Scott Sumner  

How bad government policies make us meaner

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Man, Economy, and Science... RIP Nathan Rosenberg...

In a recent post I argued that government monopolies often offered worse service to customers than competitive private firms. In this post (which will have something to offend both progressives and conservatives), I'll look at a different, but related problem.

A few days ago there was a big debate about a New York Times expose on working conditions at Amazon.com. (BTW, it would have been useful for the NYT to compare labor practices at the Seattle company to working conditions at firms operating in the Amazon region of Brazil.)

Many liberals were appalled, while conservatives often wondered why, if working conditions were so bad at Amazon, people didn't simply "get another job." I have sympathy for both sides, but probably a bit more for the conservative side.

One liberal objection might be that it's not easy to get another job. And perhaps that's because monetary policy since 2008 has been too contractionary. And perhaps that's because conservatives have complained about the Fed's QE/low interest rate policies, which has made the Fed reluctant to do more.

Regardless of how you feel about monetary policy, it's clear that if employers feel they have a "captive audience" of workers, who are terrified of losing their jobs, it would be easier for the employer to crack the whip and drive the employees to work extremely hard. One advantage of a healthy job market is that workers have more power to negotiate pleasant working conditions.

But progressives also have some major weaknesses in this area. They tend to favor policies such as New York City's rent controls, and the new $15 minimum wage being gradually phased in in some western cities. I like to think of these policies as engines of meanness. They are constructed in such a way that they almost guarantee that Americans will become less polite to each other.

In New York City, landlords with rent controlled units know that the rent is being artificially held far below market, and thus that they would have no trouble finding new tenants if the existing tenant is unhappy. So then have no incentive to upgrade the quality of the apartment, or to quickly fix problems. They do have an incentive to discriminate against minorities that, on average, are more likely to become unemployed, and hence unable to pay the rent. Or young people, who might damage the unit with wild parties.

Wage floors present the same sort of problem as rent ceilings, except that now it's the demanders who become meaner, not the supplier. Firms that demand labor in Los Angeles in the year 2020 will be able to treat their employees very poorly, and still find lots of people willing to work for $15/hour.

Even worse, this regulation will interact with the migrant flow from Latin America, to produce another set of unanticipated side effects. In some developing countries there is a huge army of unemployed who go to the cities, hoping to get one of the few high wage jobs available in the "formal" sector of the economy. With a $15 minimum wage, migrants will come from Mexico until the disutility of waiting for a good job just balances the expected utility of landing one of those good jobs. You'll have lots more angry, frustrated young Mexican illegal immigrants, with lots of time on their hands.

What could go wrong?

One reason that I am what Miles Kimball calls a "supply-side liberal" is that I believe my preferred policy mix (NGDP targeting plus free markets) is most likely to produce the sort of "nice" society I grew up with (in Madison, Wisconsin.)


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COMMENTS (11 to date)
JLV writes:

"Nice" to people who look like you maybe: http://host.madison.com/ct/topics/race-in-madison/madison-s-african-american-history-timeline/article_904abab8-e5b4-11e3-87a8-001a4bcf887a.html

Scott Sumner writes:

JLV, This is what you linked to:

"1973

The Madison School Board adopts an affirmative action policy that commits the school district to actively recruit minorities and women for jobs."

And your point is?

Cyril Morong writes:

This passage

"You'll have lots more angry, frustrated young Mexican illegal immigrants, with lots of time on their hands."

Reminded me of

"Exploiting changes in state and federal minimum wage laws from 1997 to 2010, we find that workers who are affected by a change in the minimum wage are more likely to commit crime, become idle, and lose employment. Individuals experiencing a binding minimum wage change were more likely to commit crime and work only part time."

http://marginalrevolution.com/marginalrevolution/2014/02/will-raising-the-minimum-wage-boost-crime.html

Kevin Erdmann writes:

Great post.

I was thinking about this sort of thing the other day. When policy ceases to be about a broad context of fair access (which I would label "liberal") and is instead about a labor vs capital divide (which I would label "progressive"), then personal gains come from patronage instead of productivity. The irony is that this tendency to create rents for labor can only succeed if those rents are available to begin with, so progressive policies tend to favor crony capitalism - limited building, protectionism, certification and licensing, etc. The tendency to see capital as having some nefarious negotiating power that overwhelms other market influences ends up favoring the very policies that create the worst forms of that power. Then progressives get what they conceived of in the first place - a stagnant level of output that we fight over politically, like jackals. It's a self-fulfilling world-view.

I hope it's not a problem that I tend to link to myself on these things, but I'm too verbose for comment layouts. :-)

Jared writes:

Amazon takes the cream of the crop. I'm pretty sure those workers would have no problem finding another job even if we had Greece levels of unemployment.

