Wednesday, November 16, 2016


According to Nobel laureate and influential public intellectual Joseph Stiglitz, “In the US, the bottom 90% has endured income stagnation for a third of a century. Median income for full-time male workers is actually lower in real (inflation-adjusted) terms than it was 42 years ago. At the bottom, real wages are comparable to their level 60 years ago.”
These statistics drive much of the current political debate in the United States, Canada and most other Western democracies. The trouble is that they measure the wrong thing. Wages and incomes determine the amount of market goods and services consumers can buy. But through time public demand has shifted increasingly to the provision of non-market goods that determine well being and are supplied by governments: the stability and predictability of income, the quality of the environment and characteristics of national culture.
Politicians have responded to these demands with a vengeance. There now are public insurance programs that make incomes more stable and predictable: government-run insurance against the results of personal ill health, accidents, unemployment and retirement. For the entire economy there are regulations for the prevention of financial instability, global warming and harm to the safety of consumers and workers.
The public has also demanded policies that affect its sense of well being by making it feel good: policies to clean the environment; make the distributions of incomes and wealth more equal; create racial and gender equality; accept large numbers of immigrants and refugees and create a multi-cultural society.
There are several aspects of these government policies, which bear directly on the problem of low wages and incomes discussed by Stiglitz. First, the benefits from social insurance programs involve the redistribution of incomes. The value of the programs to society is assumed to be equal to the governments’ cost of operating them, which means that these programs can never increase the productivity of labour and capital and lead to higher average incomes and wages.
Second, policies aimed at the delivery of other non-market goods result in ephemeral, non-measurable benefits at an uncertain time in the future that cannot be recorded in wage-increasing current income, as is the case with policies preventing of global warming or financial crises.
Third, while these non-market benefits are not recorded in national income, their creation results in the use of labour and capital that is withdrawn from the production of market goods. The value of resources used by regulatory agencies and by private firms complying with regulations has been estimated to be worth $1.8 trillion in the United States in 2015.
In addition, some regulations reduce economic growth by imposing costs and delays on entrepreneurship and innovation. Some regulations actually lower growth, as will happen if the efficient use of fossil fuel is replaced by the less efficient use of renewable sources of energy to create electricity. (The US Supreme Court has in fact stopped this replacement on the grounds that the costs are too large.)
In effect, these economic consequences of regulations show again that there is no such thing as a free lunch. The more the public wants greater security in all aspects of their lives and more feel-good policies, the smaller will be incomes and wages that can be used to buy market goods.
These public preferences can also explain the vexing puzzle why since 2008 interest rates near zero have not generated economic growth. The reason is that reduced incomes and wages of the public have lowered the demand for private goods and the need for growth-generating investments by so much that even the very low interest rates are insufficient to induce private sector investment and cause cash-rich companies to buy back shares or their competitors.
The shift of the public demand from market to non-market goods has profound implications for economic policies. Expansionary monetary and fiscal policies to stimulate the production of market goods must fail because the stock of labour and capital are finite and already utilized fully in the production of market and public goods. In addition, expansionary monetary policy will create inflation and expansionary fiscal deficits will eventually become unsustainable. Both pathologies can be cured only by recessions and fiscal austerity.
The preceding analysis does not imply that the growth in the production of non-market goods has failed to increase the well being of the public. However, it does suggest that the public needs to be aware that it is impossible to have both, more market and non-market goods and that asking politicians to ignore this fact will lead to inflation and austerity in the future and possibly much more instability and lower levels of income and wages.

Published in the Financial Post on November 9, 2016, page FP7.

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