Arnold Kling  

Seeing Like a Central Planner

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Mike Konczal writes,


The government's workforce is more educated than the private workforce. For instance, the government's "college plus" level is 54%, while all private workforce is 35%. "Some college" is 14% of government workers, 19% of the private workforce. So this is important to control for.

This is part of an argument the government workers are not underpaid. As a central planner, you are convinced that you can measure a worker's value by looking at characteristics such as education level.

Two points I would make.

1. The government can never know the value of a government worker. We do not know the value of the output that they produce. The socialist calculation problem is very real.

2. We might be able to make a guess about the opportunity cost of a government worker. That is, what does the worker forego in order to work for the government? To make this guess, we would want to look at the willingness of people to take government jobs and the willingness of people to leave government jobs. If the government has a hard time filling positions, then those positions are likely to be underpaid relative to opportunity cost. If the government has a hard time retaining workers, then those workers are likely to be underpaid relative to opportunity cost.

It seems to me that no matter how many studies one does of pay relative to education or other characteristics, they will only be convincing to dedicated believers in central planning. If you held a gun to my head and made me a central planner, I suppose that I would try to allocate labor by measuring characteristics of workers and aligning those characteristics to jobs.

However, if I were hiring for the government in the context of a market, and I could pay workers whatever I want, then I would only keep salaries high for workers based on my guess about their opportunity cost and value added (the latter being almost impossible to measure, but assume we come up with something). My guess is that I could cut pay for many categories of government workers without causing them to seek jobs elsewhere. My fear is not that government workers would quit, but that they would stay and cause problems to express their resentment.


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COMMENTS (24 to date)
liberty writes:

"We might be able to make a guess about the opportunity cost of a government worker. That is, what does the worker forego in order to work for the government? To make this guess, we would want to look at the willingness of people to take government jobs and the willingness of people to leave government jobs."

This is true but only to the extent that government employment has not affected private opportunities. The opportunity cost of giving up a government job will be different if government employs 70% of the workforce (at any pay rate) than if it employs 30% of workers (at the same rate) because the other opportunities available for private employment will be different.

If government employs 70% of the workforce then it affects the prices of products that private employers will need to buy as inputs, the tax rate they have to pay, the price they can charge for their products, etc. Hence, the calculation problem still persists even when you look to market-based opportunity cost calculation.

Daniel Kuehn writes:

Your points are well taken, but I think your critique of Konczal's simple point is absurd. If I took workers in a firm where 90% of their employers had a higher degree and compared their wages to the wages of McDonald's workers, would it make sense to argue that the McDonald's workers were underpaid? Of course not. The first thing you would say is "well you have to control for educational level, etc." It's not "seeing like a central planner" to recognize the relationship between human capital and wages.

That having been said your points are obviously right.

I just don't understand why you have to accuse someone of seeing like a "central planner" to make those good points. Just like I don't understand why you had to accuse people of being "elitists" to make your point in a previous post.


On your point #2 I would note one thing - a lot of people see government work as a "mission" of sorts, and are therefore willing to take lower pay to do it. In some senses (public school teachers, maybe a few other positions) I can see where they're coming from here. Regardless, the willingness to work and stay employed may say more about that than opportunity cost. In other words the low pay and high tenure (when comparing comparable workers) may be a sign of the fact that there is no need for a compensating wage differential as much as it is a sign of opportunity cost. Does that make sense? I agree with your point #2 as far as it goes, it just seems a little lop-sided. The same can go for certain private sector jobs too - people will accept lower pay if they see it as a "mission" or "calling" of some sort.

kurt writes:

I don't think opportunity cost will work either, because of a heterogeneous labor force. A government attorney cannot readily become a corporate contract lawyer, and vice versa. My hunch is that government compensation is best left as a negotiation between politicians and bureaucrats, without any reference to what happens in the market.

Dirck Noorman writes:

Are all graduate degrees equivalent? Is someone with a graduate degree automatically better educated than someone with only a college degree?

I bet most people with MPA degrees go into government. And most people with a masters degree in computer science go into the private sector. These are not equivalent degrees.

The same applies for undergraduate degrees. Govt bureaucracies are teeming with people with undergraduate degrees in Sociology, “xyz Studies”, and other majors. Many of these people are unemployable in the private sector.

