The Free Market Begins with a Fence: Muncie Teachers, Hoosier Workers, Panglossian Optimism, and Changing Priorities

How’s that title for a dog’s breakfast? It’s Labor Day Weekend, and there are some (marginally) related items I’d like to try to synthesize:

• The State has taken over Muncie Schools and is depriving Muncie teachers of bargaining rights.
• Indiana has come to resemble Southern states with respect to the well-being of its citizens.
• Defenses of the economic status quo are often Panglossian.
• Property is a policy choice. The free market begins with a fence (and government employees with guns defending that fence).

tl;dr: There is nothing natural or inevitable about the scope of the property rights we’ve chosen or the priority we give those rights as compared to other rights — such as the rights of laborers. The choices we are making are not serving as well as they could. This, is evident if you look at other times and places when and where people, on average, prospered more and, more importantly have been happier with their lives. We see those choices being made and the negative consequences of those choices in the report on Hoosier working families since 2004 and the stripping of rights from Muncie teachers in 2018.

Muncie Schools

Muncie Schools got into financial trouble because of school funding restrictions imposed by the State of Indiana over the last decade or so. Changes in the school funding formula, Indiana’s property tax caps, the growth of charter schools, vouchers, and inter-school transfers — all state-level policies — combined to hurt Muncie Schools. To deal with that financial trouble, last session (well, special session — when it failed to pass originally, the General Assembly got a do-over in the form of a special session) the State took control of the school system away from Muncie residents and their school board. Seth Slabaugh, writing for the Muncie Star Press, reported on August 30:

During a question-and-answer session with the media at the end of this week’s Muncie Community School Board meeting, board President Jim Williams was asked whether the district would start collective bargaining with teachers in September.

“No,” he answered.

Why not?

“The Legislature has given, specifically in House Enrolled Act 1315, that we would have to specifically opt in, and frankly, everything is on the table, and right now this board is not in a position to opt in,” Williams said.

So, it’s hard to escape the notion that the State intends to shift the costs of the funding formula, property tax caps, vouchers, and charters onto teachers. Not to put too fine a point on it, that’s a stupid way to try to build an educated citizenry.

But, perhaps creating educated citizens isn’t the priority.

Indiana is becoming more like a Southern State

I’m not sure if it’s original to Morton Marcus, but I recall his quip that “Indiana is the middle finger of the South thrust up into the North.” A recent report by the Indiana Institute for Working Families makes it clear that this is one of those “funny because it’s true” kind of things. According to the report:

[A]fter 2004, wages began to decline alongside policy choices that cut job quality standards and worker voice, weakened the safety net, and limited economic opportunities for middle- and low-income families. Indiana now resembles a Southern state as much as or more than our Midwestern neighbors when it comes to child poverty, low income families, rates of adults with a postsecondary degree, and more.

. . .

In 2009, median Hoosier household wages fell below the average of the South’s, where they’ve remained virtually tied at best. In recent years, Indiana has gained the dubious distinction of having the highest rate of poverty wage jobs and low-income working families in the Midwest. Even accounting for cost of living, the state’s per capita personal income is now second-lowest in the region.

The report says that basic costs for working families have gone up 32% since 2009 but wages have gone up only 6.3%. Since 1979, the productivity of Hoosier workers has gone up 66.6% while wages have gone up only 9.5% in the same period. On the other hand, Indiana leads the Midwest in terms of profits as a share of GDP. In other words, owners are pocketing a lion’s share of the money being generated by this economic productivity. Or, as the IIWF puts it, “Profitability is not the problem in Indiana, but instead policy has not translated the productive and profitable efforts of Hoosiers into higher compensation and better lifetime outcomes for working families.” It’s a new Gilded Age where the top 1% makes 7-30x as much as the bottom 99%. (The report uses the term “earns,” but that’s a loaded term. “Acquires” is probably a more neutral term.) This lopsided level of acquisition is not inevitable. From 1945-1973, the report says that the top 1% captured 5.7% of Hoosier’s income growth compared to the 72.4% they’ve captured from 1973-2015.

There are obviously some national and international trends that are responsible for the lopsided distribution of wealth, but Indiana’s policies have exacerbated some of those trends. The State has made regressive tax choices that has shifted burdens from the wealthiest onto the working class: reduction of personal & corporate taxes; tax caps on real estate; elimination of the inheritance tax; increased fuel taxes; increased sales taxes; and reduction in the Earned Income Tax Credit. The reduction in taxes was much more beneficial to upper incomes than lower incomes. Meanwhile, the consequences of reduced tax revenues has been less money available for expenditures on the general welfare — schools, roads, and any number of other programs and services that benefit the public. The report suggests some policy choices that could help Indiana look more like its Midwestern peers and less like the Southern states: increased minimum wage and greater access to a stronger social safety net (e.g. TANF, SNAP, work sharing to mitigate layoffs; consumer and renter protections; and better employment training & financial literacy programs).

