Episode in Review – Page 2 – Crash Course Criticism

Market Failures, Taxes, and Subsidies – Episode #21, Part 2

We’re back for the second part of Crash Course Economic’s episode on Market Failures, Taxes, and Subsidies. In this post we’ll cover the second half of the video, which talks about externalities, pollution, and the education system. Let’s rock and roll:

Negative Externalities

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Remember, sometimes markets misallocate resources because they don’t have the right price signals. There is no better example of this than what economists call externalities. Externalities are situations when there’s an external costs or external benefits that accrue to other people or society as a whole.

Market misallocation of resources is something we covered last week in episode 20, so I won’t go into it here. What Mr. Clifford is trying to say here is that markets don’t take into account negative externalities when pricing a product, since the companies don’t have to pay for these externalities.

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Let’s look at a TV factory that pollutes a river with toxic chemicals. This is definitely a negative externality […] There are also external costs associated with polluting the waterways, like dead fish, contaminated drinking water, and people getting sick […] The free market assumes that all the costs associated with producing TVs are accounted for within the price of those TVs, but, in this case, the market is wrong. The end result is a market failure because the factory is producing too many TVs.

This is a textbook example of a negative externality. An entity is directly responsible for a lot of bad things, but the entity never has to take legal responsibility for it. Something is clearly wrong here, but what’s the solution? Crash Course offers one that’s used most often:

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Economists often look to the government to step in and solve the problem. For example, the government could tax the TV factory.

The taxes will increase the cost of producing each TV, and thus reduce the supply and raise the price of each one. This bring the supply and price closer to what Mr. Clifford and many government economists have determined to be the appropriate supply/price for a TV, since according to them, the free market could not do it on its own.

While this solution may bring the supply and price closer to what the real market would be if the TV factory had to account for the negative externalities, it doesn’t clean the river, and it doesn’t incentivize the TV factory to stop polluting the river. In the end, the river is still polluted, but now the government has more money. Is this the trade off economists are looking for?

Instead, some economists suggest, the problem is one of property rights. If someone owned the river or the right to use it, he could sue the factory for violating his property rights. Since rivers are owned by governments (remember tragedy of the commons?), no private individual could sue the factory. The government is satisfied with the taxation solution since it means a new stream of cash flow, but it probably doesn’t mean much to the people who have use the polluted river. But where would the money collected from these taxes go (at least, in theory)? To the positive externalities, of course.

Positive Externalities

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More education is great for you. You’ll likely generate more income and it makes you more interesting to talk to at parties. But there are also external benefits of your education. Everyone is actually made better off. With more education you’re more likely be a positive and productive member of society. And if you earn a higher income, that means more tax revenue.

Funding education would, in theory, produce graduates with much greater productive value. This increase in value would be better off for the economy at large, since more wealth is now created. That wealth would also be taxed. If you’ve ever heard someone say that “subsidized education pays for itself,” this is the theory behind it.

Of course, this is assuming that putting money towards any school system is a good return on investment. Considering the extremely high price of college tuition, is each dollar really spent wisely on improving the productive capacity of its students?

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If the government didn’t get involved, all education would be provided by private schools that would charge tuition; there might not be enough affordable schools to educate young people. The government funds education because they think that the external benefits, like literate, well-informed, erudite citizens, are so high it’s worth forcing everyone to pay.

Well-informed, erudite citizens. Is that the world we live in? According to the most recent statistics, about a quarter of the United States is functionally illiterate.

Of course, it’s very difficult to speculate about what the market would look like if there were not any public education. The education market as a whole is so heavily influenced by the public school system, economists can only theorize about what low-cost private schooling choices would appear if they were not crowded out by no-cost public schools.

But what economists always ask themselves is “compared to what?” Would people be better off if the government put the money (wherever it comes from) toward education, some other project, or back in the hands of the citizens? That’s very hard to tell, but for spending over $12,000+ on every elementary and secondary school student, would the students would be more literate, well-informed, and erudite if that money went to private tutoring?

Thanks for sticking around for part two of this week’s episode. Please come back every Thursday for a fresh new post on a new episode. And don’t forget to join our newsletter and our facebook group, and comment below!

Market Failures, Taxes, and Subsidies – Episode #21, Part 1

This week Crash Course takes a step in the pro-government direction, despite concluding at the end of this episode that neither markets nor government is “better,” but rather that the two must work together for everyone’s benefit. This episode is such a doozy that it’ll be broken into two parts. Let’s get started:

Prisoner’s Dilemma

The episode begins with a variation of the prisoner’s dilemma situation in game theory. In short, the game offers someone a choice between something that will benefit them a lot vs. something that will benefit them a little, but if that person and other people (who are given the same choice) also choose the more beneficial option, then all parties end up with a very bad result.

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The [prisoner’s dilemma] question alludes to one of the biggest problems with free markets: sometimes people have a personal incentive to do something that is against the collective interests of the group.

