Since there are always more tenants than landlords, and more people who don't understand economics than people who do, it is nearly impossible to get the voters in a community with rent control to vote it out. However, many state legislatures across the country have taken that decision out of local hands by passing laws forbidding cities and towns from having rent control. When rent control was gotten rid of this way in Massachusetts, new housing began to be built in formerly rent-controlled communities for the first time in decades.
It can be done. But it is unlikely to be done in San Francisco. Nor is the liberal state legislature likely to act. There is in fact a measure on this year's ballot to tighten rent control in San Francisco some more.
THE END OF MONTGOMERY WARD
The passing of a once-great business is often a time for nostalgia and regret, so the announced closing down of Montgomery Ward has provoked much media comment along these lines. But both the rise and the fall of Montgomery Ward illustrate the dynamic adjustments of a free market economy and the prosperity that it makes possible.
Although most people today think of Montgomery Ward as a chain of department stores, the company was one of the dominant retailers in the country for more than half a century before it opened its first store. It began as a mail-order house in 1872, when the United States was a rural country, with very high costs of delivering goods to a widely scattered population. Neither trucks nor automobiles nor airplanes had yet arrived on the scene, so transportation costs added greatly to the cost of getting merchandise to small general stores in isolated communities.
Montgomery Ward mailed its merchandise, lowering delivery costs by using the most efficient transportation available at the time—the railroad—and the only nationwide delivery service, the U.S. mails. Railroad tracks ran right through the huge Montgomery Ward warehouse in Chicago. The net result was that it could charge lower prices than others who used more costly methods of transportation, enabling more Americans to afford more things.
But nothing stays the same. Montgomery Ward was the largest retailer in the world in the 19th century, but that was destined to change because of a young railroad agent who sold watches on the side. His name was Richard Sears.
The company that Sears set up also grew into a mail-order house—one that eventually surpassed Montgomery Ward. Meanwhile, the country itself was changing. By 1920, there were for the first time more Americans living in urban areas than in rural areas. That changed the whole economics of retailing.
Now the cheapest way to deliver merchandise to many Americans was by setting up chains of stores where they lived. But neither Sears nor Montgomery Ward had any stores—nor any desire to build stores. They had been highly successful for decades in the mail-order business. Why change? When an executive at Montgomery Ward suggested to the head man that they start opening stores to supplement their mail-order business, he was fired for his trouble.
The greatness of a free-market economy is that it does not depend upon the wisdom of those who happen to be on top at the moment. The rich and complacent men who ran Montgomery Ward and Sears were destined to be forced into change by a new man named James Cash Penney, born and raised in poverty.
Penney's first experience as a retailer came as a one-third owner of a small store in a little town in Wyoming. Yet his ideas on retailing changed the whole industry. By 1920, there were 300 J. C. Penney stores—prospering, growing and taking business away from Sears and Montgomery Ward, both of which began losing millions of dollars. Only then did Sears begin to listen to the executive who had been fired from Montgomery Ward and start opening its own stores, saving the company from the brink of bankruptcy.
Montgomery Ward then belatedly followed suit. The rich men who ran these two giant mail-order houses realized that they would not be rich much longer if they kept losing millions of dollars a year.
In the years after the Second World War, as the country grew more prosperous and people began moving to the suburbs, some Montgomery Ward executives suggested to the head man that they should start building stores in suburban shopping malls. They were fired for their trouble.
The net result was that Sears hit the shopping malls first and Montgomery Ward never caught up. Meanwhile, a young clerk in a J. C. Penney store—a man named Sam Walton—began learning retailing from the ground up. Later, he put his knowledge and insights to work in his own stores, which would eventually become the Wal-Mart chain, with sales larger than those of Sears and J. C. Penney combined.
Montgomery Ward once made a great contribution to the rising standard of living of ordinary Americans. But the continued prosperity of Americans eventually required that it be replaced by new businesses, better adapted to new conditions. Those who complain that some are “left behind” amid growing prosperity do not understand that leaving some behind is the way the country moves ahead.
“SAVING” SOCIAL SECURITY
Nothing seems so insecure as Social Security. However, before we start “saving” Social Security, we need to stop and think about why it needs saving in the first place. Then maybe we can avoid making the same mistakes all over again.
Some people blame the problem on the large numbers of “baby boomers” who will be retiring in the next few decades. But why don't we hear about private annuities that are worried about the number of baby boomers who will be retiring?
Social Security's problems go much deeper than the size of the generation that is going to be retiring. In fact, Social Security's problems go all the way back to the beginning—to the way it was set up, to the lies that politicians told about it and to the misconceptions and political irresponsibility that have now come home to roost.
