Renegotiating NAFTA May Harm College-Educated African Americans

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Introduction

A key promise of Donald Trump’s presidential campaign – the renegotiation of the North American Free Trade Agreement (NAFTA) – is well under way, with a fifth round of trilateral talks held last month. It is no secret that President Trump has been highly critical of the trade deal, as he has taken to Twitter to slam Canada and Mexico for being “difficult” during the negotiations and suggested that his administration will “probably end up terminating NAFTA at some point.”

Proponents of free trade assert that it leads to cheaper foreign goods, additional income in the pockets of consumers, and an increase in overall economic well-being. In fact, economists tend to favor the concept of trade liberalization, with a 2007 survey finding that 83 percent of members of the American Economic Association agreed with the notion that the United States should eliminate its remaining trade barriers. Despite such a widespread consensus among economists, the American public remains divided on the virtues of free trade: a recent survey from the Pew Research Center found that 52 percent of Americans believe that free trade agreements are good for the United States, with 40 percent disagreeing.

This article investigates the differential labor-market effects of NAFTA by linking the wages, industries and geographic locations of impacted workers to changes in tariffs induced by trade liberalization. I find that African American workers experience drastic effects due to trade liberalization, while there is little evidence of a differential impact for Native American workers. In my main regression specification, individual characteristics including age, race, marital status, ability to speak English, educational attainment, worker industry tariffs and Mexican comparative advantage account for about a quarter of the variation in wage levels. Furthermore, I find that trade liberalization has stronger negative effects for less-educated workers, who tend to be employed in industries with higher initial, pre-NAFTA tariffs.

Background

As a general matter, there are deep distinctions in economic security among white, Hispanic and African American families: on average, white families have approximately ten times the wealth of Hispanic families and 13 times the wealth of African American families. Additionally, research by Amitabh Chandra finds very slow rates of wage convergence between white and African American male workers from 1950 to 1990, with African American male workers earning approximately 75 percent of what their white counterparts do, when excluding non-workers. Such large racial discrepancies in earnings introduce the possibility of endogeneity when attempting to quantify the labor-market effects of NAFTA; in other words, it is difficult to disentangle the effects of NAFTA attributable to race from the effects of other underlying factors that also influence wages. Therefore, it is important to take any prima facie relationship between race and NAFTA with a grain of salt.

Economists John McLaren and Shushanik Hakobyan have explored the local labor-market effects of NAFTA, finding evidence of substantially lower wage growth among low-education workers in areas most vulnerable to trade liberalization. Moreover, they find evidence of a “multiplier effect,” with liberalization putting significant downward pressure on wages across all industries in NAFTA-vulnerable regions. Finally, in their seminal 2013 paper, David Autor, David Dorn and Gordon Hanson find significant evidence of downward pressure on American workers’ wages as the share of Chinese imports increased.

Data and Methodology

The dataset used in my analysis incorporates publicly available U.S. Census information from 1990 and 2000, maintained through the IPUMS project of the Minnesota Population Center. The U.S. Census divides the country into 543 similarly-sized, overlapping regions determined primarily through economic integration called Consistent Public Use Microdata Areas (ConsPUMAs). The U.S. Census also defines 89 traded-goods industries. Table 1 includes summary statistics for the sample workforce for 1990 and 2000.

Table1

While most of the above measurables are fairly stable over time, there are some differences to note. First, the workforce was more diverse in 2000 than it was in 1990, as the proportion of the country identifying as “white” dropped by approximately 5.3 percentage points. Second, there is a perceptible difference in educational attainment levels, with a slightly larger proportion of workers having a college degree in 2000.

For each industry, I designated τ to be the average tariff that the United States levies on Mexican imports in that industry, similar to McLaren and Hakobyan’s convention. However, since vulnerability to NAFTA is only important if Mexico has a comparative advantage in the production of a particular good, I use a weighted-average tariff for each ConsPUMA that incorporates Mexico’s revealed comparative advantage (i.e., the share of Mexico’s world exports of a particular good relative to the share of Mexico’s world exports across all goods). The change in the weighted-average tariff from 1990 to 2000 for each ConsPUMA c is given by locΔτc.

For the purposes of estimation, I use what is known as the LASSO, or least absolute shrinkage and selection operator, to penalize the inclusion of additional, irrelevant variables to my model. The following is the preliminary model specification, prior to LASSO feature selection:

Model

The dependent variable in the model, log(wi), is the natural logarithm of worker i’s wages in 2000. The independent variables include educ, which measures the maximum educational attainment of each worker; border, which applies to those geographical areas along the border between the United States and Mexico; and X, a set of personal characteristics intrinsic to worker i, such as sex, race, age, marital status and ability to speak English. The two other independent variables, minwage and chnm, represent the state-level minimum wage and the employment-adjusted share of Chinese imports in the worker’s industry, respectively. In my analysis, the parameters of interest are β4 and β5, which measure the geographical impact of NAFTA on wages, disaggregated by race.

Results

The results of my analysis are included in Table 2. I find that African American workers with a college education likely benefited from trade liberalization resulting from NAFTA. This may be due to higher-than-average growth in the proportion of African Americans with a college degree relative to the rest of the workforce between 1990 and 2000. Additionally, college-educated African Americans were typically employed in industries that had fewer trade protections, and thus saw tariffs decline by less on average. This is an important point because industries that are less protected are more likely to benefit from economic integration and a higher demand for exports. Hence, in these industries one would expect less outsourcing of labor to low-wage countries, ultimately benefiting the worker.

I also find that NAFTA had a roughly uniform effect on Native American workers, as there is no statistically significant evidence of a slope change, which indicates that the effects of NAFTA on Native American workers are independent of other factors like educational attainment or industry-specific tariff reductions. This likely reflects the fact that college-educated Native American workers are more prevalent in higher-protected industries that saw larger declines in tariffs, on average. When coupled with the negative wage shock for Native Americans, the result is likely a mixed, insignificant effect of NAFTA on the wages of Native American workers. Furthermore, I conclude that the change in the share of Chinese imports in a worker’s industry, while indeed placing downward pressure on a worker’s wages, has effects that are separate and distinguishable from those caused by NAFTA’s trade liberalization.