I found this connection pretty attenuated, since this problem doesn’t really have anything to do with free markets. In fact, this problem could be just as easily (or more easily) be connected to the tragedy of the commons than to the free market. We’ll better explain these terms (market failures and the tragedy of the commons) later in this post.

Market Failures

Despite it being so important that it’s named in the title of the episode, the term Market Failures is only briefly defined before moving on. Let’s look at how Crash Course introduces it:

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Things that are for our collective well being, like fire protection, schools, and national defense are often funded by the government. When markets alone fail to provide enough of these things, that’s called market failures.

The term “Market Failure” is used to describe when the market does not produce something (or enough of something) to meet consumer demand. Markets are always adjusting to meet consumer demand, but the term Market Failure is usually used for allegedly huge discrepancies between supply and demand.

For example, Crash Course purports that if government fire departments did not exist, then there would not exist any fire protection for people. Since people need fire protection, the government must step in during these Market Failures.

Confusingly, evidence of privately-owned and operated Fire Departments is so abundant, I’m surprised that Crash Course would use this as one of their examples where the market cannot provide. National Defense is a much harder example to argue against, so I’m wondering why Crash Course extrapolated on their weakest example. Of course the market can provide for fire protection services, since it does in many areas for less cost.

Public Goods

Crash Course gives the textbook definition of public goods:

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The technical definition of a public good is anything that has two characteristics: non-exclusion and non-rivalry. Non-exclusion is the idea that you can’t exclude people that don’t pay. For example, it’s impossible to limit the benefits of national defense to only people that pay their taxes. People who pay no federal taxes still get the benefit of protection from bombs, and people who pay a lot of federal taxes don’t get extra protection. Non-rivalry is the idea that one person’s consumption of the good doesn’t ruin it for other people. So, public parks are a great example. You can use it today, I can use it tomorrow; it can be shared.

It’s hard to improve upon this definition. One particular area to note, however, is that things like Fire Departments would not be considered public goods, since they are not non-rival. One city cannot adequately provide fire protection services to 50 buildings that are on fire in different locations at the same time.

While the definition of public goods is accurate, some schools of economic thought may have a problem with a common conclusion regarding public goods, which Crash Course gives immediately after defining it:

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If a good or service meets these two criteria it’s unlikely that private firms will produce it, no matter how essential it is. Street lights and organizations that track and prevent the spread of diseases are pretty important, and if the government doesn’t step in, we probably won’t get them.

First, while Crash Course (and other economists) argue that it is unlikely the private firms will produce items that fit the definition of public good, there are plenty of examples to the contrary, especially today. Any software or website made available for free or funded by donations (Wikipedia, WinRar, etc.) meet the definition of public good and were created privately.

Additionally, Crash Course’s two examples (street lights and the CDC) might not be the best examples to give. Street lights would fall into the Tragedy of the Commons category (which we’ll get to, I promise), since they are on public property, and there exist plenty of private organizations that track and prevent the spread of diseases.

Tragedy of the Commons

Crash Course next talks about Tragedy of the Commons, one of the most important principles to any free market economist:

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The incentive to do what’s best for you, rather than what’s best for everyone is the root cause of something economists call the Tragedy of the Commons. This is the idea that common goods that everyone has access to are often misused and exploited.

The best visual understanding of The Tragedy of the Commons comes from William Forster Lloyd, whose example is still used to this day (via Wikipedia):

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In 1833 the English economist William Forster Lloyd published a pamphlet which included a hypothetical example of over-use of a common resource. This was the situation of cattle herders sharing a common parcel of land on which they are each entitled to let their cows graze, as was the custom in English villages. He postulated that if a herder put more than his allotted number of cattle on the common, overgrazing could result. For each additional animal, a herder could receive additional benefits, but the whole group shared damage to the commons. If all herders made this individually rational economic decision, the common could be depleted or even destroyed, to the detriment of all.^[5]

The Tragedy of the Commons is often used as an argument against public ownership of goods and for private property. After all, if you are a farmer and owned your own parcel of land, it’s unlikely that you’ll let it become overgrazed, since that will hurt you in the future. However, the writers at Crash Course see it a different way. To them, Tragedy of the Commons is not a argument for privatization, but rather one for regulation.

The Tragedy of the Commons explains why fish stocks get depleted, the rainforest get cut down, and why endangered species get hunted for their hides or horns […] The problem here is that unregulated markets sometimes don’t produce the outcome that society wants.

As Crash Course will talk about later in the video, there are two ways to look at the solutions to problems such as these: one is a regulatory solution, and the other is a market-based solution.

In general, economists tend to prefer market-based policies.

Despite admitting (and later explaining why) market-based policies are preferred, when talking about examples of Tragedy of the Commons problems, their proposed solution is nonetheless regulatory. Crash Course never explains why they recommended the admittedly less preferable solution.

