Pitching In

I tend to agree with Don Boudreaux about almost everything, but I think one bit of this recent letter to the editor is misleading:

First, in market economies incomes aren't “distributed”; they're produced and earned.  Second, persons whose earnings rise disproportionately more than those of other persons generally achieve this outcome by increasing their production disproportionately more than other persons increase theirs; the fact that someone's income rises means that he or she already is pitching in more.  Third, the share of federal individual income-tax revenues paid by America's top one-percent of income earners has recently been on the rise.  In 2006 (the latest year for which data are available) this tiny group of Americans paid a whopping – and all-time high – 39.9 percent of such taxes.

The first point is right on, as is the third. But the first half of the second point attributes intention where it should not, and the second half of the second point fallaciously infers a kind of increased effort from increased productivity. Let's look at it closer:

… persons whose earnings rise disproportionately more than those of other persons generally achieve this outcome by increasing their production disproportionately more than other persons increase theirs

Holding demand and hours worked equal, increased inequality in earnings in wages tends to imply increased inequality in productivity. But a worker may become more productive due to some innovation in a technology that complements his or her skills without having done anything to increase his or her productivity.  

… the fact that someone's income rises means that he or she already is pitching in more. 

If the rise comes from an increase in hours worked, sure. But trends in increasing wage and income inequality are primarily a matter of supply and demand. If demand for a certain set of skills goes up relative to supply, the wages of workers with that set of skills tends to go up. The fact that engineers are paid more than gardeners mostly has to do with the fact that engineers are relatively scarce compared to engineering opportunities, while gardeners are relatively plentiful compared to gardening opportunities. Wage and income levels are a pretty poor index of the social value of work, so an increase in an individual's income neither suggests an increase in effort nor an increase of the value of the individual's type of work. What it means is that, for whatever reason, that person's skills happen to command an increasingly high wage on the market. 
The idea that income tracks virtue, effort, or merit–anything other than supply and demand–is a myth that I think Hayek pretty well exploded. I think it hurts more than it helps to suggest that the emergent pattern of incomes somehow reflects who is and who isn't pitching in, since it doesn't. For my money, Don is the world's best economic fallacy exposer, so consider this a tribute to Don.

23 Replies to “Pitching In”

  1. Here again is a peculiar anti-domestic bias in the Ikenson quote you provide. 3 US companies on one half and 7 (plus “other”) on the other half, but it is the more numerous companies whose products are described as more desirable. Isn’t desirability determined by purchases? By that standard cars from these three automakers are exactly as desirable as the cars of all other competitors combined. And yet the glass is read as “half-empty”, and an indication that they are less desirable.
    Certainly the big 3 have lost market share over the years, and have missed pretty big on a number of opportunities. But its worth mentioning I think that Toyota only really challenged GMs position as top of market share after they started selling the now derided full-size trucks and SUVs they had cribbed from undesirable automakers like GM and Ford.
    I’m really not a Detroit apologist (I did work for GM but have never owned one because they weren’t desirable to *me*) but its really astonishing how heavily people are putting their thumb on the scale after the fact.
    Of course the labor situation is untenable. But can you tell me how a graph that shows that the Big 3 pay their workers almost twice as much as their competitors is an indication that the situation is hopelessly beyond repair and not an indication that restructuring of contracts backed by a government loan could completely transform them in a short period of time? It seems the latter is a far more rational deduction from that data. Rather than point out how hopeless the situation is, it puts a bright highlight on the most urgent need for change.
    I’d also argue that it is not the UAW worker that is the primary beneficiary, as they are very likely to lose pay in any new arrangement. The beneficiary is the $7.25/hr plastics plant worker who gets to keep her job. Is that sufficiently poor for you?
    Still, I don’t know that a bailout is necessary. But overemphasizing how terrible the management is doesn’t really serve anyone. Its bad enough without making things up.

