There are some interesting things to think about and perspectives to ponder.

• If I were a policymaker in a competing state I would probably want to take a close look at my home state and how it compares to to Texas.  I would be interested in finding ways to attract more employers and job hunters.

 

• Which came first? The chicken or the egg?  Did these employers setup shop here because of a good stock of skilled talent or whas the initial move a cost-benefit one where taxes and state provided incentives were offered?

 

• Forbes did not publish (or at least I did not see it) their data tables but I would be interested to see how each city in their list ranked in terms of transportation options.

• Should potential employers have access to your financial history?
• What relevance does one’s credit score have on employment candidacy?
• What protections have been put in place to prevent abuse?
• Who (what federal agency) is representing the interests of the candidate?
• Are employers opening themselves up to potential legal problems by making hiring decisions based on personal and confidential financial information?
• What kinds of externalities can we expect from this activity?

Lets start with the most basic question – why should potential employers have access to this information?  The most compelling argument I have seen is that potential employers can use a credit report to gauge a candidate’s decision-making abilities.  It goes like so: the likelihood that a candidate who has a history of delinquencies, collections, foreclosure or perhaps a bankruptcy will make similarly poor decisions in their professional life is higher than a candidate with a clean credit history with few or no blips. In other words, the argument says, “hey, this person has taken good care of his/her financial reputation and demonstrated responsibility over the long term”.

While I may appreciate and even agree with that claim, I cannot reconcile that argument against a more important claim – that personal financial and medical information is too sensitive to be used for anything other than what they were originally intended for – doctors need your medical record to provide health care and banks need it to decide whether they should lend you money for that car or business idea. Why did I throw in medical information? Because I consider both to be the last bastions of personal privacy afforded us by the government from prying employers, insurance companies, marketing agencies and the like.  Although HIPAA has made progress with Protected Health Information it seems that our credit history is slowly becoming a one-stop shop for anyone willing to write Experian, TransUnion or Equifax a check.

Another area of concern is what happens to this information once it is obtained by potential employers?  Who in the organization has access to this information?  In today’s world of Twitter and Facebook how long will it be before we hear about someone tweeting about a candidate’s bankruptcy?  What happens after a candidate has been hired?  Will the employer have an obligation (read unintended consequence) to disclose any of this information to other parties?

Perhaps my strongest concern for using credit reports as a way to screen job candidates is the long-term and compounding (yet to be determined) socioeconomic effect.  Hans Rossling’s enlightening presentation at the 2006 TED Conference comes to mind.  Watch it below.

What we should be cognizant of is that this is a slippery slope we have started.  I know that my car insurance provider accesses and (whether they acknowledge it or not) utilizes my credit score to determine my premiums.  Although I have yet to be asked by a potential employer for my credit report it may only be a matter of time.  What will be next?  Will credit scores be required for admission to colleges and universities? Hey, the admissions departments could argue that it would help them keep their graduation rates high.

I can imagine a situation where pervasive use of credit reports for employee screening could perpetuate a gradual segregation of those who have had the success or luck in maintaining their credit in good standing from those who have not.  I can imagine watching Hans Rossling’s presentation 10 years from now as he shows the ‘completely new world’ we live in, where those with good credit have access to every definition of economic opportunity one could conceive while those with poor credit are left to struggle for whatever remains as they descend into a self reinforcing spiral.

Every time I decide to blog something about this issue I can’t get over how anyone could take issue with unrestricted trade policies. It takes acute short sightedness and a very narrow interest to do so.

What do protectionists want? Well, they want to protect a small group’s interests at the expense of everyone else. For example, GM and Ford workers argue that they are entitled to a job, regardless of whether or not they can work as competitively and cheaply as workers at Toyota or Nissan. Not only do they feel that Ford and GM owe them a job, but they should be paid handsomely for it as well. In the case of GM, if the company has trouble finding people to buy these cars at inflated prices, these prima donna workers are entitled to participate in the Jobs Bank Program, whereby they get to receive full pay and benefits regardless of whether they have work or not. Who do you think is paying the bill?

In a nutshell, protectionists feel that everyone should pay more for a Tahoe or Explorer simply because some workers want to shield themselves from the competitive pressures of the labor market. Protectionists like to use fancy terms like ‘exporting American jobs’ or make one-sided statements like we will hear a ‘giant sucking sound’ as American jobs are moved out of the country, but the truth is that we benefit in many ways.