There’s still a lot to talk about with Crash Course’s analysis of externalities, the education system, and Cap & Trade, so be on the look out for a bonus blog post this Saturday. And as always, you can expect a fresh post every Thursday. Don’t forget to join our newsletter and our facebook group, and comment below!

Episode #19 – Markets, Efficiency, and Price Signals

Back again for another week of Crash Course Economics! Aren’t you loving it? We sure are here at Crash Course Criticism.

This week’s episode was, for the most part, a pretty accurate explanation of the roles of markets, and prices versus a planned economy. Crash Course does make a few generalizations, but on the whole, this episode surprised me in a good way with its refutation of common economic arguments on “price gouging” and “predatory pricing.” Let’s get started:

Markets and Efficiency

The problem with central planning is that it’s inefficient. Now, when economists talk about efficiency, they’re talking about a couple different types of efficiency.

Crash Course doesn’t beat around the bush when talking about government inefficiency. They don’t tell the audience that governments are usually less efficient, or that there are exceptions to the rule. And while there are articles that claim this not to be true (like here, here, and here), this is an economic truth, and Crash Course does a great job at explaining why:

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The first is productive efficiency: the idea that products are being made at their lowest possible cost […] Central planners in general, aren’t that focused on cost. But in the free market an individual business owner has an incentive not to be wasteful because they want to maximize profit.

Governments agencies do not have a “bottom line” to meet, so to speak. They are not worried about the threat of corporate bankruptcy or investors making sure that the organization is making the best decisions. If someone makes a wrong decision about how many widgets to order or the estimated cost of a project, there is unlikely to be the same negative reaction from superiors that would be seen at a private company. And when the employees aren’t incentivized to do the best job or produce the greatest value, the entire organization will naturally be more inefficient than its private counterpart.

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The second type of efficiency is called allocative efficiency This means that the things we’re producing are the things that consumers actually want. In other words, our scarce resources are being allocated towards the things we value. Central planners are less likely to be allocatively efficient because they have a harder feedback about what people want.

Customer service and feedback are a big part of any large business. Have you ever complained to Uber about a bad ride experience you had? Uber would usually apologize, refund your ride, and may even give you a discount on future rides. Now have you ever complained to the DMV about a bad customer experience?

Businesses focus on meeting consumer needs because they don’t want to lose you to their competitor. They are incentivized to take care of you, since a satisfied customer will likely continue to do business with that company.

Planned Economies do not pay much attention to the consumer in these areas, since there is no incentive to. If the government controls a sector of the economy, and there is no alternative for consumers, why would they need to take care of the customers? Where else are they going to go?

Prices

Crash Course explained the role of price signals very well with their example of Skinny Jeans:

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If people are paying high prices for skinny jeans, it tells producers “Society wants more skinny jeans, start making them.” If no one wants skinny jeans, producers start making something else instead. Here’s another example: tablet computers weren’t really popular until Apple introduced the iPad. After that, boom! The market exploded.

Price signals play an important role of signaling to producers what people want and how much they want it. These signals allow for more competitors to enter the market and compete on quality and price.

The market decides what the price is, and consumers decide if a price is too high by not buying it.

Price Gouging

But what about when companies charge high prices in times of emergency? Aren’t they just trying to maximize profit at the expense of everyone’s well-being? Crash Course deals with the “price gouging” complaint surprisingly well:

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[Economists] argue that allowing prices to increase in times of crisis encourages others outside the disaster zone to haul in and sell essential goods. If prices aren’t allowed to increase, then there’s less of an incentive to bring this stuff in. Furthermore, higher prices for things like batteries, sleeping bags, and generators mean that people who don’t really need them won’t buy them, making them more available to people who do.

Using the supply/demand model, an emergency decreases the supply of goods, thus increasing the price. By artificially holding down the price (which many states do with anti-price gouging laws), the supply quickly disappears with no incentive for suppliers to enter the emergency to increase supply. Even with rationing (which anti-price gouging laws must implement to prevent supplies from disappearing), the price will not direct the goods to those who really need them.

Predatory Pricing

Similarly, “predatory pricing” is another complaint that some may have when they think a company’s price of goods is too low.

Side note: I’d like to take a moment to recognize that we live in a world where normal people (not just business competitors) complain about a company’s prices being too low. What a world!

The Predatory Pricing argument is similarly dealt with very well by Crash Course:

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[Predatory Pricing] is the idea that a business can drive out competitors by charging lower prices even at a short term loss. Competitors that can’t sustain such low prices will be forced out of the market, giving the surviving businesses market share and the ability to raise prices.

When a business successfully eliminates their competitors by selling products at a loss, they’re eventually gonna need to increase their prices above the market price to make up for those losses. In the short run, consumers would have to pay more. But eventually, other businesses would be attracted by the higher prices and enter the market. The end result is that there’s no guarantee that predatory pricing is worth it in the long run.

Perfectly put by Crash Course. In short, predatory pricing wouldn’t work, and if companies try it, they do so at their own eventual peril.

