Friday, April 26, 2013

David Stockman, Government Subsidies and the Minimum Wage

As David Stockman makes the rounds to promote his new book, I caught a few of his bon mots on government intervention in the economy. He takes the position that the technological advances we attribute to government programs would have emerged from the private sector, or that their rough equivalent would have emerged, and that the government should not be investing in private companies. I'm not entirely sold on his former point - yes, private industry might have come up with some of the technological advances resulting from projects spearheaded by the government, but there's no guarantee that it would have happened, that the process would have been more efficient, or the outcome better. At a minimum, we can say that those advancements would have taken considerably longer to develop - otherwise there would have been no need for the government-funded research. But sure, there's a cost-benefit equation to apply, reasonable minds can disagree on how much weight to assign to those costs and benefits, and we aren't able to test alternate time lines to see how the world would have turned out had the government not funded the space race, Manhattan project, military and defense R&D....

What I found more interesting... in a facepalm sort of way... was Stockman's position on the minimum wage. Stockman takes the position that the minimum wage is an incredible burden on business, and that there should be no minimum wage. Okay, standard libertarian home-brew thinking. Nothing to see there, right? He's the sort that would happily see somebody work two, three jobs and still not make enough money to support himself (let alone a family) because markets are groovy. And if Stockman left it there I would be willing to quip, "My reasonable mind can disagree with your unreasonable mind."

But Stockman's not that much of a libertarian. Not even close. He proposed that the government subsidize workers who cannot earn enough money to support themselves. I've not tried to delve into Stockman's reasoning - but if he's not going to eliminate much of the remaining 'safety net', it's difficult to imagine workers opting to work for 5 cents per hour (or whatever "the market" dictates) unless the subsidy provided by the taxpayer results in significantly higher remuneration than public assistance. If the subsidy is tied to hours worked, "the market" may well find five cents per hour to be reasonable - the worker will want more hours to get a greater subsidy, and the employer will not have to worry about paying a competitive wage because the government is picking up the bulk of the worker's compensation. And if you don't tie the subsidy to the number of hours worked, or cap the number of hours that will be subsidized, you introduce even more distortion. What such an approach might mean for the work environment or employee motivation, your guess is as good as mind... but my guess is that things would turn pretty ugly.

But more than that, if this is about "the markets", how is increasing the cost of minimum wage-level labor more of a distortion than passing along the bulk of an employee's compensation to the taxpayer? A great deal of the automation that has made lower-wage industries more efficient was created to reduce labor cost. Nations with the lowest labor costs are associated with slums and sweatshops, not innovation. Within the context of our society, why is it better to allow business to pay wages that require their employees to be subsidized by the taxpayer to maintain even a basic standard of living? Is it at all unfair to respond, "If a business cannot survive if it has to pay its employees enough money to support themselves, it's time for that business to innovate or die"?

Stockman would find it appalling if a business required copper to be available at $100 cents per ton in order to compete, with the government responding by picking up the difference between that and market price. So what is it that he sees as different about the cost of labor - which in this context is simply another line on the balance sheet. Why does the company that says, "Materials cost us $100,000 per week and we can't compete unless the taxpayer picks up 80% of our materials cost" undeserving of help, with any government intervention being an unacceptable manipulation of the markets, but when the same company says, "Labor costs us $100,000 per week and we can't compete unless the taxpayer picks up 80% of our labor cost"?

Also, frankly, Stockman's insistence that the minimum wage is harming the economy is not particularly consistent with the facts. The argument reminds me a bit of the person who rails against strong unions, then laments in the next breath that fewer and fewer blue collar jobs no longer pay a middle class salary. Might there be a connection between lower wages and the decline of labor unions? You would think that if the minimum wage destroys jobs, we would see some evidence of that destruction - of a minimum wage hike followed by a rash of business closures and bankruptcies. It's possible to imagine a minimum wage hike so high that it would make labor truly unaffordable for businesses that rely on minimum wage labor, but that's neither something that is going to happen in this country nor the basis of Stockman's argument. Why should we believe Stockman instead of our own lying eyes?

All that said, eliminating the minimum wage remains one of Stockman's better ideas....

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