Archive for February, 2011

Peter Dorman argues that, in the case of public-sector unions in Wisconsin, the debate “is really about whether you think a world in which some give orders and others simply obey is the ideal.”

And where do mainstream economists come down?

There are nice models of information flows within organizations that support dispersion of power, but they are somewhat exotic and not what gets pulled off the shelf when economists reach for a simple representation of organizational dynamics. Instead, we have crude principle-agent models of the employment relationship in which bosses always seek greater efficiency and have to fine tune the carrots and sticks of employment contracts so that workers will go along. Williamsonesque transaction cost theory is built on the same assumptions: managers must defeat workers’ opportunism, just as shareholders must subdue the opportunism of managers. Does this bias follow from the deeper assumption of individual self-interest? I think not: manager opportunism could just as readily be directed down the ladder as up. Rather, what we see is an unspoken class bias, an expression of the same instincts that lead to identifying with order-givers rather than order-takers—the belief that hierarchy is a reflection of differences in competence and social commitment and not just an organizational form.

That’s the class bias in the mainstream theory of institutions and, as we saw in the case of Professor Barro, in neoclassical theories of the labor market.

First, they came for the private-sector unions, especially in manufacturing. Then, they came for public-sector unions and financing for public higher education. Now, they’re after the professors themselves.

According to the Chronicle of Higher Education,

Changes in collective bargaining could well have a broad impact on higher education—and have led to protests by faculty members and others in several states—but a number of narrower bills being considered in some statehouses are seen as a more direct attack on academic affairs.

A measure limiting sabbaticals to 3 percent of the faculty at any one time at Iowa’s three public universities is expected to be signed by the Republican governor, a former college president, as part of a budget bill there. Another proposal in Iowa, which has already died in the Legislature, sought to force the University of Iowa to sell its most valuable painting, Jackson Pollock’s “Mural,” worth an estimated $100-million to $140-million, to pay for undergraduate scholarships.

Tenure came under fire recently in Utah, where a bill to eliminate the practice was introduced in the state’s House of Representatives. The measure, rejected last week by the Education Committee in the Utah House of Representatives, was sponsored by Rep. Christopher N. Herrod, a Republican, who has also proposed legislation to require greater state oversight of the University of Utah’s public-radio station.

Lawmakers are inserting themselves even more directly into the classroom in South Carolina, where a proposal would require professors to teach a minimum of nine credit hours per semester.

Professors may be upset about the latest attempts to control their activities. But they never spoke up about the initial attacks on workers and unions. And now it may be too late.

Last week, I gave a lecture on neoclassical economics to a group of graduate students, in which I explained the neoclassical theory of markets, including the labor market. And the students didn’t believe me. “You mean neoclassical economists argue that labor unions and collective bargaining represent restraints on trade, and should be curtailed or even abolished?” they exclaimed. Now, maybe they’ll believe me.

Robert Barro has published an extraordinary piece, in which he expresses his nostalgia for the Sherman Antitrust Act of 1890 (which was used to attack labor unions), attacks labor unions (as a form of collusion), and expresses his support for Scott Walker’s attack on public-sector unions in Wisconsin (for his “resolve”) and Right to Work laws (as if labor wasn’t weak enough already).*

The current pushback against labor-union power stems from the collision between overly generous benefits for public employees— notably for pensions and health care—and the fiscal crises of state and local governments. Teachers and other public-employee unions went too far in convincing weak or complicit state and local governments to agree to obligations, particularly defined-benefit pension plans, that created excessive burdens on taxpayers.

In recognition of this fiscal reality, even the unions and their Democratic allies in Wisconsin have agreed to Gov. Scott Walker’s proposed cutbacks of benefits, as long as he drops the restrictions on collective bargaining. The problem is that this “compromise” leaves intact the structure of strong public-employee unions that helped to create the unsustainable fiscal situation; after all, the next governor may have less fiscal discipline. A long-run solution requires a change in structure, for example, by restricting collective bargaining for public employees and, to go further, by introducing a right-to-work law.

His argument rests on shaky theory (in his view, workers coming together to bargain over wages and benefits is analogous to price collusion by capitalist enterprises) and flimsy evidence (a decade-old study of border regions). He even views the current crises in a positive light, since the “required return to fiscal discipline has caused reexamination of the growth in economic and political power of public-employee unions.”

Barro would have us go back to a time when unions were illegal and capitalists and governments were “free” to hire labor at any wage they deemed appropriate.**

*Professor Barro is joined in his attack on unions by his fellow neoclassical economist Robert Samuelson, who argues that “unions’ downfall mainly reflected their inability to adapt to change.”

**Here’s a bit of real Wisconsin history for Professor Barro, from E. J. Dionne, Jr.

Inside Job, Charles Ferguson’s exploration of the 2008 economic meltdown, won the Oscar for best documentary.

