Friday, October 26, 2007

Wealth of Station

"Anonymous" left a comment regarding yesterday's post, Unions busting you, that is worth examining. He/she writes:
The Mackinac Center for Public Policy has it all wrong.

They support a low wage economic development policy which attracts footloose jobs.

Those low paying footloose jobs will come, and leave when another state or country offers them even lower wages.

Lower wages reduce the amount of disposable income, thereby slowing the economy and reducing tax revenues to unacceptable levels.
It is telling that Anonymous thinks it will be another state (in the broad sense of a sovereign political entity) offering "even lower wages," as if what people are paid is up to the government. This is true in countries like China and Cuba, but while Western democracies did get the memo, for the most part they've only partially implemented it. Check out the reasons for Ireland's remarkable turnaround. Read about Hong Kong.

The other preliminary comment I have is that a more accurate description of the Mackinac Center's position is that they advocate market-based wages, but let us not quibble. With that correction, lets assume what Anonymous said is true and follow its implications.

The argument, I think, is stated fairly as follows:
  1. If Michigan had market wages it would indeed attract employers and create jobs.
  2. Unfortunately, these jobs will vanish as soon as some other jurisdiction offers a lower cost environment.
  3. We must therefore have laws to keep wages higher than market level.
  4. This will result in greater tax revenue, or at least a slower decline.
I unconditionally grant that if points 1 and 2 are true, then they would be prevented by point 3. If employers will move "footloose" jobs to a lower wage environment at will, they will almost certainly not move them to a higher wage environment. Legislating wages unsustainable by the market, then, ensures there won’t be a net inflow of even temporary jobs. An obvious corollary, in possible contradiction to point 4, is that jobs will continue to leave.

Another consequence of legislating above-market wages will be to allow other jurisdictions to offer much smaller incentives to win the temporary jobs we disdain. However, no evidence has been offered that suggests such jobs are any more temporary than any other jobs in a global economy. Ask the 73,000 people employed in new jobs in Alabama between 2001 and 2006; a period during which Michigan lost 220,000 jobs, and the taxes associated with those jobs. On a per capita basis that's a 1.6% increase vs a 2.2% decrease.

Personally, I think no state should offer any form of corporate welfare whatsoever. Just leave the market alone, including the right of unions to bargain. That means not mandating union wages. Then we can just focus on what should be the tax rate. This can be accomplished unilaterally.

On the question of whether the The Mackinac Center is "all wrong," let's consider these facts and advice:
In 2001, per capita disposable income was $4,000 higher in Michigan than in Alabama, but by 2006 that advantage had shrunk to less than $2,000.

We should be prepared to learn from and even emulate Alabama. That means freeing up our workforce with reforms like a right-to-work law. Repeal or reform of Michigan’s strict prevailing wage law, which requires the payment of union wages on state-financed construction, would also be helpful. The prevailing wage adds 10 percent to the cost of construction, adding roughly $250 million to the cost of government. Prevailing wage also costs jobs; Alabama, which does not have a restrictive prevailing wage law, added 5,000 construction jobs between 2001 and 2006 while Michigan lost 26,000.
You may well reject the advice, your laid-off neighbor may wish we'd taken it, but the facts indicate higher employment and greater revenue is associated with market wages, as well as increases in disposable income.

The case above shows a net difference of 31,000 construction jobs. Per capita, it's a .11% increase vs a .26% decrease.

Following Anonymous' advice would apparently further depress employment and cause the economy to stagnate. We know this is likely because in Michigan it has already happened. High wage mandates haven’t worked. Why? Anonymous' answer appears to be, “Because we don’t have enough of them.”

If the formula of government mandated above market wages was a way to improve revenue, then couldn’t we just have a law that says everyone must be paid half-a-million a year? The answer is obviously not - for 100% of the population. At the moment the wage laws only benefit a privileged class of about 20% of the population who occupy the station of union member.

Anonymous argues that wages legislated to be substantially higher than market value produce more revenue than market-based wages. This requires assumptions about the difference in wages and the number of jobs lost which are not demonstrated. Jobs times wages times tax rate. The Mackinac Center presents empirical evidence arguing that Anonymous' assumptions are mistaken on these numbers.

The idea that we can dig an economic moat around Michigan, constituting protectionism for union jobs or wages, is well past its prime. The United States economy is not powerful enough to accomplish that, and the longer Michiganians cling to this failed strategy, in this floundering state, the longer will be our one state recession.

I recommend to Anonymous that he or she read the following books for an elementary introduction to economics:

Eat the Rich, J. P. O'Rourke
Basic Economics, Thomas Sowell
Free to Choose, Milton Friedman
The Road to Serfdom, F. A. Hayek

Wealth of Nations, Adam Smith - would be good too, but it's a bit less accessible than those above.

1 comment:

Mitch said...

I think "anomynous" must be an economic advisor to Granholm based on what they've been doing the past few weeks.