Make Work Bias

Alan, like many people, suffers from make work bias.

We give credit to companies who modernize and reduce their labor force. But it is also good that companies do all they can to maximize the number of people they employ and support—good for the local community and good for our country.

Really? Well, then let's ban bulldozers and backhoes and require all holes be dug with shovels and all earth moved by wheelbarrow. That will create more jobs. Scratch that. Forget shovels. Let's ban those too and give everybody spoons. Then a bunch of people will be employed.

See the problem is that one person with a bulldozer can move more dirt and therefore is more productive. Hence, the company he works for can afford to pay him more than a person digging with spoons.

Alan then goes on to argue that unionization of Alabama autoworkers would be beneficial:

Dear citizens, labor unions have a history of mutual support with the Democratic Party, making enemies of the Republican Party as a consequence. That would change, we might expect, if a Republican like Senator Shelby supported unionization in the Alabama automotive plants. Alabama’s and America’s workers and economies would improve as a result. Those foreign car companies eventually would provide benefits equal to those in Detroit and, while they would still export their profits, would begin to rise above their second-rate status. Their contributions could exceed mere investor returns. The automotive manufacturers in Detroit, their workers, and the region’s economy would all be protected and supported by this act. We are, however, headed in the opposite direction.

There are so many holes in this logic I don't even know where to begin. One set of automakers is failing and one is not. One has unions and one does not. It seems pretty clear that the non-failing, non-unionized group shouldn't adopt a measure that, while certainly not entirely to blame for the failure of the other, is a large contributor to its problems.

What ultimately determines worker salaries is the productivity of the workers. Political organization cannot overcome that basic fact. Sure, workers can organize and get more money, but it is unsustainable over the long-term unless the workers increase their productivity. Increasing productivity requires investment in capital by the firm, which the increased labor costs constrain. Therefore, unions, like almost all political policies which endeavor to redistribute economic benefits from one party to another in time period 1 reduce overall economic growth and the benefits to all parties in time periods greater than 1.

If you say to pay all the workers who dig with spoons more money, then the company can't afford as many shovels. Yet, a person with a shovel can move more dirt. If you say to pay all the workers with shovels more money, then the company can't afford a bulldozer. Yet, a person driving a bulldozer can move even more dirt. The amount of dirt moved, the productivity, ultimately determines the salary of the workers. If you demand more money for workers, then you constrain the company's ability to buy shovels and bulldozers. If you constrain the ability to buy shovels and bulldozers you constrain the future productivity. If you constrain future productivity you constrain future worker income. So, that pay raise demanded by the union, while it appears to have been extracted from the evil management to the benefit of workers, in fact hurts workers later on. You just don't see it because the loss was income foregone.

And that -- the analysis of only one time period as if the economy was static -- is the ultimate weakness of dirigiste economic policy.