So, what is it about the South and a crummy labor market, and what is it that makes Indiana more like a Southern state. I think the latter is primarily a consequence of migration patterns. Indiana was initially settled more from Southerners coming from the Ohio River northward. The other Midwestern states were settled from Easterners moving west and/or coming south off of the Great Lakes. The South’s poor living standards have roots in the enslavement of laborers for the benefit of wealthy property owners. The policy choices in the South were an extreme preference for property rights over labor rights. We fought a war to end the outright enslavement of  laborers, but the policy preferences are still lopsided, and you can see the results in the reduced standards of living in the South compared to places where policymakers have struck a different balance. What’s more, this preference for property over labor metastasized into a durable racism that has made it harder to adjust the balance.

Panglossian Defenses of the Status Quo

Candide was a good-natured but simple character (Spongebob comes to mind) created by Voltaire in his 18th century fictional work. Candide was the naive and trusting student of Dr. Pangloss. Pangloss was an advocate of Leibnizian optimism. I’m sure I’m oversimplifying, but generally speaking, Leibniz was wrestling with how evil could exist in a world created by a benevolent, omnipotent, omniscient God. His conclusion was, in the words of Dr. Pangloss, “all is for the best in the best of all possible worlds.” If a better world was possible, then surely God would have chosen that world. So, if things seem bad, it’s only because we humans — lacking God’s level of understanding — simply don’t understand that any alternative would be worse. Candide is indoctrinated into this worldview by Dr. Pangloss while living in a pleasant and sheltered environment. When he is forced out into the wider world, he is exposed to grim events (e.g. war, disease, natural disaster, torture in the name of religion, slavery, rape, murder). In the end, Candide concludes that the complacency of Panglossian optimism isn’t a sufficient answer. Instead, “we must cultivate our garden.” Our responsibility is local and we must care for those around us.

The defenses I hear of our current status quo seem to have more than a whiff of Pangloss to them. In some online bickering about the “true meaning” of the word “socialism,” I quipped that, regardless of the label, I wanted some of whatever Denmark had. One of the responses was that, even though Danes said they were happy, they weren’t really happy.  Calls to raise the minimum wage are met with predictions that this won’t make anything better. Calls to adopt the health care system are met with predictions that any attempt at reform will make things worse, notwithstanding the experience of other countries. Really, any attempt to tamper with the current market structure is met with predictions that this will inevitably lead to Stalinism or the experience in Venezuela. There’s always an excuse. We had a stronger middle class in the 50s and 60s? Well that’s because the rest of the world was recovering from WWII. Those countries have a stronger middle class now? Well that’s because they’re homogenous. (I’ve never really seen someone connect the dots on this homogeneity argument — I assume it’s thinly veiled racism, but I guess there could be a non-racist explanation for why homogenous populations can pony up for social services but diverse ones cannot.)

Whatever the excuses, by a number of metrics, America is not doing terribly well compared to other countries. The World Happiness Report measures six key variables, “income, healthy life expectancy, social support, freedom, trust (including perception of corruption in government & business) and generosity.” The report ranks the U.S. as 18th, between Luxemborg and the UK but behind Costa Rica and Ireland. Topping the list are Finland, Norway, Denmark, Iceland, and Switzerland. One of the author notes that our income-per-capita has doubled since 1972 while our subjective happiness has declined over the same period. Potential explanations include wealth disparity, erosion of social capital and “three inter-related epidemic diseases . . . obesity, substance abuse (notably opioids), and depression.” With respect to income disparity, the research suggests that absolute income and relative income both matter, but as absolute incomes rise, relative income disparity becomes more important to a society’s overall sense of well-being. Our health adjusted life expectancy score (overall life expectancy adjusted downward for time spent in poor health) is around 69.1 which puts us in the same range as Poland and Estonia and well behind places like Japan and Switzerland at 74.9 and 73.1, respectively. Our obesity rates are far above that of other OECD countries probably related to our change in diet in recent decades – notably increased consumption of processed foods and high fructose corn syrup. The wealth disparity is only going to continue to get worse as automation advances. If the robot owners are the only people getting paid, we’re going to have a problem.

In terms of health care, we spend much more and get the same or less than other countries. In terms of education, we’re lagging. According to a 2015 OECD report, the U.S. ranks 28th. Singapore, Hong Kong, South Korea, Japan, and Taiwan are the top 5. Finland is the top European country, coming in 6th with Estonia, Switzerland, the Netherlands, and Canada rounding up the top 10. Unlike the State of Indiana and Muncie, those countries aren’t relying on an educational strategy centered on short-changing their teachers. According to an NCSL study on how to build a world-class education system, one element the best systems have in common is that they recruit high quality educators; implement a rigorous system of preparation and licensure; pay the teachers well; develop a mentor system; gives teachers a professional environment to work in; select high quality administrators; and develop standards benchmarked to other countries. Instead of copying places that work, our education policy strikes its own path with vouchers and charter schools. I’ve said elsewhere that this is likely because educational excellence is a lower priority. The primary goals are: 1) weakening the teacher’s unions; 2) subsidizing religious education; and 3) diverting public funds to friends and well-wishers of policymakers.

But, I digress. The point is that other places are getting better results than the U.S. If we ever did, we no longer live in the best of all possible worlds. To improve our situation, we should copy what others are doing successfully. This might require higher taxes and reducing the focus on the interest of property rights in order to strengthen other rights.

