The Trouble With the “Working Hypothesis”

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By James K. Galbraith

Oren Cass, domestic issues director for Mitt Romney’s 2012 presidential campaign and a writer for National Review and other journals, has produced a conservative's treatise on the social and economic ills of America, and what might be done to repair them. The Once and Future Worker, published in November, holds that a social philosophy based on consumption, equality, the welfare state and quality of life achieved through regulation—the essential vision of a liberal century from the Roosevelts through Richard Nixon—should be scrapped for more solid values: work, family, country, one might say. Above all, Cass believes in a society and culture rooted in the pride and pleasures of productive labor. “[The] argument at its most basic," he writes, "is that work matters. More specifically, [the book] offers what I will call the Working Hypothesis: that a labor market in which workers can support strong families and communities is the central determinant of long term prosperity.”

Thus the labor market, in Cass’s view, is the proper medium for delivering a work-friendly world. And the trouble comes when politicians, especially Democrats,“trample” on the market. The Democrats’ “actual agenda,” according to Cass, 

centers on the interests advanced by its coalition of labor unions, environmentalists and identity groups. Its policies rely on an expectation that government mandates and programs will deliver what the market does not. This agenda inserts countless regulatory wedges that aim to improve the conditions of employment but in the process raise its cost, driving apart the players that the market is attempting to connect. Better market outcomes require better market conditions. Government cannot command that workers be more valuable or employment relationships be more attractive, but by trying, it can bring about the reverse. The economic landscape is pocked with the resulting craters.

The vision of a labor market offered by Cass is Deist; it is the idea of the clockmaker, of intelligent design. Its Western roots lie in pre-revolutionary France, which borrowed the theme from classical China and Confucius. In the English language, it owes much to that great figure of the Scottish Enlightenment, Adam Smith. Supply and demand work like Yin and Yang: natural law and celestial harmony prevail in the equilibrium between two fixed and immutable, separate yet inseparable social forces—in this case the employer and the employed, the capitalist and the worker. The latter seeks a job; the former offers one. A bargain is struck at a given wage, when the employer decides that the worker is worth his keep, and the worker decides the wage is worth the leisure foregone. Work and production follow. The “abandonment of the worker” lamented by Cass began when the government intruded in the labor market by, among other things, creating social insurance, supporting unions, and introducing regulations to protect the environment.

Thus Cass criticizes environmental laws, going all the way back to the Clean Air Act of 1970, for killing jobs. He attacks “adversarial” unions and proposes that they be transformed into non-confrontational “co-ops” concerned with how to “optimize workplace conditions.” He finds fault with the U.S. educational system for promising an equal chance for all, and suggests that it should embrace tracking and begin funnelling students deemed less able into vocational training at an early age. He supports the exclusion, to a degree, of foreign workers and products. He promotes the big idea of a wage subsidy to persuade employers to take on low-productivity workers whom they might otherwise shun. And he favors decentralizing welfare policies to the states in order to promote experiments, diversity, and local measures appropriate to local needs.

Each of these proposals builds on the mental model of a labor market, in which it is the interaction of supply and demand that set wages and determine levels of employment. Clean air and water (and workplace and product safety) regulations raise costs to business, forcing them to move offshore or close down. Therefore, to cite two examples offered by Cass, standards for particulates or mercury should be rolled back. Unions have already achieved what their members reasonably need, and now only serve to prevent the labor market from reaching its natural balance. The result is wages that are too high and jobs that are too few. And employers should be subsidized to create jobs on the principle that if labor is cheaper, they will hire more of it rather than invest in capital improvements.

These measures would supposedly increase employment. But even if one accepts that premise, one might first ask, “Does America really need more work?” Americans have the highest labor-force participation in the industrial West. They work the longest hours and enjoy the shortest vacations. The United States is, notoriously, a working country. And it has a pretty good record on unemployment too, with by far the fastest recovery to near-full employment from the Great Financial Crisis of any major economy.

Nor does Cass fear that work may soon disappear, say from automation. He's a relentless techno-optimist; in his view since past waves of technology have always created new jobs to replace those swept away, the present one must do likewise—although Cass also doubts that there is any such wave underway, given the low recent rates of measured productivity growth. Here, fair to say, he is in murky waters. Obviously technology is spreading rapidly, costing jobs. But the U.S. economy has managed to create new jobs anyway, thanks to the growth of incomes and debt. This is a reminder that in the modern market economy it is consumption and spending that drive production, employment and work. John Maynard Keynes of course knew this, but Cass dismisses his economics out of hand.

In truth, cutting labor costs, as Cass proposes to do, might slow the adoption of new technologies, but it cannot reverse it. You cannot bring checkout clerks back to stores that have purchased automated registers, any more than you can return hand-riveters to assembly lines, even if the workers were to offer to work for free. Nor will permitting more pollution revive coal-mining in West Virginia, where employment in the coal industry peaked in 1946. The creation of new jobs, at which the United States is an outstanding success, depends on new sectors, new businesses, and on its vast non-profit sector, especially in education and health and elder-care, which has in turn been fostered over a century by high wages, pensions, public spending and by the charitable deduction in taxes on income and on estates and gifts.

