Peering Over (the Fiscal Cliff)

Copied from a comment I made on a discussion in one of my LinkedIn groups:

The standard Keynesian approach to correcting underemployment is to increase aggregate demand (AD), but how do you do that?  You increase income. How do you increase income?  There’s the issue:  You can either do it (1) with monetary policy (primarily by loosening credit, which is already about as loose as it can get right now), or (2) with fiscal policy (cut personal income taxes, increase government spending on transfer payments, or increase government spending on _____ program in order to artificially create demand and thereby jobs to meet it), or (3) by facilitating private sector investment to create new jobs by personal & corporate tax cuts, investment and R&D tax credits, and deregulation.  Each has its own pros and cons; the first two tend to be more inflationary, while the last is distasteful to some because of the perception that its most direct impact is on the wealthy, and due to the fact that folks tend to prefer immediate gratification over long-term growth (as evidenced by the abysmal rate at which we put income into savings in this country). 

What we’re facing now is that large sums of government expenditures have gone into, mostly, #2, to little effect, with the result that expenditures are growing faster than revenue at a much faster rate than in the past.  I would argue in fact that this mounting debt is to some degree why we have seen so little effect from the past few rounds of stimulus.  

The issue is that government debt, which is financed through bonds, competes in the same market as corporate debt, which is what finances the kind of capital investment that contributes to future productivity.  This leads to varying degrees of “crowding out”, where investors opt for safer Treasury bonds over riskier corporate bonds, requiring corporations to pay higher yields to draw investors, which increases the cost of acquiring new capital, and ultimately retards future productivity.  So, I suspect one reason for the sluggish recovery is that we are seeing the impact of depressed capital investment over the past several years; therefore, there is less productive capacity and less job creation.  I haven’t done any modeling to support this, but based on the theory, it is what I predict to be true. 

So, the fiscal cliff comes about because, in a rare moment of clarity, lawmakers apparently realized that the continued expansion of government debt, which now exceeds our annual GDP, cannot continue indefinitely, and perhaps they even realized that the pool of potential creditors is shrinking, given the sums required to continue our fiscal expansion.  I do think that if we do “go over” the cliff the results won’t be cataclysmic.  I suspect we probably would go back into recession, mainly because households will see a noticeable impact on their after-tax income, which will be painful to a lot of folks.  But it won’t be a depression, and I suspect it won’t be as deep a recession as what we just came out of.  In the long-term, it might just focus enough attention on the fiscal situation to get some actual reforms in place.  (Focusing event... Kingdon... any of my policy people?)  Or the preference for immediate gratification might continue to prevail. 

Twinkie Twilight

I kind of got out of the habit of writing this blog and took a "brief" 3-year break.  The recent election, however, has jolted me back into a blogging mood.  As has the following item from the news:

The Twinkie is no more... along with Ding-Dongs, Ho-Ho's... and we have the Bakery, Confectionery, Tobacco Workers and Grain Millers Union to thank for it.  Hostess has apparently been struggling financially for several years, according to a story in the NY Times, but it was done in by a Union strike that crippled 2/3 of its factories.  The workers were presumably striking for better pay.  Now they, and the rest of Hostess's 18,500 employees have no pay.  Nice job.

This underscores why I believe Unions are a detriment, not only to employers, but to the workers whom they claim to represent.  Labor unions began in the late 1800's in order to protect workers from poor working conditions and to ensure that workers were paid a fair wage.  At this time, the nation had a very different economy from what we have now: the U.S. had just transitioned from an agrarian economy to an industrial one; family farms went the way of the dinosaur, for the most part, and, with many towns being one-mill towns, laborers only had one choice of where to work to put food on the table.  In this environment (the economic term is monopsony), the employer had no incentive to create a welcoming (or in many cases, safe) work environment, or to pay workers decent wages, because the workers had no other choice than to work at the mill or face destitution.  In other words, workers had no bargaining power; the employer offered the wage and terms of employment, and the worker took it.  In this environment, the organization of labor into unions made sense; it provided workers with the bargaining power that they did not have on their own, allowing them to demand higher wages and better conditions.  Unions were, at their inception, very much a functioning of the free market.  Government did have to intervene insofar as having to remove legal barriers to organization under antitrust laws, and to require employers to allow their workers the freedom to organize.  

More than a century later, we do not face anything closely resembling the monopsonistic work environment that our great-great grandparents faced.  Factories are cleaner and safer, wages are higher, and benefits are better.  A number of factors have contributed to this, including government safety regulations, but, particularly in the area of wages, the biggest driver has been competition between employers for workers.  No longer, except possibly in some isolated rural areas, do single mills command the entire workforce.  Modern transportation allows workers to commute to other towns for work, and multiple employers are in any given town, giving the workers expanded choices about where to work.  While it is not perfect -- unskilled workers working for large employers do sometimes face unfair treatment -- it is far better than the newly-industrialized world of the 1890's.  

In this world, unions become anachronistic.  Union leadership garnishes workers' wages to pay their own salaries and to support politicians who protect their power.  They force wage rates above the market rate, which creates higher unemployment (supply and demand in the labor market works the same as in the market for bread and milk: if the price of bread goes up, you buy less bread; if the price of labor (wages) goes up, companies hire less workers).  Rigid work rules that were once designed to prevent exploitation of workers now only serve to reduce efficiency, resulting in higher production costs and therefore higher prices for consumers, and, in the case of public-sector unions, tax rates.  Multi-year labor contracts restrict the ability of employers to react to changes in economic conditions, increasing the probability of bankruptcy.  And strikes, as in the case of Hostess, sometimes only succeed in forcing the employer out of business, leaving the workers that the union claimed to be protecting unemployed, not to even mention the ripple effects that plant closures have on regional economies.  And, of course, all of the cupcakes that people won't get to enjoy...

So (unless another company buys up Hostess's production line), the next time you start craving a Twinkie only to realize that they don't exist anymore, thank a labor union.