It was an appropriate tribute to the workers in Wisconsin and elsewhere, given Ferguson’s exposé of the Wall Street players, economists, and bureaucrats—the greedy few who perpetrated a colossal crime whose costs have been paid not by them but by the rest of the population.

Equally appropriate, then, was the opening of Ferguson’s acceptance speech:

Forgive me, I must start by pointing out that three years after our horrific financial crisis caused by financial fraud, not a single financial executive has gone to jail, and that’s wrong.

George Grosz, "Stützen der Gesellschaft (Pillars of Society)" (1926)

The existence of gross inequalities in the distribution of income and wealth, and the links between inequality and the ongoing crises, are just too obvious to ignore. Even mainstream economists are starting to pay attention.

What are also becoming clear are the limited terms of the mainstream discussion of inequality and crises, which were rehearsed during a session at the recent American Economic Association meetings—and are presented once again in a recent interview with Daron Acemoglu (the page includes a link to the hour-long podcast and a rough transcript).

For one group, including Raghuram Rajan (call them the conservative mainstream economists), inequality stems from exogenous technological change (basically, the income gap between college-educated and other workers, which corresponds to their skills), to which politics responded (by expanding housing through Freddie Mac and Fannie Mae to appease those at the bottom), which led to a housing bubble that eventually burst, bringing the rest of the system into crisis. So, the problem comes down to technological change, the lack of supply of skills on the part of low-wage workers, and misguided politicians—and the solution is education.

For the other group, including Acemoglu (call them the liberal mainstream economists), there’s a difference between labor market inequality and top inequality (the growing percentage of total income captured by those in the top 1 percent or .1 percent). Those at the top were able to buy politicians (who then deregulated financial markets), thus feeding the housing and financial bubbles, which eventually came crashing down. The problem, from the perspective of these liberal mainstream economists, is campaign finance and the lack of political competition—and the solution is political reform.

Those are the limits of the mainstream story: exogenous technological change and the lack of skills (and a reactive politics) vs. captured politics (and poor incentives in the financial industry). As Acemoglu summarizes it:

So if you kind of compare Rajan’s hypothesis to the alternative hypothesis I just laid out, politics is very important in both of them. But politics plays out very differently in the two stories. In the Rajan story, the political responses come because politicians are somehow responding to the discontent of the bottom of the distribution. Or, in response to my comments, Raghu said it’s the middle of the distribution. Whereas in the story that I suggested, politics is playing out by responding to lobbying campaign contributions and otherwise the ability of the already well-off and already well-organized to influence and guide the political process. It’s not technological change. It’s institutional change.

What is clearly missing from both stories is the changing way value is produced, appropriated, and distributed under capitalism. Certainly, the level of wages and the amount of surplus-value are affected by both technology and politics. But it’s also necessary to go in the other direction, and investigate how the changing ratio of wages and surplus affects technological change and political decision-making. And then it’s necessary to connect those tendencies—especially from the mid-1970s onward—to the bubble, the crash, and the way capitalists and the state have responded to the ongoing crises.

But that’s not an analysis mainstream economists want to undertake—because they don’t have the concepts and because it would take them beyond education and campaign finance reform to reconsider the basic structures of capitalism. Having belatedly recognized the significance of inequality, that’s still one step too far for them.

Here’s Juan Cole’s judicious summary of the work that remains to be done in North Africa and the Middle East:

The protesters in Egypt and Tunisia had had only partial success, removing a strong man but wondering where genuine reform might have gone. Libyans still have not even removed the dictator, Qaddafi. And in Bahrain, Yemen and Jordan, popular demands for genuine economic and political reform have still largely fallen on deaf ears.

But events in the region continue to move forward today: Tunisia’s prime minister Mohamed Ghannouchi, a holdover from the previous government that was toppled last month, was forced to resign. And rebels are now firmly in control of Zawiya, a city just 30 miles west of Tripoli.

Is the right-wing serious about budget deficits?

As usual, Frank Rich gets it just about spot on:

The highest priority of America’s current political radicals is not to balance government budgets but to wage ideological warfare in Washington and state capitals alike. The relatively few dollars that would be saved by the proposed slashing of federal spending on Planned Parenthood and Head Start don’t dent the deficit; the cuts merely savage programs the right abhors. In Wisconsin, where state workers capitulated to Gov. Scott Walker’s demands for financial concessions, the radical Republicans’ only remaining task is to destroy labor’s right to collective bargaining.

That’s not to say there is no fiscal mission in the right’s agenda, both nationally and locally — only that the mission has nothing to do with deficit reduction. The real goal is to reward the G.O.P.’s wealthiest patrons by crippling what remains of organized labor, by wrecking the government agencies charged with regulating and policing corporations, and, as always, by rewarding the wealthiest with more tax breaks. The bankrupt moral equation codified in the Bush era — that tax cuts tilted to the highest bracket were a higher priority even than paying for two wars — is now a given. The once-bedrock American values of shared sacrifice and equal economic opportunity have been overrun.