Bad Libertarian Arguments against Sweatshop Regulation

I’m generally pretty skeptical of sweatshop regulation. I buy the argument that for most workers at low-wage factories in developing countries, these jobs are their best option relative to alternatives such as working in agriculture or in the underground economy. I think many Western efforts to regulate or boycott arguments are misguided and harm people who they think they’re helping. But some libertarians make really bad arguments against sweatshop regulation, and intellectual honesty requires  me to call them out. The existence of bad arguments for X, even when there are also good arguments, tends to undermine support for X.

One prominent recent book that defends sweatshop jobs is Out of Poverty: Sweatshops in the 21st Century by Ben Powell. It’s an interesting book with lots to think about, but I want to focus on one excerpt where Powell discusses workplace harassment. Powell objects to criticisms by anti-sweatshop groups of sexual harassment on the job:

If the risk of sexual harassment is part of the working conditions at a factory, then firms have to offer higher wages to attract workers…. In short, the analysis of sexual harassment on the job is much the same as the analysis of other working conditions. Laws that effectively eliminate sexual harassment would lower wages. If employees desired this, then market forces would remix the compensation package to minimize harassment and lower wages. (p. 184)

 

The mechanism here is the idea of “compensating differentials” for labor. If a job is unattractive in some dimension, such in the level of abuse workers endure, in a competitive market the employer will have to pay higher wages to compensate for that unattractive feature. Powell cites as evidence for this mechanism a 2010 study of U.S. markets by Joni Hersch, which finds that women do in fact enjoy a compensating differential of about $0.25.

The first thing to note, though, is that Hersch’s analysis cannot simply be applied uncritically to markets outside the US. There are at least two reasons for this. First, markets for sweatshop labor may be much less competitive than US labor markets. This is an important condition for the positive effect of compensating differentials on wages

Second, even if the compensating differentials mechanism has an effect, sexual harassment may have other negative effects on wages such as higher turnover, lower employee morale, or inefficient efforts to avoid harassment, which leads to lower productivity. Because we cannot decide from the armchair which effect dominates (the productivity effect or the effect of compensating differentials), we need to do careful empirical analysis of the labor markets in sweatshop countries before we conclude that workers are paid higher wages as compensation for harassment.

But let’s assume that workers are, in fact, paid higher wages as compensation for harassment. Powell argues that we should infer from the fact that workers take these sweatshop jobs that workers prefer the money to a harassment-free workplace, since if workers had different preferences, the employer would pay a lower wage and reduce the level of harassment. Because workers agree to jobs where they sexual harassment, anti-sweatshop activists shouldn’t oppose it.

This argument is, to put it charitably, not very good. In the first place, it doesn’t at all follow from the fact that workers accept jobs with sexual harassment that we shouldn’t object to those terms of employment. Sometimes we shouldn’t make offers to people even though they accept it, particularly the offer reflects some objectionable preference (such as the desire to grope and physically violate women). We should do what we can to change those preferences (or at least the behavior associated with them) rather than take them as a fixed cost, which is the position of most anti-sweatshop activists. Even if workers accept those terms of employment, for example, they may prefer that employers didn’t have the desire to sexually harass them. They may prefer not be part of a collective enterprise where anyone’s harassed. This possibility, raised by Amartya Sen in a critique of the revealed preference concept, means we cannot necessarily infer welfare from choice or behavior.

There are good arguments against some regulations of sweatshop labor, but those arguments are generally sensitive to the costs and benefits of different regulations or the voluntary nature of the worker’s choice. In this case of Powell’s argument against sweatshop regulation, unfortunately, neither of these desirable conditions obtain.

 

 

Two things the new administration may get right

The GOP’s corporate tax reform proposal. Republicans have proposed replacing the corporate income tax with a destination-based cash flow tax (DBCTF). This is an idea that’s received support across the partisan aisle. Economists generally object to the corporate income tax because corporations ultimately don’t may much of the tax–the real burden of the tax generally falls on workers, consumers, and owners of stock. In addition, the corporate income tax represents a falling share of government revenue and an increasingly inefficient means of revenue generation. The DBCTF proposed by the GOP would significantly reduce the corporate income tax from 35 to 20% and modify several common deductions. These are quite significant: the elimination of depreciation means that companies can write off an investment in a single year rather than pay tax on a depreciated basis every year. This eliminates a tremendous disincentive to capital investments by essentially making them tax free. The elimination of the interest deduction eliminates the distortionary treatment of debt and equity, but some worry the elimination would impose a serious burden on the financial industry given that most of that industry’s cash flow comes from borrowing to lend.

