Sunday, 2 June 2013

Insiders, Political Economy and The Reset

Tyler Cowen has a reminder for us:
It is a common observation that nominal wages are sticky but let’s not forget that real wages are often sticky too (and in fact nominal stickiness tends to matter much more when accompanied by real stickiness, but that is a point for another day.)  That means many labor market changes will be slow to manifest themselves in the real world.  Furthermore you often will see them first for new jobs, for the young, and for new labor market entrants (usually but not always the young)...Fear the reset.  The world will continue to produce much more value, and much more gdp, but who will capture that value is already changing dramatically and will continue to do so.
The consequence of real wage stickiness is that changes in the position of labour might be slow to manifest themselves, leading to a painful ‘reset’ where insiders lose their cushy priviliges.

Isn’t this a good thing? We don’t look at the examples of Greece and Italy, wring our hands and say, ‘Oh, if only the labour market was more heavily regulated and there were more insiders who could protect themselves from economic disruption.’* We see rather that labour markets are not flexible enough – and I think we’re right in that observation.

Similarly, the fact that insiders got health insurance and the outsiders didn’t was the exact problem that Obamacare sought to solve. Companies offering less generous plans or leaving their employees to buy coverage on exchanges was the intention of the legislation. The goal was to move healthcare away from the corporate-centric model, because that model doesn’t control costs properly and screws over anyone with a pre-existing condition.

The classical view, therefore, would be to say the reset is great! Move resources to productive activities! Cut unemployment! Increase efficiency! Bryan Caplan wants the reset and he wants it now.

But Cowen offers a reason why real wage flexibility might be a bad thing – the declining labour share of income. There’s a lot of discussion of a future in which the labour share of income is minimal, but maybe the problem of the deteriorating position of labour relative to other factors of production is worse than we think. If change is only taking place gradually, at the expense of a population of outsiders which grows only slowly while a shrinking but substantial fraction of insiders remain insulated, then the rate of change of labour share of income is sticky and there could be lots more negative distributional consequences on the way.

The argument goes thus: maybe the current system isn’t economically efficient, but it’s better at keeping what resources there are in the hands of the workers. Neoliberal wonks don’t like insider-dependent ways of helping the poor, like unions or the minimum wage, because they’re economically inefficient. They tend to argue for dismantling these kinds of protections in favour of better policies like tax credits.

The problem is that insider-centric policies have a political constituency, and the wonks’ policies don’t. Unions lobby for more union power. Big corporations which already pay above minimum wage like to make life harder for the competition. On the other hand, no-one wants to pay extra taxes in order to fund the EITC, or capital endowments. Therefore, it may be that pareto-efficient labour market flexibility is impossible, because once the protections are dismantled there’s no political constituency for helping the poor. With rising inequality, the political clout of the rich can only increase, helping them to entrench themselves as a new class of insiders, while ensuring that the poor are left out in the cold –  they lose the suboptimal redistributive policies that were helping them before, but don’t gain any optimal redistribution in return.

There’s a compelling case that this is exactly what’s been happening in recent years.
Resets show up more quickly in some sectors than others, most of all they come quickly when buyers and sellers have only sporadic and perhaps even anonymous contact with each other.  In other words, the reset comes more slowly for the mistress than for the street prostitute.  And when you see youth losing relative ground in labor markets, that is another signal that you should be worrying about resets.
Cowen’s ‘reset’ argument also casts the problem of labour market bifurcation in a wholly new light. The last few decades of economic growth have been much kinder to academics than they have to burger-flippers. But maybe what we’re really seeing is that there are more insiders at the high-skilled end of the labour market, who are better equipped to forestall their inevitable reset.

This is obviously true in some sectors. Cowen uses the great example of tenured professors, but you can look at public employees like teachers, or credentialist cartels run by doctors and lawyers. Maybe it’s not a coincidence that these have been the sectors most resistant to productivity growth. The ‘Great Stagnation’ hypothesis assumes that the reason developments in technology haven’t made much difference to retail or healthcare or transportation productivity is that we haven’t found ways to make tech work in these industries (yet). But perhaps the real reason is that there are powerful upper-middle-class insiders holding back MOOCs and Watson and Uber and tooth whitening. Part of the reason insiders are able to entrench themselves is low turnover and this is true of firms as well as individuals. A large fraction of productivity growth comes from low-productivity firms going out of business and resources being reallocated to high-productivity firms.

