“Increasing Demand” Is Code for “Statism”

I found this post from Adam Ozimek interesting, explaining why drastically increasing wages has consequences that are, even if unintended, not unpredictable.  The response at Democracy in America complains that Mr. Ozimek’s post “doesn’t seem to be taking [the higher-wage side’s argument] on its own terms.”  I won’t engage the specific arguments and rebuttals here, but it seems that some of the terms used in “the higher-wage side’s argument,” as described at Democracy in America, need some unpacking:

[I]ntensifying pressure for higher corporate profits has combined with weak labour bargaining power (in part due to the decline of unions) to depress wages. This has depressed buying power, threatening growth. Over the past decade the Federal Reserve responded by keeping credit cheap, allowing consumers to borrow money to pump up the economy. That led to a credit bubble and a real-estate bubble that popped in 2008, with devastating results. Basically, too little of GDP is being paid in wages to sustain adequate demand; for a while, we made up the difference with credit, but that turned out to be unsustainable. By rebalancing national income away from profits and towards wages (through, for example, stronger collective bargaining), we could re-establish adequate demand to fuel growth, which would lead to higher employment, rather than lower.

There’s something about the way economists talk about “establishing demand” and “increasing demand” that doesn’t sit well.  I’ve written before about how “injustice” concerning wealth and wages can be approached through either a “procedural” lens or a “substantive” lens.  In the former case, we say wages are “inadequate” because the processes in place are inadequate to ensure market signals accurately translate into appropriate wage increases (or decreases, as the case may be).  In such cases, perhaps collective bargaining presents a solution (or, in the public employee context, the problem).  In the latter or “substantive” case, we say wages are “inadequate” because they miss the mark of some otherwise predetermined result—i.e., we say the output (the wage) should, irrespective of input (the work), afford the worker a certain minimum standard of living.

To my understanding, any approach to the question about whether a given wage is appropriate will fall within one of those two very broad conceptual models.  However, when economists talk about manipulating “demand,” they don’t seem to be working from either of these models.  They don’t seem to be saying, in a prescriptive sense, either that workers should have more bargaining power, or that they deserve a greater wage.  Instead, they simply run thought experiments about what would happen if, say, the value of picking grapes or tomatoes were suddenly twice as much as it is.  They assign the experiment a benign term like “increasing demand,” and then report, in a descriptive sense, whether it would lead to desirable economic outcomes.  “If you take money from Adam and give it to Bob and Chuck, Bob and Chuck will buy stuff from Doris and Edna, and, as a result, government accountants will produce balance sheets with more appealing numbers.” 

When policy makers manipulate “demand,” however, they do so without ever passing judgment on those preliminary questions above.  Economists are entitled to skip the “ought” questions because economists are not moralists or politicians.  But before economic theory can be translated into economic policy, mustn’t policy makers engage those questions?  Mustn’t they pass on the questions about whether the wages are correct or incorrect, just or unjust?  Economic policy questions should be posed in the form of, would it be appropriate if…?  Instead, the questions are usually posed in the form of, what will happen if…?  And if the answer to the latter question is sufficiently pleasant, issues of appropriateness are deemed moot.

In that regard, something about economic policy is fundamentally disingenuous, as it eventually means no one can have any sound idea what the value of anyone’s labor actually is.  Instead, we only know, based on the current iteration of the tax code and the menu of available entitlements, what kind of lifestyle is available.  In that case, the source of a better life becomes the state rather than ourselves.