Robert Reich’s arguments against “paid-what-you’re-worth” are a garble.

March 17, 2014
Robert Reich's arguments are curiously poor for a former cabinet member.

Robert Reich’s arguments are curiously poor for a former cabinet member.

Okay, so we’re comparing who to what, now?

Robert Reich is the former Secretary of Labor under Bill Clinton who has made waves on the internet with provocative YouTube videos assailing income inequality and other apparent economic problems in America. His arguments generally have ready responses among libertarians that, unsurprisingly, I find convincing. Reich’s latest exposé is against the economic theory that workers are generally “paid what their worth”. Libertarians use this argument to oppose to minimum wage laws. Because Robert Reich favors an increase in the legal minimum wage, he argues that the “paid-what-you’re-worth” theory of wages as a myth. Salon.com thought Reich’s exposé merited republication, but I was not so impressed. Entitling it, The “Paid-What-You’re-Worth” Myth, Robert Reich begins his exposé by stating the economic theory this way:

It’s often assumed that people are paid what they’re worth. According to this logic, minimum wage workers aren’t worth more than the $7.25 an hour they now receive. If they were worth more, they’d earn more. Any attempt to force employers to pay them more will only kill jobs.

According to this same logic, CEOs of big companies are worth their giant compensation packages, now averaging 300 times pay of the typical American worker. They must be worth it or they wouldn’t be paid this much. Any attempt to limit their pay is fruitless because their pay will only take some other form.

To libertarians, this is not a bare assumption. To libertarians, this is the expected result of a market process. Ph.D. economist Matt Zwolinski explains the process, also known as the Marginal Revenue Productivity Theory of Wages:

Well, first, it’s absolutely correct that capitalists want to exploit workers. they want to pay as low a wage as possible, and get as much work out of workers as possible, in order to maximize profit. but the fact that other capitalists also want to exploit workers in this way makes it difficult for any of them to do so. This is because competitive pressures force capitalist to pay workers close to the value of what those workers produce, whether they want to or not. If you tried to pay someone less than they’re worth, someone else will offer them more, because they can profit by doing so. Imagine you’re in an auction bidding against others for a dollar [symbolic of the value a worker might produce in some short amount of time ~eds]. Of course, you’d like to pay as little as possible for that dollar. But if someone else was bidding 60¢ for it, wouldn’t it be worth your while to bid 62¢? And wouldn’t someone else then bid 64¢, and so on? In a competitive market, that same process leads capitalists to pay workers close to the value of what they produce, not because they want to, but because they have to.

Sounds convincing to me. At least I can’t refute it on the spot. Let’s consider Robert Reich’s rebuttal. Ladies and gentlemen, Robert Reich:

Fifty years ago, when General Motors was the largest employer in America, the typical GM worker got paid $35 an hour in today’s dollars. Today, America’s largest employer is Walmart, and the typical Walmart workers earns $8.80 an hour.

Does this mean the typical GM employee a half-century ago was worth four times what today’s typical Walmart employee is worth? Not at all. Yes, that GM worker helped produce cars rather than retail sales. But he wasn’t much better educated or even that much more productive. He often hadn’t graduated from high school. And he worked on a slow-moving assembly line. Today’s Walmart worker is surrounded by digital gadgets — mobile inventory controls, instant checkout devices, retail search engines — making him or her quite productive.

I see. So, rather than expose the flaws in a libertarian’s actual economic argument, our former Secretary of Labor instead tosses us a pure apples-to-oranges comparison. He wants us to compare the productivity and earnings of 1964’s auto workers to those of today’s retail workers. Well, I’m sorry, but in my tiny little libertarian brain, this comparison is completely opaque. Yes, I see that today’s Walmart workers are surrounded by digital gadgets that make them “quite” productive. Could Mr. Reich show us, perhaps a little more quantitatively, just how quitely the productivity of Walmart workers now approaches that of 1964’s auto workers? Maybe I’m dumb, but “quite” doesn’t quite draw a clear enough picture. Why not at least compare 1964’s apples to today’s apples by sticking with either auto workers or retail workers?

Well, let’s let Reich continue:

The real difference is the GM worker a half-century ago had a strong union behind him that summoned the collective bargaining power of all autoworkers to get a substantial share of company revenues for its members. And because more than a third of workers across America belonged to a labor union, the bargains those unions struck with employers raised the wages and benefits of non-unionized workers as well. Non-union firms knew they’d be unionized if they didn’t come close to matching the union contracts.

Today’s Walmart workers don’t have a union to negotiate a better deal. They’re on their own. And because fewer than 7 percent of today’s private-sector workers are unionized, non-union employers across America don’t have to match union contracts. This puts unionized firms at a competitive disadvantage. The result has been a race to the bottom.

Guess which company's business model the former secretary of labor prefers.

Guess which company’s business model the former secretary of labor prefers.

