Economics for Editorial Writers

I promise, really, to be done talking about the auto companies, at least after this. Actually, this is less about the auto companies than it is a critique of one economic view informing a pro-, or near pro-bailout position. Read this essay by E.J. Dionne. Here's the money quote:

If this bailout happens, it should reflect the core reason it will pass: Long-term economic growth depends upon a well-paid middle class (and that definitely includes autoworkers) with real purchasing power. If saving our auto industry means moving GM workers ever closer to Wal-Mart wages, the bailout isn't worth doing.

Naturally, Dionne gets in a cheap shot at Wal-Mart, the left's favorite corporate punching bag. Wal-Mart, of course, is profitable and growing while GM isn't and isn't. GM has juicy labor contracts and self-satisfied management and Wal-Mart doesn't and doesn't. GM is knocking on D.C.'s door seeking supplication and Wal-Mart, of course, isn't. In Dionne's down-is-up world, GM is noble and Wal-Mart isn't. However, Wal-Mart has the audacity to do more than hope for profit, it actually earns one. Silly thing, this profit. It's only funds healthier, freer and better lives for billions around the planet, but mocking it is more fun.

I'd argue that long term economic growth depends on innovation and productivity, not the wages of this or that demographic. Wage growth, as an end, is a good thing. But the means matter. If wages grow because businesses innovate or increase productivity, wage growth is sustainable. If wages grow because policy makers demand it, well, that's not. Forcing up wages through labor supply restrictions (unionization) and protections (tariffs and subsidies) eventually undermines the companies delivering those wages by stripping them, or their employees, of the incentive to innovate. If wage growth is connected to productivity unionization doesn't create a cost problem. If managers aren't rewarding labor's productivity, then they're stupid managers. But, as in the Big 2.5, the policy maker and subsidized wage earner may be dead long after the problem surfaces, so really what do they care?

Smart organizations align expectations, incentives and rewards so stakeholders (i.e. management, labor, customers, owners) are properly rewarded relative to their alternatives. If only my compensation reflected what I think I'm worth, or my retirement account appreciated according to my needs my financial life would be easier than it is. It would be nice if everyone got paid more but either a business' cost structure fits into the price a market will bear or it goes under. What Dionne's view doesn't recognize (whether urging higher wages for auto workers or criticizing Wal-Mart's wages) is ultimately managers don't set wages, customers do.

Because capital is more mobile than labor capital goes wherever it's loved. Capital has no objection to well paid employees only as long as compensation doesn't make an alternative more attractive. That's a very delicate balance and investment alternatives often gain or lose favor for reasons unrelated to wages. But Dionne's view would be more viable if he proposed tethering wage gains to productivity and profitability (not one for one, though; owners have to get paid too). Smart organizations do that, dumb ones don't and there's no way to make everyone smart through legislation. That's tough medicine for someone who works for a dumb company and doesn't have a good alternative, but it's reality. But if those workers unionize in order to secure wage growth dislodged from productivity, then a lower cost provider will eventually prevail.

Saying wage earners should earn more because they just should is just as empty as saying CEO pay should be lower because, well, it just should. Executive pay is a problem when it's based on a "heads I win, tails you lose" position because it encourages, probably demands, poor risk management. Objecting to a particular absolute amount because it's too high in the eyes of the objector is meaningless (same thing with criticism of UAW pay). It's only too high if it constrains profit to the point capital goes elsewhere. Just like with labor, if someone can expect better wages tomorrow irrespective of how she performs today, don't be surprised when the results are bad.