Wednesday, November 14, 2007

Responses on Unions

I have a colleague who is fond of saying that "One cannot overcome the fact that coffee is a constant-cost industry with sheer force of will." He says this when discussing fair trade coffee, which is coffee produced by workers who are paid by people trying to raise the equilibrium price by paying more. The problem is that doing this lures more coffee producers into the market, pushing the market price back down, leading to more poor coffee producers (and possibly resulting in fewer sales by those who get the "fair trade" price, because people shift to buying the cheaper coffee). Of course, the real reason they are poor is not that they are being taken advantage of by evil foreigners; the reason they are poor is that they are less productive than workers in other countries (that is not to say they do not work hard--productivity has to do with how much output one gets for a given amount of labor, not with how hard the worker works). It's not clear that the fair trade coffee has really made a net positive contribution, but people vocally support it. I suspect that there are some of you who are, at this very moment, thinking that I must be evil for questioning it.

But again I say to you, "You cannot overcome the fact that coffee is a constant-cost industry with sheer force of will". You cannot, by wishing, keep new coffee makers from entering the industry, pushing the price back to the equilibrium price--the economics will not go away just because you don't understand it.

This brings me to my previous post. There were several responses to my post on unions, via email and other places. Frankly, most of them are worthless. Here's the problem: You don't know what you're talking about.

The rational thing to do would be not to talk about things one doesn't understand (or to read up on the subject if one is so inclined, although this is costly). I certainly avoid discussions of nuclear physics, because I'm pretty ignorant on the subject. The puzzling thing is when people freely discuss economics when they don't really know a damn thing about it. I know that lots of you are going to say "Economists don't know anything; they don't agree on anything it's not a real science." You're wrong, wrong, and wrong. Of course, it makes sense that you're wrong--you're ignorant on the subject. Why should you know that economists actually know a great deal about how people behave? Why should you know that economists agree on a great deal? Why should you know that, in economics, theories are tested with evidence, and bad theories are thrown out? Now if you're talking about Macroeconomics, then I'll grant you a bit more credit: Macroeconomics seems to be a field in which disagreement persists, and hypotheses have proven difficult to test with any degree of finality. Still, there are areas of agreement in Macro area, too (For example, we all agree that inflation is ultimately caused by increases in the money supply, and not by the oil crises or labor unions or any of the other factors that have been suggested in the past).

Let's start with the apparent inability to actually read what I wrote in my blog post. Many people seemed to take my post to mean "screw the poor". I actually explicitly said that if you're concerned about the poverty of low-income individuals, you should consider income redistribution, rather than unions. I don't know how you missed it. I never said that poverty doesn't exist. Nor did I suggest that poverty is good. I can't imagine how you inferred from my post that I don't believe poverty exists. I think that what you did--and it's common among people who are bad at separating their emotions from political arguments--is that when you decided that I was on the opposite side of a political argument from you, you decided that my intentions must be bad. That is, people on the other side are bad people, not just people who disagree because they are misinformed or because the science is not yet settled. Clearly, anyone who suggests unions could be harmful must be a bad person, and one should feel free to insult them (even if the insulter is not an expert, and the insulted is).

One person linked to this article. The problem with studies like this is that they generally do not include non-wage compensation, which now makes up quite a large portion of total compensation. If you read the details of this study, you'll find that they only looked at "Family Cash Income".
Family cash income does not include the value of non-cash compensation such as employer contributions to health insurance and retirement benefits, nor does it include the effect of taxes or non-cash benefits such as food stamps.
Consider this graph. It shows where the increase in total income for the average worker came from between 2000 and 2005. 35% of it came from health benefits alone. Only 29% of it was an actual increase in wages. You can argue--correctly--that low income workers are less likely to get these benefits, or that their benefits will be lower, but the question is, how much lower? You can't tell by looking at the Economic Mobility Project's report. We don't really know if middle- and lower-income blacks' total compensation has gone up or down if we don't include all forms of compensation.

The report used CPI-R-US to adjust for inflation. This is one of the better measures of inflation, as it tries to account for the quality improvements of goods purchased. There is evidence, however, that it still understates the improvement in the quality of goods, and therefore overstates inflation. That is, real wages have probably not fallen by as much as it appears, or have risen more than they appear. Add in non-monetary benefits, and the real picture could be radically different from what is presented in this report.

Also, this report really doesn't have anything to do with unions. How will unions increase income mobility among poor blacks? Most people don't work in unionized industries, and most union workers aren't poor blacks. Are you suggesting that we should unionize all workers, so that they can all get higher wages? Then you have a problem: If you raise the wages of all workers, then employers will hire fewer of them. This is the Law of Demand, and you cannot overcome it with sheer force of will. The workers most likely to be left out will be the lowest-skilled workers, and if racism is at work, it will also be the workers least-liked by those who control the union--possibly minority workers. Unions are good at providing above-market wages to workers who already have jobs. If you are worried about a low-income worker who has trouble getting a job at all, or a poor single mother who finds it difficult to fulfill her family obligations and hold a job, unionization will not help.

