Although I wasn’t able to post myself yesterday, I was able to read some blog posts. It occurred to me that there are a couple of bits of economic jargon that may prove helpful in some of the discussions of the situation in Wisconsin, the role of government, compensation, and so on. The two phrases are market clearing price and deadweight loss.
First, I want to commend Steven Taylor post at OTB disentangling the many issues that are being bundled together in the discussion of the controversy between Wisconsin’s governor and the public employees’ unions to your attention. I think it’s a very helpful contribution to the discussion.
On to the two phrases. There’s quite a bit of discussion going on about what the proper pay for public employees should be. James Joyner posted on the subject here and Alex Knapp post on it here. The tools they’re using to analyze the question are not only inappropriate, they’re counter-productive. So, for example, when James comments on teachers’ pay:
Schoolteachers, then, are part of an elite subsection of Wisconsin workers: the 25.4% who have a bachelor’s degree or higher. Many of them, in fact, have a master’s degree. Meanwhile, 45.3% of the state’s adults have a high school diploma or less.
And they do a job that we all agree is very important. Further, I think we can agree that getting an education is actually relevant to what they do on the job! Surely, then, we don’t want to pay them wages comparable to the 74.6% of workers who haven’t attained a college degree?
he’s effectively saying that a bachelors-only teacher who works a nine or ten month schedule should make more than police officers or firefighters, most of whom have high school only. Is that right? I think that the work that police officers and firefighters do is pretty important, too. I honestly don’t know whether we should be paying teachers or firefighters more and I don’t think that James or anybody else knows, either.
The confusion here is that he’s introducing a factor, investment in education, that, sadly, is irrelevant to compensation other than to determine return on investment. The way you determine whether you’re paying enough, too much, or just right is by determining the market clearing price.
The market clearing price of a good or service is the price when the quantity on offer is equal to the quantity demanded. In simplistic terms, if you turn away qualified candidates for a job, if there’s a waiting list for a job, you’re probably offering too much. We shouldn’t be trying to determine relative worth among dissimilar jobs in non-comparable circumstances in the hothouse of a bureaucract’s desk or as an exercise in abstract thought. The reason that the Soviets failed at it is not because they were evil or stupid but because it can’t be done. Trying to do so frivolous, futile, a waste of the public’s time and money, and a violation of fiduciary responsibility. It is both a crime and a mistake.
That brings us to deadweight loss. Alex writes:
But personally, I donâ€™t see the point of comparing private vs. public sector compensation. For my own part, I think that public servants should be paid well. As economists are fond of pointing out, incentives matter. And good pay and benefits from the government helps to attract to the best workers to the government â€” which makes for a smoother running, more efficient government. Underpaying public servants, on the other hand, means that talented people will turn elsewhere â€” and that inevitably results in less efficient government.
There are so many things wrong with this statement, it’s hard to know where to start. For one, it fails to distinguish between intrinsic worth and extrinsic worth. If, rather than paying a starting kindergarten teacher $45,000 (as is the case in Chicago), you paid the starting teacher $4,500,000 would that result in better teachers or just teachers who are more motivated by money? I believe the latter.
I don’t believe that you want teachers whose main interest is becoming wealthy; I think that you want teachers whose main interest is teaching children. If you’re getting unqualified people, you don’t just need to increase the amount of pay you’re offering you need to raise the qualifications that are required. Doing the former without doing the latter in a bureaucratic system means although the intended effect may be to attract better candidates, the greater effect will be to pay the current (apparently unqualified) staff more. I don’t believe that produces smoother running, more efficient government. I believe it produces rapacious, avaricious government. Avarice is without limit. That’s why it’s considered one of the seven deadly sins.
However, there’s another reason that we should be thinking of right-pricing rather than just paying more and that reason is deadweight loss. In the sense that I’m using it deadweight loss is the loss in economic activity between paying the right price for something and overpaying for it and the loss in economic activity between doing whatever’s being done and doing what a market would have done. There is a deadweight loss of government activity. That is a fact. I am not arguing that we should have no government, merely that we should be very careful that we are getting the government we need and not a smidgeon more.
The problem with our economy right now is that we don’t have enough economic activity. If there were more economic activity people would be selling and buying more and more people would be employed. We do not have excess economic activity to burn and allocating resources inefficiently is doing just that.