Monday, July 06, 2015

Public policy decisions to depress wages can lead to unconscionable contracts

Evidence is mounting that inequality is a public policy decision, not just something that happened. In any economy, there is bound to be some inequality. But the inequality we see today, in the United States towers above all other countries. Most people have no clue just how bad it is and find it hard to imagine that inequality in the US is worse than your typical banana republic. Here's a video to explain the magnitude of the problem in the US:


I just finished a report about inequality as a result of public policy. This report by economist John Schmitt provides a good overview of the way public policy has been debated. In most cases, the debate over inequality focuses on some external effect, as if that process is happening to us. Globalization and technology are the two main bogeymen in the conservative story, bogeymen meant to distract us from what is really happening.

As Schmitt notes in his report, from about the 1930s to the late 1970s, social movements have worked to create and implement public policy that reduces inequality. Equal rights and equal pay for women, the unionizing movements, progressive taxation, and desegregation were all policies that helped to flatten the distribution of wealth.

But starting around the late 70s, business interests began to coalesce and organize to provide effective opposition to the movements that made the middle class strong in the middle of the last century. The opposition to labor started to deliver decisive blows with the Reagan administration starting with the firing of the air traffic controllers when they went on strike in 1981. Since then, we've been treated to a non-stop party to marginalize or neuter the power of labor.

Businesses are in the market to make money to be sure. They want to be paid fairly for their products and they want to be paid in a timely fashion. They want to make a profit. This is a reasonable set of assumptions to work from.

On the other hand, business interests worked hard to resist the social and economic reforms of the last century. Having established the upper hand, they have pursued their interests with government intervention in the market to the point we see today. A point where one family owns more wealth than 130 million Americans - combined.

This concentration of wealth has become an unbeatable opponent in public policy debates. We know this because our legislatures have largely ignored everyone except the 1% for at least the last 20 years. Study after study has borne this out. Without the organized social movements we had in the 20th century, the average man or woman is unable to influence public policy.

Any businessman will tell you that they know an unconscionable contract when they see one. They know when they're not being treated fairly. They know they can sue when they're being treated unfairly. They also know that they can find another supplier or customer rather than take an unconscionable contract in order to pay the bills. A good businessman always knows he has options.

The last 30 years have shown us that business in general has had little compassion for the employee. The lack of paid time off, a minimum wage that has not kept pace with inflation or productivity, the fight over health care, these are just some of the examples where businesses have worked hard to externalize costs at the expense of the employee.

A basic principle of contract law is that a good contract is one where both parties are better off after entering the contract than if they did not. Business knows a good contract when they see one. Businesses organize in associations, like the US Chamber of Commerce to improve their bargaining power.

In the same way, employees organize into a union to improve their bargaining power. Yet, businesses prefer not to allow employees to unionize and seek government intervention in the market to prevent unionization. This is just one example of many to show that business likes a free market to the extent they are the ones set free.

But when business uses government intervention in the market to suppress wages, or deny the right to unionize, that intervention can color all employment contracts as unconscionable. Businesses claim to want to work in a free market, but their desire for government intervention on their part belies their claims.

Where we draw the line depends on whether our leaders just represent the top or everyone.
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