Negative Productivity

With retail prices lifted by a value-added tax of 19.6 percent, the purchasing power of the smic is hardly above the bare subsistence level in an urban environment. People who have a heart must find it shamefully low. Yet people with a head regretfully find it too high; for within the great mass of unemployed, the proportion of the unskilled who would be candidates for the smic is much higher than the average, i.e. the skilled and the unskilled taken together. Average unemployment is at 9.5 percent, but among the unskilled it can locally be 25 percent or more. Is then the minimum wage too low or too high?

The answer is that it is both, due largely to the caring, “socially”-just hand of the government. Paying 1,365 euros a month to a smicard costs his or her employer anything between 2,200 and 2,500 euros due to the highly complex social insurance schemes whose premiums the employer pays on his employees’ behalf. The result is that it is cheaper to go capital-intensive, install automatic checkout counters in supermarkets, automatic ticket controllers at subway stations and giant street-cleaning machines to sweep the streets, rather than employ smicards to do these lowly tasks.

Suppose for a near-delirious moment that freedom of contract is suddenly and miraculously recognised as a firm rule. Among many other things, “social” insurance against illness, old age and unemployment ceases to be compulsory. The wage, with or without deductions for insurance, would become freely negotiable. Would a smicard give up all his entitlements under the various “social” schemes in exchange for a rise in his take-home pay? Some would not at almost any price, but some, probably many, would rather take a raise from 1,365 to 2,000 euros in cash than persist with the old system. The effect on employment of the unskilled might be very substantial indeed.

The author of this column was recently the tacit witness of a debate among a group of economists on low-wage employment. The majority thought that the unskilled were getting a rather miserable cash wage but a whole array of in-kind benefits (of which the three major “social” insurances of health, old age and unemployment represent the greatest part) as well as housing, family and other allowances, and that it would be a good idea if all or some of these fringe benefits were abolished and their cost returned to the workers in the form of higher cash wages. For liberals (in the original, not the American, sense of “liberal”) this would be an obvious improvement, for cash that can buy the in-kind benefit but also anything else is necessarily preferable to the in-kind benefit alone. There are of course well-rehearsed weakness-of-will and other paternalistic arguments against the liberal thesis, but they become weaker as society learns to live with more personal responsibility and less collective care.

A different economist, however, had an interesting objection. Society, she explained, has over the past half-century has erected an elaborate system of pipes that conducts vital fluids to parts of the body politic and economic where they are the most needed. Dismantling what she called “the pipe work” would upset the political equilibrium and, more tangibly, throw the hundreds of thousands who “operate the pipe work” on the heap of the unemployed. Last year in this column, in pale imitation of Frederic Bastiat’s genial idea of the “negative railway”, I spoke of the “negative marginal productivity of government”. Treating government as a factor of production like labour or capital, the idea was that when it only enforces the rule of law, its productivity is very high. As it expands its scope to what Friedrich Hayek, with touching good faith, called “useful public goods and services”, its marginal productivity becomes increasingly dubious. What is grievous about this large zone of government activity is that unlike the case of labour that is sacked and capital that is lost or withdrawn when its productivity is less than its cost, there is no market test to decide about the productivity, or lack of it, of governments. “Operating the pipe work” where the fluids of the welfare state circulate may or may not be positively productive. However, whether it is or is not cannot easily be decided by what would pass for pure, non-subjective economics. It is a matter for political polemic and ethical convictions about what some people are entitled to impose upon the rest of us.

However, there are some extreme configurations of state and society where the negative productivity of government action is so blatantly perceptible as to make discussion almost redundant. It is hardly possible to think of the near-desperate condition of many African countries without attributing the blame, the frustration and the repeated economic backsliding to their truly awful governments. Development economists, who get consulting contracts from African governments or international organisations subconsciously repay patronage by not blaming governments, but discoursing instead about the better targeting of development aid, strategic investment in education and health, technology transfers and so forth, but the wasteful stupidity, corruption and cynicism of kleptocratic governments over the post-colonial half-century has been destroying all the good that good will attempted to do in these fields. Lack of democracy is cited as a reason; but the big and the little tigers of Asia and South America were not, and still are not, noticeably democratic, yet economically they have raced ahead while Africa was mostly stayed on the same place while its governments were tormenting its hapless subjects.

At the other end of the spectrum of civilisation, there are countries that abound in intelligence, capital (and are exporting it), have first-class technology, a vast health-care and educational apparatus and a reasonably clean-handed judicial and administrative class, yet are steadily falling behind in terms of material wealth. France is the outstanding example. It has been running a budget deficit without interruption for the last thirty years and is now running one at 8 percent of GDP; 55 percent of GDP is spent by collective decision, leaving over less than half for individuals to dispose of. By a colossal effort of political rivalry and administrative tenacity, 55 percent of economic lifeblood is siphoned out, to be re-injected by a staggeringly complicated tangle of perfusion tubes on places chosen and ceaselessly changed by the government. The arteries and veins of the natural body make do with what is left. We cannot be absolutely sure of the operative reasons for the resulting under-performance. But ascribing it to negative productivity of the factor “government” offsetting the positive productivity of capital and labour is at least logically a sufficient explanation.