  2. ish, market share and/or sales aren’t really good measures when some market participants, i.e. the domestic makers, are selling their products at a loss. If, for example, Toyota were selling half the cars on the market and making $1000 on each one, and GM were selling the other half and losing $1000 on each one, it would be perfectly reasonable to conclude that GM is producing undesirable goods.

  3. It’s spectacularly dishonest to include outstanding obligations to retirees’ healthcare and pensions – as these numbers do – in the figures for the hourly compensation of their current workforce. Look at the data: the nefarious fatcat UAW members are averaging the median wage. Do you really think they’re getting $45/hour in benefits? Really? 54% more than management and professional workers? I guess it’s one way to manufacture baseless resentment, but it completely misidentifies the sunk cost.
    You’ve got over half a million retired autoworkers on healthcare and pension plans that aren’t included in the denominator: liquidating the union isn’t going to sever those old contracts, slashing present labor costs isn’t going to save GM’s bacon.

      1. The PBGC doesn’t cover retiree medical, nor is there a dedicated trust for future payments – coverage is dependent on the financial health and good faith of the guarantor.
        PBGC does cover pension benefits, but it also takes in premiums. The taxpayers won’t pay a dime unless the PBGC goes bust, which, while possible, is a separate problem that should be dealt with explicitly.

  4. What is happening here in Detroit right now isn’t just ‘creative destruction’ as some would describe it. Some of what is going on is very uncreative destruction that the government (both national and Michigan State) has had a hand in.
    Recently the UAW agreed to ‘two tier’ wage systems, fewer job categories and is absorbing retiree health care costs. Also the car makers are (or were) about 2 years out (with current best practice product development cycles) from producing more fuel efficient vehicles. The problem is, both of these situations will not be effective until 2010 at the earliest.
    What hit the Big Three so hard when they were already weak was the perfect storm of the unexpectedly high gas prices this last summer and the fallout in the financial sector from the subprime mortgage fiasco. The mortgage fiasco is at least partially the government’s fault, from legislation passed during the Clinton administration to encourage lenders to loan to more ‘economically challenged’ Americans to own a home, the pressure applied to Freddie Mac and Fannie Mae for the same purpose, and the inflationary monetary policy that fueled the housing bubble. It is worth keeping in mind that the transplant companies (Honda, Toyota, BMW etc.) are all losing money in this climate as well, but they have more cash on hand to weather the storm.
    Then there is the issue of the union. I doubt the union would have had such influence, to create such an unsustainable situation, if it were not for US labor laws and the specific state laws of Michigan. It isn’t a mystery that all of the profitable foreign transplant manufacturers have built all of their plants down south in ‘Right to Work’ states. Michigan just lost out recently to Tennessee to get a VW plant, which would have been a tremendous reversal of what has been happening for the last 30 years.
    I am not necessarily arguing that a bailout is necessary or even a good idea, but it will do us all well to remember that if one or more of the traditional American auto companies goes under, it was partially killed by bad government policy.

    1. You captured the facts, Jim. THe labor contract negotiations in 2007 will within 5 years put the average rate at less than Toyota’s average rate. The work rule changes allowing, for example, more team/ empowered employee and two tier wage rates are historical by UAW standards. It won’t happen on Obama’s watch, but the distortion of the labor market favoring unions keeps a cement jacket on any unionized firm.
      So.. they are making great strides in the major factor affecting their success– the union straight jacket. They are winning many quality contests and their cars are inching up on satisfaction surveys. They have a larger array of high mileage cars coming on stream– the Malibu is very good.
      They face a credit storm diminishing their marketplace place from 16m sales to 11 millioin sales. Not of their own doing… their competence is not on the line. The 200,000 or so employees of suppliers across the country are at risk and so the famous SYSTEMIC risk exists that TARP was designed to address.
      Most of the arguments beg the fact that we are trying to prevent a fiasco from descending into a disaster. $25B is a small amount to offer to insure that an auto bankruptcy isn’t the tipping point to a depression.
      Further, they asked for a LOAN not a bailout. I know… it is a higher risk loan, but the term is important.
      Bill