Regulation

Crash Course makes a very small note on the need for regulation by talking about rat pellets in our wheat:

In the United States, which is often mistaken for a free market economy, it turns out just about everything is regulated. For example, FDA regulations reject any wheat that contains nine milligrams or more rodent excreta pellets and/or pellet fragments per kilogram.

After this remark, the show immediately changes to talking about the market, without ever coming back to this point. If the point here was to show that the United States is not a free market economy, I get it. But if, however, this is meant to show that government regulation is the only way to keep rat poop out of our lunch, well, we’ll have to deal with that when their future episode on regulation in general.

Consumer Choice

Crash Course finishes the episode with a really nice note on consumer choice and ethical business practices, which I would like to reprint in full:

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Here’s the big takeaway: Capitalism, with its system of price signals, is basically crowdfunding. We collectively choose what we want and how we want it made when we spend our money. After all, companies can’t force you to buy their stuff, they have to earn your money. Now if you want to see real changes in the world, don’t just complain that corporations are greedy; expect more from them.

You also need to expect more from ourselves. If you disagree with the way a retailer treats its workers, then don’t buy from them. Even if they do have the lowest prices and convenient delivery options. If we as consumers want our purchases to have a positive impact, it’s on us to seek out companies that try to improve the world. This might mean paying more for the stuff we buy or it might mean buying less stuff. A market based society still has shared social goals. They just don’t come from a central planner.

I thought this was a great note to end on. Markets do the best job at responding to customer needs, but it’s also up the consumers themselves to decide what those needs are. Feel free to boycott businesses you don’t like. Consumer demands is what keeps them in line.

But if you’re the only one who is boycotting Bed, Bath, and Beyond (just an example), maybe that’s because people just don’t care about the cause as much as you do. Instead, try to persuade others in refusing to patronize their business.

Two weeks in a row of excellent (by that, I mean accurate) Crash Course episodes. Can they make it a hat trick? Come back next week to find out!

Don’t forget to join our newsletter and our facebook group, and comment below!

Episode #17 – Income and Wealth Inequality, Part 3

We’re back for the FINAL CHAPTER of this very important 3-part blog post. Here is the video if you’ve missed it. In parts 1 and 2, we talked about the causes and effect of income inequality, and today we will talk about solutions.

It should be stressed that we are now leaving the world of economics. Economics explains how X causes Y, but it does not say what X or Y should be. We are diving into the world of policy prescriptions to reduce income inequality, but since Crash Course did it, so shall we.

What Should Be Done About Income Inequality?

So, how do we address this inequality? There’s not a lot of agreement on this. Some argue that education is the key to reducing the gap. Basically, workers with more and better education tend to have the skills that earn higher income. Some economists push for an increased minimum wage, which we’re going to talk about in another episode. There’s even an argument that access to affordable, high quality childcare would go a long way. And some think governments should do more to provide a social safety net, focus on getting more people to work and adjust the tax code to redistribute income.

Education

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I talked about this in part 2, but education (which, in the context of this episode, means schooling) often does not lead to increased skills learning. In fact, it doesn’t necessarily lead to improvements in any knowledge, skills-based or not.

In recent years, the push for more education really means greater access to government student loans. Many students are now graduating college with a increasingly meaningless degree, few skills, and a lot of debt.

However, this should not be a knock on real skill-based education. Trade schools and free online programs like Free Code Camp can actually give people the skills to create real value for an employer without all the debt associated with regular college.

High Quality Childcare

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Although Crash Course doesn’t flesh out this argument, I’m going to assume that it goes like this: a lot of households have skills and would be working, but they cannot afford childcare, so the government should supply child care for them so the parents can get out and work.

This, in theory, would work to reduce income inequality, if that is the only goal. However, you would run the risk of creating another enormous government institution that would rival the public school system. And if public schools are any indicator, they will be far from “high quality”.

Free market economists might suggest tax breaks for childcare facilities, which would allow them to reduce their costs and thus their price, making their services more affordable for people without compromising quality.

Bigger Social Safety Net

The United States currently spends more on the social safety net (as a percentage of GDP) than every other country except France, but Crash Course points out that some argue that increasing the safety net further would reduce income inequality.

Crash Course did not flesh out this argument either, but it goes like this: the safety net helps people who are unemployed get back on their feet and into the job market. If the net weren’t there, people would stay in unemployed and in poverty, and it would be harder to get back out into the job market.

However, wealth inequality has increased the greatest since the largest social welfare programs were put in place in the 1960’s. Free market economists argue that this is because the social safety net allows people to get by (in poverty) without working. Although jobs may be available, some people choose not to work, since the amount of time spent working would not be worth the marginal improvement in income (since this person would lose his/her safety net upon employment). Many economists argue that the social safety is doing more to further income inequality than solve it.

Political Scientists and Sociologists tend to dislike this economic theory about welfare spending, but it is certainly prevalent among economists. I am surprised that Crash Course would advocate for something that runs contrary to most of mainstream economic thought.

