Yglesias and Ackerman in violent internet fight

Matt Yglesias had a post about left economic mistakes a few days ago. I responded in turn, focusing only on how it is completely legitimate to be worried about productivity-enhancing layoffs that happen within a social structure that does little to ensure those laid off continue to do well. I argued that Yglesias hastily concluded that efficiency gains from labor-saving technology improve the lot of people across the board. It is possible for such gains to do that if we have our institutions set up right, but we don’t and there are people who lose out big time from these kinds of technologies.

Ackerman takes a totally different stab at this post at the Jacobin today. Ackerman’s post shows how a purely price-inflationary wage increase of the entire working class still benefits the working class because it essentially changes the distribution of real income.

Ackerman goes about showing this in a different way, but one way to think about it is at the consumer level. Suppose we double the incomes of the entire working class and finance this doubling purely by jacking up the prices of goods and services. If only the working class purchased goods and services, this move would be a total wash. The working class would be paying for their own income increase at the checkout counter, and would receive no net gain. But working class people aren’t the only people buying things. Executives, managers, and other professionals also buy things. The purchases of that class of people will also partially finance the working class income increase, and that part of the financing will be a pure gain for the working class. Therefore, the working class would gain from a purely price-inflationary income increase, contra Yglesias.

This analysis is solid, but there is a problem. Generally, price-inflationary wage increases don’t happen across the entire working class. In the union context for instance, they usually happen at the firm or, occasionally, industry level. In the case where you increase working class wages at a single firm by jacking up the prices of the firm’s products, all customers of that firm pay the price. Some of those customers will be executives, managers, and other professionals — so that is a win. But other customers will be working class people who do not work at the firm. So part of the real gains of workers in that firm come at the expense of other workers. This would still be a net win for the working class conceived of as a whole, but a really messy one to say the least.

In fact, a purely price-inflationary wage increase at a firm that makes products for low-income people could increase overall inequality. The workers of the firm would be making higher wages financed by the higher prices paid by the low-income customers of the firm. If the firm’s workers were more highly-paid than their low-income customers, the net result would be a distributive change that pushes real income upwards in the distribution.

The end point here is that we really do need to take account of how the costs of a specific inflationary wage increase are actually distributed. These sorts of increases can be extremely messy and their distributive consequences can be hard to tease out. This is one of the reasons why cash transfers and other kinds of after-the-fact distributive institutions are so attractive. They allow much more distributive precision than firm-level or even industry-level wage bumps. That does not mean there are no arguments for such wage bumps, but it does mark one of their limitations.