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Economic Schadenfreude

February 2, 2011

Tags Business Cycles

One aspect of the current economic crisis has been the comeuppance for certain firms, industries, and segments of the labor market that are overdue for correction, all made possible by their special relationships with the state. The result is a case study in how political favors can result in short-term gain, while in the long run economic laws still have the final say.

Is it wrong to enjoy this comeuppance, even if just a little bit?

If you do enjoy it, then you may be guilty of economic schadenfreude, which is a special case of schadenfreude (enjoyment gained by seeing the misfortune of others) available to those of us blessed with the economic way of thinking. This is simply ordinary schadenfreude applied to economic events. What makes this phenomenon different is that those untrained in the economic way of thinking are oblivious to the opportunity for it.

Our Friend in Indiana

Economic schadenfreude hit me first a year ago; watching a network newscast about the crisis, I learned about a 30-something union worker in Indiana who was very scared about the possibility of losing his job: the job he had held since high school, and the same job that sustained his father in earlier times. If the firm for which he worked — we'll call it company X — were allowed to fail, could he continue to provide for his family? Would he lose his house?

Cue the tape of the beleaguered, teary-eyed laborer! It must have been effective, because I remember it still today.

Economists may be especially susceptible to schadenfreude in such cases. Despite the network-news bias in favor of bailing out company X, we know that labor like that chosen by our forlorn friend in Indiana is one of the reasons why company X was in so much trouble in the first place. The wages and benefits won for such workers during flusher times proved burdensome in a dynamic economy. When they exceeded the revenue individuals like him created for his firm, the firm lost money by continuing to employ him. The obvious economic responses for firms in that position — to adjust the wages to reflect the worker's productivity and revenue, or possibly to fire the worker and replace him if he refuses — were denied to company X because of protections offered to union labor by government.

These protections made this worker a part of a class of anointed labor that could only be made possible by extramarket forces thwarting market forces. This allowed him to live better than he otherwise would have had his wages simply reflected his marginal productivity and, by extension, the revenue he brought to his employer.

Furthermore, those of us with an economic way of thinking know that the ability of his segment of the labor force to demand higher wages and benefits from this worker's industry meant that others had to cover the cost for his wages and benefits. Investors received reduced returns as firms employing such labor had to pick up the slack. Consumers paid higher prices for the output of the industry in which this worker worked, a problem that, in the short run, was made less of an issue because ubiquitous consumer credit (thanks, Fed!) made consumers less price conscious. In the long run, however, these conditions rewarded the emergence of substitute products, especially those made by foreign competitors who are relatively less burdened by union-based cost constraints.

None of these aspects made it into the network-news story, which we can assume had its intended effect, because this worker's industry was eventually bailed out by the federal government. We can assume that he has since wiped away his tears and resumed his previous existence. Nonetheless, those of us trained to notice the unseen effects of his position in the labor market can be forgiven for feelings of schadenfreude when viewing his plight.

On Wisconsin

Then there is the problem of states today that are facing impending budget crises. Just as Europe has its PIIGS (Portugal, Ireland, Italy, Greece, and Spain), we now have the acronym CINN: California, Illinois, New York and New Jersey. Legislatures in these states and several others will come to terms this year with fiscal realities characterized by falling property-tax revenues, outrageous spending, and pension obligations. It is likely that at least one of these states will default on some portion of its debt obligations. If this happens, it will be the first time since the 1930s that a state defaulted on its loans.

Can one feel schadenfreude for the problems of an entire legislature? Consider the case of Wisconsin. Like most states in trouble today, the Cheese State has been a land of hefty taxes and regulations for years, causing it, over decades, to leak capital and labor. Many a talented and productive person has been forced to leave the state for regions more conducive to economic growth.

As a result, economic activity taking place there today is based largely on wealth redistribution rather than on wealth creation, as evidenced by the list below of the state's top-ten employers. Note that six are public-sector entities, which means that they are sustained by coerced capital flows diverted from wealth creators. Of the remaining four, two are in a healthcare industry largely protected from competition due to the cartelizing effect of government regulation of business.

Meanwhile, the largest employer is the much-maligned Walmart, which serves as a godsend in a labor market with so few alternatives for workers. The irony is that Walmart sells goods produced in areas characterized by less intervention in market forces than Wisconsin.

Largest Wisconsin Employers

  1. Walmart
  2. University of Wisconsin–Madison
  3. Milwaukee Public Schools
  4. US Postal Service
  5. Wisconsin Department of Corrections
  6. Menards
  7. Marshfield Clinic
  8. Aurora Health Care
  9. City of Milwaukee
  10. Wisconsin Department of Veterans Affairs[1]

This leaves Wisconsin's legislature in a bind. The federal stimulus granted it an artificial lifeline, but that runs out this year. Meanwhile, its massive public-sector payroll cannot be met by income taxes on that same sector. (If only!) Economists now predict a $2.25 billion shortfall in tax revenues for a $31 billion budget, which is now around 13 percent of state GDP. Wisconsin's debt service now takes up 33 percent of its spending. Of all the state's revenues, almost 30 percent comes from the federal government. (See the state's "Budget in Brief" for more information.Download PDF) This is a state economy propped up by federal spending programs recently monetized by the Federal Reserve.

But what else would you expect from a state that was birthplace of both the Progressive movement and better living through progressive taxation? The better living was short-lived, as many taxpayers eventually fled the state.

Mises Academy: Robert Murphy teaches Principles of Economics

Those of us with an understanding of economic theory may take pleasure in the rumblings of those who benefited from these policies for decades, as it dawns on them that budget constraints are real-world phenomena that can now, finally, apply to them.

Conclusion

Economic schadenfreude is a condition not available to everyone who can experience schadenfreude. It is available only to those who understand economic theory. However, the now-increasing opportunities for this feeling suggest that the economy is recovering, to the extent that politically well-connected groups that benefit at the expense of productive members of the economy are now suffering. Maybe the Conference Board and other organizations that study business cycles should take note.


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