Dry-Cleaning Economics in One Lesson
What Caused Dry Cleaners' Hanger Prices to Double?
SEPTEMBER 01, 2008 by E. FRANK STEPHENSON
Another day, another news story about economic wackiness. Gas prices rise, the dollar sinks, and stores are limiting rice sales. What could be next? Clothes hangers.
Yes, clothes hangers. Marie Sledge, co-owner of Rome (Georgia) Cleaners, states, “Hangers last year at this time were $28 a box, where now they are $56.” News reports indicate that cleaners in Springfield, Missouri; Birmingham, Alabama; and Harlem are also encountering doubling hanger prices. In response, many cleaners are posting signs in their shops encouraging customers to return used hangers.
Hangers can’t, even if combined with government subsidies, be converted into biofuels. So what is causing the rapid increase in hanger prices? Government, of course, though in this case it’s the trade bureaucrats at the Department of Commerce rather than the folks behind other debacles in the news these days.
In a March 19 news release the Department of Commerce “announced its affirmative preliminary determination in the antidumping duty investigation on imports of steel wire garment hangers from the People’s Republic of China.” Translation: The government will now impose tariffs on hangers imported from China. The tariffs vary by supplier, ranging from a lightly starched 33 percent to a truly stiff 221 percent. With hanger prices potentially tripling because of tariffs, it’s easy to understand the disruption facing dry cleaners.
Why would the Commerce Department impose such taxes on imported hangers? The key bit of bureaucratese is the press release’s “antidumping duty” clause. Prompted by a complaint from M&B Metal Products Company of Leeds, Alabama, the only domestic metal-hanger manufacturer, Commerce analyzed prices charged by Chinese hanger producers to determine if they were below “fair value.” Calling anything other than a price arrived at through voluntary exchange between the buyer and seller “fair value” is perverse. But the U.S. government, in its infinite wisdom, has defined “unfair value” as the price charged by foreign firms selling below their cost of production or below the price they charge in their domestic markets.
In any event, economist Russell Roberts, in The Choice, describes Commerce’s process as “arbitrary” (hardly surprising, given the slipperiness of “fair value”) and reports that between 1986 and 1992 Commerce found dumping in 97 percent of the 251 cases it investigated. In a 2002 paper, Cato Institute scholars Brink Lindsey and Dan Ikenson elaborated: “In a depressingly wide variety of circumstances, a foreign producer can charge prices in the United States that are identical to or even higher than its home-market prices and still be found guilty of dumping.” It therefore comes as no surprise that Commerce determined that Chinese producers have been dumping their hangers on the United States market.
The notion of dumping, even without arbitrariness by Commerce apparatchiks, is suspect. Since the raison d’être of firms is to make profits for their owners, there should be a strong presumption that firms will not sell below cost, regardless of the Commerce Department’s Byzantine calculations. And if, glory be, some foreign firm does choose to sell below its production cost, we should welcome the gift rather than ensnare the givers in a thicket of questionnaires, documents, and legal mumbo jumbo.
In the case at hand, it’s unlikely that the Chinese firms were selling below cost. M&B president Milton Magnus states, “The price [Chinese firms] pay for wire is about 30 percent less than what we pay, [and] [t]hey’re paying workers 83 cents per hour.” (M&B’s ire about competition from cheap foreign labor seems rather selective because, according to American Drycleaner, it operates a hanger-manufacturing plant in Piedras Negras, Mexico.) If true, the Chinese firms might well be able to charge a much lower price than M&B and still not be selling below their cost of production.
Although firms might rationally choose to sell an item at lower prices in foreign markets, there’s strong reason to doubt Chinese hanger manufacturers would do so. Transportation costs for weighty and bulky items like hangers are not trivial. Moreover, one might expect price-discriminating firms to charge lower prices in poor countries, but not in wealthier ones such as the United States (as is done with pharmaceuticals). But as I said about the Chinese selling at a loss, glory be if they are willing to price-discriminate to our benefit.
Of course, the fear is that the alleged dumping is a scheme to bankrupt domestic producers, shut them down, and leave U.S. consumers vulnerable to large price hikes that will recoup the losses incurred by selling below cost. Among the many conceptual problems with such a notion is that it would be easy for U.S. customers to find alternative international suppliers or for firms in the United States to restart their production when the predatory Chinese firms jacked up their prices. In the case of the Chinese hangers, the Department of Commerce indicates that there are more than a dozen Chinese hanger manufacturers, so it is hardly a given that, even if they desired to do so, they could sufficiently coordinate their activities to cartelize the international hanger market.
Overlooking the Unseen
The department defends antidumping duties as being necessary to protect American jobs. Indeed, news reports indicate that M&B has hired about 50 new workers and may double its workforce over the next two years. Alas, as is so often the case, such thinking ignores Henry Hazlitt’s admonition in Economics in One Lesson to “trac[e] the consequences of [a] policy not merely for one group but for all groups.” In the case of the great hanger crisis of 2008, other groups lose jobs in response to the protectionism that enriches M&B and its employees.
News reports indicate that higher hanger prices will cost cleaners $4,000 or more per year. Suppose that cleaners try to pass the increased cost of hangers along to their customers. Charging an extra, say, 10 cents per item will cause at least a few customers to reduce the number of items they send out for cleaning. If so, cleaners will need fewer employees, and M&B’s jobs will have come at the expense of cleaners’ employees. (Similar logic would apply if cleaners reduced their workers’ hours or wages in response to higher hanger prices.)
Even if customers grudgingly pay the extra dime without reducing their cleaning, they will have less to spend elsewhere. Although that may seem like a trivial amount, the cumulative impact of many consumers having perhaps a dollar per week less to spend on other goods and services may reduce employment in those occupations.
Another possible result of the hanger tariff is that cleaners will earn less profit rather than raise their prices or reduce workers’ hours or wages. Again, there would be unseen job losses since it is now the cleaners’ owners who would have less income available to spend on other goods and services. Of course, if the dry cleaners in an area do not pass along the higher costs, any marginally profitable firms will close, eliminating jobs for all their employees.
The Costs of Intervention
Brandon Fuller, writing May 21 on the Aplia Econ blog (http://tinyurl.com/6dk67x), provides a back-of-the-envelope calculation of the cost of the antidumping hanger tariff. Multiplying the $4,000 per-firm cost by the 30,000 dry-cleaning firms in the country yields a cost of $120 million. To put the $120 million figure in perspective, the tariff is expected to cost some $212,765 for each of the 564 jobs saved.
The lesson is that the misguided attempt to save jobs for domestic hanger manufacturers comes at the expense of other domestic employment. Failure to base policy on Hazlitt’s wisdom has led to the substitution of political competition and bureaucratic fiat for the market process. Not only has M&B enriched itself by using the political process to stifle competition from foreign firms, it has also taken advantage of the reduced competition by raising its price by more than 10 percent. (See Stan Diel, “Hanger Costs Belt Dry Cleaners,” Times-Picayune, April 15, 2008, http://tinyurl.com/63nhbs.)
Talk about being taken to the cleaners.