Courtesy of the New York Times, we learn that Obama is planning on using Federal contracts to engineer the “appropriate” wage levels for unskilled workers:
The Obama administration is planning to use the government’s enormous buying power to prod private companies to improve wages and benefits for millions of workers, according to White House officials and several interest groups briefed on the plan.
By altering how it awards $500 billion in contracts each year, the government would disqualify more companies with labor, environmental or other violations and give an edge to companies that offer better levels of pay, health coverage, pensions and other benefits, the officials said.
I want to comment on what Republicans have been saying about this, for example:
They see it as a gift to organized labor and say it would drive up costs for the government in the face of a $1.3 trillion budget deficit.
Now, it is hard to argue that this isn’t a gift to organized labor, but that is beside the point. Big government is in the business of giving gifts, and competition is fierce. No, the problem is the argument that this will drive up costs. Will it drive up costs for the government? Well, no. The demand is fixed at a nominal price of $500 billion. What Obama is doing is increasing the price of labor, which will cause the quantity of labor demanded to fall. This can be a good thing, as it can represent an increase in productivity — which it will have to, unless we want to spend $500 billion and only get half of a lawn mowed. I don’t think that will look very good, aesthetically, or politically. The result is that fewer workers will be employed.
Republicans have nothing to fear, though…costs are still fixed!
However, Obama seems to believe that on net, he is doing some good for the working poor. Of course, he is doing nothing of the sort. There is a tendency among the left to think that the “laws” of supply and demand don’t exist when convenient, much like Ray LaHood thinks the laws of physics don’t exist. By raising the price of labor, you also increase the quantity of labor supplied. Since demand is fixed, that means people go unemployed. Who goes unemployed? The least productive. Who are the least productive? The most poor. So if the government has the market power that is intimated in the article, then you will see this chart persist (for the “Less than High School” and “High School” categories) well into the future.
This tendency is called the “just price fallacy“, and it is very popular in politics…and unfortunately, seems to be human nature to decry prices we don’t deem to be “just”. Going all the way back to Diocletian, we can find examples of people verily condemning “price gouging” or “profiteering”. Of course, as we know from economic theory (and experience) setting price floors causes unemployment, and setting price ceilings causes shortages.
In (nearly?) all cases, simply giving poor people money is much better anti-poverty measure. Ironically, Milton Friedman, widely regarded as a “conservative economist” was one of the strongest backers of the negative income tax — a policy deemed “too liberal”! Why the tepid response to things like the Earned Income Tax Credit from the non-economist left (we know the right do it to simply score political points with constituents)? Well, it seems that it stems from what I like to call the “Barbara Ehrenreich theory of value“. For those of you who do not know who Ehrenreich is, she pretty much built the industry of authors working undercover doing low-paying jobs, with the intent on writing a normative essay about the experience. Of course, the common conclusions are that we should treat these people nicer (which is fairly uncontroversial), and we should pay them more based on the humility that they face. By giving money directly to the poor, it seems that we are “justifying” employers that profit from “slave labor”. Of course, this is wrong and wrong-headed, but the view persists.
That’s about as far into psychology as I care to go…the bottom line is, if Barack Obama wants to help poor people, cut the contracts and give money directly too poor people. If all $500 billion were cut (hypothetically), it would afford the government a $6,000 subsidy for every household under $25,000. You could avoid the poverty trap by phasing the benefit out over the next quintile of income, and you would have a very effective anti-poverty program.
Not to be confused with the “labor theory of value“.