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Back to Work

Irwin M. Stelzer

Millions of Americans, glutted with benefits that until now have seemed likely to be renewed and renewed again, have suddenly become devoid of ambition, shed the work ethic, and taken to the couch and the TV remote. Or found a back pain or emotional problem that entitles them to the even higher benefits designed to ameliorate the plight of truly disabled workers.

So runs the narrative that for too long has been the underpinning of conservative policies towards the unemployed, especially since the steady decline in the workforce participation rate. For many conservatives, “entitlement” is most frequently used as the adjective to precede “cuts.” They are not entirely wrong, but there are entitlements, and then there are entitlements. There are those paid to the undeserving unemployed, who will always prefer benefits to work, just as there are benefits available to the undeserving rich, who are allowed to treat ordinary income as capital gains and deduct interest paid on mortgages on second homes.

Now, there is little doubt that there will always be some who prefer benefits to paychecks, and who will game any system in order to avoid the biblical injunction to earn their bread by the sweat of their brows or, in the updated version, at the risk of carpal tunnel syndrome. My advice to conservatives is “Live with it.” Better that than to try to shape policy for the mass of the unemployed to thwart the relatively few work-shy for whom no available wage is high enough and no benefit our decent society is prepared to tolerate is too low.

The undeserving unemployed will always be with us no matter the incentives available to them to train and find work. But their existence should not prevent a generous attitude towards the deserving unemployed, sidelined by forces beyond their control: an education system that leaves them unprepared to cope with a 21st-century economy; globalization that has destroyed jobs in America for the unskilled; easy money policies that have funded a recovery that adds to the wealth of the asset-owning while creating relatively few new jobs. These are the Americans on whom conservatives should lavish their policy-making ingenuity by creating a two-pronged program to woo workforce dropouts back into the labor market: Make work pay, and make jobs available. The first requires increasing the gap between what we pay people not to work, aka benefits, and what they can earn by working; the second requires that jobs be available to those with a renewed incentive to take those jobs.

Anyone familiar with art auctions knows that sellers have a reservation price, one below which they will withdraw their object from the sale. The same is true of even the most ambitious rational worker. If the wage offered, minus transportation, clothing, meals, and other costs of accepting employment is not sufficiently above the value of benefits, the worker will quite rationally prefer his benefits. Yes, for some there is the psychic reward and pride that comes with a paycheck, but it is not sensible to build policy on the assumption that such considerations would prompt the great mass of workers to take a reduction in income in order to participate in the labor market. Most will quite reasonably compare the gap between the income on offer in the workplace and the income generated from the benefits programs available to them, the latter constituting their reservation price.

At Harvard’s Kennedy School current and aspiring politicians, regulators, policymakers, and bureaucrats are taught that if they get the incentives right they will have done more to achieve their policy goals than regulatory oversight, auditing, and the other stuff of ever-growing government could accomplish. In the case of those who have dropped out of the workforce that would mean increasing income from work and, eventually but not until job-creating growth is restored, decreasing income from benefits.

Now, conservatives have always believed that benefits provide an incentive to stay home rather than look for work. But when it comes to increasing the value of work, for example by raising the minimum wage, conservatives’ faith in incentives is sorely tested. Yes, at some level an increase in the statutory minimum should reduce employers’ incentives to hire, and prompt them to seek labor-saving innovations, or raise prices for their products, thereby cutting into the demand for those products and for the workers that produce them. The CBO reckons that a move to the level Obama seeks would destroy 500,000 jobs. But it would also increase the incomes of more than 16.5 million workers. Factor in the inevitable unforeseen consequences and it is not at all clear that conservatives should automatically oppose an increase in the minimum wage. Surely a policy that increases both aggregate incomes and the gap between the value of work and the worker’s reservation price is worth another look.

As is the idea of ameliorating the job-destroying effect of an increase in the minimum wage by outright grants to employers preparing to lay off workers as a consequence of the increase. By way of a thought experiment: The increase from $7.25 per hour to $10.10, a raise the CBO guesses might cause the loss of 500,000 jobs, would add a bit less than $5,000 per year to the pay of a 30-hour-per-week worker. To induce employers to pay that rather than to cashier 500,000 workers would cost about $2.2 billion per year for, say, two years. Worth it?

Possibly a fatally flawed thought. But the basic idea, that we have to think in terms of trade-offs and rise above knee-jerk reactions to proposals such as raising the minimum wage, is not—at least not if conservatives want once again to be the source of ideas that keep market capitalism the system of choice. And be comforted by the fact that in thinking about this you are once again following the lead of Adam Smith:

Where wages are high .  .  . we shall always find the workmen more active, diligent, and expeditious, than where they are low. .  .  . No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. .  .  . That men in general should work better when they are ill fed than when they are well fed, when they are disheartened than when they are in good spirits, when they are frequently sick than when they are generally in good health, seems not very probable.

Of course, raising the minimum wage is not the only, and certainly not the most efficient way to increase the value of work. There is the Earned Income Tax Credit, which rebates employer and employee payroll taxes to low-wage workers, and which Eli Lehrer and Lori Sanders of the R Street Institute described in these pages (“Let’s Move,” February 10, 2014) as providing “virtually perfect incentives. .  .  . [I]t’s also entirely portable .  .  . [but] remains quite modest.” There is also a negative income tax. I leave it to others to devise ways to make work pay more, the funding to come from the savings in the benefits programs or from part two of a conservative back-to-work policy: accelerated growth.

Making work pay more amply than sitting on the couch now does is only part of the policy needed. There have to be jobs out there so that wages are available. For conservatives, now comes the hard part: We have to accept that both Adam Smith and John Maynard Keynes have lessons we cannot ignore. Smith emphasized the key role of economic growth:

It is not the actual greatness of national wealth, but its continual increase, which occasions a rise in the wages of labour. .  .  . Though the wealth of a country should be very great, yet if it has been long stationary, we must not expect to find the wages of labour very high in it.

We now reside in what for policy purposes we can consider a “long stationary” economy. We must concede that it is possible, not certain, but possible, that John Maynard Keynes was right when he said that in a recessed economy stimulation of demand would help that economy to start growing again. In order to make that concession we must first recognize that there is no theory of how our huge, complicated economy will respond to the pulling, or not, of this or that policy lever: For better or worse we are left with the sort of experimentation that characterized Roosevelt’s mixture of successes and failures that, in the end, saved capitalism.

Second, we must ignore the vulgar, unnuanced Keynesians who conclude from their master that only government can implement a demand-expanding policy. There is more than one way to implement a demand stimulus than that chosen by progressives, unrelenting in their search for ways to expand the reach of government.

We would do well to consider the possibility, for instance, that in a period of low interest rates, it might make sense to undertake infrastructure projects with a high social payoff. Given that possibility, it just might be possible to couple increased incentives to look for work with job-creating growth by—are you ready for this?—developing a better stimulus program. Look at it this way: If the Keynesians are wrong, and we follow their suggestions, we will waste some but not all of the money spent as described below. If they are right, and we don’t follow their urgings, we will have wasted lives, and doomed millions of men and women to permanent separation from the labor market.

Stimulus spending need not be of the sort in which the government, in consultation with the trade unions, selects nonexistent shovel-ready projects. Or that ends up enriching the green entitlement-seekers who so generously support the Obama political machine. Instead, it should be possible to allocate available funds by devising a process in which companies bid for government funds by indicating just how large a portion of the capital required they are willing to fund from their own treasuries. The company willing to bear the largest portion of the project’s capital and operating cost wins, and gets to share in the revenues from tolls, landing fees, or whatever income is generated by the infrastructure projects put out to bid. Such funds as the government ends up investing—“investing” is the right word in this connection, although not in the case of most government spending—will be repaid from the proceeds of user fees. The projects will thereby have to pass a market test—no bridges to nowhere, no airports in the hometown of some important congressman, no express trains that can’t attract private capital because their costs so far exceed their market-determined benefits.

This is a rather sketchy outline of a way to avoid another abomination like the Obama stimulus. But a large subset of the economics profession specializes in devising bidding systems that maximize bang for a buck, and that could accommodate the maximization of private-sector participation and of market-oriented means of allocating available funds.

Finally, we might pursue what the late Alfred E. Kahn, the Cornell professor, called “sensible microeconomic policies” that produce “beneficent macroeconomic consequences.” Vigorous enforcement of competition policies, even (especially) those that antagonize powerful incumbents; a no-nonsense policy towards innovation-reducing theft of intellectual property by China among others; removal of barriers to entry into trades such as hair and corpse dressing and the education business; regulation where competition is impossible or systemic risk is present, and deregulation in most other cases come to mind. As does support for projects that have benefits in excess of external costs, such as the Keystone pipeline.

None of this is to minimize the ideas bubbling up from conservative economists. Still, if we could get the incentives right and gradually and with ample notice lower the unemployed workers’ reservation price while increasing the reward for work made more available by sensible fiscal policy, conservatives just might have a framework on which to erect a voter-friendly, humane, and effective attack on the decline in work-force participation and the stubbornly high level of long-term unemployment, especially among workers in their prime working years. Combine that with what New York Times conservative-in-residence Ross Douthat says is the case, that “reform conservatism suddenly has national politicians in its corner,” and it might just be a tad early to reserve a place at Hillary Clinton’s inaugural ball.

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