There's another problem with using this report as an argument for unions: Look at all those white workers who are better off than their parents. Most of them are not unionized. Why are their wages going up? It is almost certainly not any biological superiority. And they are, by and large, not being aided by unions. What is making the difference? Instead of simply saying "unionize them!" shouldn't you instead be asking "What is the cause of the difference?" I suspect that, if you look closely, you'll find an interesting answer. I don't know what it is, but if I had to guess, I would guess that it is the fact that blacks are more likely to live in urban areas, and that urban areas tend to have poorer schools, and that (for possibly racist reasons) blacks in urban areas get the worst schools of all. Poor education makes for a bleak future. So wouldn't it make more sense to improve the schools than to argue for unionization? Furthermore, unions in the U.S. traditionally have not been the friends of the very poor, women, and minorities (although they are, thankfully no longer explicitly racist or sexist).

Some of the other criticisms were along the lines of "Economists make unrealistic assumptions about humans". The reality is that all scientists make unrealistic assumptions. If a physicist wants to model billiard balls on a pool table, he might leave out friction on his first pass. That model will work so-so, but not great, so next he adds friction. Adding friction is good, but not perfect, so next he adds air resistance. Now the model predicts pretty well, but it's still not perfect. Should he stop there? Probably so. Adding more complexity to a model is not always worthwhile. The physicist knows that other factors (chaos theory, maybe) might make the model even more accurate, but the model would become unwieldy, and the simpler model predicts very, very well.

Similarly, economists know that people are not purely rational calculating machines. We know that markets are not always perfectly efficient (there's a huge literature on market failure, the highlights of which are taught in every Econ 101 class). It is a fact, however, that assuming rational self-interest results in pretty good predictions most of the time. It is also a fact that policies designed under the assumption that people are not rationally self-interested tend to turn out badly. It is possible that labor markets may not be exactly like the perfectly competitive model, but it is also true that they are far away from monopsony. The competitive model predicts better, and is the better model to use.

It is also true that most of you will go on being ignorant on the subject, because it is rational for you to do so. Bryan Caplan argues that it can be rational for you to hold incorrect beliefs, because there is no consequence for being wrong, and holding a belief can make you feel good. For example, it might feel good to believe that businesses are part of a conspiracy to oppress workers, and that only unions can counter them. It is wrong, but why should you bother to have a different view? Holding a more nuanced view (that labor unions are sometimes valuable, and sometimes not, and that worker exploitation is not likely to happen in competitive labor markets) would require costly study on your part. It might also make you less liked by your friends, or cause you to feel guilty for giving up your support for the little guy. (As it happens, I support the little guy too, but I don't think unions are the way to help him).

Incidentally, the "rationally irrational voter" argument applies to areas outside of economics. Creationists come up with bizarre arguments to support their religious view, and many people decide to believe them, rather than genuine scientists. Or, to take a less controversial example, people have strange views on toxicology. Surveys show that people say they are willing to pay large amounts to avoid very small risks. Bryan Caplan cites a survey of the general public and toxicologists, asking them to agree or disagree with the following statement:
For pesticides, it's not how much of the chemical you are exposed to that should worry you, but whether or not you are exposed at all.
Toxicologists know that it's the dose that makes the poison, so 94.6% either strongly disagree or disagree. Among the general public, however, 36.1% agree with the statement! Only 11.9% strongly disagree, and 47.3% disagree. We should therefore expect the public to overreact to toxic threats, because so many of them believe that even a tiny dose is dangerous.

To quote Murray Rothbard (an economist with whom I seldom agree):
"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a 'dismal science.' But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance."

4 comments:

Alex said...

if people don't know anything about pesticides except that they can be poisonous then it's probably in their /our best interest for them to believe that small amounts are dangerous. They are not qualified to judge what amount would be dangerous. (for any number of substances)

Mike Hammock said...
This comment has been removed by the author.
Mike Hammock said...

That's exactly my point (or rather, Bryan Caplan's point--I didn't come up with the rational irrationality idea). Their bias is rational. Given that becoming better informed is costly, and will bring most people no significant benefit, reacting strongly to all potential toxins is probably rational.

The danger arises when this bias affects political decisions. When people demand that politicians respond to extremely small risks, the result can be a waste of resources. Hence a toxicologist might wonder why the standards for arsenic in drinking water were tightened, but people somehow bring themselves to climb into their cars and engage in the risky activity of driving.

I think it's quite rational for laymen to be ignorant about economics. The puzzle is why they believe that they are, in fact, experts.

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