Blaming the victim for market failure

by: Paul Rosenberg

Wed Aug 18, 2010 at 10:30

Prelude: A Typical Demonized Victim of Circumstances

Last week, Kieth Olbermann had  52-year-old mechanic Michael Hatchell on his show, along with his wife, Sarah.  After months of blaming the anonymous unemployed for their plight, Hatchell had surfaced as the first named individual for conservatives to pounce on, in a WSJ article, and pounce Newt Gingrich did:

"The article also quotes an engineer who admits he turned down more than a dozen offers because the salary would have been less than he made on welfare."

But, of course, Hatchell wasn't on welfare.  He was on unemployment insurance, insurance that he had paid into for decades.  And why didn't he take just any old job?  For the same reason that Ford won't sell its cars for just any old price:  He wants to earn enough to survive.

Here's part of the transcript, with added emphasis courtesy of Think Progress:

OLBERMANN: You're a 52 years old now former law enforcement officer, used to have your own business as a mechanic, you were employed for 59 weeks [...] and Mr. Gingrich suggests you got used to being unproductive. If that's not true why did you turn down so many job offers?

HATCHELL: Keith, it's really hard for someone like Mr. Gingrich to understand the fact that when you have a mortgage, you have a family to support, car payments, insurance everything else [...] if you're going out to look for a job, jobs that were going to pay half of what I was making, when they were offering me these jobs and [...] this is going to be a situation where we're going to start you out at the entry level wage, I've got 32 years of experience, in the automotive business, it's kinda hard for me to do that. Even at 40 hours at 7.75 an hour [...] With a mortgage and everything else, yes I was drawing unemployment 475 dollars a week, I paid into since I was a young man, 35 years I actually paid into it. It's unemployment insurance, not welfare that Mr. Gingrich has spoken about. Until such time I can get a gainful job that will let me keep my house, keep my family fed, not necessarily anything expensive, I wasn't going to take any other job.

OLBERMANN: He seemed to leave out the idea that it is insurance and you did pay into it. Pay now and don't get it later! If you had taken those lower paying jobs your family would be consiederably worse now than it actually is.
HATCHELL: Yes sir, with the mortgage payments, if you don't pay your mortgage, you'll be out on the street [...] When I did find a situation where I did have it better off, I took it.

A Simplistic Moral Fantasy vs. Realworld Complexity

What's happening here is that we're seeing a clash of broadly-defined narrative frameworks.  In the conservative framework, the system--in its mythical "free market" incarnation--works perfectly.  

If we look at the original WSJ article that Gingrich was referring to, we can see both narrative frameworks at play:  it shows signs bleed-over from the editorial pages in the very framing of the story's headline: "Some Firms Struggle to Hire Despite High Unemployment", and some of the quotes in the story.  At the same time, although it places some blame on unemployment benefits, that's not the only factor it cites:

With a 9.5% jobless rate and some 15 million Americans looking for work, many employers are inundated with applicants. But a surprising number say they are getting an underwhelming response, and many are having trouble filling open positions.

"This is as bad now as at the height of business back in the 1990s," says Dan Cunningham, chief executive of the Long-Stanton Manufacturing Co., a maker of stamped-metal parts in West Chester, Ohio, that has been struggling to hire a few toolmakers. "It's bizarre. We are just not getting applicants."

Employers and economists point to several explanations. Extending jobless benefits to 99 weeks gives the unemployed less incentive to search out new work. Millions of homeowners are unable to move for a job because the real-estate collapse leaves them owing more on their homes than they are worth.

The job market itself also has changed. During the crisis, companies slashed millions of middle-skill, middle-wage jobs. That has created a glut of people who can't qualify for highly skilled jobs but have a hard time adjusting to low-pay, unskilled work like the food servers that Pilot Flying J seeks for its truck stops.

There's a graphic that goes with that last bit of information--a graphic that's pretty staggering:

This graphic certainly comports with  Michael Hatchell's experience--as well as some other examples cited in theWSJ article--and is a lot more germane than complaining about him being "spoiled" by unemployment insurance

Other factors that might be cited as well, but even moreso, one might take an entirely different view of the economy right now, which would highlight an entirely different view of our most pressing problems, such as:

(1) Corporate profits and CEO pay fully rebounded, while millions remain unemployed.
(2) A pattern of increasingly long jobless recoveries since the shift away from manufacturing began in the early 1980s, with the latest one far and away more severe, but conforming to the same type.
(3) A 30+ year trend of relatively steady growth matched to stagnating wages.
(4) A massive loss in middle-class home equity, unprecedented in American history.

These and other related factors might more accurately reflect the reality of Hatchell's experience writ large: the economy has not been working for the vast majority of Americans for a very long time, and this latest financial collapse has shifted tens of millions of them from a condition of false to security to one of short-term desperation and long-term fundamental uncertainty.

The Simplistic Moral Fantasy Unmasked-Capital Gets Victimized, Too

As digy observed:

What Gingrich was telling him to do was take a full time job that would result in his losing his house and everything he's worked for all his life. And that's because when you take a full time job --- it's really hard to look for another one. Your new employer tends to resent it if you take time off for interviews when you are still in your probation period.