  5. GM needs to go thru some kind of bankruptcy to escape the retirees’ healthcare and pensions — yet the gov’t bailout of using Medicare & Social Security is already in place.
    Great charts, based on fine Chrysler data (OK, estimates for other carmakers).
    Instead of a bailout, what should be the focus of discussion is the post-bankruptcy business plan for the car factories and the workers.
    The gov’t should probably offer matching loan dollars to the highest equity bidder for buying the factories, at an ARM starting at current Fed rates (of 1%) plus 1%, or some such.
    What I don’t know is whether union pension debt comes before or after bond holders in bankruptcy — I know that equity investors get wiped out. And they should.
    Gov’t helping UAW buy GM after a bankruptcy seems excellent — let the management work for UAW and decide about the workers and management salary levels. All prior UAW ‘benefits’ should have been funded by stock grant purchases to the UAW account.

  6. These numbers seem to be about 4 years old. As far as I can tell GM shirked off most of the legacy costs for its retiree healthcare plans with the VEBA stuff in 2007, so going bankrupt isn’t going to help much to escape costs they’ve already escaped.

  7. Thanks Mr. Wilkinson, this is the single most informative blog post I’ve seen on this topic. However, I think the last two commenters are right; those hourly labor cost figures can’t possibly refer just to current workers. So maybe it’s true that the UAW is making unreasonable demands, and that the current workers are making way more than the average taxpayer who’s being asked to bail them out, but that bar chart you reproduced is very misleading I think.
    Could you possibly look into this and give us a more appropriate factoid? I am all for union-bashing, but I want to be fair about it. 🙂

  8. In 2007 UAW agreed to half-price wages for new workers. I believe though, that all these workers have probably been fired, because these new workers would have such low seniority during a layoff. Therefore, UAW concessions on labor were likely a sham, and have had no impact on labor costs thus far :
    http://www.aam.com/index.php?s=217
    “Does AAM already have a 2nd Tier wage structure?
    Yes. In 2006, AAM and the UAW agreed to an all-in wage and benefit package for new hires at the original U.S. locations. This agreement is more closely aligned to what AAM’s competitors pay. Unfortunately, as a result of the decline in market demand for its products, AAM has not been able to hire any associates under this second tier wage and benefit structure.”

  9. I checked out that Mark Perry chart which you provided. It was derived from a Forbes magazine article which is now dead-linked. No way to tell if his information is correct, no way to evaluate the methodology used to gather the original data..
    Maybe the best “long-term solution” for all of us would be for anti-worker blog-sites to go the way of the dodo bird. They sure as hell don’t provide the public with much reliable information.

  10. I think it is far past time for Wilkison to correct the false claim that the auto workers make over $70/hr, even if Mulligan can’t quite bring himself to do so.

  11. Umm, the 70 an hour figure includes health and welfare benefits that Toyota does not pay because Japan, like every other industrialized country, has the government pay that.
    It also divides all current retirement benefits among current employees.
    Thats just wrong.

  12. Exactly. Which is why the statement,
    those workers’ salary and benefits total more than $70 per hour!!
    is false.

  13. The numbers are based on a Daimler-Chrysler press release. This data is crap. Looking at the data source, you find that the average hourly is about $30.
    How did they do it? One trick is to add in 2005 profit sharing because the 2006 number was zero.
    Another trick, apparently, is to include all payments to retirees (and dependents) in the costs, but not in the number of workers. From their figures, it appears that there are twice as many retirees as current workers. That’s a good way to inflate costs.
    I suppose, in some dubious libertarian fantasy world, these numbers could be seen as labor costs to the car manufacturer. However, these numbers are being reported as what the workers get paid – a real perversion of math and economics.

  14. Auto industry specially GM and Ford have problems financially all over their company. They layoff people to survive. I think they should keep the higher rank people pays low. So people that really make the cars can have a job.

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