Wednesday, December 30, 2009

Robert J. Gordon is TRULY a Buffoon

In his closing remarks in The Economist debate on European vacations, Professor Robert J. Gordon once again invoked the bogus lump-of-labour fallacy but not before himself committing the "fixed-amount-of-this-that-and-the-other-thing fallacy" oh, about four or five times in a "calculation" of how much income Europeans would take home if they worked as many hours as Americans.
Let us figure out how much Europeans pay for shorter annual hours of work in general and their longer days of vacation in particular. International data comparing Europe and the United States in dollars of equivalent purchasing power show that the ratio of Europe to the United States is 90% for output per hour, 68% for output per person and 75% for hours of work per person. Converting these ratios to real GDP per household (using 2.5 people per household, the US figure for 2004) yields a US GDP per household of $120,000 compared with a European value of $81,600.

But Europeans are not allowed to keep this amount, because OECD data show that they pay 39.15 of GDP in taxes, compared with 25% in the United States. This brings European take-home pay down to $49,700 compared with $90,000 in the United States, or 55% as much. If Europeans worked as many annual hours as Americans, their per-household GDP would be 90% as high (the remaining difference is due to lower productivity) and their take-home pay would leap to $76,100, an increase of 53%. The disproportionate impact on take-home pay occurs because total government tax revenue stays the same, greatly reducing the share of taxes in GDP due to spreading the costs of European government across many more hours of work. Given the large discrepancy in GDP per head, the lower American tax rates generate almost as much tax revenue as the higher European rates: $30,000 compared with $31,900.

This multiplier effect, that raising European hours of work by 32% would raise take-home pay by 53%, carries over to the portion of shorter European hours attributable to longer vacations. So the proper question Mr de Graaf should be asking Europeans is not whether they like their long vacations or would like to enjoy longer ones. Rather, he should be asking whether lengthening their vacations by one more week, five out of the 365 days in the year, or 1.4%, would be worth giving up an extra 4.4% ($2,200) in take-home pay.

Unfortunately, Europeans have not been asked to vote on this question, nor on the question of whether the alternative of working American hours per year (including lower unemployment, higher labour force participation, shorter vacations and a higher age of retirement) would be worth an extra 53% ($26,400 per household) higher take-home pay. Politicians and union leaders have been taken in by the "lump of labour" fallacy and have spun a web of employment protection regulations, restrictions on hours, early retirement and high taxes, in the mistaken belief forcing people to work less creates new jobs for others. Most Europeans would be surprised to learn how much real money they have sacrificed at the altar of this fallacy.


Anonymous said...

You probably are not knowledgeable enough of French politics to realize that the current IMF general manager, reflecting a widely shared opinion in France,initiated, in his capacity of top economist of the socialist party then in power, a policy of reducing the regulated length of the workweek to 35 hours, precisely in order to reduce unemployment by sharing the total -- and supposed fixed -- amount of labor demanded among a larger number of workers (the "Aubry laws" named after the then minister of labor in the socialist government).

So the "bogus lump-of-labor fallacy" is not that bogus in France for instance, and probably in other European countries.

Who then is the "buffoon" really??

Walker said...

Unlike Anonymous, above, I've read the arguments put forward by the proponents of the 35-hour work week and I've read the assessments of its outcomes. The amount of labor demanded was NEVER assumed to be "fixed". It was ALWAYS understood that there would be offsetting productivity gains and increased labor costs could dampen the employment effects. To say that the Aubry laws were based on a lump-of-labor fallacy is a LIE.

Unlike Anonymous, above, I don't jump to conclusions about what other people "probably" are or are not "knowledgeable enough" about. I RESEARCH what people have actually said. It's so much easier to MAKE SHIT UP though. Thanks for sharing, Anonymous.

"Who then is the buffoon?" Now there are two: Robert Gordon and Anonymous.

Walker said...

"You probably are not knowledgeable enough of French politics to realize that the current IMF general manager..."

Presumably, Anonymous meant to refer to the Managing Director of the IMF (not the "general manager"), Dominique Strauss-Kahn. Below is an excerpt from a letter I sent nearly ten years ago to the Deputy Assistant Secretary for Policy of the U.S. Department of Labor in which I refer to the then French Minister of Finance, Strauss-Kahn, with regard to the 35-hour policy.

February 25, 2000

Dear Mr. Droitsch,


Calling the lump-of-labor claim a 'theory' is like calling anti-semitism a religious faith. It is not a theory in any recognized scientific sense. It is a hostile caricature that demeans the intelligence of working people and the motives of trade unions.

To illustrate, I am enclosing for your information an editorial from the National Post of Canada ridiculing the Government of France and the Minister of Finance, Dominique Strauss-Kahn, over legislation to establish a 35-hour work week. Please note that the editorial does not simply theorize about the tendency of workers to slow down production. Rather, it accuses the government, the finance minister and French labor unions of "a thorough ignorance of economics". It also insinuates totalitarian motives behind the 35-hour workweek policy. Similar attacks appear routinely in the English language financial press and are echoed by employers' groups lobbying against proposals for reduced work time.

