The Incorrigible President Obama

Monday, December 9, 2013

This past week in Washington DC, the President made a speech about the state of the economy and about his determination to reform it. But much as things change, so they remain the same. A great deal of what he said there was reminiscent of a major address he gave two years ago on economic policy before a friendly audience in Osawatomie, Kansas. The President there talked with dizzying rapidity about the lost greatness of America’s past, and his plans to restore that greatness in the future. It's worth revisiting some of the basic themes of his speech since they obviously continue to inform his policy decisions today.

As is common in speeches that romanticize history to advocate change, Obama’s address contained an unforgivable level of jingoistic nationalism: He claimed, “It was here in America that the most productive workers, the most innovative companies turned out the best products on Earth…. Today, we’re still home to the world’s most productive workers. We’re still home to the world’s most innovative companies.”

Illustration by Barbara Kelley

No one, not even the United States, can be that good. In fact, our present national status will only become worse if we do not understand that the American position has eroded from its glory days, in part because of the very policies that the President champions as the solution to our issues. But where to begin? The President manages to pack so many economic and historical falsehoods into his speech that it is nearly impossible to take them all on at the same time.

In one of his illustrative sentences, he says: “The truth is we’ll never be able to compete with other countries when it comes to who’s best at letting their businesses pay the lowest wages, who’s best at busting unions, who’s best at letting companies pollute as much as they want.” For the President, each of these goals represents the ugly end of an economic “race to the bottom” that the U.S. should do its best to avoid. Unfortunately, his statement is wrong on every point.

“Pay the lowest wages.” There is nothing wrong with letting businesses pay the lowest wages that they can. The point of allowing them this option is not to rejoice in any decision to pay low wages; it is to recognize that once they are endowed with this freedom, they are still bound by the implicit constraint that no business has the power to set whatever wages it chooses. All firms will still have to attract workers in the face of competition.

Sometimes wages fall because of a sharp increase in supply. Efforts to prop them up artificially will lead to a breakdown of labor markets. The correct response lets firms make their individual adjustments. In each case the dominant constraint on the employer is the constant trade-off between marginal benefits and marginal costs. The firm that sets its wage scale too low will not attract sufficient labor to allow it to remain in business. In many markets, therefore, firms will be obligated to pay increasing wages, up to the point that their marginable benefits are just balanced off by their marginal costs.

In this world, there is no need for government intervention to raise wages. An increase in labor productivity will result in higher sustainable wages. Labor markets are almost always competitive because most workers can work in multiple industries that compete in different product markets. The result is that during the Progressive period, in which there was little or no wage protection, wages grew at a rapid rate, female participation increased in labor markets, and average hours of work went down with higher rates of productivity.

Contrast that picture with the stagnant results of the last five years, and it is clear that the effort to force feed employer markets by various forms of protection has turned out to be counterproductive. The President repeatedly laments the decline in employment policies and real wages during the last decade, but refuses to take ownership of his administration’s policies that have thrown multiple monkey-wrenches into labor markets, particularly at the bottom end of the distribution, that is, with the least well-off people. These are the people whom the President wishes to place in the expanding “middle class,” to which he refers repeatedly in his speech.

But the expansion of the middle class just cannot happen through labor policies that work to keep people off the first step of the employment ladder. If the President is worried about giving everyone a “fair shot” at future opportunities, why does he adopt policies that impose the greatest toll on the most vulnerable portion of the population?

One of the many great vices of the minimum wage law is that it concentrates on the wage element of the labor contract. Yet for people down on the economic latter, learning skills on the job, gaining experience, and establishing contacts often count for a great deal more than dollars, which is why young people often take summer internships for zero pay. It gives them a chance to work in a vibrant environment and they leave with a letter of recommendation. Entry-level workers start from a lower base, but they too acquire human capital that lets them climb the employment ladder.

Unfortunately, our visionary President knows little of the unintended consequences of legal intervention, so he continues to push hard on policies that fail. But he accuses everyone who disagrees with him of a form of “collective amnesia.” He caricatures them as believing that “we are better off when everybody is left to fend for themselves and play by their own rules.” Both halves of that sentence grossly mischaracterize the opposition.

The laissez faire system does not mandate that people should not help each other. There is no nefarious cohort advocating the position that it is somehow wrong to give assistance to people in need. Indeed, voluntary forms of targeted assistance will generate more bang for the buck than government grants. Nor should any firm ever be “allowed to play by their own rules.” Rather, within the strong legal constraints that define and establish competitive markets, firms should be allowed to offer whatever package of wages and collateral terms they choose—knowing that they have to keep pace with the market in order to succeed.