Table2

Conclusion

From my findings, I conclude that while trade liberalization had no significant impact on the wages of Native American workers, college-educated African American workers greatly benefited from trade liberalization policies resulting from NAFTA. This likely results from the fact that college-educated workers are concentrated in industries that are less protected from Mexican competition, giving employers little incentive to outsource their jobs. However, the wage growth seen by African American workers who did benefit from NAFTA was slower than that of their white counterparts – further evidence of the persistent wage gap between white and African American workers in the United States.

Moreover, my findings suggest that President Trump’s desire to renegotiate NAFTA may reverse key gains made among urban, college-educated African Americans while failing to actually bring back blue-collar manufacturing jobs. In addition, while it may be the case that trade liberalization depressed wages for less-educated workers, American workers – including racial minorities – are becoming more educated. Thus, free, unrestricted access to Canadian and Mexican markets for professional services may benefit minorities with higher levels of educational attainment and help narrow the massive income disparity between racial groups in this country.

No Grounds to Stand On: Analyzing the Case Against Lil’ Bill

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The video was all over Facebook, trailed by hundreds of angry comments from USC students. The reason? “I’ve been asked to leave the campus,” says Aaron Flournoy in the clip. “It’s like an eviction so to speak.”

The word “eviction” glares in bright gold from its subtitle on the screen, as if daring someone to object to its usage. First covered by Annenberg Media on March 31 by Cole Sullivan, the story of Lil’ Bill’s Bike Shop has frequently been spun as an economic injustice, for reasons that have little economic justification.

Lil’ Bill was being “evicted” from campus, because Solé Bicycles was becoming a vendor for USC Village. Solé and the university had agreed to sign a non-compete clause, preventing USC from allowing a competitor like Lil’ Bill to sell bikes on campus with a business move that has been virtually banned from California, except in three circumstances:  

  1. When one business acquires another
  2. When a partnership is dissolved
  3. Limited Liability Companies (LLCs)

USC isn’t acquiring Solé. The two had no preexisting partnership, and are not involved in an LLC, so none of the three circumstances apply. Has Lil’ Bill been illegally targeted?

When asked to elaborate on the specifics of the non-compete in an email exchange, David Donovan, Associate Director of USC Transportation, who has previously addressed media inquiries regarding the Village, declined to respond. Even so, studying the case history of non-competes in California may offer an answer.

An exception to California’s strict criteria for non-competes emerged in Campbell v. Board of Trustees of Leland Stanford Junior Univ., 817 F.2d 499 (9th Cir.1987), where the court ruled against Stanford’s contract preventing a professor from reproducing a psychological test he developed. Campbell states that contracts “where one is barred from pursuing only a small or limited part of the business, trade or profession” are valid, and that the burden of proving whether a contract fully bars business is up to the plaintiff.

This statement became known as the “narrow-restraint” clause, and has since been applied to several other cases. It might be Solé’s justification behind implementing a non-compete clause, which would not fully bar Lil’ Bill from his profession of fixing bicycles. In fact, in Boughton v. Socony Mobil Oil Co., the Ninth Circuit upheld the narrow-restraint clause to allow a non-compete that prevented the use of land for a competitor’s business, rather than prevent the competitor from carrying out business.

The only problem? In 2008, the California Supreme Court overturned the “narrow-restraint” clause in Edwards v. Arthur Andersen LLP, claiming that “if the legislature had intended the statute to apply only to unreasonable or over-broad restraints, it could have included language to indicate so.” While the Court in Edwards agreed with the Boughton decision, the Court argued that restricting use of land did not qualify as a non-compete. Furthermore, California lawyer David Trossen points out that the court claimed Boughton did not offer any guidance on evaluating non-compete, suggesting that using Boughton as a precedent for justifying a non-compete would be risky for Solé.

Yet Solé must have felt threatened enough by Lil’ Bill to risk a non-compete clause. After all, according to the Daily Trojan, Lil’ Bill and his family have been serving the USC community for 40 years. Surely, those 40 years gave enough of a foundation for them to gain significant market power and become a monopoly within the USC community. Perhaps Solé meant to kill Lil’ Bill’s market power.

Or perhaps the justification was even simpler. USC faces strong incentives to favor Solé’s non-compete over Lil’ Bill. The university financially benefits from Solé paying rent for a venue in the Village. Furthermore, in 2028, when USC Village will be used to host the Summer Olympics, Solé will reap additional profit from sales to competing athletes. Meanwhile, Lil’ Bill’s venue takes up a parking spot on USC’s property for free. Even if the financial loss of favoring Lil’ Bill were discounted, USC could face the legal cost of facilitating an illegal business. In a Daily Trojan interview, David Donovan said that “the city of Los Angeles has identified [Lil’ Bill’s] shop as an illegal business because it is operating out of parking lot and occupying a handicap space.”

But what do Lil’ Bill’s losses matter? They are excluded from the contract, as a negative externality–that is, a cost that signers of the contract cause, but are not held accountable for. And it is not enough to ask Lil’ Bill to give up his business and work for Solé, and call it accountability. When companies make decisions about their community, without the community’s legal ability to negotiate, the law itself ought to be reevaluated to consider the existing community businesses as stakeholders. To do otherwise, would be an economic injustice.

Index Funds Help Curb Corporate Short-Termism

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Active money management has lost its luster. Since the Great Recession, investors have given up on expensive hedge funds and their mediocre returns, preferring far less flashy options like index funds. Even after years of loose monetary policies and low volatility, weary investors are hesitant to jump back into the fray of active investing. Passive investing in index funds is now the new normal for the stock market. If investors want to see companies return to innovation and long-term growth, they should hope it stays that way.

Passive investing holds promise as a key tool in the fight against an increasingly common issue: corporate short-termism. Measuring data for publicly traded companies from 2001 to 2015, a McKinsey report found a significant, upwards trend in short-term thinking by corporations. For public companies, short-termism typically takes the form of share buybacks. Rather than reinvesting profits in new projects, these companies use the money to buy shares from their investors to boost their stock prices. As a result, short-term companies invest less in innovation and, according to the same McKinsey report, experience lower earnings growth than companies with long-term strategies.

Company executives cite pressure from investors, arising from increased media coverage and lower trading costs, as one of the main reasons for their short-term thinking. Index funds offer insulation from these pressures, allowing corporate executives to worry less about volatile investor reactions and focus instead on long-term growth. Index fund investors focus on the performance of the fund as whole, and the diverse companies that make up these funds dilute the impact of any one company’s stock fluctuations. Because of this, missed quarterly earnings face less scrutiny when many investors are only looking at the performance of the index and not the individual stocks it is comprised of.