ThomasH writes:

Hmm

Maybe we need a category (I think Miles already fits the bill) of "Supply side Liberal+" I'll take your NGDP targeting and free markets and raise you re-distributive taxation of consumption, eg, a higher EITC instead of minimum wages plus partial tax credits rather than deductions for contributions to retirement plans.

As for analysis, making the working experience miserable for workers for whom the minimum wage is binding is not the only why employers may react. They may also be motivated to find cost effective ways of making their MP=wage. Of course some of those ways may imply moving up the demand curve and employing fewer workers, hence the superiority of the EITC.

Daniel Klein writes:

I agree Scott.

Kindness is one of the non-wage attributes of an employment relationship.

Kindness is one of the non-rent attributes of a rental relationship.

Kindness is one of the many, many attributes that gets adjusted when Big G imposes requirements with respect to one attribute.

Recognizing the adjustments often prompts illiberals, not to see the folly of the first, but to push for more impositions.

Scott Sumner writes:

Lots of good comments. I don't really have anything to add.

J Mann writes:

Of course, if you're using a monopolistic competitor model for the private sector, that customer service might be inefficient. (My daughter just finished an AP econ summer class - I wish I had appreciated that idea then. The idea that monopolistic competitors might spend their quondam profits on a race for customer service instead of advertising would have been fun to work through with her.)

James D writes:

I don't know if I'd agree with the premise that what is occurring is that people who are normally honest and caring become less so due to price controls but rather that:

A) Price controls reduce the cost of discrimination so that those people who want to discriminate can do so and it won't cost them profits.

B) Price controls reduce the profit that can be earned by someone who is honest and caring so they may sell their business/property to someone who will make more money from the property because they are willing to cut corners.

From Thomas Sowell's Basic Economics, 4th edition,

In short, honesty is more than a moral principle. It is also a major economic factor. While government can do little to create honesty directly, in various ways it can indirectly either support or undermine the traditions on which honest conduct is based. This it can do by what it teaches in its schools, by the exampels set by public officials, or by the laws that it passes. These laws can create incentive toward either moral or immoral conduct. Where laws create a situation in which the only way to avoid ruinous losses is by violating the law, the government is in effect reducing public respect for laws in general, as well as rewarding specific dishonest behavior.

Advocates of rent control, for example, often point to examples of dishonest behavior among landlords to demonstrate an apparent need for both rent control itself and for related tenants' rights legislation. However, rent control laws can widen the difference between the value of a given apartment building to honest owners and dishonest owners. Where the costs of legally mandated services - heat, maintenance, hot water - are high enough to equal of exceed the amount of rent permitted under the law, the value of a building to an honest landlord can become zero or even negative. Yet, to a landlord who is willing to violate the law and save money by neglecting required services, or who accepts bribes from prospective tenants during a housing shortage under rent control, the building may still have some value.

Where something has different value to different people, it tends to move through the marketplace to its most valued use, which is where the bids will be highest. In this case, dishonest landlords can easily bid apartment buildings away from honest landlords, some of whom may be relieved to escape the bind that rent control puts them in. Landlords willing to resort to arson may find the building most valuable of all, if they can sell the site for commercial or industrial use after burning the building down, thereby getting rid of both tenants and rent control. As one study found:

'In New York City, landlord arsons became so common in some areas that the city responded with special welfare allowances. For a while, burned-out tenants were moved to the top of the list for coveted public housing. That gave tenants an incentive to burn down their buildings. They did, often moving television sets and furniture out onto the sidewalk before starting the fire.'

Those who create incentives toward widespread dishonesty by promoting laws which make honest behavior financially impossible are often among the most indignant at the dishonesty - and the least likely to regard themselves as in any way responsible for it. Arson is just one of the forms of dishonesty promoted by rent control laws. Shrewd and unscrupulous landlords have made virtually a science out of milking a rent-controlled building by neglecting maintenance and repairs, defaulting on mortgage payments, falling behind in the payment of takes, and then finally letting the building become the property of the city by default, while they move on to repeat the same destructive process with other rent-controlled buildings.

Without rent control, the incentives facing landlords are directly the opposite - that is, to maintain the quality of the property, in order to attract tenants, and to safeguard it against fire and other sources of dangers to the survival of the building, which is a valuable piece of property to them in a free market. In short, complaints against landlords' behavior by rent control advocates can be valid, even though few of those advocates see any connections between rent control and a declining moral quality in people who become landlords. When honest landlords stand to lose money under rent control, while dishonest landlords can still make a profit, it is virtually inevitable that the property will pass from the former to the latter.

Brett writes:
You'll have lots more angry, frustrated young Mexican illegal immigrants, with lots of time on their hands.

Nah, they'll just do what they do already in construction and agriculture, and work illegally for less than the legal minimum wage amount (even if it means paying them in cash). It's the legal workers that will suffer, unless the overall economy is simultaneously growing enough that other jobs soak them up.

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