Friday, March 25, 2011

Finally revealed: The GOP JOB Strategy

The long-promised GOP jobs strategy turns out to be based on lowering wages to increase jobs. According to "Spend Less, Owe Less, Grow the Economy — Executive Summary" published in the Joint Economic Committee — Republicans:

"Decreasing the number and compensation of government workers. A smaller government workforce increases the available supply of educated, skilled workers for private firms, thus lowering labor costs [overall]."

The idea is clear. Decreasing government employment increases the number of educated and skilled jobseekers, thereby driving down wages for all workers by lower the offer. There being more bidders than jobs, the increased number of bidders competing with each other for limited offers will be inclined to accept a lower offer.

The GOP strategy is being played out in the states, where GOP governors are cutting taxes on business to make their states more attractive to businesses in order to lure businesses to the state. Cutting state government employment and reducing wages and benefits for existing workers lowers wages prevailing in the state, making the state more attractive to businesses. Reducing the power of unions and collective bargaining in their states also reduces the bargaining power of workers there. It is assumed that this will create more jobs in the private sector "by reducing labor cost." One wonders whether they have forgotten that workers are also voters who may not appreciate the lower pay scale and reduced benefits and protections.

The race to the bottom is on.

Where is the demand to come from, you ask? Ricardian equivalence, which Prof. Bill Mitchell dispatches at the link.

Here is what they say: "Keynesians hold that fiscal consolidation programs are contractionary in the short term, because they reduce aggregate demand. However, large government budget deficits create expectations for higher taxes to service government debt and affect the economy in the short term as well as the long term. Consequently, fiscal consolidation programs that reduce government spending decrease short-term uncertainty about taxes and diminish the specter of large tax increases in the future for both households and businesses. These “non-Keynesian” factors can boost GDP growth in the short term as well as the long term because:

• Households’ expectations of higher permanent disposable income create a wealth effect, which stimulates purchases of consumer durables and home buying thus driving up personal consumption expenditures and residential investment in the short term.

• Businesses expecting higher after-tax returns boost their investment in non-residential fixed assets in the short term."

How is the UK doing with that?

(Hat tip to Ezra Klein, Prosperity through lower wages?)


googleheim said...

what about reducing the work week to mon to thurs for those who are above $50K ?

that way someone who makes less does not have to be strapped by law not to work his butt off

and then for those who are above $50K then they get a tax break and also make instant 20% room for employment ?

1 day out of 5 days is 20 % jobs created

anyone think of that besides the french ?

sforst said...

I believe in MMT, and full employment. I do not not believe in strong unions. I do support Republicans when they break unions. The unions protect incompetent workers and retard innovation; offset by other things they do that are very good. I would like to see an open debate on the net value of unions without it turning into a rich vs. poor debate. Maybe I can be enlightened. Tom, I'm sure you are very capable of posting something that will open the debate up. Thanks!

Crake said...

Wasn't the Ricardo equivalence theorem disproven empirically over the last 30 years?

Crake said...

Wasn't the Ricardo equivalence theorem disproven empirically over the last 30 years?

Tom Hickey said...

sforst, this is a topic I am sure we will be returning to. It is going to be a key issue in the coming election.

Economically, the issue is not so much unions per se, but the bargaining power of labor. Unions are a way of increasing the bargaining power labor in order to reduce capital's monopoly as price setter.

Tom Hickey said...

Crake, follow the link in the post for Ricardian Equivalence. It leads to Bill MItchell's criticism of Barro, who put forward the current version of Ricardian equivalence that conservatives rely on in their argument.

Red Rock said...

Agree with sforst. Article mention that cutting public employees will lower wages for all. On the state level, having bloated government payrolls reduces the after tax income of all as the states must raise taxes to make payroll. What's the difference between lower wages and lower after tax income? None.

Additionally as sforst states, it's not just about salaries. Look how difficult it is to fire a public school teacher in NY. Virtually impossible.

sforst said...

In the middle class white collar circles I run in, unions are very much disliked. Trust me, my friends aren't people with power, just people resentful of corrupt union thugs. We have all heard the "stories".

I really do respect your thought Tom, so I look forward to reading more about this subject and learning.

My fear is that MMT loses possible converts when the "lefty" rhetoric get's too cliche.

