Tuesday, August 2, 2016

Federalization of Labor

We are getting a good hint that a centerpiece of economic policy in the Hillary Clinton administration will be an increase in Federal control over labor markets.

The news here is that serious economists are advocating these policies, not just to transfer income from one to another, reduce inequality, help specific groups, or enhance some sense of social justice, at the expense of dynamism and growth, but that more Federal control of the labor market will increase wages, productivity and economic growth for everyone!

Alan Blinder's cogent Aug 2 Wall Street Journal opinion piece gives a good sense of the language and logic,
... Hillary Clinton has presented an extensive list of policies that would raise wages, starting with a higher minimum wage. ...

Mrs. Clinton also advocates widespread profit-sharing as a way to put more money into workers’ pockets. She would promote that goal both by using the presidential bully pulpit and by providing tax incentives for businesses that share profits. Since the scholarly evidence suggests that profit-sharing raises productivity, such tax breaks will partly pay for themselves.

Increased vocational training and apprenticeships for the non-college-bound are also major Clinton policies....The U.S. can increase its productivity and reduce inequality by ensuring that the right people get vocational training and apprenticeships.

And then there is what may be the surest way to raise wages over the long run: providing pre-K education for all American children....
Labor market intervention is getting wrapped up in "stimulus," as reported in an excellent Bloomberg column by Brendan Greeley here,
 "It’s really simple," she said at a rally in June in Ohio. "Higher wages leads to more demand, which leads to more jobs, which leads to higher wages." ...

When Clinton uses the word "demand" on the stump, she’s blowing a dog whistle. (Economists have them, too.) Increase demand, she’s saying, and you get growth.... 
Bob Gordon signs on reluctantly,  
"I think it’s a very marginal way of promoting economic growth," says Robert Gordon, economist at Northwestern University who specializes in the subject. Like Summers, he prefers a massive investment in infrastructure. But he does agree that a shift in business income away from profits and toward salaries would create growth. Workers are more likely to buy things from their paychecks than businesses are to invest out of their profits.
Alan Krueger ["former chairman of the Council of Economic Advisers and an informal adviser to the Clinton campaign," and candidate for vice-president of the American Economic Association] agrees wholeheartedly:
... "I think the time could be right for a more virtuous growth model," he said, "which is driven by stronger wage growth...more consumption, more demand, creating more jobs." 
Novel rationalizations for decades-old policies are always suspect. And the usual passive or verb-less sentences hiding the heavy hand of Federal government always invites skepticism.

But let's take it seriously. How much sense do these analyses make?

Without rehashing the whole minimum-wage fight, it is worth asking, if the Federal Government forces businesses to raise some people's wages, but others become unemployed as a result, whether that really count as raising wages overall?

The words "presidential bully pulipit" has poor overtones in the current age. The bully pulpit means the DOJ, EEOC, IRS, NLRB, EPA and who knows even the fish and wildlife service may come calling if you don't do what the president wants. Schoolyard bully, not Teddy Roosevelt's jolly-good pulpit.

"The scholarly evidence indicates that profit-sharing raises productivity.." That's a new twist on the abominable "studies show" argument by reference to vague authority.  But even "scholarly evidence" has to make some sense.

It does make sense that firms which study the question and choose profit-sharing plans can thereby raise productivity, either by giving their employees better incentives or by attracting different and more productive employees. They would not do it otherwise.

But this classic subject-free sentence is about Federal Regulations to force profit-sharing that "puts money into workers' pockets" on all firms. It does not follow that such a mandate will have the same effect. This is the classic, "rich guys drive BMWs, so if we force BMW to give cars away we'll all get rich."

To belabor the obvious, that some firms choose it because they see it will work does not mean that the Federal Government forcing it on all firms will work.  That profit sharing which increases workers' incentives can work does not mean that reducing profits and paying lump sums to workers will work. That profit sharing accompanied by greater selection of productive workers works does not mean that forced profit sharing will work for everyone -- someone employs the less productive, I hope.

If it's about incentives, then there should be a widespread Federal initiative to promote piece-work, commissions rather than salaries, independent contractors rather than employees... Hmm, we're headed the other way.