Should Something Be Done about Income Inequality?

The question economists love is “compared to what?” Crash Course speaks in depth about what income inequality is, how it’s caused, and what should be done about it, but there is absolutely no consideration given to the negative economic effects of wealth redistribution, especially since this supposed to be an economics program.

Capital

We have mentioned this in a number of other posts, but the idea of capital is really important here. Capital goods is what brings about widespread material wealth. The current abundance in automobiles, air conditioners, and even smartphones is because people invested money in capital goods, such as research and development for new technologies and machinery to make those goods more cheaply.

Redistributing income from the rich to the poor also shifts spending from capital goods to consumer goods (food, TVs, couches, etc.). As a result, less money is invested into capital goods, meaning fewer technologies are developed and made cheaply for future consumption.

Material Wealth vs. Bank Accounts

Income inequality is certainly greater than it’s ever been, but material wealth inequality is the smallest it’s ever been, which also deserves some recognition. Today the average person living in poverty might have a beat up car, while the rich person drives a Mercedes. This may seem like a significant difference today, but can you imagine what the difference was a century ago? A person living in poverty would have no car while the rich man would have a car. That’s enormous.

These improvements in material wealth come from investments in capital goods, and while wealth redistribution may be a good idea from a sociological or policy perspective, it would not be good for the future economy.

Right now, [the highest tax bracket] peaks at around 40%, but some economists call for increases up to 50 or 60%.

When any economist calls for increasing taxes, he/she is not saying that the money would be more efficiently spent by the government, but rather that the negative effects of the tax increase (decrease in capital goods investments, inefficiently spent money) are outweighed by the predicted social gains in the economist’s opinion. In these cases, the economist wears two hats: one of an economist and one of a sociologist. The economist explains how something can cause something else, without interjecting their personal policy perspectives on how society should be organized. The sociologist, on the other hand, weighs potential benefits and detriments of particular policies, and usually comes out advocating for one side or the other.

Crash Course does the same thing throughout this video. While keeping the series primarily focused on economics, Crash Course frames their questions in a way that show their sociological or political bias. The question “Should the top income tax be 40% or 60%?” eliminates any discussion about how society might be more equal (at least in material terms) with a tax rate of less than 40% (or more than 60% for that matter).

I do wish that Crash Course would distinguish their discussion of economics from their discussions of social policy proposals or morality (i.e. what “should be okay”). It would help clarify for the audience what the field of economics is, and what it is not.

Phew! What an episode. Feel free to post your thought on the episode (or my critique) in the comments section. And don’t forget to join our newsletter and our facebook group!

Episode #17 – Income and Wealth Inequality, Part 2

We’re back for part 2, and we’re just going to jump right in. Here’s the episode if you missed it:

Income and Education

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In the last thirty years in the US, the number of college-educated people living in poverty has doubled from 3% to 6%, which is bad! And then consider that during the same period of time, the number of people living in poverty with a high school degree has risen from 6% to a whopping 22%.

Crash Course jumps from discussing the causes of income inequality (see part 1) to the statistical results. I assume this is to imply that technology is widening the income gap so fast that even college graduates are living in poverty.

These numbers are designed to be shocking, and they are. Aren’t schools supposed to give students skills to be successful in real life? And shouldn’t colleges do this to a greater extent, considering students are spending tens of thousands of dollars on it?

If you’ve been to college (or high school for that matter) in the past 10 years, you already know the answer to this: High Schools and Colleges, with some exceptions, are not teaching students the skills they need to survive in the modern economy. Crash Course implicitly blames the number of high school and college graduates in poverty on technology (and other causes they cite which we’ll also get to), while there is no responsibility placed on the failings of these educational institutions.

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Over the last fifty years, the salary of college graduates has continued to grow while, after adjusting for inflation, high school graduates’ incomes have actually dropped. It’s a good reason to stay in school!

Crash Course’s argument here implies that going to college will give you steady salary growth because college classes give you the skills to get a higher paying job.

This (again with some exceptions) is not necessarily true. High-paying employers might discriminate against those who haven’t graduated from college, which would also explain the statistics. Many employers see a college degree one of the few ways to judge a candidates ability, since they often shy away from real skills-testing for job applicant since it might be considered an illegal form of discrimination.

This is not to say that someone couldn’t learn marketable skills in college. There are many areas (engineering and computer science come to mind) which actually give students the skills they need for the job market. It’s no surprise that these majors are also the highest paying for college graduates. But the majority of college students do not choose these skills-based majors.

Other Causes of the Income Gap

There are other reasons the income gap is widening. The reduced influence of unions, tax policies that favor the wealthy, and the fact that somehow it’s okay for CEOs to make salaries many, many times greater than those of their employees.