The free market begins with a fence

Part of the resistance to making different choices about the free market and the various priorities given to property rights is a denial that choices have been made in the first place. “Property isn’t a choice. It’s a ‘natural’ right.” With all due respect to John Locke and the Founding Fathers, property does not exist in a state of nature. Without human-made laws and a government to back them up, you don’t have property. You have an opinion. Where there is a difference of opinion, in the state of nature with no government, the person who can bring the most force to bear is going to win the argument. (And, I might mention, that it really grinds people’s gears when I point out that there is no property without government. They think they hate government, and they love the idea of property rights. The idea that property rights are dependent on government seems to create a cognitive dissonance that must be really uncomfortable.)

In a state of nature, land belongs to everyone and no one. That changes when you can separate your land with a fence provided that you can also have government employees with guns convince the rest of the world to respect your fence as something more  than a flimsy barrier. Having established ownership to the land, you can claim rights to the crops grown there and the minerals underneath the land. You can demand compensation for these things. You can withhold them from others altogether. Where once people could theoretically live off the land without your say-so, now they are forced to go elsewhere, pay you, or do work for you in order to use that land. And then we’re off to the races – a system of property laws, contract laws, courts, and police enforcing those laws form a structure without which markets would not work.

And none of this is inherently bad. Let me repeat for the benefit of those who might think my intent is to savage property rights: I like property rights. Property rights and the markets that they allow have done a great deal of good. Why bother working, creating, or taking risks if you cannot lay claim to the fruits of those endeavors? But, striking the appropriate balance can be tricky. When people work collaboratively to create value, how do you allocate the profits from that effort? The Panglossian view is that “the market” will magically allocate profits to people according to their worth. We can rest assured that, if the market is allowed to work without government interference, money acquired is money earned.  But the existence of markets is a product of government interference. No government means no property and, therefore, no market. So, as the joke goes, we’ve already established what you are, now we’re haggling over the price. The market doesn’t reward value, it rewards leverage. Bringing more value to the common endeavor is a form of leverage. But so are property rights. Being able to keep your labor or machines or product on the sidelines until prices rise — without worrying about how you’re going to feed your family — is another form of leverage.

We can adopt policies that alter the leverage various people have in a transaction and alter the allocation of profits from economic activity. Some options could definitely lead us to a worse place – the Soviet Union and Venezuela are flamboyant examples (although, I guess I’ve seen some stats that suggest the lot of your average Russian peasant actually improved under Soviet policies, so your starting point matters). What do I have in mind? An increased minimum wage, stronger rights for unions, single-payer health care, better public transportation, more walkable neighborhoods, and increased spending on schools and particularly paying teachers more and giving them more control over teaching, incentives or laws for fewer hours worked and improved benefits, better unemployment benefits and family leave benefits, maybe even a Universal Basic Income. How are we going to pay for this? Taxes obviously.

And, I guess there are three basic reasons why I’m o.k. with this: first, there are some instances where we get more bang for our buck spending through the government than we do going through the private market; second, I’m o.k. having less money if I end up happier; and third, there’s wealth disparity that could stand to be redistributed. (See above, wealth acquired isn’t necessarily wealth earned).

Contrary to conservative dogma, sometimes the government is more efficient than the private market. The big example I have in mind is healthcare. Other countries with significant government regulation of healthcare markets get the same or better healthcare results for their people than the U.S. does. There isn’t an example in the world of a less regulated healthcare system that delivers better results for less. My tiny example is in-house printing at the Legislative Services Agency. LSA used to hire out printing of the General Assembly’s bills. When they attempted to bring it in-house, they met stiff resistance from a conservative Senator who took it as a matter of faith that having government employees do the work would raise the price. It saved millions with a two-thirds reduction in printing appropriations. I’m not, by any means, suggesting that the government is always more efficient than private spending; but sometimes it is. So, we should dismiss it out of hand. If I’m paying money out in taxes rather than paying it out in insurance premiums, I don’t mind the higher taxes. It’s all the same to me if I’m getting health care. I’m delighted if I’m getting more and better health care services.

Second, I also don’t mind higher taxes if I end up poorer but happier. I might be an outlier here, but if I have less spending money, but my community is healthier, happier, better educated, and generally more functional, I think I’m going to be happier. Not because of any excessive altruism on my part, but because living in such a place ultimately brings me more joy than I’d get from having those extra tax dollars in my pocket.

Third, the wealthy are just hoarding a lot of the wealth. I don’t think having that extra money to flow to them has a lot of social utility. If everyone gets paid the same regardless of effort or output, then the economy is going to flounder. Why bother working, investing, or creating? But there has to be a point of diminishing returns. Is a guy really going to work harder for a billion than he does for a hundred million? If not, then you’ve wasted $900 million which could probably be put to better use elsewhere. There’s some fat we can trim here.

I could be wrong, of course. But there is a fair amount of evidence, both historically and internationally, that what we have now is not inevitable and is not the best of all possible worlds. We need to look at what’s working elsewhere and cultivate our garden.