Private insurance companies aren't panicked about the annuities they are going to have to pay to baby boomers because insurance companies operate in an entirely different way from Social Security. Insurance companies take their customers' premiums and invest them to create real wealth. Later, the earnings from that wealth can be used to pay annuities or life insurance benefits whenever they become due.
For example, if an insurance company uses its customers' premiums to build an apartment complex, then the rents coming in from those who live in the apartments can be used to pay the annuities or insurance benefits owed to those whose premiums built the buildings. The size of the previous generation or the next generation doesn't matter.
The reason it matters under Social Security is that there has never been any real wealth created. The government has simply been robbing Peter to pay Paul. This worked great when the baby boomers were paying into the system and their money was being used to pay benefits to a much smaller generation that was retired.
Now it has become obvious to everyone that this game will not work any more when the huge baby boomer generation itself retires. There will not be enough people working to pay them all the benefits they were promised, unless Social Security taxes are raised by huge amounts. Otherwise, the government will have to welch on its commitments to the retirees.
The biggest lie about Social Security is that it is some kind of “insurance.” But, unlike insurance premiums, Social Security taxes create no wealth. They are spent when they get to Washington, just like any other taxes. Paper transactions create the illusion of a Social Security “fund,” but there is no corresponding real wealth created—no factories, farms or railroads.
The basic principle of Social Security is the same as that behind illegal pyramid schemes run by con men. The first people to put their money into pyramid schemes get repaid handsomely from the money received from others who join later. That is what attracts still more suckers and enables the con men to rip them off.
Since the first people to join the Social Security system were from the relatively small generation of the 1930s, their later retirement benefits were easily paid with the money received from the much larger baby boom generation. So long as the pyramid keeps expanding, things are great, but eventually the pyramid stops expanding and those who joined last
get left holding the bag.
That is why pyramid schemes are illegal and that is why Social Security is now in trouble. It is not because of some demographic fluke. It was a demographic fluke that kept it from collapsing before now.
It was the deceptions and irresponsibility of politicians that got us into this mess. If you think the way to get out of it is to let politicians continue to guide Social Security in the future, then you have missed the point completely.
Investing the public's retirement money in the creation of real wealth is an essential part of any permanent fix. But, if that means letting politicians throw their weight around in the stock market, then this is truly putting the fox in charge of the hen house.
There are all sorts of sound financial institutions through which ordinary Americans can put their retirement money into the creation of real wealth, without having to pick individual stocks themselves. The time is long overdue to let them do it. The whole history of Social Security shows how important it is to keep politicians' hands off that money.
SOCIAL SECURITY VS. PRIVATIZATION
According to the unanimous preliminary report of the special commission appointed to look into Social Security, the amount of money coming into the system will be insufficient to pay out what was promised by 2016. By 2030, the choice will be to reduce Social Security benefits by about one-fourth or raise payroll taxes by about one-third. After that it gets worse.
Liberal Democrats, who have always been the biggest supporters of Social Security, have attacked the commission's conclusions. Congressman Richard Gephardt, for example, has denounced the report as “scare tactics” and said that the Social Security system faces no problems until its trust fund runs out in 2038.
When the money going out exceeds the money coming in, you are in trouble—and that happens in 2016. Those who try to push the fatal date off to 2038 are counting the money that Social Security has in its so-called trust fund. However, this “trust fund” exists only as a legal technicality, not as an economic reality.
When your Social Security taxes get to Washington, they are spent—right then and there. What preserves the illusion of a “trust fund” is that the Social Security system is given government bonds in exchange for the money that Congress takes and spends. But, no matter what kind of accounting sleight-of-hand you use, you cannot spend and save the same money.
Those bonds in the Social Security “trust fund” represent no tangible assets—not houses, not factories, not cars, not trains. They are promises that can be kept only by taxing future taxpayers.
What if the bonds in the Social Security “trust fund” had never existed? Economically, the situation would be exactly what it is now. After 2016, the government would have to either raise additional taxes or lower the benefits. The bonds serve only to fool the gullible or the uninformed.
The crucial difference between a 100 percent government-run retirement system like Social Security and one in which individuals can invest at least part of their own retirement money in the market is that the market represents real things. Private investment creates the enterprises and industries which generate real wealth, not just paper promises.
When you own a share of a company that is building houses, cars or computers, then your money is creating a larger real wealth—for the country and for yourself—than if Washington politicians were spending your Social Security taxes as fast as they reach the Beltway.
