Michael Munger on Free Markets

Russ Roberts: Let's close talking about poverty. A lot of interventionists, a lot of non-/anti-free market people, or people who think differently than I do, they want to intervene in the labor market in different ways.

One way you mentioned is licensing. They're worried about whether people might be deceived by the products that people are selling, the skills or services they're marketing.

But, more commonly, people are unhappy with market wages. They might believe, I think incorrectly, that market wages are set by the companies that pay them.

It's a reasonable thought; but in fact, I like to point out that I've spent my career--I did spend some time working at a race track, and I worked at Ho Jo's [Howard Johnson's], for you older listeners, when I was younger. I knew that'd bring a smile to your face.

I'll tell you, Mike. As a new Ho Jo's employee, one of my customers ordered two hot dogs. And I wrote it down on the slip, and I put it in the little thing that the chef, the cook uses to make the hot dogs. Five minutes passed, and 10 minutes passed, and 15 minutes passed. And my customer said, 'Where are my hot dogs?' I went back to the kitchen and I said, 'Where are my hot dogs?' And he said--he pulled the slip out and he said, 'We don't serve hot dogs. We serve frankfurters. Change it.' Lesson in life for a young man. I was probably 15.

Michael Munger: That guy now works for the Food and Drug Administration.

Russ Roberts: Yeah, exactly. And he didn't like me. I--you know, I don't really blame him.

But, I spent most of my career in academics. I am now very well paid. But, when I was younger, I wasn't particularly well paid, and I enjoyed it, and loved it, and was happy to be paid what I was paid.

The irony is, I could have gone to Wall Street. You could have, too, and we could have made a lot more money with a Ph.D. in economics. Isn't it weird that Wall Street pays more than the non-profit university? Aren't non-profits nicer? Isn't Wall Street greedy? Why would they give away so much money to higher wages of their employees?

The answer, of course is, they don't set the wages. They're set by a market and competition among the firms.

But, I think it's easy to think that it's otherwise, and to blame, as an example used earlier and say, 'You should pay for this company. You should pay more than the market will bear--because it's horrible. I don't like this outcome where certain people are earning low wages.'

How do you feel about that? Do you think we should intervene in those situations? That's very much a market outcome, the disparate salaries we face. Couldn't firms have less profit and pay more? Couldn't we require them to pay more than the market outcome? Wouldn't that be a better world?

Michael Munger: You raised a bunch of questions. Let me try to take them quickly. Why is it that football players make more than teachers? Why is it that people on Wall Street make more than college teachers?

And, that's the diamonds and water paradox. The fact is at the margin, the marginal soccer players make less than teachers. If you're only looking at the very top soccer or football players, yes, they make a lot. But, at the margin, teachers make quite a bit more than the very marginal soccer players.

And so, there's a lot of people on Wall Street, who are no longer on Wall Street, that are now waiters at Ho Jo's--until it went bankrupt.

So, at the margin, if I just look at averages or top salaries, I'm going to get a strange picture of the labor market.

The second thing is: A solution we often propose is something like minimum wages. And, the idea is that the company could afford to pay this and it would benefit the workers, so it's a Pareto improvement: We'll just pass a law and everybody will be better off, because it won't really hurt the companies because they'll all pay that.

If you go into a McDonald's now, you will probably not talk to a human being. You'll punch in your order on a kiosk. And notice that you used to go in, you looked up at a board, and you would say some words that you were reading aloud, 'Big Mac, fries, Coke,' and they would find the corresponding words on their cash register and press them. All you have to do is turn the cash register around.

Oh, wait. That's a kiosk. I press the buttons now, and that person has lost their job. That has been accelerated by minimum wages. That process was going on anyway, but the people at the very bottom of the scale, whose jobs can be replaced by software, minimum wages are going dramatically to accelerate that process.

So, there's a difference between the intent of the policy--and when I say I think minimum wages are a bad idea for this new reason, I'll have students say, 'But, minimum wages are just good. It's something that good people want.' And actually, it's a moral test for them, maybe precisely because it's not a terribly good idea for economic reasons.

But, that brings me to the last part, which is: I think politically, this ship has sailed. There is such a large amount of political support for, 'We have to do something.'

And so, I'm going to take the Milton Friedman view here, and what we need to do is do the thing that is least damaging.

As you know, I think that the answer is Universal Basic Income. I don't think that there's any system better than that. Because the people that I know that are against Universal Basic Income are not saying, 'We need minimum wages instead of that.' Well, no. What we need is a way to recognize that politically, people are very worried and upset about what they see as the unequal application of the benefits that come from economic innovation and the changes in the economy. What they see is an increased precariousness for those at the bottom of the income scale.

We're going to do something. And so, I think that universal basic income is the best of the bad lot. And I'm happy to have that debate.

But what I would like to see is not a rear guard action against, 'We should do nothing about poverty, either because people who are poor deserve it, or because, well, there's nothing we can do.' We're going to do something, politically.

And so, I wonder if universal basic income is not the best of the ugly pigs.

Russ Roberts: Hmm. Well, okay. There's a lot to say there. My answer to that is kind of a cheap answer. I don't really love it. My answer is: we have a really lousy public school system in America. And so, the way you're going to cope with that, instead of making it better, you're going to artificially change the prices of labor.

Michael Munger: And, you think we can just make it better? That's a great idea. 'We should make the public school system better. Let's start now.' Who is this 'we'?

Russ Roberts: It's going to be like Athens, actually, or like Shalem College, where I am now.

Michael Munger: I'm not opposed to making the entire public school system better. I'm with you. Let's do that.

Russ Roberts: Yeah.

But, I actually have a way to make it better. Now, you could argue it's just an even uglier pig. But I do think that a more incentive-driven system, with more freedom of choice, and less top-down government design of that curriculum, I think would be a better system. I think I could make a case for it.

But I accept the point. It's an excellent point that I think is very hard for people to face.

When they're told to tell their alternative, they say, example you gave earlier, 'I want like it is now, but that'll be different, and nothing else. That's what I want.' That world is a fantasy. It may be a comforting fantasy, by the way.

I think Universal Basic Income--we've talked about it before on the program, maybe not enough. Maybe we should come back and we'll do a longer episode on it. It's interesting that you invoke Milton Friedman. Milton actually was one of the earliest, if not the earliest advocate for a negative income tax, which has become the Earned Income Credit.

I think it's not sufficiently appreciated that that is one of the handful of innovations that he actually proposed that got accepted. It would be the Earned Income Credit. He would have liked to get rid of all of the welfare programs and replace it with that--

Michael Munger: I was going to say--

Russ Roberts: But, some of the--

Michael Munger: He ended up being against it because they didn't take everything else out. And that's my UBI [Universal Basic Income] proposal, also. I want to get rid of everything else, including minimum wage. If you're not going to do that, I'm not for it.

Russ Roberts: Okay. We'll talk about it. To be continued.

My guest today has been the great Michael Munger. Mike, thanks for being part of EconTalk.

Michael Munger: It was such a pleasure.