Surely such belligerent rhetoric is not aimed at expressing a theory or philosophy but at forestalling debate on the issue of working time. If that is the intent, it has been remarkably successful in North America over the past 40 years or so.

As I mentioned in my letter to Bill Emmott, editor of the Economist, I have recently completed a review of the literature on the multiple versions of the supposed fallacy. In "The 'Lump of Labor' Claim Against Work-Sharing: Populist Fallacy or Marginalist Throwback" I documented that there is no coherent and authoritative source in the economic literature for the claim of a fallacy regarding the reduction of the hours of work. That review is scheduled to be published in the fall by Routledge as a chapter in Working Time: International Trends, Theory and Policy Perspectives, edited by Lonnie Golden and Deborah Figart. I also have several hundred pages of notes and photocopies indicating very clearly that the sources for the fallacy claim were not economists but publicists hired by employers' organizations campaigning against an eight-hour day.

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Walker said...
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Anonymous said...

Would it be inappropriate for a non-economist to point out that European governments aren't obliged to "create" as many "jobs" by buying weapons as our government does. Many of these weapons are never intended to be used and have no function other than to "create jobs." Even worse, many are intended to be used -- to "preserve jobs" by securing a stable fuel supply for an extremely inefficient transportation system.

Kaleberg said...

"This brings European take-home pay down to $49,700 compared with $90,000 in the United States,"

Weird. I thought the median take home pay was about $50,000, not anywhere near $90,000. Perhaps the author is referring to a different United States? Perhaps one on a different planet?

Walker said...
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Walker said...

Kaleberg: "Perhaps the author is referring to a different United States? Perhaps one on a different planet?"

I believe Professor Gordon was referring to the planet where all the Americans dump all their income into a great big pot and then share it out amongst themselves equally.

And to think that Jamie Galbraith got on my case for comparing median wages instead of median compensation (that is to say, I failed to regard inflated health insurance premiums as a boon to worker welfare)!

By the way, here's an essay by a 59-year old unemployed former teacher that I think puts Gordon's disingenuous and smug number juggling into some real world context. It's not that the essayist's situation is the worst imaginable. It just illustrates the everyday "it could happen to anybody" angle.

Barkley Rosser said...
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Walker said...

Anonymous II: it is always poor taste to remind people that "war is the health of the state."

"The State thus becomes an instrument by which the power of the whole herd is wielded for the benefit of a class. The rulers soon learn to capitalize the reverence which the State produces in the majority, and turn it into a general resistance toward a lessening of their privileges. The sanctity of the State becomes identified with the sanctity of the ruling class, and the latter are permitted to remain in power under the impression that in obeying and serving them, we are obeying and serving society, the nation, the great collectivity of all of us. . . ."

You see, Anonymous II, in economics as it is officially sanctioned, there is no war, there are no classes, especially not a "ruling class". There are only markets and money and choices of people about how to spend their money.

Barkley Rosser said...
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media said...

I actually thought Gordon was joking (though for him, these exchanges can be taken as entertainment since they have no consequences).
I did like his coments about how european cities have slums in the suburbs, and graffitti downtown, with their low 47G after tax family income, compared with the US at 90G after-tax where the last slums dissapeared largley in '68 (along with MLK who presumably took them to the Promised Land) along with the graffiti.
(a few lasted longer, like polars bears today, and i used to watch from the roof the gradually changing landscape of clotheslines which went away as the income hit 90G and people bought dryers).

Is there any evidence americans dont dump all the money in a pot and share it equally, the way they do labor (or jobs)? or is that another fallacy?

(i forgot what the fallacy was so i saw that Krugman, the leftist-socialist-liberal, had written on it. his take seems to be pretty correct unless its been refuted (e.g. by that Edward denison 60's paper cited elsewehre). If people share hours, then the creativity cited by Hayek, which forces people to make new jobs (wars, weapons, prisons, trash and health problems to clean up etc.) will be stifled.

why share when one can go on a crusade, and keep the competetive instinct fresh and sharp.

it works in academia. who else is going to shelves all those redundant 'publish or perish' books and journals and build new libraries, or work in conference centers in dubai in the age of information? Its the Good News business.

the 'new socialist (wo?/)man' might be a slacker, or not tolerate people like Gordon or even Krugman with that second rate bs or rhetoric. (and the NYT's, eg Tierney, would be downsized and outsourced too---shipe em abroad where they can work for competetive wages).

Walker said...

From the Wall Street Journal:

Economist Robert Gordon, of Northwestern University, says he drives out of his way to go to a grocery store where prices are cheaper than at the nearby Whole Foods, even though it takes him an extra half hour to save no more than $5.

Mr. Gordon, however, is no ascetic. He, his wife and their two dogs live in a 11,000-square-foot, 21-room 1889 mansion on the largest residential lot in Evanston, Ill., outside Chicago.

"The house is full, every room is furnished, there are 72 oriental rugs and vast collections of oriental art, 1930s art deco Czech perfume bottles and other nice stuff," he says.