Andrew Leonard’s column is called “How the World Works,” and there is some unintended irony in that. It ought to be called, “How Andrew Leonard Wishes the World Would Work.” Where to start with his latest, “The final nail in the supply side coffin”?
The theory of supply-side economics tells us that if you cut taxes on rich people and corporations, the newly liberated moguls and businessmen will take their windfall and invest it, creating jobs and accelerating the rate of economic growth. The benefits of a light hand on the upper class, therefore, will “trickle down” to the working man and woman.
Ever since Ronald Reagan first attempted to make supply-side economics a reality and proceeded to inaugurate an era of persistent government deficits and growing income inequality, it has become harder and harder to make the trickle-down argument with a straight face. But we’ve never seen anything quite like the disaster that’s playing out right now.
This is tendentious even by Mr. Leonard’s standards. I’d define supply-side economics as the esoteric doctrine that you can’t eat an omelet made from theoretical eggs. Which is to say, you can’t consume what hasn’t been produced, production logically precedes consumption, you cannot consume your way to prosperity but must instead produce your way to prosperity, etc.
(And is it true that “we’ve never seen anything quite like the disaster that’s playing out right now”? I suppose it depends on whom you mean by “we.”)
It’s always worth making the correction — even if it is for the 10,000th time — that “supply side” is not synonymous with “trickle down.” “Trickle down,” in fact, is a term largely devoid of meaning; it is merely rhetorical and pejorative, a way of trying to introduce old-school class warfare into the debate, and does not describe much of anything about how supply-side economists or policy thinkers think. Supply-side isn’t about privileging the privileged, but privileging production: Low tax rates on capital gains, for instance, benefit investors of modest means as well as wealthy ones, and in fact help make future gains from investing more attractive to the non-wealthy than present consumption. Helping producers produce more efficiently benefits workers by making their labor more profitable, which is the only sustainable source of real wage gains. Etc.
That being said, Leonard is particularly wide of the mark here:
What makes this “recovery” so different? Perhaps the simplest answer is that labor has been broken as a force that can put pressure on management, so there’s little incentive for employers to turn profits into wage hikes or new jobs. Instead, employers are squeezing more out of the workers that they’ve got, and investing in equipment upgrades and new technology instead of human assets — labor productivity has risen sharply since the end of the recession.
Angels and ministers of grace defend us, businesses are investing in equipment and technology — in capital. Mr. Leonard is seemingly oblivious to the fact that this is an excellent, desirable thing. He stops just short of bemoaning these gains (squeezing!) in labor productivity.
This is an interesting window into the Left’s worldview. Mr. Leonard probably would not put it this way, but his view is that “labor” (as though there were a real entity in the world to be called “labor”) can bring jobs and wage raises into existence through extortion (“pressure on management”) and that this is not only a substitute for real investment but is in fact preferable to it.
In reality such extortion has created acute incentives for businesses to invest in substitutes in order to avoid high U.S. labor costs, and to develop complex global production chains that allocate labor-intensive production to markets where labor prices are low. Extortion may be profitable, at least in the short term; being victimized by extortion is unprofitable, immediately, and firms respond to it. (Washington State’s machinists’ unions are creating lots of Boeing jobs — in South Carolina.)
The United States led the world in manufacturing for 110 years (China is estimated to have surpassed the United States in manufacturing output in 2011) but employment in manufacturing steadily dropped as worker productivity went up but rising labor costs made substitutes for U.S. labor more attractive. Gains in productivity need not necessarily lead to fewer jobs; but lower labor productivity usually will not lead to more jobs and most assuredly will not lead to sustainable, long-term jobs — it will lead to less output and lowered standards of living. (How does your theoretical omelet taste, Mr. President?)
American labor unions and their friends in Washington could learn something about productivity from their German counterparts. Consider the fact that of the world’s largest exporting nations, only a few are low-wage countries: Among the world’s 15 top exporters, only one is a truly poor country (China). The rest are mostly wealthy, high-wage countries, including the United States, Canada, Singapore, Belgium, etc. Prominent on that list is Germany, the world’s No. 2 exporter, a manufacturing powerhouse that ships out more goods than the United States with less than one-third of the population. As Matthew Yglesias points out, German unions have been engaged in the opposite of the profit-destroying extortion favored by their American counterparts, working closely with firms to practice what Yglesias calls “very severe wage restraint,” which is another way of saying “improving labor productivity.” Germany’s median household income is not as high as the U.S. median, but Germany is hardly a poor country, and many a job-seeking industrial worker would, I suspect, be happier with German opportunities at German wages than with American opportunities at American wages. If U.S. labor leaders were as intelligent as they are power-hungry, they’d be encouraging both Washington and Wall Street to create conditions favorable to even more capital investment, especially investment in hard capital such as equipment and facilities. That is where jobs and wage growth come from.
Mr. Leonard is distressed that most of the income growth in the United States during this feeble recovery has come in the form of corporate profits (88 percent) rather than wages (1 percent), as though wages would be higher if profits were lower. In fact, the labor market is like any other market in that, ultimately, consumers rule. (If you don’t believe it, ask a guy who’s been out of work for two years.) Sellers who don’t have a product and a price that the market wants don’t make sales. That’s true whether you are selling software or an hour’s worth of work.
A great deal of our present unemployment is long-term and structural, and the only way those workers are coming back into employment is through greater productivity, which means either higher output or lower wages, or some combination of the two. Lower wages are not wildly popular, so higher output is where we probably want to go.
How do you get productivity gains? Stop treating productivity gains like a sin, for starters.
And perhaps start thinking about the uncomfortable fact that U.S. unemployment and wage stagnation probably is in no small part the result of the declining quality of our work force. Producers want to produce, and there is a reason they are not buying labor on the U.S. market.
Highly skilled and highly educated workers thrive in the United States, even though most of them do not work in industries in which “labor” extorts management for higher wages, relying instead on competition to bump up their compensation. This is a pretty great place to be an engineer or a pharmacist and a rotten place to be an unskilled high-school dropout, a non–English speaking job-seeker, or a 30-odd-year-old man looking for his first regular job. But we are getting more of the latter workers every year. Critical public-policy failures have left the United States with a large population of low-quality workers who are only marginally employable at U.S. wages, if employable at all. Those key failures include catastrophically inept government-monopoly schools, an immigration policy that pays little or no attention to worker productivity, and a welfare state that discourages early-life labor-market entry, which all together have left us with a population in which one-third of adults are illiterate or barely literate, have negligible skills, and in many cases lack even the basic competence to reliably perform routine tasks. We’re all stocked up on farmhands and off-the-books dishwashers, but good engineers are hard to come by. Ask a Democrat how to change that, and the answer will be to dump another $1 trillion into the criminally negligent education system that helped get us here in the first place, a second $1 trillion into training the unemployable for work on newly dreamt-up “shovel-ready” projects that don’t exist, etc.
When it comes to the woes of the American labor market, the problem may indeed be on the supply side, and all the political tinkering in the world isn’t going to make unproductive workers productive. Neither will union extortion or wasting money on government-subsidized make-work projects. And only the most lumpen of the lumpenleft could believe that the answer to stagnant wages and scarce job opportunities is to make businesses less profitable.
— Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism,published by Regnery. You can buy an autographed copy through National Review Online here.