Mephisto ALMOST made it on "Donkey's Inn" when pre-bans were allowed, but I think she still fell short of a hundred.
A couple interesting articles:
finance.yahoo.com
When Protecting Jobs Only Destroys Them
by Charles Wheelan
Wednesday, June 7, 2006
[Charles Wheelan, Ph.D.]
I like France. The language is beautiful. The food is inspiring. And I appreciate topless beaches as much as the next guy. Still, I sometimes wonder if eating snails doesn't somehow dull one's ability to make sensible economic policy.
I promised that in this column, I would debunk one of the most pernicious economic ideas of the left. (In my last column, I skewered one from the right: See "Debunking One of the Worst Ideas in Economics".) I've chosen the "lump of labor" fallacy, which is the mistaken notion that the world has a fixed number of jobs and that therefore the best way to make workers better off is by protecting those jobs. The French are not the only people who subscribe to this erroneous view of a modern economy, but they seem to cling to it more tenaciously than most.
For example, the French government passed a law in 2000 mandating a 35-hour work week for most workers while paying them for 39 hours. The primary intent was not to make life better for the affected workers but rather to create jobs for the unemployed. The French unemployment rate at the time was over 10 percent.
The supposed economic logic was that restricting the number of hours worked by the employed would generate new demand for workers to take over the remaining hours. In short, the architects of the policy reckoned that if I cut my work week from 39 hours to 35, and others are required to do the same, then new folks will be hired to do the other four hours of work.
Smaller Slices Aren't the Solution
Like most bad economic ideas that persist over time, the notion of a "lump of labor" has a certain intuitive appeal. The French policy assumes that the amount of work to be done in a modern economy is fixed, like a pie, and that cutting that work into smaller pieces -- fewer hours per week -- will provide slices for more people. If you've got six pieces of maple pecan pie to feed 12 people at Thanksgiving, then just cut each slice in half, right?
Not exactly. Requiring 39 hours of pay for 35 hours on the job makes workers more expensive relative to what they produce -- not unlike raising the minimum wage in the U.S. If workers become more expensive, firms will hire fewer of them, not more. French unemployment remains near 10%, roughly twice the rate in the U.S.
More recently, French students took to the streets to protest a policy that would make it easier to fire young workers. In the U.S., we take it for granted that firms can shed workers who aren't needed or aren't getting the job done. In France, workers who are hired full time are granted the employment equivalent of tenure.
To its credit, the government was seeking to introduce a two-year probationary period for workers under age 26, during which time there would be more flexible rules for termination. Young people -- and lots of sympathetic older people -- took to the streets to protest the policy, and the government backed off. Once again, the supposed logic was rooted in the idea of a "lump of labor" -- if you've got an unemployment problem, why make it easier to fire people?
Productivity: The Key to Job Creation
The problem is that fighting unemployment by making it harder to fire people is the equivalent of a department store deciding that profits would be higher if customers could no longer return merchandise. That logic ignores the important fact that if you can't return those pink Bermuda shorts from Nordstrom, you will be far more cautious about buying them in the first place.
The more fundamental point is that thinking about the economy as a zero-sum situation, in which every job gain must be someone else's loss and vice versa, is not only wrong but likely to lead to policies that produce more unemployment, not less. The number of jobs to be done in a modern economy is not fixed. The entire software industry didn't exist 25 years ago. Where did those jobs come from?
Instead, the key to creating both jobs and wealth is a concept that economists refer to as productivity. As productivity goes up, as it has steadily in the U.S. for 200 years, we're able to make more and better things as a society. In other words, we get richer.
Multiplying Opportunities
To get your mind around the concept of productivity, imagine a small, insular farming village in which all of the good land is being farmed and every household grows or makes whatever it uses -- from food to the house itself. Further suppose that a stranger walks into town looking for work.
If you subscribe to the "lump of labor" theory, then this guy is out of luck. The only way he could go to work would be by farming part of someone else's land. If he eats more, someone else must eat less.