Hmm. So, aside from being in a completely different industry, with a completely different demand curve, and living in a completely different era, the real difference between the two is that, whereas GM workers a half-century ago had a strong union behind them, today’s Walmart workers do not. I see. Well, another difference that I think should not pass without mention is that, whereas GM is a complete failure of a company that would have gone under but for a massive government bailout, Walmart thrives as one of America’s most successful businesses. Of course governments throw favors at Walmart cronies in a variety of ways, so I’m not holding Walmart up as a paragon of free-market excellence, but let’s try to acknowledge some the recent failures of GM’s business model before lionizing unions for negotiating extravagant wage and benefits packages. A business that is not profitable can not employ people, and not all industries can always rely on governments to bail them out, nor should they.

I know Mr. Reich feels that he put together a decent case here, but just in case you found his anachronisms to be unconvincing, he continues:

If you still believe people are paid what they’re worth, take a look at Wall Street bonuses. Last year’s average bonus was up 15 percent over the year before, to more than $164,000. It was the largest average Wall Street bonus since the 2008 financial crisis and the third highest on record, according to New York’s state comptroller. Remember, we’re talking bonuses, above and beyond salaries.

All told, the Street paid out a whopping $26.7 billion in bonuses last year.

Are Wall Street bankers really worth it? Not if you figure in the hidden subsidy flowing to the big Wall Street banks that ever since the bailout of 2008 have been considered too big to fail.

Well, yes. Fair enough. Like GM’s auto workers, Wall Street’s bankers are also unworthy of a government bailout. The solution to the problem, of course, is for the government to stop making it rain on Wall Street with bailout money that it either borrowed or forcibly confiscated from taxpayers. Understand, though, that this has absolutely nothing to do with the minimum wage debate, where the pay-what-you’re-worth theory tends to surface.

As for the run-of-the-mill CEO who makes 300 times that of an average worker, Mr. Reich observes:

By the same token, today’s CEOs don’t rake in 300 times the pay of average workers because they’re “worth” it. They get these humongous pay packages because they appoint the compensation committees on their boards that decide executive pay. Or their boards don’t want to be seen by investors as having hired a “second-string” CEO who’s paid less than the CEOs of their major competitors. Either way, the result has been a race to the top.

The operators of facebook’s Being Classically Liberal page have rebutted this repeatedly and convincingly, in my opinion. Running a multi-billion dollar corporation is not as easy as these CEOs make it look. Balancing all of the factors takes a great skill that not many people have. CEOs’ decisions can generate either billions of dollars in wealth for consumers and shareholders alike, or billions of dollars in losses for the latter. Does the CEO who generates billions of dollars in wealth for others by soundly making difficult decisions not earn a multi-million-dollar paycheck? I think so. I do not find convincing Mr. Reich’s explanation that a CEO is little more than a multi-million-dollar figurehead—a veneer of machismo to parade before gullible investors. I think CEOs do more than that.

In conclusion, Mr. Reich offers a great case study in why I am still a libertarian after all these years. As a former Secretary of Labor, Mr. Reich is supposed to offer the best of the best arguments in favor of his preferred economic policy of higher minimum wages. In this case, as is typical, the best of the best arguments against a good libertarian idea consists of complete unresponsiveness, anachronistic apples-to-oranges comparisons, unhelpful caricatures, and the unrelated failures of other government interventions. Isn’t it about time for voters to listen more carefully to what libertarians are saying?

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Peter Schiff and the Daily Show: The trouble is, graphs don’t win arguments.

February 1, 2014

Anyone can read the news to you; The Daily Show promises to feel the news at you.

I thought Jon Stewart was heroic when he took on Paul Begala and Tucker Carlson on Crossfire, exposing media theater and the uncomfortable truth that news organizations essentially take cues on integrity from Comedy Central. I bought it for a long time that Stewart’s The Daily Show was almost an acceptable substitute for cable news. Well, we all got a cold splash of reality last week, when Jon proved to us that his show is really is only comedy, and properly scheduled after puppets making crank phone calls.

Last week, the producers of The Daily Show defamed one of my intellectual heroes, Peter Schiff. Many libertarians criticized Schiff for walking into an obvious trap, but I can understand why Schiff took the bait. He personally appeared on the show in 2009 to speak with host Jon Stewart after having correctly predicted the 2007 financial meltdown. Stewart treated Schiff respectfully, and Schiff won the audience’s approval:

I imagine Schiff was expecting similar respect and thoughtfulness this time around. What he received instead was the following hatchet job, led by comedian Samantha Bee:

Read the rest of this entry »


Minimum Wage Increases: Economic Snake Oil

January 29, 2013
Senator Stephen Sweeney (D-Gloucester) has the cure for our economic ailments, ...

Senator Stephen Sweeney (D-Gloucester) has the cure for our economic ailments, …

Checking out the news of the day on facebook, a friend posts this article for our consideration, courtesy of ThinkProgress:

New Jersey Governor Vetoes Minimum Wage Increase

The New Jersey Governor at issue is Republican governor Chris Christie. The tone is not celebratory. My facebook friend lamented: “Really, he might as well just go re-flood people’s homes.” Is it that bad? I’m not convinced.

