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. 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?