Furthermore, for the casual investor, index funds are typically part of a hands-off investing strategy, again offering more leeway for companies to pursue long-term growth. Individual investors increasingly recognize that neither day trading nor actively managed funds are likely to outperform stock indexes over the long term. In response, these investors rely more on diversified index funds, offering better returns and peace of mind. This means fewer stockholders scrutinizing the performance of individual companies, leaving fewer people to exacerbate price changes by jumping into the dangerous strategy of buying rising stocks and selling falling ones. Thus, index fund investors escape the dreaded “buy high, sell low” scenario that plagues traders of individual stocks, while corporations avoid the volatility that accompanies this positive feedback loop.

However, index funds do not erase volatility altogether, especially when one considers that not all index funds investors are so passive. In fact, trading data for a type of index fund known as an exchange-traded fund (ETF) indicates higher volatility for stocks making up ETFs due to the low trading costs of these funds. Importantly, though, this increased trading can largely be considered “noise,” not tied to market fundamentals of individual stocks. Because of this, individual companies’ actions have little effect on this volatility, still allowing executives to pursue long-term projects with less pressure from myopic investors.

By moderating investor pressure to meet short-term expectations, the popularity of index funds grants corporations more freedom to invest in innovation, even when these projects take time to turn a profit. Because most project expenses are immediate while resultant increases in revenue may take time to materialize, investments in innovation often fall prey to shortsighted expectations for a company’s bottom line. Other companies avoid investing in innovation due to the uncertainty of success, weighed against the investor backlash if they fail. If companies expect an outsized impact on their stock performance should a project prove unprofitable, otherwise-promising investment opportunities go unrealized. In either case, companies can invest more in innovation as more projects become worthwhile when given enough time to overcome the costs of the initial investment.  

Some critics of index funds charge that rather than promoting innovation, the popularity of index funds instead encourages monopolization and other anti-competitive practices. Supposedly, index fund managers use their large ownership stakes of companies within the same industries to discourage competition and raise prices. As a recent piece from The Atlantic highlighted, though, fund managers can only offer their low-cost index funds by avoiding costs of highly active management. Thus, the coordination required to design and enforce anticompetitive efforts on such a large scale would prove prohibitively expensive for these index fund managers.

Furthermore, in instances where index fund managers do exercise their voting power, they typically do so in ways that support long-term company performance. In August 2017, Vanguard voted against ExxonMobil’s management to require disclosure of climate change risks. In the long-term, this increased transparency will help the company, boosting its reputation for honesty and encouraging it to adapt to the climate risks it will face. For Blackrock, issues over executive compensation make up the largest proportion of its votes against management. Both of these asset managers are willing to exert their influence to encourage long-term thinking in the companies they hold, largely because it is long-term performance that index funds’ customers seek.

These criticisms do raise another valid concern over the rise of index funds. While freedom from excessive investor scrutiny can encourage companies to pursue innovative projects, it can also allow corporate executives to engage in dubious business practices with fewer repercussions. Investors play a key role in disciplining C-suite executives through company votes, but this threat is only credible if investors catch wrongdoing in the first place. As large shareholders, index fund managers should remain vigilant of wrongdoing, monitoring companies on their own or heeding the warnings of activist investors.

The popularity of index funds has eased some of the pressure restraining corporate investment in long-term growth, but it is still up to index fund managers to ensure company executives use this freedom to enrich their investors, not to line their own pockets.    

Much Ado About Rice: Thailand’s Rice Market Exploitation Wildly Backfires

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On August 25, former Thai Prime Minister Yingluck Shinawatra was due to appear in court to hear the verdict on her trial over involvement in a rice subsidy scandal. If she is found guilty of negligence, she could face up to ten years in prison. Yet Ms. Shinawatra never showed up in court, and many officials believe she may have fled the country.

The rice subsidy program, which led to Ms. Shinawatra’s impeachment in January of 2015 as well as her subsequent trial, started off as a well-intentioned plan to help Thailand’s agricultural sector. It was one of the main selling points for her populist party, Pheu Thai, during the 2011 campaign cycle, and helped to win the party a landslide victory. Approximately 23 percent of the Thai population are farmers, and the subsidy program was intended to help Thailand’s rice farmers earn more for their crop.

The program worked like this: the government would buy rice from farmers at up to double the market price. Then, the rice would be stockpiled and withheld from the global market in order to drive global rice prices up. Once global rice prices rose, the Thai government would sell the rice and make a profit in the process.

At the time the program was implemented, Thailand was the world’s largest exporter of rice. In addition to having a warm, damp climate, Thailand has an abundance of fresh water sources, making it an ideal location for rice production. Furthermore, the Thai people have plenty of experience producing rice–it has been their staple crop for over 5,000 years. (“In the water there are fish, in the field there is rice” is a proverbial Thai saying). All of these factors combine to give Thailand an overall advantage in rice production vis-a-vis many other countries, which have neither the climate nor the experience in such a line of production.

When a country has this comparative advantage in the production of a good, it means that that country can produce that good more efficiently than other countries can. For example, Thailand can produce rice more efficiently than Norway can because its climate and topography are better suited for rice production. Therefore, Thailand will gain the most economically if it can focus its resources on rice production, thereby producing more rice at a lower cost.  Thailand can then purchase the goods and services it does not produce as efficiently from countries that do have comparative advantages in those lines of production. If we consider the Thailand and Norway example, we notice that Thailand can sell its rice to Norway and in turn buy oil, a good that Norway has a comparative advantage in. If two countries can play to their comparative advantages and focus on what they can produce most efficiently, they can produce more, sell more, and purchase other goods at lower prices. Thus, two trading partners can actually gain from trade.

