DRI-257 for week of 9-14-14: McClatchy Series is a ‘Contract to Cheat’ Readers of the Truth

An Access Advertising EconBrief:

McClatchy Series is a ‘Contract to Cheat’ Readers of the Truth

A recurring theme in this space is the corrupt deterioration of journalism. This process began long before the rise of the Internet and ushered in the industry-wide decline in circulation that has now reached crisis stage. The decay is most evident in investigative journalism, which has abandoned factual research methods in favor of left-wing political advocacy.

The latest proof is supplied by the McClatchy chain’s three-part series entitled “Contract to Cheat,” which appeared in early September. McClatchy reporters spent a year reviewing transactions from construction projects commissioned by the federal government beginning in 2009 as part of the so-called “economic stimulus” program. According to the article appearing in the Kansas City Star, some of whose reporters contributed to the research, the stimulus was negated by dishonest behavior of contractors. This behavior consisted primarily of “misclassification” – the listing of workers as independent contractors rather than employees.

The Allegations

Contractors supposedly engaged in misclassification of workers for economic reasons. First, the misclassification allowed the contractors to avoid paying payroll tax on wages paid to workers. Second, it allowed them to pay lower wages by evading minimum-wage standards for wages paid on federally contracted work. Third, it allowed them to avoid paying workers compensation benefits to workers who were mis-classified as independent contractors. Fourth, it allowed them to avoid an increase in their unemployment “experience rating” when the workers were eventually laid off following completion of the work. Fifth, it facilitated the avoidance of income tax on the wages paid.

In the early installments of the series, stress was placed on losses suffered by taxpayers from contractor cheating. Although the article was long on indignant rhetoric and short on specifics, readers could draw the conclusion that those losses were due to the reduced collection of rightful payroll taxes, the lower level of wages on which taxes were levied and the outright avoidance of tax on income that was never reported. In later installments, greater stress was placed on losses suffered by workers in the form of lower wages received than were due according to statute for work performed, loss of future Social Security benefits from unpaid payroll taxes, loss of unemployment and workers’ compensation and the psychological detriment of insecurity.

A banner proclamation of the series was the claim that contractor cheating thwarted and blunted the effects of federal-government stimulus spending. Despite the headline status of this claim, it was merely asserted and never supported by either logic or evidence. The only economist quoted in the series, former Chairman of the Council of Economic Advisors’ Jared Bernstein, commented (briefly) only on the issue of misclassification and was silent on its interaction with the stimulus program.

In keeping with the contemporary modus operandi of investigative journalism, the series employed interviews, anecdotes and quotations from non-authoritative sources to achieve maximum emotive effect. Despite the reference to economic stimulus, economic theory and logic were nowhere employed or cited.

Needless to say, the lack of economics means that readers of the series were cheated of the truth. In effect, McClatchy operated under an implicit contract with the political Left. The outlines of that contract are clear to anybody with an elementary understanding of economic theory and logic.

John Keynes’ Body Lies A-Spinnin’ In His Grave

The first article in the series quotes President Obama’s grave declaration that the federal government was “the only entity with the resources to act” in the face of economic depression engulfing us in early 2009. This astonishing assertion, somehow swallowed at face value by a bewildered nation, is patently false. The federal government owns no resources other than the assets it commands. These consist mostly of large land holdings, mostly in the western U.S. It did not sell these lands to foreigners in order to finance the stimulus. So the President’s rationale for action was a lie.

The true rationale was the one cited by his economic advisors, who have consistently followed a Keynesian philosophy. John Maynard Keynes legitimized the practice of deficit spending by national governments as a corrective to recession and depression. He rationalized this by positing a chronic lack of effective demand, or spending, as the source of recession and unemployment. Government must increase the volume of total spending on output by increasing its own spending and inducing the private sector to spend more. It increases its own spending by spending more than it withdraws in tax receipts. It induces businesses to spend more by supplying more money (“liquidity”), lowering interest rates and inducing more investment spending. It induces consumers to spend more by reducing taxes, thus increasing their disposable incomes, whence their consumption spending derives. In addition, consumer spending will increase in response to government and investment spending increases due to the so-called “multiplier” effect of the resulting increases in income.