As economists, we are supposed to start with a problem. What is the market failure that stops companies form putting in productivity enhancing profit sharing programs? Or are they just too dumb and need the benevolent hand of the "bully pulpit" to educate them?

"Increased vocational training and apprenticeships for the non-college-bound," are more Orwellian subject-less sentences. Who is going to do this increasing and how? What is the market failure? Do we need to have triple digit numbers of Federal Job-training programs?

"Providing pre-k education" is another subject-free sentence. I presume he does not mean reducing regulations and union requirements so more pre-k schools can start up! That might actually be effective. But perhaps it is technically correct: a large Federal subsidy for pre-k education, funneled through the public school systems and teacher's unions will raise someone's wages. The "scholarly evidence" is not that it will be the kids.

The idea that forcing companies to pay out greater wages is the key to "stimulus," and that demand-side "stimulus" is the key to long-run growth is...er... even more novel economics.

In classic Keynesian stimulus, there is something about the government borrowing money and spending it, or giving it to consumers to spend, that causes people to forget that the borrowed money must be paid back someday. Not here -- this is directly the claim that taking from Peter and giving to Paul is the key to prosperity. And not just temporary stimulus, but long run growth.

One of many fallacies at work here is the notion that companies face a choice between "paper" investment and "real" investment; that by piling up cash reserves they are somehow diverting resources that could be "real demand" into "paper investments." But every paper asset is a paper liability, so this possible truth about an individual company makes no sense for an economy as a whole.

And let's follow the logic.  If this works for stimulus and growth, force companies to give away cash to consumers. Consumers are, well, people who like to consume. Force them to give cash away to thieves. They consume quickly.  If this is a bad idea.. well then maybe the whole "stimulus" thin is a bit of bunk as well.

Gordon at least has the decency to belittle the idea. And on "a shift in business income [another subjectless sentence -- this shift is forced by the Federal Government!] away from profits and toward salaries would create growth"  because "Workers are more likely to buy things from their paychecks than businesses are to invest out of their profits," one can hope that a statement which violates basic accounting is a misquotation.

 Krueger has less defense: "a more virtuous growth model,...which is driven by stronger wage growth...more consumption, more demand, creating more jobs" is a direct quote. It may be "virtuous" to feel this way, but the classic criticism of Democratic economic policy is doing things that make you feel good but don't work.

Well maybe, maybe not. Economics is a work in progress. But it is certainly brand-new, made-up-on-the spot economics, designed to buttress policies decided on for other reasons.

A last grumpy comment. The WSJ titled Blinder's oped, "Only one candidate can make wages grow again."  Actually I agree with the sentence   Like most media they forgot there are more than two candidates!


  1. Verbless sentences. Awesome catch. Have you read Orwell's Politics and the English Language? I think it is fun and very much to your point. (Stocks down, the gods must be angry was also great.)

    For selfish reasons that you might not approve, I think you should really promote the Libertarian Party. There are indeed more than two parties. Get your guys here on board the Johnson/Weld train! ;)

  2. I didn't even know that the Department of Labor had agents until the Obama Administration started sending them off to intimidate coal and oil and gas companies. I haven't heard of many inquiries into companies building solar arrays and wind farms. Funny how enforcement of outmoded 1930's legislation is so selective.

  3. Hillary appears to be worst of both worlds: a market interventionist and a globalist-militarist (implemented through the fantastically expensive if ineffective agencies of the federal government).

    And she is considered the orthodox choice.

  4. One way to increase wages is to make them more volatile -- higher risk means higher expected returns. Paying labor a fixed percent of revenues, instead of a fixed dollar amount, would also reduce the volatility of profits, thereby reducing the cost of of capital (or required profit margin). It would also give labor a direct stake in the business, aligning their interests with management and shareholders. It may not be a good solution for all companies or industries, but it's something many companies and labor unions should consider. Note that a revenue share is different from profit sharing.

