The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Wages First


I wrote an impressionistic column on how the health reform challenge is actually a subset of the larger challenge posed by sluggish wage growth. Part of the column addresses a new White House effort to use executive authority to remake the process of awarding $500 billion in federal contracts, and the broader impact this initiative might have on U.S. political economy.

The Obama administration has developed yet another strategy, which Steven Greenhouse recently described in The New York Times. The idea is to use the $500 billion in contracts awarded by the federal government every year to encourage employers to pay high wages. Rather than award contracts to the lowest bidder, the government would explicitly favor firms it deems to be good corporate citizens while excluding others from the bidding process. In effect, firms with more burdensome cost structures thanks to high wages and generous benefits would receive a massive subsidy. This initiative has the potential to transform the private sector economy, as large firms scramble to meet the new federal standards.

The hope is that firms will pursue a “high-road” strategy that seeks to make up for high costs by sharply increasing productivity, perhaps through heavier investment in labor-saving machinery. That, of course, isn’t a recipe for a jobs bonanza. Procurement officers will have to micromanage the process to guarantee that the winning bids meet evolving criteria for social impact. If the federal government has to spend more to buy goods and services in light of its new social mission, it will presumably have to tax more to pay for the privilege.

Meanwhile, firms jockeying to be good corporate citizens won’t receive the same favorable treatment from other customers, including foreign customers. It’s hard to see why firms in Brazil or India will care if American manufacturers pass muster as good corporate citizens. In the worst-case scenario, this very well-intentioned initiative could lead to the Detroitization of American industry, a vicious spiral in which privileging employees in a government-approved sector puts upward pressure on the federal budget and thus federal taxes, which will in turn dampen growth and put pressure on wages. This is a trap that we see in developing economies like South Africa, where workers in the formal sector enjoy expensive protections that workers in the far-larger informal sector can’t imagine.

It is possible that I’m being too pessimistic. I certainly hope that it’s true. It’s worth noting that the FCC, under the leadership of Julius Genachowski, has softened its stance on net neutrality, recognizing that a heavy-handed regulatory approach might discourage large-scale private investment in expanding broadband access. That’s encouraging, and it suggests that there are influential pragmatists within the Obama administration.

On the other hand, as Ross has argued, even if the health reform effort stalls, the power of the president to shape the regulatory environment through executive orders, etc., is vast, and while the White House has worked to strengthen various regulatory bodies, we haven’t really seen serious muscle-flexing yet. Expect more to come, particularly if congressional Democrats experience serious political reversals.


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