A better screen: separate undergraduate and graduate degrees that require a post-high school level science class. So the lawyers and sociologists and basketweaving PhDs would be separated from the computer scientists and engineers and physicians.

Hyena writes:

There is a private labor market, Konzcal is looking for factors that determine how comparable a given worker is.

There is no socialist calculation problem here because a necessary condition of the problem is that there does not exist a market in the good. Nor does one appear out of Konzcal's own ruminations: he's not ignoring labor markets, he's explicitly referring to them.

You can't have a socialist calculation problem without a socialist state. We don't have one in this respect, so we don't have the problem.

David writes:

I believe the most important refute to Mike's original argument is that the incentives placed by government pay grades push for more education quantity. While government pay grades are increased by education quantity, education quality is not as important. In the private sector, both education quality and work experience is rewarded over degree levels. So the measure of education used is baised towards government employees.

I would be very interested to see a comparison between public and private sector employees for certification passing rates such as the bar or cpa exam.

Floccina writes:

12 percent of letter carriers have college degrees. That could be viewed as evidence of Gov. pay being too high pay. All that talent wasted. Is it worse for us if more Gov. employees have college degrees because they are lowering the productivity of a better class of employees.

Floccina writes:

@Daniel Kuehn wrote

If I took workers in a firm where 90% of their employers had a higher degree and compared their wages to the wages of McDonald's workers, would it make sense to argue that the McDonald's workers were underpaid? Of course not. The first thing you would say is "well you have to control for educational level, etc."

No you would say you need to control for the difficulty of the task and productivity of the workers and working conditions. Consider Garbage men, consider king crab fishermen, consider professional athletes consider computer programmers none of them need any formal education all can earn relatively high income (I say relatively because Garbage men may earn below average wages). Even some people doing piece work can earn high income due to their speed.

Education is a poor thing to control for in part because the more you pay the more educated people you get.

BV writes:

"The government's workforce is more educated than the private workforce."

That is vague as heck.

Instead use: "The government's workforce spends more time in school than the private workforce."

Fixed.

Daniel Kuehn writes:

Floccina - I wouldn't disagree at all. And if there were an easy way to control for task I would say by all means to that too. Occupational group may be the easiest thing.

None of that changes the fact that productivity is a function of human capital. There's nothing at all wrong with Konczal suggesting we control for human capital, and there's nothing about controlling for human capital that prevents you from ALSO controlling for the issues you raise.

Kurbla writes:

What do you think, is it possible that American soldiers eat better and cheaper than American citizens? Is it possible that American soldiers are subjectively more satisfied with their diet than American citizens? On average, of course ... Or it is impossible because of "socialist calculation problem"?

Tom Perich writes:

Many points already made on this board are accurate. As a former government employee, people who stay in government are self selecting.

1. Rising through the government takes seniority and education, not competance.
2. It's almost impossible to be fired from a government job.
3. The top government pay is around $170M, meaning that you can earn a good living in the government, but you'll never be super rich.

Think about those three things and the then match them to the type of person who'll stay in the government. Someone who is better at punching tickets than performing, someone who values job security over high pay.

The rest are people with highly specialized skills that can only be used in the government. These are few and far between, maybe 10% of the government workforce.

Most of the government work force is nice and well meaning people with interesting social lives. They're not very competant, don't want to worry about getting fired, and are fine with an upper middle class lifestyle.

Pleasant neighbors, but not the kind of person you'd pick to lead a Fortune 500 company or start a small business.

liberty writes:

Hyena: "There is no socialist calculation problem here because a necessary condition of the problem is that there does not exist a market in the good."

Not true - see my comment above. The full extent of the socialist calculation problem only occurs when there is *no* market for the good, but the problem exists whenever there is any intervention. This is why Stalin could not use the private farmers markets prices to determine the correct state price for e.g., corn (or world markets); because the private farmers markets were heavily influenced by the state's actions in the economy (and the world food market prices were too distant and did not reflect the Soviet economic realities and prices). Of course, having some kind of market to look to helps, its better than nothing, but it does not resolve the entire issue.