Obama administration economists – and their acolytes, such as Paul Krugman – have mouthed this party line with a straight face, despite the fact that it has been discredited for decades. Books have been written outlining its flaws. We might sum them up by saying that government must acquire the “resources” it commands, and this acquisition (more than) negates any stimulative effect that the spending itself generates. But the worship of spending itself remains sacred within the fraternity of Keynesian economists – which might better be termed a “coven.”

And that is why the McClatchy article is an eyebrow raiser. In so many words, the authors nonchalantly accuse cheating contractors of thwarting the stimulus. It is one thing to accuse them of breaking the law. That may or may not be true, but it is at least consistent with the allegations they make. But the McClatchy authors’ conclusion about the stimulus makes absolutely no sense even if we assume that their every allegation against contractors is the gospel truth.

First of all, consider the authors’ insistence that taxpayers were “cheated” by contractors. Even if we assume this to be true, that can’t have reduced the impact of the stimulus. Keynes himself advocated deficit spending; e.g., increasing government expenditures relative to tax receipts. One way to achieve that is by increasing government spending; another way is by reducing tax receipts. Every elementary macroeconomics textbook published from the 1940s to the 1980s acknowledged this. Contractor cheating, to the extent that it did occur, increased the impact of the stimulus. This applies equally to payroll-tax evasion by employers and income-tax evasion by workers. Indeed, we have been hearing for six years how important it supposedly is to get more income in the hands of those low-income workers who are ostensibly more avid to spend. Well, the series details how the cheating process did just that, by allowing them to evade taxes. That may have been illegal, but there is no doubt whatsoever that it was stimulative according to the dictates of Keynesian economics.

There is no contradiction here in saying simultaneously that behavior is illegal and economically desirable. The series “accuses” contractors of committing these illegal acts in order to lower their bids and beat out competitors for the government contracts. Again, this may be illegal, but it is exactly how the competitive market process works when prices are allowed to fluctuate in accordance with supply and demand and not artificially fixed by government. For years, economists have been complaining that artificially high wages mandated by government laws such as the Davis-Bacon Act were harming workers and consumers by restricting employment, incomes and output. Here is concrete proof – contractors and workers were willing and able to complete government contracts for lower wages than mandated by government. This means that there was money left over to spend on other bridges, dams and “shovel-ready” projects that would stimulate the economy. The so-called harm of the lower wages paid to the “cheating” workers was really a benefit in real economic terms because it allowed more goods and services to be produced using the same total stimulus money. That is exactly how free markets react to economic depression; lower wages stimulate more employment, production and real income. The authors unwittingly hint at this solution when they quote a worker defending his decision to work at a sub-minimum wage: “I was just happy to be working at all.” If producing more stuff with the same amount of money is supposed to be economically harmful, then we are living in Alice’s Wonderland, not reality. Even Keynesians know that more goods are preferable to fewer.

We know realize that the McClatchy series is an affront to general economic theory, not just the left-wing Keynesian theory. Every government mandate cited by the McClatchy authors – payroll taxes, income-tax withholding and the rest – contributes to the “wedge” driven between what the employer pays and what the employee receives. Traditionally, the left wing maintains that this tax burden is worth every penny because the services it finances are so valuable to workers. Paradoxically, the Left also maintains that the burden is trivial to employers and doesn’t discourage much work effort, despite the huge value it creates.

But now the McClatchy authors – apparently without even realizing it – provide empirical evidence that completely refutes the longstanding left-wing position on taxation and work effort. Employers and workers are so anxious to evade this tax burden that they actually break the law. This fully vindicates the longtime supply-side view that lower taxes will call forth more production and work effort. And then the McClatchy authors blithely assert that this is bad for the economy because…because…well, they don’t give a reason other than because it is against the law. Of course it’s against the law; the government has made economically beneficial competition unlawful.

When the Left violates the precepts of Keynes and free-market economics, you know it’s gone off the deep end.

And That’s Not All, Folks

Does this world-class stupidity exhaust the stock of errors committed in the McClatchy series? No. Nobody ever went broke underestimating the economic literacy of metropolitan newspaper staff. The second article in the series is occupied primarily with excoriating contractors, regulators, and politicians for failure to anticipate or correct the misclassification of workers.

