A Grand Bargain?

While many Americans filled their stomachs and then emptied their wallets last week, the economic blogosphere was buzzing with the possibility that the newly elected Democratic Congress might strike a "grand bargain" with the Bush administration over the issue of Social Security reform.

The Economist suggests that an option for such a bargain would be to combine two bipartisan proposals: one by William Gale, Jonathan Gruber, and Peter Orszag that would subsidize retirement saving for low- and middle-income households, and another by Jeffrey Liebman, Maya MacGuineas, and Andrew Samwick that would reform Social Security through benefit cuts, an increase in the payroll tax cap, mandatory personal retirement accounts, and more. Mark Thoma, Andrew Samwick, and Brad DeLong, among others, have interesting comments on the matter.

Why would a Democratic takeover of Congress make such a "grand bargain" more likely? After all, President Bush's Social Security reform package flopped, even when he had a solid Republican majority in Congress.

One possible answer is that hashing out a solution to a major problem like Social Security requires that all relevant stakeholders have strong enough bargaining positions to ensure that everyone comes out of the negotiations better off than when they went in. Other successful large-scale policy changes, like welfare reform under Bill Clinton and a Republican-led Congress, have followed this pattern. By contrast, when negotiations are held between parties who do not adequately represent larger groups, agreements can break down. For example, the various conflicts in the Middle East present a number of cases in which groups that are left out of negotiations attempt to subvert the agreements that come out of those negotiations. If the Republicans had tried last year to push through Social Security reforms that were unacceptable to Democrats, such a plan would have had difficulty withstanding the test of time, as the Democrats would have tried to implement a plan of their own.

Discussion Questions

1. What kinds of transactions involve bargaining rather than market mechanisms? What principles of economics are applicable in a bargaining situation? What elements of economic theory are not?

2. Social Security reform is often called the "third rail" of American politics. (The third rail is the electrified rail of a train track, which gives anyone who touches it a nasty shock.) Why is it such a difficult problem to solve through the political process? In other words, what economic or political forces are aligned against a "grand bargain" to solve this problem?

3. Why might politicians be more willing to tackle a difficult issue when both major political parties have significant power?

4. Suppose no bargain is reached in the next few years. As the years go on, and as the Baby Boomers start to retire, do you think the likelihood of reaching a bargain in the future will increase or decrease? Why?

One of the most exciting areas of economic research in recent years has been on the subject of bargaining. If you're interested in this kind of thing, a good place to start is Al Roth's page on bargaining at Harvard.

Milton Friedman: In Memoriam

This week saw the passing of Milton Friedman, one of the most influential economists in the history of the discipline.

We hope that the following list of remembrances and comments that have appeared across the Internet will be a useful resource to students, teachers, and other readers of our blog. If you have written a post or know of others that we haven't listed, please leave us a comment.

Note: At the Aplia EconBlog, we generally try to include links that we have confidence will not cease to exist. We are not following this policy for this post; if you find that one of the links below doesn't work, please let us know so that we can remove it.

Newspaper Obituaries and Editorials:
The Financial Times (London)
The New York Times
The Wall Street Journal
The Washington Post

Professors, Bloggers, and other Commentators:
Tyler Cowen at Marginal Revolution has more posts than we can link to.
Brad DeLong, UC Berkeley
Austan Goolsbee, University of Chicago
Greg Mankiw, Harvard University
Meghan McArdle (a.k.a. Jane Galt), Asymmetrical Information
Steve Pearlstein, Washington Post
Lawrence Summers, Harvard University
Alex Tabarrok, Marginal Revolution

Multimedia Resources
Interview on The Charlie Rose Show
Podcasts of Milton Friedman at EconTalk
The Milton Friedman Chorus sings "The Corporation"

Other Collections of Links and References
Instapundit.com
Wikipedia

Are There Too Many Wal-Mart Jobs, or Too Few?

Policy proposals often address a problem that is visible. In many cases, there is a related problem that is not visible. Policy, like life, is fraught with tradeoffs. A proposal that helps the visible problem will in many instances make the hidden problem worse.

When Wal-Mart comes to town, it puts pressure on existing firms. Because of the new competition that they face, these firms may cut wages, particularly if unions had negotiated a wage higher than the market-clearing wage. To address this problem, politicians have proposed various measures designed to push up the wages and benefits that Wal-Mart has to offer its workers.

A recent op-ed in the New York Times nicely captures the corresponding hidden problem. After Mayor Daley overruled city council members who wanted to keep Wal-Mart out of Chicago because it did not offer a "living wage," 15,000 people applied for 400 jobs at a new Wal-Mart that opened on the city's west side. Their response shows the hidden problem: Many poor people can't find jobs that offer the wages and benefits that Wal-Mart pays. If the demand for labor slopes down, measures designed to force Wal-Mart and firms like it to pay higher wages will make this hidden problem worse. There will be even fewer of these jobs.

Discussion Questions

1. Consider two groups of workers mentioned above: (1) employees at Wal-Mart's competitors, and (2) workers who would not otherwise have a job, but who might get a job at Wal-Mart. What effect would policies that increase Wal-Mart's wages and benefits have on each of these groups of workers?

2. The line for jobs at Wal-Mart indicates that there are many people in Chicago who are either not working, or working at jobs that offer a less attractive package of wages and benefits. What policies, besides more Wal-Marts, could help to alleviate these problems?

3. According to the article, how might a lower-cost retail outlet help low-wage workers who don't work at Wal-Mart?