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Former Thai PM Yingluck Shinawatra has come under fire for the rice debacle

It is important to remember, however, that a comparative advantage in a certain line of production does not guarantee that a country will dominate a given market. In designing the rice subsidy program, this was the Thai government’s — and Ms. Shinawatra’s — critical mistake. There is no such thing as a patent on rice production; anyone who lives in an area with ideal conditions for growing rice can do so. Thailand is not the only country with ideal conditions for growing rice. When Thailand withdrew rice from the global market, countries such as India and Vietnam jumped in to fill the gap. The presence of these competitors meant that the global price of rice did not rise as the Thai government had hoped. Instead, rice prices plummeted, going from a peak of $1,000 per ton in 2008 to around $390 per ton in 2014. Thai farmers were edged out of the global rice market, rice exports fell by a third, and the Thai government was forced to stockpile 18 million tons of rice in the first year of the program alone. In the end, the rice subsidy fiasco cost Thailand around $15 billion. Given that GDP per capita in Thailand hovers around $6,000, this is a gargantuan sum.

Despite the heavy losses that the Thai government sustained, then Prime Minister Shinawatra refused to end or reform the program. As the program lost more and more money, government scandals and social unrest ensued. In February of 2014, a group of rice farmers threatened to park 100 tractors at Bangkok’s airport as they had not been paid for their rice. In May of 2014, Ms. Shinawatra was removed from office by the Thai Constitutional Court after six months of anti-government protests, riots, and occupations of government buildings. In July of this year, the military junta now in control in Thailand froze some of Ms. Shinawatra’s bank accounts and ordered her to pay $1 billion in civil damages. And on August 25, the same day Ms. Shinawatra failed to appear in court, her former commerce minister, Boonsong Teriyapirom, was sentenced to 42 years in prison for falsifying government-to-government rice deals with China in an attempt to cover up losses on the rice subsidy scheme.

Ms. Shinawatra’s rice subsidy program, which started off as a well-intentioned plan to help Thai farmers, ended in losses and Ms. Shinawatra’s removal from office. Interestingly, much of the instability that stemmed from the program and the government’s response to its failure is rooted in economics, or rather, faulty economic assumptions. It is true that Thailand has a comparative advantage in rice production. Yet the benefits of a comparative advantage can only be reaped if a country sells the goods it produces well and maintains its market share. Pulling out of the market is very dangerous, for a competitor may be ready and willing to take your place.

 

Making capitalism in rural New England

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Since the 50s economic historians have gone back and forth over how to break down the puzzle of this shift in growth. Much of the debate has centered on figuring out why farms were so slow to produce food for such a long time. Some argued it was about a lack of access to markets for selling goods, so there was no incentive for producing more than what one family could consume. But then figures like James T. Lemon gathered data on output and family consumption (based on yield and family size estimates) revealing the presence of farm surpluses above and beyond what a family would need to sustain itself, which he believed proved the existence of early markets for agricultural output in the 1700s.

Others took a more anthropological approach, arguing that it wasn’t about market access at all, but a sociocultural “mentality” that was divorced from the idea of maximizing profit. These “moral economy” historians, borrowing from the anthropologist Clifford Geertz’s accounts of non-entrepreneurial Indonesian peasant villages saw early New England as a pre-capitalist, community-oriented system of exchange where norms, gifts and tradition mattered much more than efficient management and production to advance crop or meat output. In the words of historian Marc Bloch, “The society was certainly not unacquainted with either buying or selling. But it did not, like our own, live by buying and selling.”

This position is partly ideological. Marxist-minded historians like to think of peasant societies as having a non-capitalist ethics grounded in communal ideals. But there’s also some interesting evidence in its favor. Vickers, in his paper, “The culture of credit in rural New England, 1750-1800” describes farming communities as immersed in non-monetary exchanges– neighborly solidarity networks that helped families manage risk and allocate resources. Vickers provides some useful data based on farmer’s accounting books that offer a glimpse of how these informal networks of sharing, reciprocal gift-giving and mutual aid may have operated in rural American communities.

Some of the reports describe swapping casual labor or lending out farming equipment. One interesting data point comes from the diary of the midwife Martha Ballard. Nearly 78 percent of the transactions recorded in her journal account are purely non-monetary, with no mention of money or price value. In many cases, Martha provided lodgings and meals to travelers, or offered her abilities as a nurse. In exchange, members of the community would bring her foods or agree to watch her children, but in total Martha remained a major creditor to the community:

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Vickers argues that Martha never expected to be paid back in full, but rather believed that, “the final unit of accountability in non-monetary exchanges was not the individual but the community.” It was only in the monetary world, in her work as a midwife, where she expected to be paid a regular fee. Similar results are found for male farmers who loan out labor and equipment without expecting exact monetary compensation. In his conclusions, Vickers notes that while these non-monetary exchanges were not explicitly quantified, exchanges did reflect a sort of balance based on ethical beliefs such as duty to kin, respect for the elderly, and pity for the disadvantaged.

So if we take the “moral economy” historians at their word, the American capitalist transformation was largely about a change in values and attitudes, whereby farmers were suddenly inspired to begin thinking like entrepreneurs, to efficiently allocate resources and produce goods for a market. As for what exactly created that change, no clear mechanism is presented besides a few vague references to “energies” generated in the American Revolution.

Winifred Rothenberg, first in a paper and then in her book From Market-Places to a Market Economy, made one of the most compelling cases for why the moral economy position is unrealistic, or at least not the best explanation for how we moved from low to high productivity on our family farms. For her, development occurred when a lot isolated farming networks began to connect together to form cohesive markets for goods and labor. Instead of looking at changing attitudes, Rothenberg considers a series of indicators of a gradual cohesion and consolidation of markets, including convergences in wage rates and farm prices, the extension of credit networks to further and further partners, and the proliferation of market towns. For Rothenberg, the Revolution did play a role, but it was in the form of catalyzing the emergence of commodity, labor and capital markets as established entities. In one analysis, Rothenberg charts how prices for staple crops began to converge and fluctuate in unison; an indicator of increased market connectivity. Price data was gathered from 54 manuscripts for the price of corn, potatoes, rye oats, hay, beef, pork and cider:

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Her results showed a clear convergence of prices moving towards the 1800s in several commodities including corn and rye. Rothenberg writes, “The people who settled this land came from a tradition of Market Crosses, Market Days, Corn Markets, cattle, wool, cheese, silk and produce markets, stalls, shops, fairs, itinerant peddlers, and cattle drovers.” In other words, the farming families were never non-trading ethical peasants, but were instead just slow to develop the extensive networks needed to facilitate their entrepreneurial, labor productive spirit. The cultural changes that did occur (sons stopped spending their whole life on the family farm, the neighborly networks of mutual aid began to diminish in importance) were the result of market changes, not the other way around.

