Markets and mayhem

Sometimes it seems like half the time you talk public policy, you talk about markets. It's frustrating, but I guess it's a hazard of the field. A hazard because I don't think public policy is all about markets – but there's no denying the connection. Public policy relies on markets, it influences markets, and it sometimes needs to respond to markets.

We often talk about market failures and how government can respond. We talk about using markets to deliver services, or using the market imperative to accomplish policy goals. We do a lot about markets, so much sometimes that I just want to disappear into my happy, friendly, comfortable legislative and regulatory world and never consciously think about markets.

The relationship between markets and public policy is sometimes tense. When we think about some markets like housing, there are clear, bold moves that public policy could take – if we had financial ability – that could address market failures in bold, clear ways. If a market has failed, sometimes it's the role of government to step in, and find ways to make it work – or to temper or mitigate or neutralize the market so that the harms stop.

These kinds of moves would also be tremendously disruptive to markets – in housing, so much generational wealth and economic indicators are tied into the appreciating nature of speculative assets that fundamental shifts in these markets could be powerfully disruptive and destructive. That doesn't mean that we shouldn't think about ways to disrupt these markets, but it highlights that public policy, an incrementalist and cautious trade, is often afraid of the term disruption in the way that private entrepreneurs – who have held up 'disrupting' markets as a mark of success and as a virtue – are not.

But then sometimes we have weeks where decades happen, and sometimes we see absolutely fascinating developments that show us how public policy can indeed be used to disrupt markets. And it's sometimes worth asking why, and how.

See, for example, Figure 1:

One observation, and one question: first, note how Musk holds out the idea that there must be "disruption" but that whatever that disruption is, it is ultimately for the best. But it's worth asking – what market is Musk talking about disrupting?

Here, for once, it's clear. Musk wants the labour and employment market disrupted. He wants people to stop working in the public sector and to go work in the private, "commercial" sector. And he's willing to engage in disruption to do so.

Okay, but why?

It's worth leaning into Musk's language and descriptions here for a bit. He makes reference to low and negative-productivity roles in the public sector, referencing his other public comments where he suggests that everyone in the public service is just a drain on economic productivity. This isn't new, this stereotype is everywhere. It's a suggestion that people who work in the public sector are lazy, and are happy to stay employed in positions where they don't have to be productive.

Like any rumour or stereotype, parts of it make sense. Bureaucracy can be slow, and people sometimes work in it for a long time. But it's also not exactly true – while some jobs may not fit Musk's definition of "productive," a lot of public sector work is essential to the functioning of the private sector, creating the systems that enforce contracts, or promote standards, or keep the lights on, etc. Heck, tons of Musk's absurdly large wealth comes via the public sector through his government contracts. Public sector workers keep those contracts working.

But what Musk skips over is what he's disrupting – labour and employment markets. And how he's disrupting it – laying off tens to hundreds of thousands of public sector workers, eliminating entire government agencies (USAID, Consumer Financial Protection Bureau) and departments (next on the list is apparently the US Department of Education).

By laying off tens and hundreds of thousands of workers, and cutting subsidies and grant programs and program funding, Musk is directly engaging in the labour and employment market, by creating a large supply of workers – freshly on the unemployment rolls – and concurrently creating a large demand for work.

Markets work well as stabilizing forces. When demand and supply are mismatched, markets work to find new equilibria so that exchange can function well. In a labour market, we can work to identify which parties are players in the game, and what they're seeking. This is pretty self-explanatory: workers are seeking increased wages in exchange for their labour-time, and employers are seeking workers at the lowest wages that they are able to pay.

In a functioning market, exchange pushes parties to consider their demands and consider their positions as they make their demands in exchange. When there are few workers seeking high wages, and many employers seeking workers, employers have to move on their demands for low wages because they need the workers. Conversely, when there are more workers seeking work, those workers need to consider their demands for high wages, moderating them somewhat.

Wrapped up in Musk's stereotypical portrayal of lazy public sector workers is also a criticism of their wages. He's acted surprised recently, noting that many workers make living wages. He wonders why, because he thinks they're not productive. And then he lays them off and fires them.

Musk knows that markets also have areas of resistance or support in exchange. That is, where there are large benchmarks of employers paying good wages, or employees making good wages, it can be harder to make the workers budge on their demands for good wages – because they can give up offers of employment that don't pay well and move to better jobs. As such, the public sector offers a wage 'floor' – a lower limit on wages where workers with the right qualifications will refuse to leave the public sector because they are happy with their work and make enough money.

But if you just fire everyone, as Musk is doing, you can eliminate that resistance in the market to new equilibria, meaning that because they no longer have jobs, workers will be forced to take new, lower-paying jobs, because they need to survive.

Musk doesn't want the private sector to have to step up and pay workers more to entice them away from the public sector – that's counter to his modus operandi. Instead, what he wants to do is denigrate the people doing the public sector work to devalue their contributions to society, and then he wants to eliminate the public sector jobs so that people have nowhere else to go.

He's doing this by using public policy as a cudgel or a sledgehammer to not just disrupt but directly attack markets. Through this, he can increase the supply of workers, depressing wage demands, and enabling private sector workers to pay less, given an overabundance of supply.

The truth is that labour and employment markets right now – in an era of inflation, high costs, and challenging economic conditions – are "failing" in the eyes of Musk because they've reached equilibria with higher wages.

So what Musk is disrupting are those equilibria, so that new ones – with lower wages – can be found.

In public policy, we have tools that can disrupt and distort markets. And we often shy away from that, because we don't want to disrupt equilibria unfairly. Musk has no such concern, because he doesn't understand public policy. But he understands how he can beat down wages.