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A Rising Tide Lifts All Boats. Sort of.

The first part of the title to this post is a very common phrase amongst conservative circles. In it’s simplest form, the phrase means that as long as we can improve the general economy we will improve the lot of everyone actively involved in the economy. Generally, this statement is true. A growing economy grows total compensation for workers at all levels. The phrase is incomplete though. You can’t artificially raise the tide. You’ll drown a lot of boats.

The Obama Administration is set to do just that. From Friday’s New York Times:

The Obama administration is planning to use the government’s enormous buying power to prod private companies to improve wages and benefits for millions of workers, according to White House officials and several interest groups briefed on the plan.

By altering how it awards $500 billion in contracts each year, the government would disqualify more companies with labor, environmental or other violations and give an edge to companies that offer better levels of pay, health coverage, pensions and other benefits, the officials said.

Because nearly one in four workers is employed by companies that have contracts with the federal government, administration officials see the plan as a way to shape social policy and lift more families into the middle class.

On it’s face, this sounds like a good move. Use your large bargaining power to raise wages for those jobs that fall under federal contracts. The problem is, you have to think about more than just the immediate consequences of your actions when you set economic policy. I’ll let Marginal Revolution’s Alex Tabarrok explain:

At a time of 10% unemployment when real wages need to fall this is bad business cycle policy. I am more worried, however, about the long term consequences of creating a dual labor market in which insiders with government or government-connected jobs are highly paid and secure while outsiders face high unemployment rates, low wages and part-time work without a career path.

Long-term unemployment is at shockingly high levels which in itself creates a dynamic of persistence because the longer a worker is unemployed the less employable they become (in part due to loss of human capital and signaling problems). Thus, getting these workers back to work is going to be hard enough as it is. Labor regulations which raise wages and make hiring and firing workers even more costly will make re-employing the long-term unemployed even more difficult.

Moreover, once an economy is in the insider-outsider equilibrium it’s very difficult to get out because insiders fear that they will lose their privileges with a deregulated labor market and outsiders focus their political energy not on deregulating the labor market but on becoming insiders[.]

The Obama Administration, through these actions, is going to assure that the easiest way to earn a decent wage is to have a government job. Why would you trade in your artificially inflated government salary for a public sector job that has depressed wages? Most wouldn’t. We really would be creating “two Americas”, only it won’t be Big Business leading the charge, it will be Big Government (and it’s ally in Big Labor). Don’t believe me about the Big Labor part? Read further in the NYT piece:

Two of Mr. Obama’s allies — John Podesta, the Clinton administration chief of staff who headed the president’s transition team, and Andy Stern, president of the Service Employees International Union — have repeatedly pressed the president to use procurement policy to push up wages and benefits. [emphasis mine]

That’s what you call payback for helping him get elected. [Aside: How many ways does Obama have to pay back Big Labor? On top of pushing for card check and an overwhelming portion of stimulus funds going to union jobs, he's now stacking the deck in government contracts too?]

So, how do we fix our phrase? I think it should be “A rising tide lifts all boats, as long as they aren’t tethered to the bottom of the ocean.”

P.S.: That insider-outsider equilibrium thing pretty much explains why Big Government seems to always get bigger no matter who is in charge, doesn’t it? That’s why it is going to take an extremely focused effort on the part of conservatives to slay the beast. Whatever we do, we can’t get discouraged. It’s going to take a lot of work. I hope you are in this one for the long haul.

h/t to Instapundit

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