Tom Hickey said...

sfort, the left v. right rhetoric in macro is about demand-side v. supply-side. Demand comes from income and supply comes from investment.

Supply siders correctly observe that investment creates income. The Laffer (Reaganomics) wing of the GOP is supply side. The Tea Party is traditionally fiscally conservative (balanced budgets).

Demand siders correctly observe that demand sends a signal to invest. Post Keynesianism and MMT is demand side.

The basis of MMT analysis is sectoral balances. Government and nongovernment stand in an inverse relationship. If nongovernment is saving (running a surplus), then government must dissave (run a deficit) since fiscal deficits create the net financial assets that nongovernment saves. (Funds created through bank credit net to zero.)

When government maintains this balance, the economy can run at full capacity/full employment, and also allow nongovernment to save as it desires.

In summary, a monetarily sovereign government as monopoly currency issuer has the sole prerogative and corresponding sole responsibility to provide the correct amount of currency as nongovernment net financial assets to balance spending power (nominal aggregate demand) and goods for sale (real output capacity). If the government issues currency (nongovernment net financial assets) in an amount that results in effective demand in excess of productive potential to expand capacity to meet it, demand-side inflation will occur due to demand exceeding supply. Conversely, if the government falls short in maintaining this balance, so that supply exceeds demand, then inventories build up, recession and unemployment result due to insufficient demand relative to supply (like now).

Laura said...

Unions, as they exist today, are paper tigers. Their power has long since become political rather than economic. Now their ability to buy off politicians is coming to an end. The minority of workers that unions still represent have very little bargaining power. I believe many union members already realize this.

As a non-unionized worker I appreciate the gains made for all through past struggles. But the world has changed since then. The old strategies and tactics are ineffective in a globalized economy.

Unions have been reduced to seeking political favors through bribery. In some cases they have links to organized crime. Instead of advancing the cause of all workers, we see a corrupt leadership protecting themselves and the priviledge of an ever shrinking minority of workers. Non-unionized labour is viewed as a threat to that priviledge, as potential scabs.

This state of affairs does nothing for labour solidarity or bargaining power. I would advise abandoning unionism in favor of a political movement that can obtain policies beneficial to workers. I would advise expanding this movement to include small businesses and possibly any business involved in the real economy. General strikes and wars between labour and management aren't going to get us anywhere.

The GOP job strategy includes abolishing the minimum wage. That might be more of a challenge than abolishing the unions. Then again, I don't understand the social darwinist tendencies of a segment of American society. If the minimum wage was a barrier to employment, wouldn't workers and employers simply arrange to ignore it, as part of the black market?

Tom Hickey said...

I appreciate the sentiment, Laura, but how does political action close the gap between wages and productivity gains, so that workers get to share in the gains instead of the bulk of the gain going to capital, therefore saving, much of which is used in leveraged speculation that drives up asset prices?

There has to be some specific transmission mechanism. Other than collective bargaining, what might this be?

Laura said...

Progressive taxation is a mechanism to reduce inequality. Pigovian taxes target negative externalities, while a land value tax would target real estate speculation. Other taxes can target other forms of rent seeking.

Institutional reform aimed at uncovering and eliminating conflicts of interest would help reduce corruption.

This is more or less the social democratic tradition, intended to curb the excesses of actually existing capitalism. MMT would provide additional insight for such a government.

Beyond reform of the status quo, democratizing our economy might be the way to go.

Tom Hickey said...

I have been preaching taxing away economic rent since discovering Michael Hudson.

I also subscribe to institutional economics. Warren Mosler says all these problems are basically institutional. So I agree it's the institutions that need to be changed.

But getting to social democracy will take a revolution.

Ravi Batra sees something like this coming in his book, The New Golden Age: The Coming Revolution against Political Corruption and Economic Chaos (2007), a follow up to The Downfall of Capitalism and Communism (1978).

Musgrave said...

The problem with the above GOP theory about improving skilled labour supply for the private sector is that there is no evidence that skilled labour shortages are a major problem for employers. At least according the three employer surveys below, shortage of skilled labour is the least of employers’ problems. But then reality has never been of much interest to the idiots and bigots of this world.

1. (Page 18)

2. (Page 4)

3. (Page 26)