Thursday, October 28, 2010

Peter Elkan, Adjustment of Sectors to stop pay-cost inflation, thoughtful thursday

The New Model Economy: Economic Inventions for the Rest of the Century, by Peter G. Elkan, pergamon Press, Oxford, New York, etc. 1982, HD82 E485 1982

(I promised a review of this when I wrote up Kenneth Boulding's review of this book.)

To prevent pay-cost inflation, the salaries negotiated by unions and management and individuals and management should be adjusted. They would be adjusted to equal the amount agreed upon. Thus, each union would negotiate a pay increase in the normal manner. The total pay would be added up and compared with the target figure. Then, each pay would be adjusted to the following. This can be done by the total pay, which means that some people might receive a decrease in total pay.

And it can be done by the increase, which Dr. Elkan suggests is more politically feasible. Here is a simple example. Society agrees that the average pay increase is two per cent. Half of the population (group A) negotiates a 2.5 percent increase.. Other half of the population (group B) negotiates a 3.0 increase. The adjustment factor is 4/5.5. Group A gets an increase of 1.81% and group B gets an increase of 2.11.

In the United States and Britain, union agreements are made throughout the year. Dr. Elkan is concerned that unions should not wait until the end of the year to find out what increase they would get with thei ncrease delayed-- int he same manner that a worker with high deductions on their income tax would have to wait until the following April for their tax refund. Thus, he proposes that all pay go through a central computer and the adjustment made on a running basis. (That might not have been practical in 1980 when he proposed it but it is with modern computers.)

He was concerned about pay-cost inflation, when each union tries to leapfrog other unions in negotiating a salary. And trade unions are so used to insisting upon regular increases, that they do so past the point of productivity growth. When this causes inflation, the unions try to leapfrog the inflation by asking for a cost of living increase that includes what they fear will be a runup in prices. (NPR Planet Money talked on another approach to dealing with the psychological factor in inflation on the price side that worked in Brazil which I will cover in another blog post.) And of course, there is the Share Economy solution--on the pay side, suggested by Dr. Weitzman and expanded by myself.

Certainly, one could organize an economy and political system where the voters vote on the amount transferred frmo each major sector to another, corporations to investors, corporations to labor, etc.

However, the same thing can be effected by tax policies. The increases that Dr. Elkan is trying to control are less than the tax bill. The people could vote ont he amount of taxes paid by each sector. This could be adjusted, at least in part, by the increase of that sector relative to desires. There is an empirical question. Would the voters best think about the magnitude of each flow in the macr economy. In my Intermediate macroeconomics course, we started with a circulation model showing the flows from economy part to economy part. Or, would the voters just say this sector is too big, this sector is too small, adjust the taxes higher in the big sectors, adjust the taxes lower in the smaller sectors. (If needed, one could have modify the reverse flow, payments to corporations that provide services to the federal government, if it was desired to send more money to the corporations.) Dr. Elkan cited Sir Roy Harrod in 1965 for using the taxes to adjust the distribution to sectors.

And whether we structure the adjustment by the sector-to-sector flow or by taxes, the demos can vote using median voting for the adjustment. That is everyone would say that the total amount payed out by corporations to their investors should be x1, x2, x3, etc. And the median is the amount that would be used.

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