Wednesday, November 20, 2013

The Labor Market and Labor Policy Since Kennedy

Copyright, The New York Times Company

Fundamental changes in economic performance since the John F. Kennedy presidency help explain why economic policy debates are so polarized these days.

In its 34 months, the Kennedy administration embraced a range of interesting federal economic policies. Kennedy proposed permanently cutting personal and corporate income tax rates to promote economic growth, and his cuts became law. During his administration, the maximum duration of unemployment benefits was temporarily extended only 13 weeks, less than in any other recession since then.

He expanded the federal space program. He wanted a strong peacetime military and was willing to use it to stand up to communism. His Department of Justice, led by his brother Robert F. Kennedy, was tough on labor unions.

President Kennedy pushed for national health reform, although he did not see any legislation passed during his term. As a candidate and then president, Kennedy was initially cautious on civil rights issues, but ultimately worked to put together a civil-rights bill that became the Civil Rights Act of 1964.

From today’s perspective, Kennedy looks like a hybrid of a Democrat and a Republican, and as America remembers his assassination in November 1963, journalists and scholars continue to debate whether Kennedy was a liberal.

In my view, Kennedy was entirely a Democrat, but that’s less visible today because Democrats and Republicans, and their respective economists, were a lot less different than they are now, especially on matters of microeconomics. Kennedy was advised by James Tobin of Yale, a Nobel laureate who advised other Democratic presidents, too.

Both Tobin and Milton Friedman, who subsequently advised several Republican candidates and was an adviser to President Richard M. Nixon, were concerned that antipoverty programs would perpetuate poverty by giving people too little reward for taking care of themselves. Tobin wrote that high marginal tax rates cause “needless waste and demoralization,” adding:

This application of the means test is bad economics as well as bad sociology. It is almost as if our present programs of public assistance had been consciously contrived to perpetuate the conditions they are supposed to alleviate.

Tobin thought public programs had gone seriously awry whenever program participants kept less than a third of what they earned on a job, rather than losing it to extra taxes or withdrawn benefits. Friedman thought that people should keep at least half of their earnings after taking into account taxes or lost benefits. Yet in modern times, Friedman and Tobin appear to be quibbling, because now we have millions of citizens who keep a quarter of what they make, or less, in net earnings beyond the benefits they forgo, yet few Democrats are concerned that federal antipoverty programs might be counterproductive.

In “Roofs or Ceilings?” Milton Friedman and George J. Stigler wrote about the economic damage done by minimum wages, rent controls and other restrictions on market prices. Tobin offered similar explanations, writing:

People who lack the capacity to earn a decent living need to be helped, but they will not be helped by minimum wage laws, trade union wage pressures or other devices which seek to compel employers to pay them more than their work is worth. The more likely outcome of such regulations is that the intended beneficiaries are not employed at all.

(Unlike Friedman, Tobin did subsequently support a minimum-wage increase, because he thought better antipoverty tools would not be used).

These days, Democrats push for higher minimum wages, without any apparent concern that poor people might have more trouble finding work.

My point is not that Democrats are more wrong about economics that they used to be, but that, regardless of who is right or wrong, the gaps between Democrats and Republicans in economic reasoning are greater now than they used to be.

The economy is different now than it was in the 1960s, especially in that the incomes of the poor have not kept up with national incomes. When the poor are prevented from working by minimum wages or high marginal tax rates, a lesser fraction of national income is lost than in Kennedy’s era, when the poor could produce a more significant piece of the national economic pie.

So proponents of big social programs have less reason to be cautious about program expansions.

As long as the American economy produces such a wide range of labor market outcomes, we may never see a president, who, like Kennedy, has such wide-ranging economic policies.

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