    1. Reducing profit volatility means increasing labor income volatility doesn't it? How will that go down?

  5. A colleague and I were working on a 3D printing startup. Our research and capital commitment of $2,000,000 were in place. We estimated the venture would reach break even in the first year with p~.8. Our optimism was truncated when both the EPA and OSHA couldn't give us definite guidelines for compliance. Their comments: "No study has been done as to safety...blah blah." "We'll get back to you." "When?" "Indeterminate." The best one, off the record from one of these incompetent civil servants, "You'll put a lot of people out of work." I had enough.I said, "No sir! You and your agencies are putting people out of work with moronic regulations." Of course I have no intention of pursuing a venture that puts me in an uncertain position vis a vis authoritarian government agencies. My biggest fear, one of these agencies criminalizing a garden variety manufacturing error.

  6. I'm not sure if it'll make you any less grumpy but, for what it's worth, Clinton at least has the good graces to keep her "please elect me" economic proposals small. The stuff you're worried about amounts to a hill of beans in the grand scheme of things.

    The Clinton plan involves spending huge amounts on ending sequestration, making college tuition cheaper, infrastructure investment and her worker's leave programs. Each of these costs substantially more on its own than all of Clinton's other proposals combined (at least per Moody's break-down).

    So yes, the profit sharing tax break is foolish. But it's also teeny-tiny, so it'll never hurt anyone either (other than Sanders & Trump; it is a pretty ingenious method for garnering moderate votes). Ditto the whole apprenticeship thing and pre-K. So no need to get so grumpy!

  7. At least the calls for infrastructure spending, K-12 education, and vocational training are all justifiable on economic grounds; if a bit naive when it comes to the actual results.

    The perpetual motion machine of personal consumption leading to ever increasing prosperity is really puzzling. The heart of modern macro is all about inter-temporal decision making, dynamic programming, and budget constraints. These people get paid to teach this stuff, so its disappointing to see them continuing to peddle this. I'm at a loss to explain their willingness to say this, short of being paid to do so.

  8. Taking from Peter to give to Paul is an incomplete definition of deficit spending. Peter gets a T-security in return for his money so he is no poorer. Paul, in contrast, has more money. To the extent Paul spends the money, GDP, etc. is increased. This is no long-term solution to economic growth, of course, but it can help over the short-run. In addition, this "borrowed" money will typically never be paid back, as this "debt" (the private sector asset) will usually just grow along with the economy forever. It is only paid back if budget surpluses were to occur. Thanks.

  9. Re:Gordon. Businesses have little ability to shift money from profits to salaries. That is, if higher salaries get spent, it increases business revenues such that overall it is a wash for profits. Thanks.

  10. "Equal pay for equal work?" Just terrible!Now the feds will determine pay, hiring and firing? Criminal penalties are threatened if businesses' don't comply? This is nothing less than despotic statism writ large.

  11. Don't you understand? Every business has a big bucket of "profit" sitting in the accounting department that each company is puzzled about what to do with it. Thankfully, the Federal government can help these businesses decide what to do with that bucket of profits. As an added bonus we get to increase the size of the government so they can think of even more wonderful things that businesses can do to be more successful.

  12. Most economic models sweep away any distributional downsides to a policy with the following argument:
    "First maximize the size of the pie, then THROUGH REDISTRIBUTION everyone should be better off"
    This is true, but redistribution hasn't happened in the last 40 years. Then when people call on distribution, classical narrow-minded economists repeat the same phrase about the size of the pie, for how long will this be sustainable?

    1. "Redistribution hasn't happened in the last 40 years?" Sorry, I have to call a four Pinocchios on that one. Our income tax is highly progressive, and our government spends several trillions of dollars each year, sending people checks. Have you never heard of social security, medicare, medicaid, welfare, food stamps, and so forth? (To say nothing of farm price supports, small business subsidies and so on). Maybe you don't think enough redistribution has happened, or that it goes to the wrong people-- tenable positions. But "redistribution hasn't happened" is just so ludicrously false I have to call it out.

  13. A few years ago, I posted:
    "I just realized that I haven't seen the claim that paying higher wages is good for the economy because it enables workers to buy more in years, possibly decades."

    It's ba-ack!


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