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Americans squeezed by forces they set in motion

College professors. Manufacturing workers. Recent college graduates. What do they all have in common?

They are all, as a group, seeing the terms of their employment reset downward. The average package available to those people is worse than what similarly situated people got a generation ago, Tyler Cowen writes in the New York Times. Tenure lines are being dropped in favor of adjunct jobs that pay worse and have no protection from firing. New manufacturing workers get lower wages and benefits.

Recent college grads find fewer well paying, steady jobs. This is the end of a long process, not a sudden bump, but as Cowen notes, “Such processes are scary because we may be watching the slow unfolding of a hand that, in its fundamentals, has already been dealt.”

As this hand is played, the common response is to demand that we go back to the last hand, which was much better. It has become customary, almost a required ritual, for any academic writing about adjunct faculty in any context to insert a call for their work to be done by well-paid tenure-track faculty.

No meditation on “American manufacturing” is complete without explaining why those workers need stronger unions to get them higher pay (or at least an explanation of why that won’t work). And I don’t need to tell you how much ink has been spilled on the plight of college graduates and their student loans.

The average American is at the heart of this story — as the victim and as the perpetrator. We suffer as employees because we exert influence as consumers.

One of the best explanations I ever read of any economic topic is by Arnold Kling, who points out that the fundamental purpose of any advanced banking system is to resolve a tension between what savers want (stable, profitable, liquid assets like bank accounts and mutual funds) and what investors want (stable, long-term finance of big, illiquid assets like houses and farms and industrial machinery).

When we are providing the money, we want to be able to get at it whenever possible and bear no risk. When we are borrowing it, we want to be able to lock it up as long as possible, and have the lender eat as much of the risk as possible. The banking system exists to transform the long-term, illiquid loans we want as borrowers into the short-term, liquid investments we want as savers.

In a similar way, as employees, we want to have maximum freedom to take better jobs, to withhold our labor until we get a better deal, or to take time off for stuff we think is important, while enjoying maximum income stability. As customers, however, we want folks who will work cheaply with no commitments and yet show up reliably, which is why we hate the cable company so much.

The institutions that intermediate these two desires are employers: governments and companies.

As with the banking system, this creates immense value: You don’t have to personally locate a cable installer every time a wire goes on the fritz. However, as we saw in 2007, it also creates risks. These risks can be mitigated by good government policy, but they can never be entirely eliminated.

Because we have these intermediaries standing between us and the other side, transforming the trades into something more suited to our tastes, it’s easy to generate contradictory demands as voters, ones that ratchet up that risk because we ask officials to guard our interests as consumers as well as our interests as workers.

You can see the recent Illinois Supreme Court decision on pensions as an example of the maximalist position on obligations to employees. The court has taken some criticism for that decision, but it’s hard to see how the outcome could have been different.

The voters of Illinois wrote into their constitution a provision that said that participation in a government retirement system “shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.” I’m sure it was not clear to them that this meant that they had essentially written a blank check that could be used by their elected representatives at any time, and then used to draw down their bank accounts to the last penny, if need be. But that is what they did.

Voters were thinking like workers who wanted protection, not like consumers who would pay higher and higher prices (taxes and reduced services) to provide that protection.

And at some point, the check may bounce, leaving us worse off as customers and employees. Government would fail to provide services to taxpayers and income to workers.

Locking in long-term obligations that can never be changed for any reason sets up a structural imbalance that may catastrophically rupture, as it recently did in Greece, and has in many other places and times throughout history. This is not an argument for getting rid of government regulations, or employers, any more than the occasional financial crisis is an argument for tearing down the banking system and going back to hoarding sacks of gold.

It’s simply an appreciation of the inevitable tensions between what we want in our dual roles as taxpayers and employees, as producers and consumers, and the difficulty of fully resolving those tensions. If you look at what’s happening with Chicago’s pensions, it seems plausible that the city, and possibly the state, are heading for a fiscal disaster that will be hard on taxpayers and employees.

So instead, we try to adjust the imbalance slowly. And the easiest way to do that is to change things for new workers. Professors who already have tenure get to keep it; new hires become adjuncts instead.

Established workers in unions get the old terms of employment, new workers get a much less generous deal. Cowen argues that we may be looking at a big reset — not just eroding pay and security in a few industries, but broadly ending Americans’ faith in a rising standard of living. The reset may not be fair. It will certainly not be easy. But it may be necessary.

Megan McArdle is a Bloomberg View columnist who writes on economics, business and public policy.

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