Let’s look at each of these in turn:

Unions

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Unions, by themselves, are collective bargaining groups for employees that generally demand higher wages from the employer. Originally, they served as a centralized mouthpiece for a large group of workers whose individual voices might not be heard. Their greatest power is the threat of striking if their needs are not met.

In economic theory, unions would help the employer and employees identify the market rate (what the employer is willing to pay and the employees are willing to work for), but it wouldn’t necessarily reduce income inequality. Let me give you two simplified examples:

In scenario 1 there is a company with 10 employees and 1 employer. Employees demand a $1/hour raise or they will strike, and the employer obliges, taking the money from either his own salary (which is rare) or from investor equity. The workers are paid more and there is less income inequality between the employees and employer.

In scenario 2, the workers demand $5/hour more. The company cannot afford this price and remain profitable, so they invest in machinery that will reduce the number of employees needed to 3. The remaining employees might get that $5/hour raise, or the employer might look outside of the union for employees, since it’s now easier to fill the fewer positions available. In scenario two, 7 or more employees are now being paid $0/hour, which widens the income gap.

Unions today, due to abundant legislation related to them, are not the unions of economic theory, and they if they were, they do not necessarily narrow income inequality. Although people might show you a graph of union membership next to a graph of income inequality, one can only speculate that this correlation equals causation.

Tax Policies That Favor the Wealthy

As Mr. Clifford points out later in the video, the United States has a progressive tax system, meaning that the rich pay a greater share of their income above a certain level to taxes. Occasionally, the rich may receive a tax cut. For example, the Bush Tax Cuts lowered the taxes on income over 400k from 39.6% to 35%. In this case, Mr. Clifford is 100% correct, since higher taxes on the rich (absent everything else) does reduce income inequality as a whole.

“Somehow It’s Okay for CEOs to Make a Lot More Money Than Employees”

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How about the framing of this sentence? It may not seem “okay” for someone to make more money than someone else, but as economists, the Crash Course hosts should know that wages are not decided by comparing them to other people in the company. We’ve talked about this before on this blog, but wages are decided by the amount of value you produce to the company (as a wage ceiling), as well as how much the employer (in this case the board of directors) and the prospective CEO negotiate for.

I am incredibly surprised that Crash Course implicitly argues that it’s not okay for two people to negotiate a salary irrespective of two other people negotiating a salary for a completely different position in the same company. How did this script make it passed the editors on Crash Course? Isn’t someone there an economist?

I think Mr. Clifford gets it, since later in the video he says:

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When different jobs have different incomes, people have incentive to become a doctor or an entrepreneur or a YouTube star – you know, the jobs society really values.

This doesn’t really talk about how wages are determined, but I’ll take it.

Wow guys. There is still a lot more to say, so we’re going to have to make this a three-parter. Thanks for reading and look forward to part three soon (Sunday hopefully)!

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Episode #17 – Income and Wealth Inequality, Part 1

What a fantastic topic this week: Income and Wealth Inequality. I don’t think I ever go a week without seeing an infographic online that shows data on wealth or income inequality, some sort of scale or graph to illustrate the differences, and a quote from Bill Gates or Warren Buffet on why taxes should be raised on the rich. #FeeltheBern.

Since Crash Course did a pretty great job talking about productivity, capital, and technology in Episode #6, I was hoping that they would revisit these topics in explaining what wealth is and how people (rich and poor alike) become wealthier without doing much work. They more or less covered this topic before: greater capital accumulation allows businesses to take risks by investing in research for technological upgrades. These upgrades make goods cheaper and more accessible to consumers.

In this episode, however, Crash Course took a completely different angle. This episode was more like a Bernie Sanders infographic than a real discussion of the pros and cons of income inequality. Arguments advocating for government intervention were given consideration, while arguments against were either strawmen or described in a way to discredit the idea. While this episode does not explicitly advocate for one side, it certainly does it implicitly. All of this will be explained in this two-part blog post on this week’s episode, but let’s get started at the beginning:

Difference Between Wealth and Income

Crash Course started off great by distinguishing between wealth and income: wealth is current assets, and income is the new wealth that is flowing in. They accurately show the difference in wealth between continents (and major countries like China), and then followed with a video graphic showing the differences in income quintiles throughout the world.

Crash Course never really makes a major point with this. It seemed a bit rushed (they have to keep every episode around 10 minutes, after all), but I wish they had discussed how income taxes only affect new money coming in and not old money already earned. In other words, when Warren Buffet or Bill Gates argues to increase the income tax, they are not advocating for taxes that would affect their wealth, but rather the income of others.

(side note: Crash Course messed up their graphic. They mentioned how Europe and North America account for less than 20% of the world’s population, but in the graphic they put a greater than sign)

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Globalization Helps Everyone

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Most economists agree that globalization has helped the world’s poorest people, but it’s also helped the rich a lot more. Harvard economist Richard Freeman noted, “The triumph of globalization and market capitalism has improved living standards for billions while concentrating billions among the few.