Representative Barbara Lee of Oakland is typical of Congressional Democrats in opposing the idea that younger workers should be allowed to invest part of their retirement money in the market, rather than in Social Security. She said: “Social Security is an insurance program, it's not an investment program. And no way should we want workers to have their benefits put at risk and put them at the whims of the stock market.”
This is classic liberalism, starting with an utter ignorance or total disregard of economics. An “insurance program” is not something different from “an investment program.” Real insurance companies invest the premiums they receive, precisely in order to have the money available to be able to pay off annuities or insurance claims when these become due.
But Representative Lee is half right: Social Security is not an investment program. People like Representative Lee can spend the Social Security money as fast as it gets to Washington, without investing anything to pay off future retirees. An insurance company executive who did that could find himself behind the walls of a federal prison. Barbara Lee, however, is only likely to find herself re-elected, as a reward for handing out goodies bought with the money that workers think is being put aside for their pensions.
You can see why liberal Congressmen don't want to see any of the trillions of dollars in Social Security pass out of their control. You can also see the arrogance of liberals who say that they don't want “workers to have their benefits put at risk.” Nobody is going to invest those workers' money in the private sector except those workers themselves.
If workers prefer to invest in mutual funds to taking their chances with a Social Security system that may never pay them back what they paid in, who are liberals to tell them that they don't have a right to do that with their own money? The so-called “whims of the stock market” are nothing compared to the whims of politicians.
MINIMUM JOURNALISM
A front-page story about minimum wages in the Wall Street Journal illustrates what is wrong with contemporary journalism as much as it illustrates anything about the minimum wage law. The first nine paragraphs deal with one individual who is wholly atypical of people earning the minimum wage. She is a 46-year-old single mother who works full-time.
Way back on page 10, we learn from a small chart that just over half the people earning the minimum wage are from 16 to 24 years of age. Just over half of the minimum wage earners are working part-time. Nevertheless, the atypical middle-aged single mother is now brought back into the story again and covered for an additional 13 paragraphs on an inside page.
Three out of four pictures of people under the heading “The Faces of Low-Wage Work” are women over 40, including one who is 76.
This is clever propaganda, but it is lousy journalism. People don't buy a newspaper in order to be deceived.
While the Wall Street Journal has one of the most intelligent editorial pages anywhere, some of its news stories on social issues—as distinguished from financial issues—are too often examples of the kind of mushy and even biased journalism that gives political correctness a bad name.
The politically correct party line on minimum wages is that people cannot afford to raise their families on low pay, so the government has to force employers to provide “a living wage” for families. But the vast majority of people making minimum wages are youngsters just beginning their careers. They are not going to be flipping hamburgers or sweeping floors all their lives. Most have better sense than to have children that they cannot feed and house.
Yet the main focus of this long article is on a small minority who have a “minimum wage career.” Our atypical middle-aged single mother is invoked once again: “In Ms. Williams' case, practically everyone she knows has been mired in such occupations their whole working lives.” Is it supposed to be news that birds of a feather flock together?
Are we supposed to base national policy on one woman's experience? If we wanted to watch Oprah Winfrey, would we be reading the Wall Street Journal?
What about those minimum wage earners who are just passing through that income bracket on their way up? Most of the people in the bottom 20 percent of the income distribution—“the poor”—are also in the top 20 percent at some other point in their lives, when they are now counted among “the rich.” Usually they are not poor the first time nor rich the second time, but such is the state of political rhetoric.
The reality of what happens to people over time gets far less attention than one middle-aged single mother working at a minimum wage job—and, incidentally, receiving government subsidies.
The minimum wage law is very cleverly misnamed. The real minimum wage is zero—and that is what many inexperienced and low-skilled people receive as a result of legislation that makes it illegal to pay them what they are currently worth to an employer.
Most economists have long recognized that minimum wage laws increase unemployment among the least skilled, least experienced, and minority workers. With a little experience, these workers are likely to be worth more. But they cannot move up the ladder if they can't get on the ladder.
That is the real tragedy of the real minimum wage—zero. It is not just the money that these young people miss. It is the experience that can turn out to be far more valuable to them than the first paychecks they take home.
This is especially tragic in the Third World, where multinational corporations may be pressured into setting wages well above what the local labor market conditions would justify. This pressure often comes from self-righteous people back home who mount shrill demonstrations in the mistaken belief that they are helping poor people overseas.
Half a century ago, Professor Peter Bauer of the London School of Economics pointed out that “a striking feature of many under-developed countries is that money wages are maintained at high levels” while “large numbers are seeking but unable to find work.” These people can least afford to get the minimum wage of zero, just so that their would-be saviors can feel noble, or so that labor unions in Europe or America can price them out of a job, in order to protect their own members' jobs.
MERIT AND MONEY