The thrust of the article is that the people of New Jersey would have bathed in fountains of prosperity, if only the governor would have been willing to force employers to pay their employees more money. The bill, as it was passed, would have increased the minimum wage from its current $7.25 to $8.50. Christie vetoed the bill conditionally, saying he would sign it if the increase were lowered to $8.25 and phased in over three years. This was not good enough for Pat Garofalo, the author of the ThinkProgress piece, who reasoned:

As the New Jersey Policy Perspective noted, “the first year increase proposed by the governor of 25 cents will be erased by inflation by the time the third year kicks in its 25 cents.” Here are more benefits that Christie denied to working New Jerseyans:  Read the rest of this entry »


Links for November 21, 2011: Story of Broke; MoJo mangles the market (again); Unpaid interns want money (Who doesn’t?); others….

November 19, 2011
  1. For all of its flaws, this is actually not an awful video, considering the source. Annie mostly correctly identifies government boondoggles and waste as reducing the quality of our economy. She unfortunately does not identify the correct solution. He clings to the myth of good government. If only we vote the bums out, we’ll get good government, she seems to believe. I don’t think that’s ever happened, and I don’t think it ever will. As I’ve been saying ever since the Occupy movement has been making some of its demands known: Handouts to the politically connected are not a bug, they are a feature, of government. The free market will solve these problems better than the ballot box will.

  2. Lee Doren critiques “The Story of Broke” more fully.

  3. What Sexton should worry about is the very institution the Freakonomics crew worships: the market.

    First fallacy: Misrepresent the market. The market is where people go to exchange goods and services peacefully and voluntarily. People should worry not about peaceful, voluntary exchange, but rather about forceful interference into peaceful, voluntary exchange. Read the rest of this entry »


Links for July 12, 2010: Is the Energy Star Program a Rubber Stamp?; Much Ado About the Economy, Economics; Much, Much More!

July 11, 2010
  1. The Government Accountability Office tested the government’s Energy Star program with phony products and found it essentially to be a rubber stamp–except that only 15 of 20 products were accepted and two were rejected.  I wish they’d explained the rejections in a little more detail.

  2. Every time a libertarian stays in the closet, an angel gets its wings ripped off.

  3. We need you out here!!! I highly recommend listening to Mises.org podcasts and watching Reason.tv. After a while, you’ll come to realize that you have ready responses to every statist argument that comes down the tube.  Also, take Christopher Hitchens’s sage advice to heart.

  4. “The Conscience of a Liberal”: Calling your opponent “bizarre” and “crazy” = Checkmate!!! See full ThinkMarkets.wordpress.com response hereRead the rest of this entry »


Links for June 21, 2010: Police Shoot Expenctant Father Dead Over Marijuana, The Economics of the Minimum Wage, others….

June 20, 2010
  1. The victims.

    “One of the problems that the marijuana reform movement consistently faces is that everyone wants to talk about what marijuana does, but no one ever wants to look at what marijuana prohibition does. Marijuana never kicks down your door in the middle of the night. Marijuana never locks up sick and dying people. Marijuana does not suppress medical research. Marijuana does not peek in bedroom windows. Even if one takes every reefer madness allegation of the prohibitionists at face value, marijuana prohibition has done far more harm to far more people than marijuana ever could.” ~ Richard Cowan

    … and Marijuana never shoots expectant fathers in the face for making “furtive movements”. If you are not speaking out against these tragedies, then you are telling our lawmakers that you tacitly approve of them. Spread the word, to your legislators and across your social networks, that you do not approve.

  2. It lays out the basic argument. Progressives might revile at the suggestion that the minimum wage is more that a worker “is worth”, but I think this ignores economic reality.  Read the rest of this entry »


Links for June 14, 2010: Christopher Hitchens on disagreeing with the Left, Study alleges progressives are poor at basic economics, others….

June 13, 2010
  1. I would never make a political disagreement the cause of a quarrel with a friend. I think it’s silly to do that. But there is a tendency on the left—and I bet there are people here who know what I’m talking about—to think that if someone in any way disagrees with the left, it must be for the lowest possible reason, and that if you’ve found the lowest possible motive, you’ve found the right one. There’s this whole culture of: no one would leave us or quarrel with us if they weren’t a sellout. It’s actually a very sick mentality, and very widespread, and people who think like that or feel like that can dump me if they want, but that’s almost to as much as to say that they weren’t much of a friend.

    Yes, I know what he’s talking about. Speaking of sell-outs, Christopher Hitchens will be speaking to a sold-out crowd tomorrow, June 15, at the Free Library of Philadelphia.

  2. This study purports to find that self-identified progressives and liberals are less “economically enlightened” as compared to conservatives and Libertarians. I believe the result is essentially correct because every day I read articles from progressives who advocate feel-good policy proposals without examining economic consequences or responding adequately to economic concerns. I regularly comment on this very phenomenon here on this blog. Unfortunately, this study is so biased and flawed that it will not convince anybody.  The condescending title of this article alone will rightfully repel the very people who should receive the message most.  See a rebuttal here and a forum discussion here. Read the rest of this entry »