Last week Crash Course talked about how Globalization significantly helps the poor and is the greatest contributor to ending extreme poverty. This week however, helping hundreds of millions of people out of extreme poverty pales in comparison to how much richer the rich are becoming.

It was very surprising to see two very different emphases on globalization in consecutive weeks on Crash Course. It is no doubt accurate to point out that globalization creates greater income inequality (just as the Industrial Revolution did, as they note), but it’s not necessary to put this fact in such a dark light. Crash Course here is supposed to be talking about the causes of income inequality, not editorializing it as good or bad. This comes later in the episode (and in this blog post).

Skills and Income

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Economists point to something called “skill-biased technological change.” The jobs created in modernized economies are more technology-based, generally requiring new skills. Workers that have the education and skills to do those jobs thrive, while others are left behind. So, in a way, technology’s become a complement for skilled workers but a replacement for many unskilled workers.

Crash Course does a great job at explaining how technology affects the job market. Technology raises the salaries of skilled workers, as one person can create more revenue (or work product) for his/her business. Meanwhile, the technology puts unskilled workers out of their current job. This widens the difference in income between skilled and unskilled workers.

But this is not the same as saying that unskilled workers have no jobs now because of technology has made them obsolete. On the contrary, technology has made thousands of unskilled jobs available (Taskrabbit) in addition to millions of low-skill jobs (Uber, Airbnb hosting). As we’ve mentioned before on this blog, technological developments create shifts in the economy, moving people from certain areas of the economy to others.

In economic theory however, it is possible that one day, technology will reach a point where all desired tasks under a certain value will be performed by technology. But in an economy where you can still get paid to stand in line, there are an unlimited amount of unskilled or low-skilled jobs.

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The end result is an ever widening gap between not just the poor and the rich, but also the poor and the working class. As economies develop and as manufacturing jobs move overseas, low skill low pay and high skill high pay work are the only jobs left. People with few skills fall behind in terms of income.

People with certain skills are put out of work by technology. This phenomenon has been happening for centuries, but especially after the industrial revolution. Technology has always been putting people out of work, just ask the horse and carriage industry. Is today any different from other times in history?

As stated above, one way it is different is that technology is also creating millions of low-skilled jobs.

There’s still a lot to say about this episode, and a lot of questions still to answer. For example, what should be done (if anything) about income inequality? Stay tuned later this week (possibly Friday) for the second part of this post.

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Episode #16 – Globalization and Trade and Poverty

Crash Course’s episode this week is very timely with Donald Trump’s campaign’s consistent talking point about China taking US jobs, Bernie Sanders’ championing of the poor, and the general buzz about how low wages can rise. This post might get lengthy, but stay with me. Let’s dive in:

The Big Difference-Maker in Reducing Poverty

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The greatest contributor [to reducing extreme poverty] is globalization and trade. The world’s economies and cultures have become more interconnected and free trade has driven the growth of many developing economies.

Crash Course attributes global trade as the leading contributor to reducing poverty. This is consistent with general economic principles, namely that trade necessarily makes both parties better off.

However, Crash Course also states:

Better access to education, humanitarian aid, and the policies of international organizations like the UN have made a difference.

This is up for debate, depending on which examples you cite. Foreign aid may help, but it also may do a lot of damage by disrupting the local economy and creating a prize for political factions to fight over. Additionally, The UN makes hundreds of policies that impact international trade; some help and some do not. The UN is not solely a global trade organization, and sometimes their other goals conflict with their goal to increase free trade.

Opponents of Global Trade

While Crash Course does come down in favor of global trade, they don’t do a very good job at rebutting the arguments against global trade.

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But not everyone agrees. Opponents of globalization called outsourcing of jobs “exploitation and oppression”, a form of economic colonialism that put profits before people. A few call for protectionist policies like higher tariffs and limitations on outsourcing.

Crash Course never responds to this objection to global trade or the argument’s proposed solution. If someone is worried about “exploitation and oppression,” (i.e. low wages and poor working conditions), higher tariffs and limitations on outsourcing do not help these workers at all. These policies protect domestic businesses from international competition, but it does not improve the working conditions or the pay of foreign workers. Furthermore, an economist would argue that by reducing the demand for these foreign products (through tariffs or limits on outsourcing), you are reducing the revenues of these businesses and reducing the value that these workers provide. This puts downward pressure on their wages.

Improvement in wages and working conditions come from economic prosperity and competition for labor; growing businesses that need employees will have to compete for workers, and those businesses that provide either improved conditions or wages will attract the most workers from other sectors of the economy.

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But others focus on the foreign workers themselves by demanding they receive higher wages and more protections. The root of many arguments against globalization is that companies don’t have to follow the same rules they do in developed countries. Some developing countries have no minimum wage laws. They don’t have regulations that provide safe working conditions, or protect the environment. And although nearly every country bans child labor, those laws are not always enforced.

