- When the labor market is tight, rising tides lift all boats and economic growth trickles down.
- A hot economy pushes interest rates up and makes government waste more costly.
- Conservatives should welcome the tight labor market because it makes these talking points true.
- This is an opinion column. The thoughts expressed are those of the author.
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I wrote last week about the pressures facing Amazon as it tries to hire workers and expand rapidly in a tight labor market. It’s a hard task. The company is almost certainly going to need to raise wages and rethink its approach to employment in an attempt to become more of a place where people really want to get jobs and, more importantly, keep those jobs.
In large part because of stimulative fiscal and monetary policy, these sorts of hiring struggles are playing out all over the economy: Companies are being forced to compete for labor, and workers are enjoying better terms because of it. This is a good thing.
So instead of fretting about inflation or about how difficult it is to be a boss right now, conservatives should smile. That’s because a hot labor market makes a lot of things conservatives say about the economy true.
Trickle down is real, when the labor market is tight
Tight labor markets make various conservative policy prescriptions more appropriate. When the labor market serves workers, it becomes more appropriate for the government to take a hands-off approach to setting the terms of employment. It becomes less necessary to use taxes to distribute income and wealth because the labor market does that for you.
And because a tight labor market comes as a package with economic conditions where businesses want to expand, conservative concerns about government spending crowding out resources needed for business investment become more valid.
Here’s what Mike Konczal and J.W. Mason, a fellow at the leftist Roosevelt Institute and an economist at John Jay College of Criminal Justice, respectively, say happens “when spending pushes against the productive potential of the economy.” The result isn’t necessarily just inflation. Instead you can see what the pair described in an op-ed for The New York Times:
The economy’s productive potential is not fixed. Strong demand also creates “tight” labor markets, in which employers are competing for workers instead of the other way around. This decreases racial discrimination (by making racist pick-and-choose hiring deeply inefficient) and raises labor force participation.
Booms also raise productivity, as higher wages, scarce labor and strong demand create both the incentive and the opportunity for innovation among business owners and executives. They also create a more equitable and fair distribution of income, a welcome development after decades of increased inequality.
There is something in here for everyone. This is a great story for workers: Productivity rises, the economy grows faster, and the scarcity of labor means workers can demand wage increases that exceed their productivity gains (unlike the past two decades, when wage gains have lagged productivity gains).
But it’s also a great story about markets. The economic condition of strong demand gives businesses incentives to invest and grow, and the scarcity of labor incentivizes them to find innovative ways to be more productive. All the positive effects discussed here, including the wage gains, are driven by market forces, not government regulation.
This is a vindication of the traditionally conservative view that economic policy should focus on growing the economy robustly with minimal direct government involvement, in the expectation that economic gains will be broadly shared. That hasn’t always been the case, but a tight labor market makes it much more likely.
A tight labor market lets workers fend for themselves
The conservative proposition that people who can work should work and that people who don’t like their jobs should get new jobs doesn’t address all the specific concerns and needs of workers — especially when the labor market is loose. There are many times when some people can’t find work and some people can’t find good work.
But a tight labor market makes these ideas more true, more of the time, for more people.
When the labor market is tight, the “quits rate” goes up, meaning more workers voluntarily leave their jobs because they believe they can find better ones (or have already done so). This even benefits workers who don’t quit because businesses are pushed to pay more and provide better working conditions if they want to keep their workers.
This circumstance also shifts the cost-benefit analysis around employment regulations. The market does more of the work that liberals might ordinarily try to do through regulation, so it’s harder to say a regulation’s benefits exceed its costs. So if conservatives want to root for letting businesses organize their own affairs, they should seek a playing field where that arrangement more often works out to workers’ benefit.
In a booming economy, government efficiency matters more
For 20 years, we’ve been living through post-scarcity fiscal policy: Interest rates have been so low and so apparently impervious to the size of the federal budget deficit that there is little reason for government not to borrow and spend.
Low interest rates do not make value unimportant. Even when the government can borrow very cheaply, building a subway for $200 million per kilometer is better than building it for $1 billion per kilometer. But in practice, cheap money has given public officials license to care less about cost and value, and it shows in the wastefulness of how our government operates, especially when making capital investments.
If the economy runs hot for long enough, scarcity will come back. Interest rates will rise — one driver of long-term interest rates is economic growth expectations — and trade-offs will matter again. This will make conservatives (and no-labels-type centrists) right again when they issue grave warnings that government spending X will crowd out private investment Y, and we had better think hard about whether X is really a good use of money.
Bring back the late ’90s
There’s a reason neoliberal governance reached its zenith during the Clinton administration. The late 1990s were the last time the US labor market really worked for workers. It produced large and sustained real wage increases.
Unfortunately, that nice period ended with the bursting of the tech bubble, and the ensuing decades of weak growth have undermined political arguments for markets as a driver of wage growth and prosperity. But now, the combination of the rapid economic recovery and supportive macroeconomic policy brings us tantalizingly close to a return to the sort of economic condition that makes markets look great.
So instead of complaining that
Chairman Jerome Powell is manipulating the economy, conservatives should seize the opportunity to point out that we’ve made markets work better, and therefore should be more comfortable relying on them to order the economy.
This isn’t just an antidote to liberalism — it’s an antidote to a conservative populism that too has soured on markets. There is no small irony here: Pre-Trump conservatives who would like to go back to more laissez-faire economic ideas may soon have more room to pitch them, and the people they have to thank are a Democratic president and the Federal Reserve chairman picked by Donald Trump.
There is just one catch: If they want to sustain that positive image for markets, they need to stop trying to undermine the macro-policy innovations that came from their opponents. I think it’s a small price. But it will require more conservatives to get their heads out of the 1970s and focus instead on the benefits of the current economic boom.