David R. Henderson  

More Evidence for Block

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Bryan, in his earlier post today, refers to an excellent quote from Walter Block that I hadn't been aware of. I have some striking evidence for it that suggests that Walter actually understated the case. Here's the story.

In about 1988, a German labor economist visited my school, the Naval Postgraduate School. My late colleague, Loren Solnick, and I had lunch with him. He wanted to know about regulation of the labor market in the United States. I was about to tell him that U.S. labor markets were substantially freer than those in Germany, but I deferred to my colleague, Loren, because he was a full-time labor economist and I thought I would play cleanup.

Then Loren shocked me. He said that labor markets in the United States are highly regulated, probably substantially less free than those in Germany. But he was doing a comparison based on one country. The German economist raised his eyebrows and started listing interventions in Germany, asking if we had those here. Loren sheepishly admitted that we didn't.

What had happened? Before Loren had come to the Navy school in about 1986, he had worked full-time as an expert economist, typically defending employers from discrimination suits. He had seen some of the worst of the interventions in U.S. labor markets, and it was hard for him to see that it could be worse. It was and still is.


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COMMENTS (14 to date)
Justin Martyr writes:

I've been a Europe kick lately. I just finished Can Germany Be Saved? by the economist Hans-Warner Sinn and it shocked me.

1. Co-determination. German Unions are so powerful that they have a large fraction of seats on the boards of their companies (I forget the exact percentage, but somewhere in the ballpark of half).
2. German labor unions have basically used the dismissal protection laws as ways to raise their wages. This is part of what is driving outsourcing to Eastern Europe and the high unemployment rate in Europe.
3. Until reforms in the early 2000's, you could get fired and then go on unemployment insurance for the rest of your life and make 57% of your salary. I kid you not.
4. The government offers a guaranteed minimum income and it is actually higher than the minimum wage. The only people in Germany who work minimum wage jobs are wives in two-income families, retirees, and others who are ineligible for welfare benefits. Again, the unions have encouraged this because creating a vigorous insider-outsider dynamic demands a method of assuaging outsiders.
5. The reason why East Germany is such a train wreck is because the West German unions did not want competition with cheap labor. The reason why currency union between East and West was at par was not out of altruism. However, since the productivity of East German workers is only about 60% the level of West German counterparts, no one wants to invest in East Germany (relatively speaking).
6. Germany actually spends 16% on payroll taxes for Social Security rather than the 12.4% of the United States. And they have a total fertility rate of 1.3 compared to about 2.1 for the US, although that may not be relevant to the labor market.

I think the Nordic countries will make it through the demographic transition and still be able to keep something that is recognizably a welfare state, but Germany is big trouble. The unions are too strong and the demographics are too nasty.

David R. Henderson writes:

Well-done, Justin.
David

Justin Martyr writes:

Thanks David! :)

david writes:

There's a problem with just listing formal regulations, namely that the consistency of enforcement and the issue of whether the regulation even bounds any practical activity tends to be hidden. In particular, in areas where power is reserved to a discretionary authority, we cease to distinguish between a careful technocrat backed by tradition and 'pragmatic' ideology (Singapore?), and a kleptocrat with a Swiss bank account.

I wrote a comment along these lines in Sumner's post, but take Singapore, as mentioned in Sumner's post. It has a National Wages Council, which has a mandate to resolve labor disputes in the broader interests of society. It (still) publishes national wage guidelines. It has a government-controlled and government-backed national union, and Singapore has very high levels of unionization, well above the United States. It has numerous government-owned companies that dominate the economy.

But this political machine is not turned towards redistribution from employer to employees, as one might expect, but towards delivering a skilled and compliant labor force towards MNCs, preferably before Hong Kong's relatively timid government responds to global trends. Sometimes returns to scale exist and sometimes a responsive government can leverage them.

Sumner looks at this and says, aha, a laissez-faire market... but there is very little here that is not the result of bureaucratic planning, or the implicit or explicit use of coercion.