But that's not how the world works. Suppose the guy who walks into town has figured out how to build a more effective plow. He can sell his plows to farmers, who will pay for them with a share of their more bountiful harvests. Not only will our stranger have a job, but the farmers will be growing and eating more -- even after paying for their new plows.
We can do it again: A second stranger walks into town and offers to set up a school -- or make clothes, or build houses, or design irrigation ditches, or do anything that frees up the farmers to spend more time cultivating their crops. Again, crop yields go up. And again, we've created another job.
A third stranger could open up a medical clinic, which may not increase crop yields directly but will still make the village better off as farmers willingly trade some of their crops for better health. That's another job. (And two if there's a receptionist).
We can do the same exercise over and over again until our village has artists, yoga instructors, child-care centers, professional sports teams, dog walkers, and everything else you see going on around you. These jobs don't necessarily have to be created by strangers arriving in town -- farmers can always sell their land and launch an entrepreneurial venture. The key is that new ideas and better ways of doing things make the village continually more productive.
Self-Defeating Policies
What are the keys to raising productivity in a modern economy? Innovation, education, specialization, sensible tax and regulatory policies, and so on. The problem with the French policies I described -- and most other labor policies rooted in the lump of labor fallacy -- is that they discourage innovation and productivity. Firms are less likely to take a risk on an employee -- or expansion in general -- if they can't fire their mistakes. Meanwhile, requiring employers to pay 39 hours worth of wages for 35 hours of work makes automation or outsourcing that much more attractive.
When it comes to bad policy, France has good company. India still has a policy on its books requiring that firms with more than 100 workers receive government permission before laying off workers (which the government rarely deigns to grant). The logic is that a country with so much poverty and unemployment should protect every job it has.
The result: China has grabbed a disproportionate share of low-skill manufacturing because it's an easier place to set up large factories. India's thriving high-tech sector is the exception that proves the rule -- it's exempt from the most onerous labor regulations.
And Ross Perot enlivened the 1992 presidential election with his prediction that the North American Free Trade Agreement (NAFTA) would cause a "giant sucking sound" as jobs fled the U.S. for Mexico. His supposed logic was that what's good for low-wage workers in Mexico must be bad for workers in the U.S. If you haven't got enough pie to feed your own hungry family, don't start giving away pieces to the neighbors -- particularly really hungry neighbors.
The result: Ross Perot was the one blowing (rather than sucking) hot air. Ten years of data have confirmed what economists predicted at the time -- NAFTA gave a large boost to the Mexican economy and had a small positive effect on the U.S. economy. Trade allows countries to focus on what they do best, making all parties more productive in the process.
There's a crucial caveat to all this, illustrated best by going back to our fictitious farming village. Suppose the stranger walking into town has no high school diploma and no other skills to speak of. In that case, there really is no job for him. Therein lies the most important policy lesson: The key to growing the economy is making potential workers more productive, not trying to ration the amount of work that gets done.
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finance.yahoo.com
Debunking One of the Worst Ideas in Economics
by Charles Wheelan
Wednesday, May 3, 2006
[Charles Wheelan, Ph.D.]
In this column, I'm focusing on bad economics. In fact, I'm going to write about what I consider to be the two worst economic ideas -- or at least ideas that pass as economics, though both have been thoroughly repudiated by nearly all credible thinkers.
When I say worst, I don't mean the most outlandish (e.g. stock prices are controlled by aliens) because those ideas usually collapse of their own weight. Rather, the most pernicious bad ideas in economics are those that have a ring of truth. They're hard to debunk because they have a certain intuitive appeal. As a result, they stick around, providing bogus intellectual cover for bad policy, year after year, decade after decade.
For the sake of political balance, I'll skewer a favorite of the right in this column, and then a favorite of the left in my next piece.
The Laffer Curve
Economist Arthur Laffer made a very interesting supposition: If tax rates are high enough, then cutting taxes might actually generate more revenue for the government, or at least pay for themselves. (In one of life's great coincidences, he first sketched a graph of this idea on Dick Cheney's cocktail napkin.) If the government cuts taxes, then Uncle Sam gets a smaller cut of all economic activity -- but reducing taxes also generates new economic activity. Laffer reasoned that, under some circumstances, a tax cut would stimulate so much new economic activity that the government would end up with more in its coffers -- by taking a smaller slice of a much larger pie.
In fairness to Mr. Laffer, there's nothing wrong with this theory. It's almost certainly true at very high rates of taxation. If you consider the extreme, say a 99 percent marginal tax rate, then the government will probably not be collecting a lot of revenue. To begin with, citizens are going to hide as much income as possible. (The more honest ones will turn to barter and avoid the tax system entirely.) And no one is going to rush out and take a second job or build a factory if they get to keep only $1 of every $100 that they earn.
So it's entirely plausible that slashing tax rates from 99 percent to 30 percent could increase government tax revenues. It would deflate the black market and provide a huge new incentive to work and invest.
No Big Jolt for the U.S.
But here's the problem when we take Laffer's theory and try to apply it in the U.S.: We don't have a 99 percent marginal tax rate. Or 70 percent. Or even 50 percent. We start with low marginal tax rates relative to the rest of the developed world. (Yes, I understand that it may not feel that way after the check you wrote last month.)
So cutting the tax rate from 36 percent to 33 percent is not going to give you the same kind of economic jolt as slashing a tax rate from 90 percent to 50 percent. There's no huge black market to be shut down, no big supply of skilled workers to be lured back into the labor market, and so on.
Will it generate new economic activity? Probably. And that will generate some incremental tax revenue for the government. But remember, it also means that the government will be taking a smaller cut of all the economic activity that we already have.
Think about a simple numerical example: Assume you've got a $10 trillion economy and an average tax rate of 30 percent. So the government takes $3 trillion.
Let's cut the average tax rate to 25 percent and, for the sake of example, assume that it generates $1 trillion in new economic growth (a Herculean assumption, by the way). So now, what does Uncle Sam get? One quarter of $11 trillion is only $2.75 trillion. The economy grows, government revenues shrink.
That's basically what happened with the large Reagan and George W. Bush tax cuts, both of which were followed by large budget deficits. Yes, spending has a lot to do with that, but the bottom line is unequivocal: In both cases, government revenue was lower than it would have been without the tax cuts.
Can't Lose Weight by Eating More
Neither the Reagan nor the George W. Bush tax cuts were "self-financing," as the Laffer disciples like to argue. According to The Economist -- my former employer and no bastion of left-wing thought -- the current Bush Administration's top economist, Gregory Mankiw, estimated that decreasing taxes on labor would generate enough growth to recoup only about 17 cents for each lost dollar; a tax cut on capital is better, paying for more than half of itself. Still, the bottom line from the Bush Administration itself is that tax cuts reduce Uncle Sam's take.
So why does Laffer's sketch on Dick Cheney's cocktail napkin rank near the top of my list of bad economic ideas? Because, when applied to the U.S., it's intellectually dishonest. The Laffer Curve offers the false promise that we can cut taxes without making any sacrifice on the spending side, and that's simply not true. It's the economic equivalent of arguing that you can lose weight by eating more.
Let me be perfectly clear: I'm not arguing that tax cuts are bad. I'm simply pointing out that we can't pretend that tax cuts won't require reductions on the spending side to balance the budget. In fact, you can disregard every other argument in this column and think about one thing: If Laffer were right, lower taxes would never require any spending sacrifice. We could pay a mere one percent of our income in taxes and still fund all of our government spending -- and maybe more! Do you think that's really possible?
This column should give you a hint of why economics is called the dismal science -- it's all about tradeoffs. We're the ones telling you that if you get more of something, you probably have to get less of something else.
Whether it's tax policy or dieting, you can't have your cake and lose weight, too, which is why America currently has huge deficits and a lot of fat people. |