Why doesn’t the IRS cross-check data to discover the tax evasion? Workers are assigned fake Social Security numbers. Why can’t workers be interviewed to uncover the falsehoods? They are given phone names and addresses. Everybody agrees that misclassification has been commonplace for many years. And everywhere the investigators went they encountered nonchalance, lethargy and lassitude rather than rage, disbelief and energetic action. Outrageous! Whoever heard of such a thing? Why, anybody would think that we are really governed by a massive, inefficient, insensitive bureaucracy. In fact, the authors quote one observer’s assessment that “you’ve got all these agencies, and this is their fiefdom. They don’t care what the other [agencies’] regulations are.”

Confronted with this massive regulatory ineptitude, what would an alert, inquisitive reporter say? The first thing that would occur to him or her would be this: If the stimulus program really depended for its effectiveness on the efficient operation of this apparatus, then the stimulus program was manifestly unwise and doomed to failure from the outset. (We are not even requiring our alert reporter to be economically knowledgeable, just minimally intelligent.)

The authors go to considerable trouble to document the ambiguity of the “independent contractor” definition, stressing that there is “no one definition” of the distinction between employee and contractor. But assuming this is true, why is it surprising that the law is so difficult to enforce? If so much supposedly rides on accurately classifying workers and the authors themselves find it difficult to explain how to do it, why are contractors villains for failing to accomplish it? Is it really contractors who are cheating us here? Or is it the government, by setting up this arbitrary distinction for its own convenience and then angrily making criminals out of ordinary people for failing to do what it is unable or unwilling to do?

The Tipoff 

The jaundiced view of McClatchy and its motives derives from decades-long experience with newspapers and reporters. It can be verified by consulting the ostensible triumphs of investigative journalism over the last 25 years, which are notable for their lack of factual accuracy and left-wing advocacy. It is on prominent display in the McClatchy series. The tipoff to the authors’ bias is their attitude toward the workers employed by the “cheating contractors.”

The contractors themselves are the villains, the cheaters of the titular “Contract to Cheat.” They are greedy, insensitive, opportunistic scofflaws. Every principal in the contracting process evinced the same attitude when interviewed by the authors. “What? Who? Me? I didn’t know…I didn’t realize…Nobody told me…It wasn’t my job…wasn’t my place.” But these protestations are treated with disdain when made by contractors, who the authors tacitly assume to be lying snakes.

What about the workers? Well, the closest thing to an assessment of blame levied on workers is the authors’ bland acknowledgment that workers “responsible for the reporting of their income to the IRS.”

No spit, Spurlock. According to law, and derelictions committed by employers don’t relieve workers of their legal responsibility. It is just as plausible to posit that employers acted in response to pressure from workers as it is to assume that employers cooked up a scheme to defraud the government.

But the authors treat workers as both dumb and innocent. That is, they tacitly assume that. If (say) a Republican legislator were to characterize America’s workers as too dumb to be responsible for their actions or too dumb to understand a simple employment relationship, he would be castigated and forced to resign. But that is the implicit position of the McClatchy authors. Illegality was rampant, nobody did their due diligence, the system failed completely and workers – well, workers were innocent bystanders who just stumbled into things by accident and did what they were told and never meant to hurt anybody or break any laws and – perdoname, senor; no hablo Ingles. (Yes, immigrants appear in the series as the obligatory exploited, downtrodden mass – acted upon, but not acting in their own behalf.)

McClatchy is an organ of the left wing. Union workers and low-income workers are a leading constituent class of the Democrat Party. They must be absolved of blame. That accounts for the wildly unbalanced portrait of the principal parties in “Contract to Cheat.” Of course, this stance is totally at variance with responsible journalism. And that is further proof that responsible journalism is virtually extinct in America today.

The Truth

The McClatchy series is indeed notable. It has uncovered useful and pertinent information. But the authors of the series have spun the information into a bizarre, distorted pattern that reflects their political (dis)orientation. Their economic illiteracy has produced a laughably inaccurate interpretation of their information, wrong no matter whose economic theory of stimulus one adopts. Their blindness to economic logic allows them to confuse illegality with inefficiency. Their left-wing bias demands that they ignore the obvious implications of the bureaucratic ineptitude and inefficiency they expose. And their pro-labor stance requires that they wash workers clean of all sin. In fact, rigid big government has strapped everybody into a regulatory straitjacket that offers a Hobson’s choice: obey the law and everybody loses or violate it and everybody gains. In that environment, everybody is a lawbreaker but the government is the morally guilty party.

There was indeed a “Contract to Cheat.” But the McClatchy authors were the contractors, bound by their political affiliation to their advocacy position, and their readers were the ones cheated of the truth.