Wednesday, May 23, 2007

Convention Hotel in Indy (Indy Star)

The Convention Hotel: Labor Policy Pro and Con

What should the Indianapolis City Council do in regard to the labor environment at the proposed convention hotel?

Before we start, there is the question of whether such a hotel should have been subsidized by taking money from taxpayers and giving it to a corporation. There are various ethical and practical arguments against such subsidies. First, in what cases is it appropriate to take money from Joe Six-Pack to give to another individual or to a company? Second, was the subsidy necessary to attract the business? If not, it's a complete waste of money; if so, why is Indy building something the market considers inefficient?

In any case, it's difficult for an economist, let alone a politician, to know for sure.

We do know that taxpayers are unlikely to protest this sort of subsidy. Why? The answer is that as is the case with most government interventions the costs are subtle and small per person. Meanwhile, the benefits are concentrated and obvious to the recipients. This is a recipe for income redistribution by politicians from the general public to interest groups — a recipe cooked up by every level of government thousands of times a day. In regard to our hotel, city officials are likely to enjoy the perceived economic development benefits and the almost certain political benefits for merely handing out largesse to interest groups.

Now to the question of the moment: Given a public subsidy (of $48 million or of 48 cents), can the members of City Council impose restrictions on the way in which the hotel is built and operated?

Sure. Strings can be attached within the context of a "private-public partnership." Presumably, the extent of the string should be correlated to the proportion of the subsidy. It would be absurd to argue for massive intervention in the face of a only modest subsidy. (But we're talking about government here; the absurd may be a standard of performance.)

Beyond the council members’ ability to impose restrictions on the way in which the hotel is built and operated, should they impose such restrictions?

The Council could do everything from mandating union membership for employees to setting a "living wage" policy — or a wide variety of other regulations (e.g., how Muslim maids are allowed to dress). There are a number of reasons, however, to avoid such interventions. In the context of this particular project, any regulation of this type would only increase costs and spur inefficiency.

For example, if the city promotes a union, then wages will be artificially higher (above and beyond the union dues that will be paid). This is what one expects from any cartel — an economically defined group of suppliers who restrict entry in order to profit from their monopoly power. OPEC is a cartel in a product market, resulting in artificially high prices. Unions are a cartel in labor markets, resulting in artificially high wages. Cartels are a good deal . . . if you're in the cartel.

Or what if the city establishes a "prevailing wage" during the construction of the hotel — or a "living wage" during the operation of the hotel? Again, wages will be increased above the competitive outcome.

Some might protest that workers will be exploited by the hotel owners. But the relevant labor markets are competitive, so workers must be paid an appropriate market wage. (Could the hotel get away with paying its secretaries, construction workers and managers only $6 per hour?) If its employees are not paid a competitive wage, they are free to choose to work elsewhere — and will do so.

Beyond this particular project, the City Council sets a bad precedent with subsidies and significant regulation. If it is willing to take money from taxpayers to give to corporations in this context, why not in other situations as well? If Indianapolis government interferes with the workings of this project, future entrepreneurs will know to expect more intervention and higher costs.

Neither approach is an effective strategy if the City Council intends to promote fiscal prudence, sound government or economic growth.

An edited/shortened version of this appeared in the Indy Star: