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Want to Shrink the Economy? Limit the Labor Force

Mises Daily: Friday, September 18, 2009 by

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Listening to Thom Hartmann's radio program, the only halfway-interesting program broadcast during the day where I live, is a practicing ground for me on economic fallacies. His radio show, and his blog at Huffington Post, have strengthened my ability to find these fallacies, and given me fresh examples for future use.

Hartmann (who, like most of the media folk around him, believes "deregulation" and "capitalism" caused the current economic depression) subscribes to the "demand drives the economy" nonsense that unfortunately made John Maynard Keynes one of the most celebrated economists of the 20th century.

Hartmann recently recommended on his blog that, since he believes our stimulus plan won't work because it isn't adequately protectionist, we should lower the retirement age to 55.

Such an idea is literally insane, not to mention antilabor. To help workers get new jobs, Hartmann recommends forcibly limiting individuals' entry into the market, and killing off future productivity — new wealth, new jobs, etc. In other words, he thinks we can create jobs by killing off jobs. This sounds quite similar to FDR's attempt to stimulate the economy by destroying food supplies in the 1930s. In short, it's insane.

Here, I will explain why, by responding to remarks of Thom's op-ed column.

[Lowering the retirement age to 55] would eliminate the problem of unemployment in the United States. All those Boomers retiring would make room in the labor market for all the recent high-school and college graduates who are now finding it so hard to find a job.

First, Hartmann's shows that he fails to realize that the minimum wage is a hurdle that cannot be jumped by the types of high-school and college graduates he specifies here. Without the minimum wage, these people — who are unemployed because employers do not value their services more than the minimum wage rate government makes them pay — would already be employed at lower wages. They could then begin learning new skills, building résumés, moving up in the work world, and then gaining higher wages.

This idea of Hartmann's would lower productivity. It would also increase the costs of goods because of lower productivity and because of the increased volume of spending chasing the already-more-expensive goods.

On Hartmann's radio show, he recently debated John Lott, author of the book Freedomnomics. When Lott stated that Hartmann's plan would lower productivity, Hartmann dismissed him by saying that the 20-year-olds would merely take the jobs, and productivity would then be the same or better.

But this idea ignores two things: (1) the people over 55 would no longer be creating goods and services — i.e., wealth. They would merely be collecting government benefits and spending them. (2) if the 20-year-olds were the best for the jobs that people over 55 held, they would already have been hired instead of the older people. In short, we can a priori know that a worse person for the job would now hold it, thanks to a limiting of the labor supply by the government.

As you can see, this change in the retirement age would disrupt the division of labor, and the entire economy, for the worse.

If enough Boomers left the job market, it would even flip the current dynamic of too-many-people-chasing-too-few-jobs upside down, and create a tight labor markets [sic]. Tight labor markets drive up wages.

Hartmann needs to ask himself why there are fewer jobs than people right now. He blames Reaganomics and NAFTA/GATT for outsourcing jobs, as if the only way to ensure the existence of good jobs is by government forcing citizens to buy only stuff made in America (which is exactly what protectionism does).

Yet free trade drives prices down and allows individuals in different countries to specialize in what they excel at. Without free trade, government arbitrarily forces a cartel with objectively less productive operations, in order to benefit a single "class" (the working class) at the expense of all of society. That is special-interest policy at its worst.

The truth is that right now the economy is vomiting out the malinvestment caused by the Alan Greenspan–created boom. Once the economy rebounds and readjusts itself to voluntary consumer preferences, more jobs will be created. This is what happened in 1920–1921, thanks to Warren Harding's laissez-faire response to the 1920 economic crash (which was worse than the 1929 crash). The only thing that could get in the way of this recovery is the kind of interventions that Hartmann proposes.

Additionally, these new-into-the-workforce people can then pay off student loans, buy new houses and cars, and otherwise drive the economy from the bottom up.

In other words, Thom wants us to create the very sort of insane spending that got our country into this economic crisis in the first place. And the economy is never built from the bottom up, unless you believe that somehow supply can magically catch up with demand. Ever heard of savings, Thom?

To further tighten the job market and drive up wages (and tax revenues), modify the Fair Labor Standards Act of 1938 — which tightened the labor market and reduced unemployment by establishing the 40-hour work week — to include all hours worked by a person. We could also, like in France, drop the 40-hour maximum-workweek threshold to 35 hours.

In this example, just like the last one, Hartmann recommends lowering productivity and increasing raw spending. In other words, he suggests lowering supply and increasing demand, which would kill living standards by forcibly subsidizing inefficiency and waste. This is the polar opposite of what is helpful for an economy.

He and other "progressives" may quip that the inflated wages spent by the workers will in turn create more jobs and thus stimulate more supply, but the fact is that this stimulus is never sustainable — it can only create tiny offshoots of economic growth that do not spread throughout the economy, and will be offset by reduced productivity.

And he thinks the 40-hour workweek and 8-hour workday reduced unemployment? Such measures always increase unemployment, because individuals who would voluntarily work more are barred from doing so by the government.

This is the main reason why the labor movements of the 18th and 19th centuries fought so hard against child labor; they knew that if children were removed from the labor marketplace, then the supply of labor (the number of people available to work) would decrease and the price of labor (wages) would increase. And, sure enough, that's exactly what happened — and it began the creation of a blue-collar middle class.

Precisely. One of the key reasons that unions fought so hard for restrictions on youth entering the marketplace was not for social justice (like the high school history books say), but for the protection of their own bloated wage rates. And Hartmann views this as a good thing? It forced youths out of jobs so other workers could protect their own inflated wage rates — again, special-interest policy at its worst.

This policy is also not what led to the creation of a middle class. In believing this, Hartmann has simply fallen prey to the post hoc ergo propter hoc fallacy.

Hartmann has stated previously that "the 'middle class' is not a normal result of 'free markets,'" and that it has to be created by government. In other words, he believes that freedom would naturally create a few rich people and a mass of poor people starving and begging for mercy. (A reading of Rothbard's and Mises's writings on monopoly may be in order for Thom.)

Of course, this is the exact opposite of American labor policy ever since the Reagan/Bush/Clinton/Bush era. Reagan drove down wages by busting unions (which tighten a labor marketplace); declared an amnesty for millions of then-illegal immigrant workers to increase the supply of labor and depress wages (particularly whacking the carpenters and other construction trades unions); and began the process (completed in a big way by Bill Clinton with NAFTA and GATT/WTO) of dismantling tariffs, taxes, and laws that made it expensive or illegal to export American jobs.

This is just more of the same. Hartmann even decries amnesty for illegal immigrants, a standard progressive political ideal, simply because it brings down the wages of carpenters and construction workers. But last time I checked, immigrants need food and jobs too. There's a reason why they're coming over here.

If the immigrants are indeed hired, then the companies are getting better workers for a lower price, thus increasing productivity and living standards. In turn, it is up to the newly unemployed construction workers and carpenters to realign themselves in the division of labor in a manner that is most productive to consumer wants. Taking down the government's fiat labor restrictions, such as the minimum wage, would be a simple way to get that ball rolling.

Frédéric Bastiat (1801–1850)
Right-wing Ideologue?

Furthermore, Thom Hartmann, who constantly slams "corporate dominance," here advocates tariffs, which actually force a protected cartel to form within our country. These measures ensure corporate dominance, reduce supply, and increase demand. They are terrible for the living standards of all people, including the working class.

In order to understand this, you need to understand the long-run effects, not just the short-run effects; in essence, you need to see "That Which Is Not Seen," to quote the title of a famous essay by Frédéric Bastiat — but I'm sure Hartmann would simply label Bastiat a right-wing ideologue.

Reagan also put into the chairmanship of the Fed Alan Greenspan, who openly declared that his most important job as chairman of the Fed was to prevent "wage inflation" — a term which he exclusively applied to working-class people. Greenspan is still preaching that now-discredited and anti-American philosophy he learned from Ayn Rand, in fact.