That’s not to say that we should completely discount culture-centric theories of capitalist transition. Jan De Vries has done important work documenting how changing aspirations for leisure products helped drive the consumption and productivity boom in the Netherlands. Vickers favors a view of America’s transition as an interplay between changing cultural values and impersonal market convergences. For him, people “engaged widely in marketplace dealings but conducted them on credit based on evaluations of personal character, which were inevitably cultural constructions…the concern over neighbourly reputation was actually a product of market growth, not its victim.” So mutual aid networks and moral economies actually helped facilitate the growth and expansion of interregional markets.

Following Vickers, we might conceive of America’s transition to capitalism as a case of New England farmers who for years relied on kinship and community norms to survive in a harsh, spartan climate, slowly and deliberately making way for market forces that incentivized productivity and wealth accumulation. The Revolution shook up labor and capital, and farmer’s sons began moving into the city looking for profitable work off the farm; technical improvements to roads and storage solidified generalized commodity prices, paving the way for railroads and new migrant workers to expand the manufacturing base, and the rest is history. It’s probably not a coincidence that during this period Adam Smith’s two major works on the entrepreneurial and sympathetic spirits of man, The Wealth of Nations and The Theory of Moral Sentiments were making the intellectual rounds. In his great paper “The Two Faces of Adam Smith,” Nobel laureate Vernon Smith argues that the two books come together to produce, “one behavioral axiom, ‘the propensity to truck, barter, and exchange one thing for another,’ where the objects of trade I will interpret to include not only goods, but also gifts, assistance, and favors out of sympathy … whether it is goods or favors that are exchanged, they bestow gains from trade that humans seek relentlessly in all social transactions…It explains why human nature appears to be simultaneously self-regarding and other-regarding.”

The EU’s currency conundrum: Macron hits a nerve

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Following Emmanuel Macron’s victory in the recent French presidential election, a wave of relief washed over many supporters of the European Union. Macron’s pro-EU stance won out against his right-wing opponent, Marine Le Pen, a sign that the recent populist surge may be subsiding. With the release of exit poll results, the euro hit a six-month high, buoyed by increased confidence that the EU would remain intact under a Macron presidency.

However, celebration of the EU’s preservation may be premature. As France’s newest president, Macron hopes to reform the EU and its currency to reduce the financial strains of EU policies on poorer members. These changes would come at the detriment of Germany and other EU countries with stronger economies, who have benefitted in recent years from a euro weakened by underperforming members. Challenging this currency advantage as the gap in member states’ economic performances widens, France’s new president may only have granted the EU a stay of execution if it continues to resist reform.    

On the surface, Macron’s proposals seem more likely to draw the ire of the French workers rather than other countries in the EU. Aimed at reinvigorating the struggling French economy, his labor reforms seek to improve the competitiveness of French business by reducing labor unions’ power and cutting corporate taxes. Macron’s sees free-market policies as the path to success for the French economy, currently held back by restrictive policies that restrict the workweek to just 35 hours and make firing workers a costly process. French laborers, currently some of the most expensive workers in the EU, would become more competitive, easing France’s economic troubles in the process. Macron hopes these domestic policies will assuage the current discontent and fight the appeal of anti-EU sentiment among a French labor force struggling under scarce job opportunities and a 10 percent unemployment rate.

Critical of the EU’s use of austerity in previous years, he has also called for reforms to the EU, including a common Eurozone budget designed to promote investment in member states whose economies remain stagnant. Since his inauguration, though, Macron has taken a less aggressive stance on these proposals, no longer competing for the presidency against his populist opponent, Marine Le Pen. He announced that he will focus on domestic reforms and will not demand EU members to take on any of the debt of their weaker members. But while his EU policies may be not be a priority for now, the underlying issues with the Eurozone will not be going away anytime soon, nor will the populist elements throughout Europe let the EU’s problems be quietly swept under the rug.

After all, Macron’s EU reforms take aim at economic issues inexorably linked to a defining characteristic of the European Union: the euro. To enhance economic integration within the EU, most member states adopted the euro as their currency but lost a great deal of control over monetary policy in the process. The shortcomings of this shared currency became highly apparent in the wake of the Great Recession and Eurozone debt crisis as some EU members recovered quickly while others like Greece and Spain struggled to return to pre-crisis output levels.

Member states’ divergence in economic performance led to an unintended consequence for Eurozone countries. During the recovery of stronger economies like that of Germany, economic growth typically leads to currency appreciation, which hurts exports and tempers continued economic growth. However, the presence of weaker economies under the same currency reduces currency appreciation, helping German exports. On the flip side, this also means that the weaker economies will suffer from weaker exports, as their currency is not able to depreciate as much due to the growth of other, faster-recovering economies like Germany under the same currency. Thus, the Eurozone’s shared currency provides an extra boost to already-growing members, while weaker states find it increasingly difficult to expand exports and improve their stagnant economies.

Opposition to reforms of this currency problem unsurprisingly comes mostly from Germany, a result of its vested interest in maintaining the current EU’s currency policies to safeguard its record-high trade surplus of $270 billion. With the largest economy of any EU member, Germany also possesses significant economic and political influence to protect this position. German Chancellor Angela Merkel has reflected these realities in her meetings with Macron, agreeing only to small changes in trade policy and defense but resisting more substantial changes to the EU. Opponents to Macron’s reforms argue his proposals would require changes to the EU treaty, but the unspoken objection is still Germany’s potential loss of its currency advantage.         

Though the populist surge may have settled for now, Germany cannot maintain this unfair situation for much longer, unless it offers some form of compensation to the weaker Eurozone members. If Germany continues to fight even Macron’s modest reforms, it runs the risk of galvanizing anti-EU sentiment across the struggling member states. Europeans may have been more understanding of EU intransigence in the response to earlier, radical populist movements. However, now faced with Macron’s moderate proposals to help weaker members, the EU can no longer escape blame for its failure to address the economic malaise of many of its states. Unless changes are made, the EU’s struggling member states will continue to resent the implicit subsidies they give to stronger economies like Germany through their linked currencies. If reform does not take place soon, this resentment may well give way to renewed, widespread calls for exits in numerous member states. Should this occur, Germany may not be able to salvage the EU again, but this time it will only have itself to blame.