A “destination-based” tax is good because it taxes corporations based on where they spend money, not where they produce goods. This eliminates US companies’ incentive to move profit-making activities off-shore to avoid high US rates. Such a tax may appear to subsidize exporters over importers, since importers will bear taxes on their purchases while exporters will not bear any tax on their overseas sales. While this might have a nominal effect, the real effect would be offset by changes in the exchange rate. A tax on imports and a subsidy to exports both lead to dollar appreciation–there are fewer dollars out there to buy imported goods so they’re worth more, and foreign buyers bid up the price of dollars to buy exported goods. The net appreciation of the dollar would mean no change in the US trade balance. One possibly distortionary effect, however, would be that dollar appreciation would reduce the value of foreign-denominated assets held by US citizens overseas. It’s likely that financial interests will object to this proposal as a result.

The reduction in the statutory tax rates from 35% to 20% would also put the US below the OECD statutory average of 24.7%. However, the effective tax rate faced by companies would depend on the details of the final bill.

Another prospect that excites me is the prospect of FDA reform. If you think that improved health is one of the most, maybe the most important improvement in well-being we’ve had over the last 200 years, reforming the process by which we develop new pharmaceuticals is really important. The new FDA commissioner could do important things like implement reciprocal recognition of drugs and devices with other licensing boards in advanced economies. Another policy change would eliminate the application procedure where companies have to apply to the FDA to start producing a generic drug, which is the regulatory barrier that makes it possible for entrepreneurs to implement monopoly pricing on generic drugs.

 

 

How biased advice can be good advice

Confirmation hearings for Donald Trump’s cabinet nominees are getting underway, and many commentators have expressed concern over the lack of ideological and political diversity among Trump’s cabinet nominees and advisors. I don’t want to get in to the specifics of these individuals’ qualifications, but I do want to examine an underlying assumption behind worries about ideological homogeneity in the incoming administration.

There is an idea, summarized by the expression “team of rivals,” that great leaders surround themselves with advisors with very different views of the world. Great leaders, according to this idea, incorporate a diversity of perspectives among their advisors to counteract their own biases rather than surround themselves with an echo chamber of like-minded individuals.

The team of rivals idea is only half-true, however. It’s true that good advisors should not falsify or misrepresent their beliefs to leaders. Good advisors need to have integrity and honesty, and flatterers generally make poor advisors as Machiavelli emphasized.

However, good advisors should not necessarily be unbiased or have very different biases* from the leader they advise. It is often optimal for leaders to solicit advisors with biases similar to the leader’s, or simply advisors with a bias rather than unbiased ones. The advantage of biased advisors is even stronger when there is urgency or information is costly (as all interesting decisions are). The optimal level of bias is not zero–instead, the optimal level of bias is that level most likely to shift the leader’s decision from what the leader would choose in the absence of advice.

In his 1985 paper “The Value of Biased Information: A Rational Choice Model of Political Advice,” Randall Calvert explains this counter-intuitive claim. The intuition here is that advice from someone who has a very different bias from you is a less credible source of information and less likely to change your own views. It is hard to tell with such an advisor how much of the recommendation reflects the true probability of the action’s success, and how much it reflects the advisor’s own bias. However, if someone with a similar bias to you recommends against the action toward which you’re both biased, or in favor of the action you’re biased against, that sends a very credible message.

An advisor with the same biases as a leader is more likely to advise actions consistent with the leader’s bias, which is a cost. But when the advisor recommends against his bias, that recommendation is much more credible. Put differently, suppose the advice in question concerns whether to stick with the status quo or adopt an alternative. Suppose the advisor and the leader are both biased in favor of the status quo. If the advisor recommends accepting the alternative, this is far more valuable to the leader a recommendation to accept the alternative from a neutral advisor or an advisor biased in favor of the alternative. The value of this information–a recommendation against one’s own bias–outweighs the cost of the advisor’s own status quo bias. Such a recommendation may eliminate the need for the leader to seek out further advisors and the cost of gathering further information.

Of course, there are also other dangers to advisors who share a leader’s own biases as explained above. But as Calvert showed, the optimal level of bias in an advisor is not zero for rational decision-makers. We are often better off receiving advice from people who share our own biases when information is costly and time is scarce.

*I should note that “bias” here refers to different things in the case of the leader and the advisor. In the leader’s case, a bias represents a prior belief that a particular action will be good or bad. In the advisor’s case, the advisor makes recommendations about an action that’s imperfectly based on the true probability of the action’s success. The advisor’s bias is how much the advisor discounts the true probability of success before recommending the action.