Wednesday, December 3, 2008

MvNL: New-Hire Subsidies

In another episode of a series that I think I’ll start calling "Me vs. a Nobel Laureate" (MvNL for short), today’s blog post once again challenges a blog post written by recent Nobel winner in the field of economics, liberal Princeton professor Paul Krugman. In this particular post, entitled "The greatness of Keynes…", Krugman concludes that anyone who disagrees with President-elect Obama’s "rescue plan for the middle class" is flat out wrong.

I wrote a response to his post on his website, as usual, but it will likely get lost in the already 170 other comments (some of which suggest Krugman should apply for a job as an economic advisor to Obama… /shudder), and so I wanted to include it on my own blog. Before I post my response, I feel like a little background on the policy is in order. Essentially what Obama wants to do is create more jobs in the country ("stimulating the economy" as liberals like to say) by subsidizing the first $3,000 of a worker’s wage for a scaled maximum $50,000 annual salaried employee (i.e. $25,000/year employees will have their wages subsidized by $1,500, a hypothetical $10,000/year salary would yield a $600 subsidy, etc). He calls this policy the "New American Jobs Tax Credit." Sounds pretty good… until we start thinking about the economic impact (this is an economic policy, right?).

My main issue, which is the common criticism of the policy that I allude to in my response, is that I do not see a failure in the labor market. Anyone who has taken public finance understands that the government should only intervene on a market when there is a market failure; the government can never achieve a better equilibrium than that of an externality-void free market. By that logic, if there is no failure in a market (such as the labor market), any government intervention will only waste national resources.

There are thus two questions that seemed to have been posed and answered by the Obama administration (assuming they understand economics) in reaching this conclusion: first, is there a market failure in the labor market? They apparently say yes, while I say no. People are getting laid off because it is a standard business tactic: when times are tough and sales are down, cost-cutting takes place. It happens everywhere and it is a natural consequence for a struggling business. Unemployment increases, obviously. The idea here, however, is that if society is efficient (and unregulated), a re-allocation of unused or under-used resources, in this case labor, will take place eventually as society reorganizes and recovers. A failure in the labor market, if you read that wikipedia link I put defining it, would be something where the optimal amount of labor is not being used by businesses and there is unnaturally high unemployment. In his post, Mr. Krugman tries to assert that businesses are being too conservative in their hiring decisions, I suppose he thinks beyond prudence. My response addresses that issue:

So the argument here is that laborers don't know how to properly value additional workers? And we are trying, in this post, to say that the whole country is guilty and susceptible to this fault? I'm having a hard time believing that... doesn't that imply that it would only take one company within an industry to be more lenient with hiring policy, either through chance or through brilliance, to gain an advantage over competitors? Wait a minute, if it is a mistake in judgment leading to pre-existing under-utilization of resources, isn't there already a free-market incentive to more efficiently assess labor? Why would we need Obama to step in and fix that for us?

So many questions, and I already have some theories. First, we don't need Obama to tell us how many people to hire. No one can dispute the fact, not even Mr. Krugman, that under Obama's labor policies there will be SOME people hired that, quite frankly, are not efficient enough to get hired. Not all industries are equally affected by this labor market "failure" and thus a flat subsidy across the board will generate some inefficiencies in and of itself. Granted, Mr. Krugman's argument is that the inefficiencies in the new system will be less than the current inefficiencies, but quite frankly, I don't see any current inefficiencies... with the exception of, perhaps, the minimum wage.

Mr. Krugman states in his own article that "the real choice is between having workers doing something and being uselessly, destructively unemployed." Whoa whoa whoa... I thought he was adamantly pro-minimum wage. This statement is a primary argument AGAINST having a minimum wage... if a task is valued to an employer at $2/hour, why can he not hire someone to do it for $2/hour? If no one will accept that wage, so be it. If someone will, society benefits: the job gets done and the worker gets paid what he considered a fair enough wage for the job (or else why accept it?). I agree with Mr. Krugman on his strangely utilitarian above statement: I disagree with his solution. Rather than increasing the minimum wage and force currently-working taxpayers to pay for subsidies on the currently unemployed, why don't we just eliminate or lower the minimum wage and have the free market reach its optimal solution?

Simulating a free market solution at the cost of (and the substantial risk with) government intervention financed by our already job-holding taxpayers is not as good as having a flat-out free market solution. Without a failing market, I see no reason for government intervention.

The second question for the Obama administration that I alluded to earlier is partially addressed at the end of my response: if there were a market failure, what would be the solution? They say subsidize new workers (at the expense of current workers). I say remove the minimum wage. There’s a brief summary of why I think the minimum wage is bad but seeing as how I’ve written a lot already, we’ll have to hold off that issue for a later post.

Until then… don’t believe everything you hear. Do your own research… even on the stuff I write. I welcome comments and criticisms. Oh and (shameless self plug) click “Follow this blog” on the right hand side of the page here to see updates every time I write a new post.

Thanks for reading.

1 comment:

Bobby G said...

I just thought it was interesting to note that the day after this post, Freakonomics posted an interesting insight into the labor market... for PhD economists. I posted a reply citing this very post here. The timing is amusing yet, at the same time, not that surprising; employment during our recession is a hot topic these days, and understandably so.