Cass’s preoccupation with the labor market is thus one vast misunderstanding. Cass is not alone in this misunderstanding; most economists share it as a matter of their most basic training. But actually, there is no such thing as a “labor market.” There is no adjustment mechanism that increases employment when the cost of labor falls, or cuts it because wages or other costs rise. Employment rises and falls with production, which rises and falls with consumption and investment spending. If you seek “long-term prosperity” and “strong communities and families,” the real challenge is how to fuel consumption and employment through steady wages and good public and non-profit services, rather than through unstable private debts, which drive booms and busts.

Cass’s theory of regulation, although widely held, is also mistaken. He regards the “regulatory wedges” pushed by Democrats as a form of interference in markets. They are not. Regulation is essential. Without it, no modern market would exist. Indeed no system, whether biological, mechanical, or social can survive without regulation. The body regulates temperature and blood pressure; a radiator regulates a car’s engine; and the government frames standards for every aspect of the modern market, from bacteria in food to fraud in banking. Environmental and safety regulations drive scientific research, technical innovation, cost reductions, and competitiveness. Legal penalties for deceit establish trust and reduce transaction costs; minimum wages promote productivity. Not every regulation is well-designed; some may be too weak to be effective or too strong to be practical. Weaker firms may bridle at the costs of compliance; some will go out of business. But even granting this, it is always the most advanced sectors—those least threatened by regulation—that make the best products and offer the most stable jobs.

Cass's preoccupation with the labor market is one vast misunderstanding.

Social insurance and welfare policies serve equally important functions. The reason the United States has a federal minimum wage and national programs for Social Security, Medicare, Medicaid, deposit insurance, and food stamps is that setting such policies at the national level establishes a common floor, regulating the conduct of the fifty states. Cass offers a bright vision of what he calls a “FlexFund,” effectively a slush fund for the states, to be used as each decides. This is an old scam. Cass acts as if it will not occur to states to slash their benefits to chase their poor to other states. He writes as if there were no such thing as the American Legislative Exchange Council, a state-level coordinating council for reactionary social policy, currently working everywhere to cut social benefits and taxes. There is.

In short, there is historical precedent for the type of society Cass envisions—a fixed social hierarchy of boss and worker, with tracked education, decentralized and degraded social services, low taxes and union-free factories. Although he does not acknowledge it, that society is the Jim Crow South, before the New Deal and the Civil Rights Act. However strong working families were at the time, it is perhaps not the sort of society to which most present-day workers would wish to return.

WORKERS OF THE WORLD, UNITE

And yet, it is hard not to sympathize with the moral core of Cass's argument. The United States is, in fact, a nation whose culture is founded on work and respect for work. And when one reflects on this fact, the source of its present unease becomes clear. For decades, American life has been dominated by layabouts—by a broad, bi-coastal, bipartisan elite of non-workers. There are the entitled wealthy and the corporate chiefs, mostly Republicans, and the grasping professionals at the upper levels of banking, law and mass entertainment, mostly Democrats. The connection between them and the American middle classes, let alone the struggling and the poor, is minimal. Their values, whether genteel or sybaritic, are not those of the working mainstream. Donald Trump owed his nomination and election to his pretended rejection of all that, to his ability to appear as the tribune of the working man. It was an act that top politicians had been trying to pull off for decades, at least since the day in 1988 that Republican presidential candidate George H.W. Bush munched a pork rind.

In calling attention to the centrality and troubles of working people, Cass has a point. Where he goes wrong is in diagnosis, and therefore cure. American workers are hurting not because of job-killing regulations, but because they have lost their bargaining power. Contrary to Cass, labor unions have not been central to the Democratic Party for a long time. Democratic leaders in modern times have largely focused their attention elsewhere, on assistance for food, housing, job training, on health care, income supplements and access to loans. Cass is right in skewering the latest extension of this practice, the notion of a “universal basic income,” which he correctly derides as antithetical to the American work ethic. And the problems of the workplace are not well summarized by a shortage of jobs.

The serious issues lie precisely in that key nexus of employer and worker. A telling case-in-point lies in a feature of Obamacare that may account for why that legislation, so widely reviled on passage, proved so popular in the 2018 midterms. Obamacare freed many workers from health-insurance dependency on their bosses. And so it changed, at a stroke, a half-hidden, ugly bit of leverage of the powerful over the weak. A high minimum wage, quite apart from the fact that at $15 an hour it would give some 30 percent of American workers a raise, would cut the ground from under labor contractors who bring in undocumented workers to take hard and dangerous jobs at low pay. The Earned Income Tax Credit, which offers tax credits to low-wage workers, helps to buffer the fluctuating incomes of those, such as construction workers, whose jobs come and go. A job guarantee for citizens and legal residents, federally-funded and administered by local authorities and non-profits, would give American workers agency and leverage over low-end employers. These are the steps, along with growing and strengthening unions, that would truly change the power balance in the American workplace, and in culture and society at large.