Friday, August 17, 2012

Policies economists love

From NPR via Greg Mankiw's blog, a list of policies that economists on both sides of the aisle would like to see in place.

I was especially happy to see that replacing the income tax with a consumption tax, legalizing marijuana, and eliminating the corporate income tax made the list. I agree with the others as well, though I would need more details about the carbon tax, but those other 3 are my favorite.

Monday, August 13, 2012

There is no free lunch Mr. Reich

I read this post by Mr. Reich last week but I haven't had a chance to comment on it until now. In the post Mr. Reich offers the following to each of the presidential candidates:

"Here’s a modest proposal I offer free of charge to Obama or Romney: Every American should get a mandatory minimum of three weeks paid vacation a year."

Mr. Reich claims that 3 weeks of vacation would be good for everyone, including employers. From the post:

"... a three-week minimum vacation is a win-win-win — good for workers, good for employers, and good for the economy. "

And though Mr. Reich likes to call himself an economist, he seems unable to grasp one of the most fundamental ideas of economics, namely that there are trade offs and costs for every activity.

Mr. Reich claims that workers who take vacations are more productive and that the increase in productivity will be enough to compensate employers who have to hire additional workers to cover for those who are off. But does it really matter if a worker at Taco Bell can make 2 more tacos an hour now that she is rested from her vacay? Taco Bell will still have to pay for two workers. The one sitting at home or at the beach and the one making the tacos that people are ordering that day.

The only way that this would not raise costs for places like Taco Bell would be if people became immensely more productive. If I can run my business with 5 people before mandatory vacations but afterwards I only need 4 (an incredible 20% increase in productivity) I would still be paying wages for 5 every time one of them took a vacation, not to mention all of the other costs that go along with hiring an employee. Even in this completely unrealistic scenario (I don't think that any study about vacations and productivity involves a 20% increase) the cost savings is not there.

A more realistic example in the neighborhood of 5-10% would mean 4.5 to 4.75 workers would still be needed after the productivity gains. Since you can't have .5 or .75 people, 5 workers would still be needed in the kitchen while 1 is being paid to stay home. This would obviously increase costs. (Note that this analysis assumes that  3 weeks vacation is enough to sustain any productivity gains for the entire year, which hardly seems certain or even probable)

This problem would occur at other fast food restaurants and retailers alike, as no increases in cashier speed or grocery bagging can replace a worker actually being there to carry out the task when it is needed.

Workers at places like Taco Bell, Kroger, and Wal-Mart are also precisely the types of workers that often do not have paid vacation and thus these are the employers who would be faced with higher costs.  Does Mr. Reich admit that this would raise costs and thus prices for consumers? No, he does not. Mr. Reich's failure to admit that it would not be a win for the consumers of these establishments, which is practically everyone, is quite an oversight.

Another issue that Mr. Reich does not address is whether this vacation is going to be mandatory i.e. your employer/the government makes you take it whether you want to or not. I assume that it would have to be, otherwise the productivity benefits that Mr. Reich lauds will be much smaller.

But what if you don't want to take vacation? Or only want two weeks? Some people really enjoy their job and may not want to take 3 entire weeks off. Others might not like coming back to a bunch of work and thus choose to take less vacation to avoid the stress that comes from a full email box. Who is Mr. Reich to say that the government knows what is best for those people?

Mr. Reich seems to think that all jobs are plug and play and that one worker is as good as the next. Maybe in the world of academia where you set your own schedule and pick and choose what you want to work on three weeks of vacation is never a problem. But in the business world in order to do someone else' job as well as they would have done it often involves a lot of time consuming training or bringing that person "up to speed". It is rarely as simple as having person A fill in for person B.

And if it is mandatory, who is going to enforce this policy? Will the government have to hire inspectors? Will it be self reporting? Will employees be able to sue employers who do not enforce the required amount of vacation? Will employee A be able to tell the authorities that employee B is not taking the required amount even if it is employee B's choice?

Getting the government involved with vacation time is a terrible idea. It will increase costs for consumers, deprive adults of their choices, and create a more bloated bureaucracy. None of that sounds like a win-win-win to me.