The implementation of laws that prohibit certain working conditions or wages does not necessarily benefit workers. As this episode infers toward the end of the video, if we implemented the laws on wages and working conditions of developed countries onto developing countries, it would not benefit these countries as it would eliminate most of the jobs. Employers could not afford to abide by the laws and remain profitable, and the result would be fewer businesses and fewer people employed.

As for the debate on child labor, OxFam research suggests that prohibiting child labor results in many children turning to black market activities such as prostitution in order to sustain themselves. Child labor does seem terrible, but child prostitution seems much worse. Please check out that OxFam report linked above, but be prepared that it’s some grim stuff.

Also, while many developing countries don’t have a minimum wage, neither do many developed countries. Norway, Singapore, and Switzerland aren’t “exploiting” their workers more than Andorra and Saudi Arabia (where there are minimum wage laws), so we can dismiss the implied assertion that minimum wage laws are a requirement of developed countries.

Instead of rebutting these arguments against global trade head on as we just did, Crash Course instead mentions that workers might not be mistreated, even without laws.

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First, public awareness is growing, along with pressure from the international community to take steps to protect workers. For example, the U.S. produces an annual publication called “The List of Goods Produced by Child Labor or Forced Labor”. If a company is buying products from that list, they’re likely to get blasted by officials and the media. So awareness is the first step to improvement.

Okay, that doesn’t sound very comforting. What else you got?

The second step comes from those that support globalization. The pro-globalization set argued that as developing economies grow there are more opportunities for workers, which leads to more competition for labor, and higher wages.

This is Crash Course gold. I wish they had fleshed it out and used it to directly rebut the arguments against global trade, but I guess you can’t ask for everything.

The Environment, Pollution, and Climate Change

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Perhaps the strongest argument against globalization is its lack of sustainability. Many experts don’t think the planet can sustain a growing global economy. Deforestation, pollution, and climate change aren’t gonna fix themselves […] Globalization has helped millions of people get out of extreme poverty, but the challenge of the future is to lift up the poor while at the same time keeping the planet livable.

This argument is presented pretty vaguely, and it’s hard to argue against it. After all, pollution is bad (for multiple reasons), and if our planet becomes unlivable, then the global economic output will become zero. All of this is true.

The problem is that there are no specifics in this argument. Given that Climate Change is caused by man-made CO2 activity (which invites a completely different argument), how much do developing countries contribute to total CO2 omissions? How do governments of developing countries enforce property rights in relation to pollution?

By arguing vaguely, you basically ensure that any global trade advocate will agree with you, and by doing that you can start talking about what the government should do to resolve these problems. However, the conversation of “What should the government do about pollution?” and “How can developing countries get out of poverty?” are two very different topics and require very distinct discussions. This is almost a Red Herring.

Microcredit

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Crash Course talks a good bit about Microcredit, which they tout as a success, even though a fair amount of research suggests that it is not effective at helping people get out of poverty. In fact, if you google “Microcredit Helps Poverty,” there are more articles talking about why it doesn’t work than why it might.

In economic theory, it makes sense why microcredit would be successful: In developing countries, banks do not have the capital to fund riskier small businesses that do not have much capital. Instead, foreign lenders (who are in fact, just regular Joes in developed countries) lend their money to a small business abroad, watch it flourish, and get paid back. The average Joe feels good (and may collect some interest on the loan) and a small business is expanded in a developing country. Everyone wins.

However, in practice, these loans don’t always go into the small business, and when they do, it does not have a noticeable impact on the business owner’s standard of living. Some journalists have highlighted the rare successes of Microcredit, but they are generally the exceptions. In the end, these Microcredit transactions will likely help those who receive it, but it is not the Cure for Poverty (or anywhere close) that it was theorized to be a decade ago when the idea gained traction.

I am very surprised that Crash Course declares Microlending to be a great success at helping people out of poverty. The evidence suggests otherwise.

Conclusion

Crash Course ends this episode on a bit of a sour note:

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Many of the people who emerged from extreme poverty in the last 25 years have jobs, wages, and working conditions that would be unthinkable in the developed world. Economists say that’s okay, it’s progress, but it’s progress that’s awfully hard to stomach.

It’s difficult to remove our 21st-century-developed-world lenses to see the great decline in extreme poverty throughout the world, since those who are out of extreme poverty still have it bad compared to the developed world. It is hard to stomach if you compare the developing world to the developed world, instead of comparing the developing world to the developing world 25 years ago. It might also be hard to imagine the wages and working conditions of Americans one-hundred years ago, even though they were among the richest in the world at the time.

Although it may be hard to stomach, you should always ask “compared to what?” Would the developing countries be better off or worse off today if they had implemented wage controls and regulations on working conditions 25 years ago? Economic theory suggests they would be much worse off, even though it might make you feel better that these rules are in place.

Crash Course Criticism will be on a schedule from here on out, releasing posts every Wednesday, but possibly more frequently. Thanks for the support!

Like what I wrote? Hate it? Drop some feedback in the comments.