Month: February 2015

The Pope strikes again!

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Pope Francis, like most of our friends on the left, has good intentions. Since he took over the reigns of the Catholic Church he has always argued in favor of the poor and unprivileged and renounced himself to several “luxuries” that use to come with the job. Among other things, he has repeatedly argued that workers should receive a compensation package that can allow him/her and their families to afford a decent life and cover their basic needs. He has publicly mentioned this preoccupation in many occasions and demanded of all Christians to work toward that goal. In fact, he just did it again today. And again, as in many occasions before, he made an important analytical mistake. Why can’t he hire a good economics advisor?

Today, he asked if employers who make important donations to the church but don’t pay “fair” salaries or hire workers in the informal markets (without reporting the contract and, therefore, without paying benefits, insurance, taxes etc.) can be considered good Christians. In fact, he went further and said that those employers are committing a horrible sin by “using God to cover injustices.” Hmm…let’s see…

Let’s say that Pope Francis gets his wish and starting tomorrow all employers in Argentina (his native country) report all the labor contracts and pay the full amount of benefits, insurance, taxes, etc. In other words, say that, by way of a miracle, all labor markets in Argentina become formal and completely legal. Seeing this miracle, Pope Francis declares those employers not sinners anymore but perhaps saints. Sounds good right? In fact, too good…

Let’s think carefully about the results. Would employers hire the same number of workers as they did before? Now that they have to pay benefits, insurance and taxes, hiring a worker will be a lot more expensive. So, while employers will comply with all the legal requirements, they will hire less. That is a simple economic law: price goes, other things equal, quantity demanded goes down. Think now about the incentives for workers. Now that they know that every job will pay all the benefits and insurance, a lot more people would want to work. People will stop collecting unemployment checks and join the labor force to look for a job. In fact, lots of people from the rural areas will move to the city attracted by these benefits and look for a job as well. Another simple economic law: price goes up, other things equal, quantity supplied goes up. And so, what have we created? We created a situation in which quantity supplied of labor is higher than quantity demanded of labor. That is, unintentionally, the miracle has created unemployment.

When you think about it, therefore,those employers hiring in the informal markets should be called “super heroes” instead of “sinners.” They risk their licenses to hire workers and generate a mutually profitable outcome for the employer and employee. Because of this hiring in the informal markets, workers can have a job that otherwise they wouldn’t be able to find. Yes, they would prefer to earn more (just like the employer would prefer to pay less) but a job in the informal market is better than none.

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The “fair-price” markets

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The Bolivian government regularly organizes “fair-price” markets in some of the most important cities in the country. In these markets or ferias one can buy agricultural products for significantly lower prices than in regular markets. This week, for example, you can buy a bag of potatoes for Bs. 35 in the “fair-price” market in La Paz when the price for the same item is Bs. 50 in regular markets. You can also buy a kilo of chicken for Bs. 13.50 when the regular price is Bs. 18. The Vice Minister of Rural Development argues very proudly that with these initiatives, “families will save half the money they would normally use in groceries.”

Sounds fishy, doesn’t it? It sounds too good to be true and so it probably is. If I am a producer or distributor of agricultural products, why would I take my product to the “fair-price” market when I can get a much higher price elsewhere? Doesn’t make sense, right?…unless…unless, somebody is covering my loss… If the government pays me the difference then, sure, I will sell at the “fair price” any day. And that is what I bet is happening: the government is subsidizing the difference between regular prices and “fair” prices. And voila, that is the magical trick about these “fair-market” ferias. They are just another transfer or subsidy paid with the taxes collected from everybody else in Bolivia.

More importantly, the idea of “fair prices” in itself (as opposed to regular-market-determined prices) is particularly revolting. Why are regular-market-determined prices not “fair” as well? This is an old and common misconception: if an entrepreneur makes profits, then the price at which he/she sells must not be “fair.” What proponents of this idea often forget is that in competitive markets (like agricultural markets) the only way to make money as an entrepreneur is by convincing customers to buy the product from you. And you can only do that if you offer good quality at a competitive price. Given that buyers are not obliged to buy the product from you, whenever they do one can conclude that it must be because they are better off after the purchase: they get the product they want at a price that makes the purchase worth it. In other words, a transaction such as the sale of a bag of potatoes makes the seller and the buyer both better off. There is nothing “unfair” about that.

What is truly unfair or, at the very least, deceiving, is to organize “fair-price” markets by subsidizing products with tax money paid by everybody else.