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September 27, 2007
A review by Jared Bernstein in American Propect of two books on the rational voter The Myth of the Rational Voter: Why Democracies Choose Bad Policies by Bryan Caplan and America Works: Critical Thoughts on the Exceptional U.S. Labor Market by Richard B. Freeman. Im not that interested in Caplan as he argues that because voters don't understand his version of economics, they are unable to evaluate economic policy alternatives correctly. In fact, according to Caplan, non-economists consistently support policies that they think will help them but will actually make them worse off. In other words, they are irrational.
Freeman's America Works is more interesting as he argues that relative to every other advanced economy, the US let markets rip. The problem is that during the past few decades, they've been ripping up the social fabric----markets becoming increasingly unfettered by collective bargaining, national health insurance, safety nets such as unemployment insurance, mandated vacation time, worker training, or what is broadly called the "social contract."
The result is much higher levels of inequality, and under the rubric of deregulation and expanded trade, economic power has shifted from labor to capital. So we have two Americas.
We can see signs of this happening in Australia with the attempts by the Howard Government to create more flexible labour markets through Workchoices. So what does Freeman suggest to counter this trend?
Bernstein says:
He offers two sets of proposals, the first targeted at workers and firms, the second at worker bargaining power. The first set includes boosting the pay of low-wage workers through higher minimum wages and an expanded Earned Income Tax Credit (those arguing against minimum wages always set these two ideas up as oppositional, but Freeman is right that we need both), national health care (among other advantages, it would "lower the marginal cost of hiring labor"), greater public investments, and more profit sharing.
And:
The second set includes greater corporate governance as an antidote to irresponsible boards run by old-boy networks, and expanding "modes of representation for workers beyond the dichotomy between a collective bargaining contract and nothing." In earlier work that's now widely accepted, Freeman almost single-handedly reversed economists' negative assessment of unions' impact by showing that organized labor pushes back against inequality without hurting productivity growth.
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