Ryan writes:

I don't think that I have seen anybody in this discussion talk about the opportunity cost of an education itself. Though this is related to one comment above about the non-equivalencies of degrees. For example, an auto mechanic that runs his own business has a high opportunity cost of educating himself further. Those in the government, like it or not, have possibly invested their time into degrees that don't really capture valuable skills or information. I think Mr. Perich has the same idea.

"The government can never know the value of a government worker. We do not know the value of the output that they produce. The socialist calculation problem is very real."

Arnold, get used to the fact that we live in a world of probabilities (and assumptions, if even the most basic, like what I see is actually there). You basically can't know anything 100% for sure. You can't know the (utility) value of a private sector worker precisely for sure either. First, there are, of course, very substantial externalities (especially positional/context/prestige), asymmetric information, zero marginal cost of ideas/information, inability/impracticality to patent, etc., etc. On top of this, if you've ever had a cost accounting class you know how hard it is to accurately discern the costs and benefits of an individual worker to the firm's bottom line.

But, as with government workers too, with some smart analysis, and very mild assumptions, you can come up with high probability confidence intervals that aren't that wide.

I mean think about it objectively if you're willing to think about something that goes against your libertarian dogma. Many people in government control millions, billions. You don't want to pay for a skilled competent person to do that efficiently and well. Some of these people control more money than CEOs paid, without exaggeration, over 1,000 times as much.

I'll leave you with a quote I hope you'll think about, from celebrated growth economist and perennial Nobel shortlister, Paul Romer of Stanford:

As just one example, recall that the increasing returns to scale that is implied by nonrivalry leads to the failure of Adam Smith’s famous invisible hand result. The institutions of complete property rights and perfect competition that work so well in a world consisting solely of rival goods no longer deliver the optimal allocation of resources in a world containing ideas.

– Forthcoming American Economic Journal paper, page 8, at:

http://www.stanford.edu/~promer/Kaldor.pdf

Of course, you may not care if there's tremendous loss, suffering, and decreased growth in wealth, science and medicine, if you avoid losing even one smidgeon of economic freedom that hardly anyone will even notice, but luckily, few voters are extremist libertarians.

SB7 writes:
"If the government has a hard time filling positions, ..."
They do. But only because the OPM is a first rate gong show.

There is no shortage of people willing to fill positions, which is what you'd actually want to look at.

liberty writes:

Richard H. Serlin -

First, let's say off the accusations about ideological blindness (someone could easily accuse you of same). Second, let's not use quotes that critique perfect competition against people that don't believe in same (Kling is far more Austrian, Romer's argument works only against mainstream neoclassical models).

Finally - you equate the imperfections of market knowledge with those of non-market knowledge. But, although it is true that those imperfections make it difficult for an employer to judge the value of his employees, he is only one person in the market system trying to judge. Once you have very many competing individual valuations although each person will make many mistakes the system as a whole produces much useful information and ongoing approximations of value in the price system. Government can do no such thing.

Phil writes:

Government jobs often REQUIRE a degree. Corresponding private sector jobs do not.

If I'm a really, really good programmer with no degree, I can easily get a job in the private sector. But because of bureaucratic regulations, I can't get a gov't job no matter how good I am.

That one fact alone would be enough to explain why civil servants have more education compared to a private sector worker of similar ability.

Eric Hosemann writes:

Something is worth what someone will pay for it, whether it's labor, potatoes or printed circuit boards. Crews of college students aren't hired to paint houses because they've completed their sophomore year. No one buys potatoes prepared to pay the for the labor it took to pick them or the overhead on the processing plant. When was the last time any of you bought a computer with the aim of paying for the hourly wages of each person on the assembly line?

The discrepancy in numbers of degree holders in the private and public sectors indicates to me that the market doesn't demand degrees but rather value added to production. Private sector wages are a function of the value wage earners add to the production process. They are not a function of how much education or training the wage earner accrued before he was hired, no matter how much universities and community colleges might wish otherwise. Classical musicians, doctors and lawyers sometimes repeat this fallacy. "I spent 12 years in expensive schools honing my craft, certainly I'm worth a six figure salary." Talk about Mises' Land of Cockaigne.

Public sector wages are not a function of the value wage earners add to the production process. What does the government produce? At best one can say the government produces efforts at wealth reallocation. How does one measure how well wealth is reallocated? At worst the government produces destruction, which is the exact opposite of what the private sector produces.