Cold-hearted narcissists like Gingrich will never be capable of walking a mile in the shoes of the millions of Americans facing the reality of unemployment, or other forms of real economic hardship. Nor will simple-minded moral fantasists like Ginrich ever be convinced by arguments that point to complex causality.  But many of those taken in by their fairy-tale economic fantasies could be wooed away to a more realistic point of view if they were made aware of how fundamentally flawed the "free market" mythology actually is--so flawed, in fact that conservatives turned solidly against more than a century ago.  

More precisely, the dilemma of workers like Hatchell, facing a market that doesn't pay them enough to survive, is the same dilemma that faces capital, and has faced capital in the most advanced industries for the past two centuries.  This is a situation described by heterodox economist (or self-described "lapsed economist") Michael Perelman in his book, Railroading Economics: The Creation of the Free Market Mythology  Perelman's title refers both to the industrial sector where the free market ideology necessarily lead to ruin, and to the persistent peddling of the ideology despite its obvious falsehood.

Although he is not himself a conservative, Perelman focuses considerable attention on conservative economists who developed their own critique of market economics out of their direct experience or close observation of the late-19th Century railroad industry, and its experience of catastrophic bankruptcy.  Put simply, Perelman argues that the classical free market narrative only makes sense in a situation where certain conditions are met--most notably a lack of the very fixed capital that is the very essence of industrial capitalism.  Although Perelman's book makes several subtle, interwoven arguments--about  the nature and history of economics as an enterprise as well as about the subject of how economies actually work--we can capture the essential problem with industrial competition in a most succinct passage of just a few paragraphs [pp 45-46]:

Just consider how competition would occur in a railroad industry where 1,000 parallel lines exist. Of course, no sane person would want to invest in the thousandth line, or even the second one.  Just keep in mind that the cost of hauling one extra ton of freight on a railroad is insignificant.

Suppose that each line charges just enough to pay off the loans to its creditors, and earn a little profit besides.  Let us say that the going rate is $10 per ton of freight. Finally, suppose that each company is running half empty.  

This state of affairs will not last long.  Sooner or later, one company will realize that if it drops its price down to $9.90, it will lose only one percent of the money it earns on its existing traffic, but since each shipper will want to take advantage of the cheaper rates, it might double its shipments and run at full capacity. This extra business would outweigh the minor loss from the reduced price.

In effect, the railroad will treat the use of its excess capacity of freight cars as a free good, except for wear, tear and maintenance costs. After all, empty box cars will not earn them any profits. By lowering the price, the railroad hopes to put its equipment to use, even if the revenues are small compared to the original cost of the fixed capital.

As a result, profits for the railroad that lowers its costs will soar--but only so long as all the other railroads will accept this new situation. Of course they will not.  Eventually, some other railroad will drop its price below $9.90, and these price cuts will continue to escalate. Sooner or later, prices will fall close to the marginal cost.  In the process, all of the railroads with outstanding debt will be unable to meet their obligations and fall into bankruptcy.  In fact, something very similar occurred in the railroad industry in the nineteenth century, and more recently with U.S. airlines.

This is not to say that this always happens.  But it would, if the economy actually ran according to textbook fantasy free market principles.  (Like I said, Perelman's argument is a subtle one.)

The situation faced by the Hatchells and tens of millions of others like them is directly analogous to that faced by the railroads in the 19th Century: they have have considerable sunk costs--in the form of mortgages, education, work experience, social and community relations, etc.  Some of these are recognized by conventional economists, some--such as the enormous psychic value people tend to put into their homes and communities, as seen once again in the Gulf Coast region--are not.  But even if such costs are recognized and counted--as the fixed costs of rail lines and box cars were recognized in the late 1800s--in a competitive free market there is no way to recover those costs in a massively destructive race-to-the-bottom, just like the one that Perelman describes.

This is precisely what rightwing economists (or would-be economists) prescribe:  not only do they rail against unemployment insurance, they condemn minimum wage laws as well.  Let wages fall as far as the market says they should, and voila!  No unemployment!  So goes the rightwing fantasy.  But, of course, this is the labor-side equivalent of the same destructive race-to-the-bottom that Perelman sketched out with his simplified railroad example. In such an environment, there would be very little incentive for people to gain education and work-related skills, since the economic advantages gained from them could be undercut at any time, relatively easily.  Indeed, this is precisely what we see in traditionally low-wage countries.  Such countries are often authoritarian, precisely because the lack of a credible incentive structure means that threats must take the place of positive incentives.

The value of Perelman's logical and historical criticism is that it serves to go right after the heart of the free market ideology.  As he also discusses, that ideology has a certain credibility in the relatively limited  world of pre-industrial capitalism, where fixed goods played a relatively minor role.  It's particularly appealing to explain the exchange-centered world of traders and merchants, as opposed to the production-centered world of farmers, miners and manufacturers--as well as the laborers in these fields.  But the free market has never accurately described the workings of industrial democracy, the dominant form of capitalism in the West for nearly 200 years now.  Still less is it a viable model for the post-industrial world we live in today, or for dealing with the massive externalized costs--such as global warming and other forms of environmental damage that someone always ends up paying sooner or later.