Socialism for the organized, capitalism for the unorganized

When I first heard of the Obama's administration decision to use federal contracting as leverage to "shape social policy and lift more families into the middle class", I thought that it was about time. I'm still convinced that the Obama administration should be doing more to ensure that this is a long-term objective of public policy, but Alex Tabarrok has convinced me otherwise (via Brad Delong).


My initial thought would be that this sort of policy is going to be very well-received by unions, and probably has been a union objective since Obama came into office. I don't know the recent origins of this policy proposal, but I think that it does have a strong appeal to those of us who believe that the government has wrongly abandoned its efforts to broaden the middle class. I think the appeal is in part based on the historical reading of FDR's use of federal contracts to press for racial integration in the economy. I'm not sure how well it worked, but it was probably an important contributor to the growth of a black middle class and the eventual civil rights movement. 


So the use of federal contracts for broader social purposes has a strong appeal for leftists. Enter some cold water 

[Tabarrok is]  more worried, however, about the long term consequences of creating a dual labor market in which insiders with government or government-connected jobs are highly paid and secure while outsiders face high unemployment rates, low wages and part-time work without a career path.

Long-term unemployment is at shockingly high levels which in itself creates a dynamic of persistence because the longer a worker is unemployed the less employable they become (in part due to loss of human capital and signaling problems). Thus, getting these workers back to work is going to be hard enough as it is.  Labor regulations which raise wages and make hiring and firing workers even more costly will make re-employing the long-term unemployed even more difficult.

Moreover, once an economy is in the insider-outsider equilibrium it's very difficult to get out because insiders fear that they will lose their privileges with a deregulated labor market and outsiders focus their political energy not on deregulating the labor market but on becoming insiders

 I think he is right on this. But given that the appeal, I think, is based on the FDR precedent, let me put the problem in those terms as well. Using federal contracts to leverage increased integration in the economy, I maintain, was the right thing to do. But it was undermined in its effects by other forms of exclusion that were built into the fabric of the key institutions that helped to expand and secure the middle class in the post-war years. Three of these institutions of importance were unions, and the increased bargaining power that they had been secured through state action, the Social Security Act, and the GI Bill. Each of these disproportionately excluded African Americans-- and had been designed to do so in their construction (the GI Bill less so, but with similar effects). The result was a sustained divergence in the fortunes of blacks and whites in the post-war period. In short, whites were inside the social protection, while blacks were largely excluded from social citizenship, except the politically vulnerable and underfunded assistance programs. This, I suggest, is one of the consistent findings of American political development: that the New Deal and post-war expansion of the middle class constructed an insider-outsider situation, one that entrenched interests such as white unions that became bitter opponents of civil rights legislation once it concerned matters relevant to the urban North.

So while I like the thought of an active use of federal power, including contracts, to expand and secure the middle class, it needs to be done in such a way that would not create even more inequality between those within the sphere of federal contracts and those outside.