If Mike Konczal wanted nuance, he should have compared compensation rates between similar jobs in the private and public sectors. I guess breaking things down to "private sector employees" and "public sector employees" adds enough aggregation to permit self-satisfied told-you-so's and finger wagging.

Liberty,

The private sector has many people judging employee quality, but by what criteria? Not necessarily by creation of total net societal utils. They judge by creation of profit for a single person or group, and because of asymmetric information, externalities, etc. creation of profit may be very different than creation of total societal utils. Profit creation may be high even when net util creation is negative.

In any case, it's long established in economics that there are certain things the government can provide and do that increase efficiency, that increase growth in wealth, science, and medicine, and total societal utility. For those things, which can be very big, it often makes sense to pay well for quality, skilled employees. It creates a lot more total societal utils, and it's penney-wise pound-foolish not to do it.

With regard to the Romer quote, I don't know what your definition of Austrian economics is, but if it doesn't contradict the quote then it means a large government role and a mixed economy.

8 writes:

If government employees had to collect 10,000 stickers to get a 10% boost in pay, would we say that stickers and sticker collections make workers more productive, therefore government workers aren't overpaid because they have massive sticker collections?

All that's going on here is that college degrees have the fig leaf of respectability, whereas sticker collections would be mocked. I did a simple search for teaches and master's degrees and this was in the top link, from about.com:

Overall, 41 percent of teachers at public schools hold a master's degree, compared with 30 percent at private schools.

Most teachers' undergraduate degree is also a crap education major. They double down with a master's in crap, still below a BA degree in history or English.

A non-teaching example is the police. There are cops who go to graduate school, and unlike teachers, at least learn some serious skills in criminology or investigation, forensics, etc. However, very few small town cops ever put these skills to use because there's no opportunity.

In the private sector, having your Ford mechanic learn how to fix BMW's is a waste because there's a 99.9999% chance he will never need to fix one. In government, the waste is just as large, except the system kicks in automatic pay hikes for degrees.

liberty writes:

R. Serlin:

Profit does sometimes diverge from being a coordinator of social welfare - I agree. In my opinion, this mainly occurs when either :

(a) Private property rights surrounding some aspect of the product's effect, including its inputs or outputs, is lacking (e.g., no property rights over air which becomes polluted by a factory).
OR
(b) It is a truly collective (public) good - non-rivalrous, non-excludable, like defense or charity.
OR
(c) Purchasing power for the good is lacking among those who demand the good because of the nature of the good itself - there is willingness but not ability to pay (an obvious example of this would be wheelchairs; profit alone cannot supply wheelchairs at an affordable price to those who need them because many people needing wheelchairs won't be able to work in order to earn the funds to pay the cost).

-

Anyway, I advocate an income support scheme to deal with these - or vouchers.

To your other point: you misunderstand. I said the quote argues against mainstream neoclassical not Austrian *arguments* about the market. Romer says:

"As just one example, recall that the increasing returns to scale that is implied by nonrivalry leads to the failure of Adam Smith’s famous invisible hand result. The institutions of complete property rights and perfect competition that work so well in a world consisting solely of rival goods no longer deliver the optimal allocation of resources in a world containing ideas."

His understanding of the way that increasing returns to scale implied by an "imperfect competition" destroy Adam Smith's invisible hand - the idea that you only get efficiency and welfare "in a world consisting solely of rival goods" - shows that he is suggesting a rebuttal to mainstream neoclassical ideas about efficiency -- not to Austrian ideas. No Austrian thinks all goods are rival or relies on any notion of "perfect competition."

Hyena writes:

Liberty,

I don't think your objection applies. There are about 4.5 million Federal employees in the US and fewer than 3 million outside the uniformed services.

I seriously doubt that this is distorting labor markets in any way other than time investment in job hunts. People probably send a lot more resumes to Federal agencies than they should, but I doubt it motivates employers to pay more to retain staff.

liberty writes:

I don't have time to do all the calculations right now, but total public sector payrolls (plus contractors) are not as small as you think and certainly affect the private market. Here is an article from ~1996 that discusses the issue: http://www.govexec.com/features/0199/0199s1.htm

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