“Who’s best at busting unions.” This short five-word defense of unions also needs serious unpacking. It is an open secret that most employers are unflinchingly hostile to unionization of their workforce under the National Labor Relations Act. Unfortunately, the President never once asks why that is the case. The simple answer to that question is that under the current state of American labor law, unions work to the disadvantage of the employer. Their ability to set wages and terms of employment are effectively curtailed. Huge administrative costs are added in the cumbersome collective bargaining process, wherein a union with a monopoly position is intent not only on extracting high wages, but also on imposing a variety of work rules that impair the efficiency of the firm.

These employers have fiduciary duties to their shareholders that require them to do what they can to minimize the adverse consequences of unionization. If in fact unions did help improve labor market efficiency, employers would welcome them even if we repealed all the collective bargaining rules tomorrow. But unionized firms operate at a competitive disadvantage with non-unionized ones, which is why the United Auto Workers has seen its ranks shrink in recent years.

This puts “union busting” into perspective. Right now, no firm can refuse to bargain in good faith with its unionized workers. Nor can any employer make statements that are properly construed to contain a “threat of reprisal or force or promise of benefit.” Under the current law, it is proper to say that an employer is engaged in an unfair labor practice if its statements during an organization include either of these practices. But it is not proper to treat the employer as engaging in union busting if it points out to its own workers the disappointing performance of other unionized workplaces.

Deep down, however, union defenders follow the lead of former NLRB member Craig Becker, who has denounced as meddlesome all non-union speech in union elections. Becker would have a point if the employer could walk away from any union selected by either a majority vote or card check. But make no mistake: The successful union becomes a part owner of the unionized firm. So long as its unionization constitutes a partial takeover, employers are entitled to defend themselves by resisting the inefficiencies and dislocations that unions force on the overall economy, which extend from top to bottom—from the corporate board to the parents of disabled children who cannot get to school because of a bus driver strike.

Before the passage of modern labor laws, that efficient solution was achieved by the so-called “yellow dog contract,” which I have long defended. That contract allows employers to only hire workers who agree not to be union members while employed by the firm. That one stroke lets the employer preserve flexibility in labor markets without having to fight through a thicket of labor laws.

But the President wants stronger unions at any cost, while failing to recognize that union bosses work only for union members, leaving diminished opportunities for all non-union workers who have to compete for the leftovers. The capacity of unions to disrupt the overall economy by slowdowns and strikes is not the way to expand membership into the middle class. Free entry by employers who then bid up wages without social dislocations is a far superior alternative.

Letting companies pollute as much as they want.” In many ways, this last canard is the worst of all. The principle of laissez faire argues that competitive markets best determine wages and other employment terms. I know of no defender of laissez faire, anywhere, ever, who has taken the ridiculous position that pollution is just fine.

Indeed, a line of cases going back to at least 1535 stands for the precise opposite position. One representative case is the 1900 New York Court of Appeals decision in Strobel v. Kerr Salt Co. Pollution that renders water “so salty, at times, that cattle will not drink it unless forced to by necessity, fish are destroyed in great numbers, vegetation is killed, and machinery rusted, such use, as a matter of law, is unreasonable and entitles the lower riparian owner to relief.” Further, the courts “will not change the law relating to the ownership and use of property in order to accommodate a great business enterprise.”

The President’s account is not inaccurate by happenstance; it is inexcusable slander to characterize laissez-faire theorists as recklessly inattentive to the harms that business activities could cause strangers. Nothing could be further from the truth. Laissez-faire judges got the tort law right. Modern environmentalists, meanwhile, go astray by insisting on elaborate permitting systems that, as Philip K. Howard recently reminded us, don’t allow new projects to start until they pass endless sets of reviews that frustrate development of the “best infrastructure” needed to help domestic firms compete in global markets.

What is needed here is not a feeble apology for pollution, but the adoption of a regulatory regime that dispenses with the permit thicket that blocks new major projects, both public and private. The way to keep builders in line is by subjecting them to an iron command that their operations will be shut down or curtailed should pollution take place. But the President has no patience with these niceties of system design and thus backs an Environmental Protection Agency that always seems to get its priorities wrong.

These are some of the flaws baked into just one of Obama’s sentences. If his substantive knowledge could keep pace with his soaring rhetoric, this country might start to unleash its productive powers. But so long as the President keeps pushing failed and flawed policies, we can expect more mediocrity and drift, both for ourselves and for future generations.