference) in order to encourage and reward work and move them closer to self-sufficiency. Or you can try to use policy to distort markets to produce the results that you like, which is what we most often do. The problem with that is that there are always tradeoffs in economic matters, and those tradeoffs do not always work in predictable ways.

On the minimum-wage question, we get some truly dumb analysis — e.g., the claims by Shut the Chamber, an organization that seeks to forcibly disband the U.S. Chamber of Commerce (Nice Bill of Rights you’ve got there!) and maintains that if we doubled McDonald’s workers’ wages, the price of a Big Mac would go up only 68 cents. This is pure illiteracy. McDonald’s would have many ways to respond to higher minimum wages, but simply raising prices is not one of them — because McDonald’s does not set prices. Consumers set prices. If McDonald’s could simply raise Big Mac prices by 68 cents with no consequence, they’d already have done it. McDonald’s has basically no power over consumers, but it does have some power over its suppliers, to whom it would no doubt seek to pass on additional expenses, and over its own organizational model, which it would no doubt be tempted to make less labor-intensive if wages were artificially inflated.

Organizations such as Shut the Chamber and the Democratic caucus in Congress believe that they can make low-income workers better off by making their employers worse off, and they lack the wit to understand that producers and consumers both engage in cost-shifting. They are bright enough to understand that if Starbucks were to suddenly develop a deep new appreciation for the ineffable value of the mighty MFA and raise its prices drastically, then consumers could go to Dunkin’ Donuts instead — or make their own coffee at home, or get their morning caffeine jolt from two cans of Diet Coke like a civilized person does — but they are not smart enough to realize that companies price-shop, too, as if the guys who run money at Fortune 500 companies were not as economically sophisticated as latte-loving high-school students. That is how policies putatively designed to help the poor end up making them worse off. A $10.10 minimum wage does not do you any good if you are unemployed. It just makes the labor-intensive services you yourself consume more expensive.

Complaining about market prices is like complaining about the weather. The sun shines in Florida, and it’s going to keep shining even if Charles Schumer thinks that’s unfair.

— Kevin D. Williamson is roving correspondent for National Review.

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