After all, it’s not obvious that there has been a wholesale deterioration of labour’s position in many of the ‘flexible’ sectors, and tech is a great example of this. It still provides lots of upper-middle-class jobs** and if wages aren’t soaring that’s not because the surplus is being appropriated by corporations but because it’s being taken by a) new entrants to that labour market and b) consumers.

Of course, maybe the causality goes in the other direction. Maybe tech is a ‘flexible’ sector because there’s lots of disruptive innovation going on in that industry. Maybe academics still have tenure because MOOCs haven’t really got off the ground yet, rather than the other way around. Maybe doctors can run their cartels because medical productivity growth is so slow.

If that’s the case, though, we should still celebrate the deteriorating position of insiders because it would mean productivity growth. Maybe insiders are dwindling because there is no Great Stagnation and prosperity is just around the corner.

*This might provide a useful window into the sometimes impenetrable thinking of people who use the word neoliberal a lot.

**(and might provide a lot more of them if insiders would let more people live in San Francisco)


  1. The political constituency argument is devastating, and it's refreshing to see that people are finally starting to look at the 'neolib' arguments in light of political reality.

    There is no escape from a couple of cold facts: most of the world is poor, and an untrammelled and efficient free market optimizes efficiency while ignoring other considerations, moral, political, and familial/cultural. Allow the world to run as an untrammelled free market with no blocks on efficiency, under current real-world conditions, and the result for most people in the advanced West is a steady and painful downhill slide. A few people profit hugely, most people find wages, benefits, working conditions, etc moving toward global norms, they become much, much worse off and the rest of the world gets a marginal fraction better off.

    Nor can tax credits and other forms of 'compensatory' policy make up the difference, because a given amount of income from a tax credit or government stipend is not 'equal' to the same income from a job, even a make-work or protected job. Psychologically, culturally, socially, it's _utterly_ different.

    And that ignores considerations of national interest and other things as well.

    When the public opposes 'free trade' or union-breaking, they aren't being irrational, they're being _very_ rational. The interests of the majority are not served, long-term, but such policies, not in the West.

  2. Regarding productivity and prosperity around the corner, there is another problem with using productivity as a measure and guide: it matters, it matters a _lot_, what is being produced, if anything. If the economy, the 'pie' is expanding significiantly, higher productivity is usually a good thing for most people.

    But if the pie is not growing, or growing only very slowly, if the actual, real-world economy is stagnant and the total mostly-finite supply of goods and services are simply being divied up, then higher productivity has the practical effect of concentrating them, making the pie slices bigger at the expense of becoming fewer.

    If automating the Zoink Factory means that the work formerly done by 1000 men is now being done by 250, 750 people have to find other jobs. If there are lots of new good jobs being generated by the same advancing tech that cost them their old ones, it's painful for them, but good for the populace as a whole (i.e. the buggy whip manufacturers and the car-based economy).

    But, if the new tech _isn't_ generating lots of new, good jobs, then that 750 at best find lower paying jobs, their buying power decreases, spreading the pain around to the restaurants and stores they can no longer afford to patronize, and the population at large are either the same or worse off.

    (Yes, the Zoinks might be more cheaply produced now, but that will only be passed on to the customer if there is sufficient flexibility and competition in the Zoink market. Even if it _is_ passed on to the consumer, the consumer is only better off if the price reduction in Zoinks is greater than the losses in other areas, which is by no means guaranteed. The factory may continued to make the same number of Zoinks and sell them the same, and pocket the profit).

    For the last 3 or 4 centuries, the West has enjoyed an expanding economy. Global settlement, frontiers, increasing populations, an industrial revolution that needed huge pools of labor, the combination of frontier expansion and technological growth meant that the pie, on the whole, grew by a lot.

    The frontier closed around 1900. Technology, other than information science and related arts, is advancing far more slowly than it used to, and to the degree it is advancing the results are more consolidation than expansion (i.e. the Zoink factory).

    I know claiming technical advancement has slowed sounds odd at first glance, but it's unquestionably true even so. The period from 1850 to 1950 saw staggering technological changes, with orders-of-magnitude improvement in speed of communicaton and travel, energy production and application, supply of raw materials, products and luxuries. A time traveller going from 1850 to 1950 would be stunned, even from 1903 to 1953 would be amazing.

    From 1953 to today would be simply interesting. We make as big a public fuss over a fancier cell phone (iPhone, Android) that is basically still just a cell phone/PDA combo, that we once made over order-of-magnitude changes like air travel and telegraphs. We make that fuss because that sort of thing is all we have to make a fuss over.

    We need to ask ourselves if we really _want_ higher productivity or not.

  3. at the moment the political system is not perfect but it is not even trying to improve