What gets me is that they are ironically protecting themselves from any form of self improvement. Our economy, and anyone else’s for that matter, depends on increasing productivity gains to raise the standard of living while at the same time staving off inflationary pressures. These productivity gains essentially allow firms to make a product or provide a service at the lowest cost per worker hour.

What protectionists often fail to mention is that many overseas competitors actually create jobs in the U.S. that were supposedly exported. Using the auto industry again as an example, Toyota and Nissan have invested billions in the South to build new plants. What Toyota and Nissan and others like Mercedes Benz are NOT doing is creating these jobs in places up north like Detroit. Gary N. Chaison of Clark University in Worcester, Mass. is quoted in the Times article saying that ‘These international companies want a fresh start — not in a town like Detroit, with a long history in the auto industry, but in an empty field where people appreciate them.”

Toyota must be doing something right because it is now the number 2 automaker and is not far behind GM. Toyota is making a profit and GM is hemorrhaging cash. Toyota makes cars that people want at attractive prices and GM is doling out discounts as incentives to attract buyers. What the two automakers do have in common is that both are unapologetic for their performance. However, if I were Rick Wagoner I would reconsider this.

Olson begins his discussion of groups by explaining their purpose – to further the common interest of a group of individuals. As Olson explains, the “provision of group goals is the fundamental function of organizations”. Rational individuals join associations or groups to achieve a goal or benefit which they cannot achieve themselves alone. Individuals are capable of furthering their own interests more effectively alone and therefore will not, as rational decision makers, organize to provide an individual good or benefit.
Olson continues by defining the properties characteristic of large and small groups relative to their ability to achieve their objectives. He argues that when groups form to achieve a common goal, they are inherently seeking to provide a collective good for that group. Therefore, any member of a group, that provides a collective good, will receive that good regardless of their individual contribution. Olson argues that this property of non-excludability compels the rational individual to restrict his own contribution to maximize his individual welfare.

This dynamic is dependent upon the size of the group, however. Small groups tend to more effective in providing collective goods, although the good will be provided at a suboptimal level. Olson explains that this tendency for small groups to provide collective goods at suboptimal levels is dependent on the cost of providing the good and the amount of benefit derived by a single individual in that group. If an individual in a group receives a benefit equal to or greater than the cost of providing that good, then “there is some presumption that the collective good will be provided”. This can be illustrated with use of a lighthouse. Once a lighthouse has been constructed, it is impossible to exclude others from using it. It becomes a collective good which can be used by any other ships. Although the individual firm may face difficulty in compelling each firm to pay a proportionate share of the burden of providing that good, it may still be beneficial to that firm to provide the good by itself. If the cost of constructing and operating the lighthouse can generate enough savings to pay for the costs associated with not having it, then the firm will most likely provide the good. However, since that firm is the only firm bearing the costs of providing the good, it will only provide the good to the point when the cost of providing it is less than or equal to the benefit received. This will lead to an undersupply of the good or a suboptimal level of provision.

Large groups face a more serious problem of providing a collective good. In the case of the large group, provision of the collective good will not take place without some level of coercion or inducement. As Olson argues, the rational and self-interested individual will not contribute to a common group goal. Since group objectives are public goods, just as in small groups, the individual member will receive the collective good regardless of the level of contribution made on his part. Some kind of coercion or inducement must take place in order for a large group to provide a collective good; because the individual contribution of a group member will be insignificant to the overall provision of any collective benefit. Olson argues that the rational individual understands this and that since his contribution will have no perceptible effect on the outcome of the provision of any collective good, he will not make any contribution. This is referred to as the problem of the ‘free-rider’ in economics.