In a previous blog post, Thom Hartmann referred to Alan Greenspan as an "antiregulation Libertarian." Saying that there is a libertarian running the Federal Reserve is akin to saying there is a libertarian running the DEA or the FDA. If you're in charge of one of them, you've proven you're not a supporter of even basic libertarian principles.

And Thom Hartmann is clearly an Ayn Rand illiterate. Ayn Rand decried central banking and the Federal Reserve, so even though she correctly thought it was wrong to artificially boost wages, she did NOT say that a central-bank czar should attempt to do the opposite. Hartmann is so wrong on this it's appalling.

Oh, and being "anti-American"? Isn't that the same stuff I heard from Bush and the neoconservatives?

It's shocking that ideologues like Greenspan, Reagan, and Clinton believe this, but they do. And the only way to reverse the past 29 years of Reaganomics/Clintonomics is to tighten up the labor market again. While a great start would be to pull out of our insane trade treaties and begin again protecting American manufacturers, that will take a decade for the impact to be truly felt even if we were to go back to our 1980 tariff levels today.

Greenspan, Reagan, and Clinton are not free marketers. It was Greenspan's Keynesian reduction of interest rates that caused the boom and bust. A truly free-market ideology lies in natural rights, which is an objectively determinable ideology.

But providing space for a good chunk of the 16 percent of the American workforce over 55 years old will immediately take us to nearly zero unemployment and dramatically stimulate the economy. Then we can begin to bring our manufacturing jobs back home from China and the other important steps.

Thom Hartmann believes that economies lead to wealth stratification unless government force steps in to regulate things in the name of the working class. Does he have an explanation for the quick recovery from the depression of 1920? Didn't think so. Does he have an explanation as to why anarchic Iceland lasted 1000 years? Didn't think so. Instead he subscribes to the public-school–textbook explanations, which he seems to have memorized.

The "zero unemployment" resulting from a forced reduction of the retirement age to 55 would be a counterfeit one, since those newly retired would still be working were it not for the disincentive that the government inflicted on them.

True zero unemployment would only occur in a free society, without misguided policies propping up wages and preventing the price of labor (as well as land and capital goods) from liquidating to normal levels. If you do not allow the liquidation to occur, and instead perform little tricks like lowering the retirement age, you create massive disincentives for laborers that make it impossible for the economy to ever recover.

And even with all this aside, it is bizarre that Hartmann sees falling wages as a bad thing. Falling wages mean labor is becoming cheaper, and thus easier and easier for companies to afford. Once wages are low enough, the unemployed will be employed, productivity will take off, and more and more jobs will be created.

This "liquidation of labor" is precisely what happened in 1920 when the economy crashed and government did nothing to prop up wages or demand. The crash ended a short time later. But it's not surprising that Hartmann doesn't know or understand this concept, because in a previous blog post on the Huffington Post he stated that

in Hoover's world (and virtually all the Republicans since reconstruction with the exception of Teddy Roosevelt), market fundamentalism was a virtual religion.… Hoover enthusiastically followed the advice of his Treasury Secretary, multimillionaire Andrew Mellon, who said in 1931: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down … enterprising people will pick up the wrecks from less competent people.

In fact, Herbert Hoover was a hyperinterventionist who instituted the first New Deal in 1932. Hoover's New Deal set up public works, restricted immigration, and granted loans to states for relief. Wow, Thom, that really sounds like market fundamentalism to me!

The Bastiat Collection

In conclusion, Thom Hartmann's economic views are based on misinformation. He is correct that there is a corporatocracy in this country, but he advocates the very ideas that created.

The only reason Hartmann retains any economic credibility among his audience is that he gets weak supporters of the free market, like Yaron Brook, and Dan Geinor from the T. Boone Pickens Institute, on as guests to debate government control of markets vs. free markets. Were he to have someone of real economic wisdom on the program, this would change. Perhaps this is why such individuals are never on: keeping the illusion of Hartmann's economic wisdom alive props up his salary rate and prevents it from liquidating.