Triggering by Trump and the emergence of economics of escapism

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A recent survey conducted by the online therapy company Talkspace found that, as of Inauguration Day, over 60 percent of respondents reported feeling some degree of post-election stress. In a 2016 Gallup poll, only 32 percent of Americans said they trusted conventional media “to report the news fully, accurately and fairly,” an eight percent drop from 2015 and the lowest level ever polled by Gallup. To cope with growing discontent, many Americans are turning away from their usual news outlets or their increasingly political Facebook newsfeeds in search of distractions. However, the thirst for distraction is not uncommon in American history, and escapism has become a staple during rough economic and political times.

Defined by the Merriam-Webster as “habitual diversion of the mind to purely imaginative activity or entertainment as an escape from reality or routine,” escapism may seem like a purely psychological issue, but there are very real economic ramifications when companies capitalize on this desperation by filling the demand for a break from reality.

During the Great Depression, Americans flocked to movie theaters. For 27 cents a ticket, about 4 USD in contemporary terms, people could escape the harsh reality of an economic depression for a stretch of time. Films like Dumbo, Fantasia and Arabian Nights, which were released during World War II, transported moviegoers into magical, exotic lands. The 1973-75 economic recession, which also marked the end of the Watergate scandal, the United States’ defeat in the Vietnam War, and two near assassinations of President Gerald Ford, shows a similar trend. In that time frame, directors like George Lucas and Steven Spielberg started releasing fantasy movies like Star Wars, Close Encounters of the Third Kind, The Exorcist and Jaws, all of which were among the top 10 highest grossing movies of the 1970s. Escapist cinema is key during economic and political hard times, as it is one of the easiest and most direct ways to find relief from the real world.

The Walt Disney Company, arguably the biggest player in escapist entertainment, had record breaking inflation-adjusted domestic gross ticket sales of over $2.93 billion in 2016, thanks to popular films like Captain America: Civil War, Finding Dory and Zootopia. From early November to late April, Disney’s stock increased over 26 percent. 21st Century Fox, another box office competitor, saw its stock rise by 37 percent from early September to late March. Even Netflix, which is not a direct competitor but another key player in escapist cinema, saw its stock increase by over 38 percent since the election, compared to a nine percent increase in the S&P 500 Index over the same period. Moreover, half of the top 10 highest grossing movies in 2016 were comic book adaptations, and all of the top 10 movies had a high degree of fantasy, meaning moviegoers actively seek fictional entertainment, and companies provide it.

The demand for escapist fiction extends over many markets, including the literature market. Orbit Books, a fantasy and science-fiction imprint, doubled its annual output last year. With the buzz of a likely science-fiction “golden age,” several other publishing companies launched their own science-fiction imprints. Is there a better way to hide from current unrest than to immerse oneself in a completely different universe? Along with science-fiction, the young adult (YA) genre – fiction published for readers in their teens – plays a key role in literature escapism. Seventy percent of YA novels are not purchased by teenagers, but rather by adults for their own reading enjoyment. YA literature provides not only a means of escapism, but also instant gratification and a sense of nostalgia.

Similarly, adult coloring books bring back nostalgia and reminiscence of childhood for the adult “readers.” In 2015, 12 million coloring books were sold in the United States, a huge increase from the one million sold in 2014. Millennials are 29 percent more likely to purchase an adult coloring book than all other buyers. Since coloring has the potential to reduce anxiety and increase mindfulness, it makes sense that the newfound popularity of coloring books would be directly related to the escalating need for escapism.

The rise of virtual reality (VR) and augmented reality (AR), evidenced by the boom of Pokémon GO, represents a new mode of escapist entertainment. Launched in July 2016 and known as the first use of AR to go “viral,” Pokémon GO has been downloaded globally by over 650 million people. By navigating around their physical surroundings, players are introduced to a parallel world on their phone screens, where a vast array of creatures and Pokémon supplies await discovery. The increase in popularity of AR and VR will be paved with exploitation by marketers, as already seen through the sponsorship deal between Pokémon GO and McDonald’s to entice players into the restaurant chain. Global revenue for the AR and VR markets are projected to reach almost $14 billion in 2017 and $143 billion by 2020. Clearly, this emerging market has the potential not only to provide a new means for escapism, but also to reap massive profits for those companies that utilize AR and VR.

From playing video games to trying new restaurants to visiting amusement parks, escapism is a natural way to de-stress when reality becomes overwhelming. Companies that already provide escapist entertainment are reaping the rewards of widespread unease, and if the U.S. political environment remains volatile, expect new entrants and innovations to satisfy a growing demand for escapism.

Small change, huge impact: How remittances assist development in impoverished regions of the world

 

remittancesIn 2016, Mexicans living abroad sent home $27 billion in remittances home to Mexico, the largest remittance influx that Mexico has ever received. Remittance inflows now surpass crude oil and tourism as major sources of income for Mexico, and much of these inflows go to Mexico’s most rural, impoverished areas, where they are a lifeline. Most of the remittances sent to Mexico came from the United States due to a strong U.S. labor market, a weakening Mexican peso, and fears that the Trump administration may tax remittances in order to pay for a border wall.

Often, due to poor economic prospects and a lack of opportunity at home, migrants will seek work abroad and send back a portion of their earnings to help friends and family. These funds that are sent back are called remittances. Between 1960 and 2010, the number of migrants increased from 90 million to 215 million worldwide, and migration to western Europe and the United States accounts for around two thirds of this growth. In 2015, more than $431 billion in remittances were sent to developing countries, with each remittance (also referred to as a transaction) averaging around $200. In many developing countries, remittances constitute a huge source of cash inflow; in 2013, remittance inflows globally were three times larger than inflows from official foreign aid, and remittances regularly exceed foreign direct investment in developing countries. When considering a nation’s development, it is common for policymakers and others to only consider foreign aid and largely disregard remittances as a source for development funds. It is important to remember, however, that the remittances that migrants send home have powerful impacts on encouraging development and reducing poverty in the developing world.

In developing regions around the world, remittances are a lifeline, bringing much needed funds to people who are barely scraping by. India was the biggest destination for remittances in 2015, followed by China, the Philippines, and then Mexico. Some countries could not function without substantial funds from abroad–remittances make up 29 percent of Nepal’s GDP, and in Tajikistan, that number is 42 percent. For countries that were formerly part of the Soviet Union, such as Tajikistan, remittances are especially vital.

In impoverished parts of Mexico, remittances constitute around 19.5 percent of income, which is an even higher percentage than the contributions to income from government welfare programs. The remittances that families receive are put to use covering basic needs first, with the rest going towards investments and paying back debts, allowing those who receive enough in remittances to begin to focus on getting out of poverty. A report published by the Inter-American Development Bank found that in rural Mexico, 74 percent of remittance monies are used to cover basic costs of living, with 16 percent used to pay debts and 5 percent used towards investing in the home. Furthermore, remittances have a tendency to act like insurance for recipients. Remittances tend to be  countercyclical–during an economic downturn or after a natural disaster in migrants’ home countries, remittance flows actually increase, allowing some of the poorest members of the global population to better weather financial crises.

In many cases, recipients of remittances use those funds to enroll their children in school, which allows them to achieve higher levels of education that can lead to higher-paying jobs. Data from the World Bank show that in many countries in Latin America, children in families that receive remittances are more likely to stay in school and have higher educational attainment. Thus, remittances provide a means for families to invest in the skills of their children, giving them tools that can help them break the cycle of poverty in later life.

There is also evidence that increases in remittance flows received by people in Mexico correspond directly to a decrease in crime. A study by the Inter-American Development Bank found that for every percentage point increase in remittances, street robberies in Mexico declined by 0.19 percent and homicides decreased by 0.4 percent. This decline can be attributed to several factors. First, as mentioned above, remittance flows give families the opportunity to send their children to school, reducing the incentive for these children to commit crimes. Not only does being in school prevent children from engaging in criminal activity, but the extra years of education allow students to eventually get higher-paying jobs that allow them to make ends meet without having to resort to crime. Second, remittances increase income and therefore decrease the benefits derived from committing crimes, and studies conducted in Brazil and in Colombia confirm this. Finally, 5 percent of remittance funds in Mexico are used towards home expenses, which stimulates the construction sector leading to the creation of construction jobs. These jobs offer people, particularly those with little education, the chance to earn a living without having to turn to crime.

In January of 2017, Mexican immigrants in the United States sent $2 billion back to Mexico, up 6.3 percent from this time last year. While a weaker peso did play a role in this jump, much of the increase stems from fears about a potential tax on remittances being sent from America. It is true that large sums of money flow from the United States into Mexico each year. However, this money is put to good use in impoverished regions where it is needed most. It allows children to stay in school longer and makes them less likely to commit crimes. It enables families to make ends meet and lays the groundwork for recipients to lift themselves out of poverty. Given the important role that remittances play in assisting in the development of impoverished regions of Mexico, such a tax would significantly hurt the people who rely heavily on those remittances to make ends meet.

Debunking the Model Minority Myth

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Why is it that Asians and Asian Americans must score 140 points higher than their white counterparts to be accepted by the same university? In fact, because of this disadvantage, students from the Asian-Pacific American (APA) community are left with the option of working even harder to counter the forces that hold them to a different standard. Unfortunately, this vicious cycle only seems to reinforce the Model Minority Myth (MMM) by affirming the stereotype of the “hard-working” and “dedicated” Asian or Asian American.

Moreover, even if an APA student manages to defeat the odds and attend her dream college, the already uphill battle seems to only get steeper, as seen in the existence of the bamboo ceiling. Similar to the glass ceiling that many women face, the bamboo ceiling is a barrier that many Asian and Asian Pacific Americans face as professionals who want to advance in their respective fields. Coined by business adviser and writer Jane Hyun, the bamboo ceiling works by taking the form of the lack of presence in leadership positions, as seen in the 2.6 percent board represented in Fortune 500 companies. Despite the stereotype of the successful ‘model minority,’ many of these highly educated individuals will never get to experience the promotions and wage raises as do their white counterparts for the same achievements.

18090749_1909909095692680_814742580_oThough many claim to not see race in their supposed “color blindness,” prevalent expectations of certain racial groups persist. Stereotypical generalizations in the workplace promote the establishment of collective identities of entire racial groups, for example, in the case of the model minority myth. The Model Minority Myth is the belief that a minority group, typically East Asian-Americans, is made up of members who can achieve higher socioeconomic success than the average population. Culturally problematic implications aside, the Model Minority Myth has minimal basis in economic fact, as demonstrated by their average incomes, unemployment rates, and education levels.

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Though the Model Minority Myth, in essence, is a myth, and it has brought about harmful results that have no place in a progressive society, such as the belief in The Asian Advantage. The Asian Advantage is the belief that Asians and Asian Americans have an advantage in schools and work due to their hard work and ‘positive’ stereotype as the model minority. Moreover, it states Asians and Asian Americans are likely to be perceived as more competent than their white counterparts, which helps them achieve great success. Despite the circumstantial belief called the Asian Advantage, this idea is harmful in that is renders white privilege obsolete and falsely skews favor of one group over another. 

Additionally, the implications of An Asian Invasion, in which Asian Americans “take over” through their high levels of education, are damaging due to their oversimplified nature. The belief of an Asian Invasion has been prominent throughout history but has come up more often during political turmoil where scapegoating is a useful, strategic tool i.e. after the Japanese invasion of Pearl Harbor, many Japanese Americans were perceived as scheming with ulterior agendas for a Western downfall. Though the same racist remarks are not as widely vocalized as once before, the contemporary iteration of the Asian Invasion subverts itself in the fear that Asians and Asian Americans will crowd out colleges and workspaces.

The logical oversimplifications are evident- The grouping in “Asian American” itself consists of more than 20 ethnicities, raising questions about the risks of sweeping generalization in the Model Minority Myth. Moreover, income between Asian Americans and Whites might publically be perceived to be similar. However, the overall distribution of wealth is definitely skewed, as seen in Asian Americans’ larger debts, lack of homeownership and wealth inequality within the Asian American community. Moreover, the average per capita income for whites is $31,000 while Asian Americans are at $24,000, which further contrasts the external perception of Asian Americans with the economic realities they truly face.Screen Shot 2017-04-20 at 6.49.35 PM

As calculated by the Economic Policy Institute, Asian Americans repeatedly make less than do white individuals of the same level of education. Moreover, this is especially puzzling considering roughly 80% of Asian Americans reside in more expensive, metropolitan areas such as Los Angeles and San Francisco. With less income on average and larger expenses on average, Asian Americans clearly are not a racial group with the clear advantage, and the economic inequalities cast doubt on the reasoning behind the Model Minority Myth.