What Olson has established here is that groups, large or small, exist only to provide a common good and that, generally, the rational, self-interested individual will not participate in the furtherance of obtaining a collective good unless he either benefits enough to provide the good himself or he is forced to bear some of the cost by means of inducement or coercion. He mentions an objection made against his theory that claims that “attitudes in organizations are not at all like those in markets”. Olson provides a compelling test of his argument by considering what happens if an “emotional or ideological element” is involved and asking if it makes “the argument offered here practically irrelevant”. He concludes that although “patriotism is probably the strongest non-economic motive for organizational allegiance in modern times…no major state in modern history has been able to support itself through voluntary dues or contributions.” The end result is that in the provision of a collective good, there will be a ‘tendency’ for the “exploitation of the great by the small”. He provides evidence of the need for compulsion with the case of labor unions; where labor organizations only began to succeed after they were able to negotiate with the firms directly and establish ‘closed-shop’ policies. The only way an individual was able to become employed in certain firms was to join the related labor union and act to support its common interest.

Olson compares his theory with orthodox theories of state and class as well as various theories of pressure groups. In considering Marxian theory, he argues that Marx was inconsistent in his arguments by expecting a ‘class’ to organize and act for the interest of the group as a whole. Precisely because a group is composed of ‘rational utilitarian’ individuals, they will not organize to act. I disagree with Olson’s argument that Marx did not overestimate the strength of class action through rational behavior. Where Olson attributes an inconsistency in thought between rational behavior and class action I see an idealistic, yet unrealistic, argument proposed by Marx. Marx may have been arguing that the rational individual is aware that, as Olson explains, individuals will not work towards a collective good if they know that they can benefit regardless of their contribution, and that very awareness may compel the rational individual to make a contribution.

In his consideration of pressure groups, Olson argues that again there is an inadequacy in thought about the importance of the individual in group theory. Pluralist writers have “assumed’ away the individual and have explained their theories solely in terms of the group. Writers such as Bentley, Truman and Commons “take for granted that such groups will act to defend or advance their group interests, and take it for granted that the individuals in these groups must also be concerned about their individual economic interests.” Olson provides an insightful comparison to the thoughts of the pluralist writers with that of anarchist theory. By expecting groups to join out of “suffering”, “dislocation” or “disturbance” spontaneously, Olson argues that the pluralist theories resemble characteristics of anarchist thought.

Olson’s last chapter on “By-product” and “Special Interest” theories offers an interesting new perspective on modern pressure groups with large lobbying capabilities. He argues that the “common characteristic which distinguishes all of the large economic groups with significant lobbying organizations is that these groups are also organized for some other purpose.” He helps to strengthen his argument by placing these large organizations in the context of his theory. The example of the American Medical Association and the various state bar associations offer compelling evidence to support his claims. The example of the bar associations is especially interesting. The point of these examples is to illustrate that these organization have significant lobbying power, insofar that their strength is not derived from it but from their ability to ‘mobilize’ their members through compulsion. As Olson explains, this ability to ‘mobilize’ a ‘latent’ group of members is the by-product of another function the organization is performing.

In Olson’s discussion of large groups, he asserts that there are three factors that preclude large groups from achieving the provision of a collective good. His arguments here can be weakened by certain circumstances. In the first factor he mentions that the larger the group is, the smaller the fraction of the total group benefit will be. If I use the lighthouse example again, it can be argued that the ‘total group benefit’ is indivisible. No one individual’s use of the lighthouse will detract or preclude any other individual from using it concurrently. Therefore, whether the group is composed of 10 or 10,000 individuals, the total group benefit will be the same as well as the fraction allotted each member of the group. Perhaps an even stronger argument weakening Olson’s argument is national defense. National defense is a public good by definition, in that no one individual can be excluded from its provision. This group is composed the largest possible group of individuals within a national context. Olson’s argument is unable to explain this situation adequately. His second argument that, given his first argument, it is less likely that any individual will want to bear the burden of paying for the good because his share of the benefit will not be sufficient helps to strengthen his theory of groups, however. Taxation of citizens is the only method in which the government can support public goods like that of a national defense program. Olson’s third factor, that as the group gets larger, the greater the cost of organization, and thus the less likely it will provide any public good at all can also be weakened. Using the lighthouse example again, even if there are 1,000 ships benefiting from the use of the lighthouse but there is insufficient collective action to bear the cost of provision, it is still likely that the lighthouse will be provided if the cost of providing it is greater than or equal to the benefit any one individual or firm receives from its use. This is because of the indivisibility of the total group benefit. I think that the weaknesses I discuss here are more of an exception to Olson’s argument and that his theory holds true in most situations.