The point here is that what matters are not formal regulations nor limits to power; these formal limits exist within their own implicit ideological framework, and it matters what government bureaucrats (even nominally power-limited ones) think should be done. To paraphrase Sumner, the real action is in changing the zeitgeist, not what the regulations are. Singapore represents an extreme case where regulations and regulation diverge in an obvious manner, but this applies elsewhere too. Germany's powerful unions would be a benefit to Germany if the bulk of it were convinced - as Singapore's apparently is - that its interests lie in maximizing long-term growth.

Contemplationist writes:

david

You make an excellent point. I agree in the case of Singapore. However, the generic libertarian response would simply be probabilistic reasoning. How LIKELY is it that heavy regulation would coexist with a zeitgeist of looking to the long-term? As far as I can see, Singapore is a lonely exception. In that sense, isn't the best bet simply laissez-faire labor markets? (relatively of course - like the US).

To put it another way, Singapore has philosopher-kings. And thats pretty rare. Why would we want to depend on existence of philosopher kings for prosperity?

lukas writes:

Justin,

there is no general minimum wage in Germany. Welfare acts as a de-facto minimum wage, true, but quite a few people remain in jobs that pay less than welfare (which is especially likely for couples with lots of kids and single parents) just out of pride or to keep their CVs in order. Also welfare is phased out gradually over the lower income range.

Justin Martyr writes:

Lukas,

I hinted at that point in my comment. The only people who work low wage jobs are people who are generally ineligible for welfare, such as spouses and retirees. A related point that Sinn makes is the fact that welfare benefits are phased out creates extremely high marginal tax rates. They are basically 100% over a very wide range of incomes and over 100% for certain narrow regions.

david writes:

Contemplationist,

Apply your own probabilistic reasoning here. Do you envision any way in which a laissez-faire market can persist without the support of organized political groups?

In essence, wouldn't you have to alter the policy zeitgeist anyway?

American commentators sometimes see a meaningful distinction between regulations and regulations about regulation (be it constitutional or institutional), but neither presents a significant barrier to the exercise of power. How's that Commerce Clause working out for you? You still have to change what policymakers think; any barriers on action are just speedbumps, not unbreachable restrictions.

Contemplationist writes:

You're right that it can't.
But my point simply is about what to ARGUE FOR.

We should be ARGUING for laissez-faire and agitating for it, as opposed to arguing for more regulation.

david writes:

You know it can't be done, but you're going to try anyway?

Good luck, I guess. Also, I suggest keeping in mind that first-best policies in a second-best background are often very bad. Moving toward laissez-faire can involve some very rocky bumps on the way; it's not always a unilateral improvement.

Contemplationist writes:

Its possible of course that pushing for first-best policy in a second-best environment can involve rocky bumps. But what is the alternative?
I don't believe it is a decent second-best environment. I see the alternative as continual degradation from first-best to second-best to third-best. Its already happening in the debates on financial regs, housing policy, and health care.

We can't deregulate and force banks to take on market risk (FDIC), so lets keep too big to fail etc .
We won't let go of GSE's like Fannie and Freddie, and so lets regulate housing further.
We won't deregulate health care or allow price competition, so lets nationalize.

This is futile and a slow road to stagnation.
Even in cases where first-best cases are infeasible, they must always be kept in mind, and shown brightly that they exist...and that whats accepted to is indeed second-best.

ray l love writes:

I recently read a quality article that gives a positive slant on Germany and so here it is:

http://www.prospect.org/cs/articles?article=germanys_economic_engine

Liam writes:

You know getting back to the original post this reminds me of the story I read about Germany's Welfare program. I can't remember the specifics but the gist was that if the Government found a position you were qualified for they could force you to fill a vacancy or lose your benefits if the hiring company requested someone. That is until someone pointed out that brothels were legally registered companies.

(Gee Honey, you must like your new job. You've been putting in a lot of overtime)

david writes:

@Liam

Nope.

@Contemplationist

I don't think you understand what "second-best" means... it doesn't refer to a series of possible worlds you can pick and choose from. There is no third-best. What it means is that if you try and fail to move to first-best, you will make things worse.

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