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In 2010, the US Census Bureau reveals that Asian American men had a significantly lower income than their white counterparts, despite the same level of education.

While it is true that many Asian Americans have completed higher degrees, they face higher unemployment rates in comparison to their white counterparts as well. Though the unemployment disparity in 2008-2009 is a difference of a few percentage points, the chasm has widened in the next two years, as seen in the 33.7% Asian American college graduate unemployment rate compared to the 24.7% white college graduate unemployment rate in 2010.

In 2015, the overall employment rate was 14.3%. White people had an average unemployment rate of about 11.6% whiles Asian Americans were ar 11.7%. Even though Asian Americans faced a slightly larger unemployment rate than did their white counterparts, they could not shed the ‘model minority’ stereotyped persona.

Unemployment rates, by race and education, 2010 (age 25+)

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As measured by the US Census, 18.5 percent of whites have a bachelor’s degree (roughly 45.7 million people) while 30 percent of Asians have a bachelor’s degree (roughly 5.1 million people). Asians and Asian Americans have a higher ratio of college graduates, largely due to the brain drain of countries like China and India. In 2012, Chinese and Indian individuals made up 71.6% of America’s brain drain, meaning they received numerous HB-1 visas to come to the US. These individuals definitely influence the statistics, considering they are two of the largest Asian ethnic groups in the US.

Although many Asian Americans wear MMM designation as an insignia, the implied generalizations within the myth have failed subset Asian communities by signaling to those in power that the misperceived communities do not need economic restructuring. The Model Minority Myth seems to be a complement of greater “Asian Invasion” concerns. Moreover, it lacks cohesive data that can factually support its implications, as we’ve seen in the measurement of income and unemployment rates.

In actuality, Asians and Asian Americans are not economically better off than their white counterparts. The misperception that these communities are predatory and legitimate economic threats is likely inspired by xenophobic politics, particularly politics motivated by changes to the demographics and aesthetic of the American workforce over the past few decades. Asian Americans are a deeply diverse group that on average receive lower incomes and have higher unemployment rates than whites at the same level of education, suggesting that racial discrimination in the job market may be a relevant force in employment and promotions thereon. 

United Airlines catastrophe demonstrates the human and fiscal costs of both the airline industry and regulatory agencies’ failure to embrace market forces

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On Monday, the internet woke up in outrage after multiple videos surfaced of a 69 year old physician, later identified as David Dao, being forcibly dragged by Chicago police off of a Sunday evening United Airlines flight departing for Louisville, Kentucky. Immediately, everyone in the Twittersphere broke out their respective hot takes. Many blamed United Airlines directly, while others, such as Slate columnist Helaine Olen, blamed “political anger” for the general failing of “customer service.” By noon, the outrage cycle had come full circle, with Timothy Lee at Vox echoing hundreds of others calling for greater federal regulation of the airline industry. Calling for more mitigation of market forces completely misses the point.

The Department of Transportation currently regulates the process through which an airline can overbook and subsequently “bump” a traveller who has already paid for a ticket. An airline will usually announce that it has an overbooked flight, and some passengers who can afford to take a later flight — potentially with financial incentives — will volunteer to get off the flight. If not enough people take the bait, then the incredibly regulated involuntary bumping process begins.

This involuntary bumping process employs four tiers of compensation for cancelling someone’s flight. For the case of United flight 3411, the DOT maximum compensation rate would have been $1,350 because UA did not supply Dao with alternative travel plans. However, United’s bid did not hit $1,350, let alone $1,000. It only offered $800 to cancel travel to return to a city for the beginning of a work week, hence initiating the involuntary bumping process.

The Courier Journal reports that after involuntarily bumping a couple off the plane, United staff came to Dao, the physician from the video, who refused to leave because he claimed to have patients that he had to see on Monday. After Dao refused to leave, United called on the Chicago police to forcefully drag Dao from the plane, leaving his face bloodied and evidently traumatized.

Fewer than 48 hours later, United has lost well over half a billion dollars and become the source of seemingly universal disdain and disgust on the internet. All of these catastrophic ramifications beg the questions: what happened here? And who is to blame?

First, it seems as though United violated its own policy. Its contract of carriage notes that oversold flights may deny entry for certain passengers after asking for volunteers, but nowhere does it say that the police or other government law enforcement can forcefully and violently remove a passenger from a plane.

In addition, both United’s pathetic $800 offer as well as the arbitrary $1,350 federal maximum reflect a total rejection of the reality of market forces and consumer choice. On a flight as coveted and strategic as a Sunday evening one, presumably where a majority of travelers intend on making it to work on Monday morning, the market value of their flight can be multiple times the value of the federal maximum, let alone a measly $800.

If anything, United ought to have booted one of its own employees from the plane rather than a paying customer, although union contracts may have prevented that, which presents another problem entirely. Furthermore, the government was explicitly complicit in the assault of a paying customer through Dao’s removal by the police, who laughably claimed that officers “attempted to carry [Dao] off of the flight when he fell.” Not surprisingly, the officer at hand has been put on leave.

It simply doesn’t have to be this way. Given the high opportunity cost of empty seats on flights, overbooking will remain a valuable practice for airlines, as everyone shows up for a given flight the vast minority of the time. However, by using market forces and a capitalist approach, United can find a balance between high producer surplus and maximizing customer satisfaction as a whole.

As Max Nesterak of PBS Newshour notes, Delta surveys all of its passengers to list their perceived value of its flights so that using perfect price discrimination, it can target specific individuals with low offers to get them to volunteer to take a voucher or a later flight. And on the public sector end, removing totally arbitrary maximums from federal regulatory agencies would reassert that the power of a transaction rests in the hands of the consumer, not the state.

The image of David Dao’s ruined face, murmuring “please kill me,” over and over again has been seared in the minds of millions of Americans. While the human cost of Dao’s suffering cannot and should not be exploited, perhaps the very real fiscal ramifications of United’s actions will serve as a reminder to the airline industry as a whole that the forces of the market are much more efficient, fair and effective than those of violence and forceful regulation.