File Under Told You So

A recent story in the Indianapolis Business Journal confirms what rational observers have been saying for quite a long time: keeping wages low is bad for business, and hurts the economy.

When significant numbers of workers are struggling just to make ends meet, they don’t have discretionary funds to spend in the market. That depresses business activity–and is a further drag on job creation. Most people with even an elementary understanding of market behaviors had figured that out.

What many of us probably didn’t realize is that, according to both the IBJ and that well-known bastion of socialism, Standard and Poor, low wages also threaten state budgets.

Indiana has tied its fiscal wagon to a mule. The biggest source of revenue for the state is its sales tax, which at 7 percent is among the highest in the nation. But the slowdown in wage growth for most Hoosiers means they’re not spending much more money than before. And our wealthiest residents tend to save a greater share of their income and spend it on untaxed services.

Standard and Poor report that the widening gap between the wealthiest Americans and everyone else has made it more difficult for the economy to recover from the Great Recession. Their report attributes the sluggish recovery primarily to low wages; that’s because consumer spending fuels about 70 percent of the economy, and weak pay typically slows economic growth.

This isn’t rocket science. People can’t spend what they don’t have. Economic growth–for better or worse (and that’s a different debate)–requires consumer spending.

That’s the reason that evidence fails to support all those rosy promises about economic growth being triggered by Right to Work laws, and that’s the reason that the economy actually improves in places that raise the minimum wage.

When poorer people have more money, they spend it. What a concept.

18 thoughts on “File Under Told You So

  1. A significant amount of these lost revenues have been regained through a very aggressive state lottery program; another tax on the poor and illiterate.

  2. Right to Work = Right to Fire too.
    How can employees plan a future when their boss can fire them for absolutely no reason?
    Right to Work = job insecurity

    Yeah, that’s great for the economy. Not.

  3. Because governments have done such a great job with Central Planning for thousands of years? This is a great sound bite and attention getter, but the consequences associated with government intervention in the markets have damaged/destroyed more societies than wars!

  4. Common sense and logic in the state of Indiana has been long gone; Republican rule has been a total take-over of the lives of residents living on low and middle-income level and we now exist in a caste system. Repairs of infrastructure in our neighborhoods is hit-and-miss, often supermarkets in these areas charge more for sometimes outdated foods. Our so-called leaders do not understand making more money means spending more money because they have lots of money and concentrate only on making more – for themselves. BMV is again accused of overcharging residents to the tune of $26 million, Pence is angry – but angry about what? The abuse of overcharging residents or angry that the state was caught at this AGAIN? When I order an item from Amazon I must pay Indiana 7% sales tax although Amazon and where the item comes from is not in Indiana. Has the GOP found something in their Bibles to cover these abuses of power and taxation? The crux of the blame must be laid at the feet of the voters who continue electing these people to offices of power to abuse them; then they complain about the abuse. The simple matter of not raising minimum wage is a prime example but lost in the shuffle is the fact that many Indiana residents living on Social Security have an income even lower than the current minimum wage. We get no breaks on what we pay for anything needed to subsist on our income; the basics like food, utilities, all taxes but income, gas for our vehicles IF we have one, clothing, home and vehicle repairs, etc. November is fast approaching; will we use this election day wisely or will we again be subjected to the buyout of our representation and our future?

  5. Republicans seem to put everything in a binary equation, in which the only options are (1) taxes, or (2) no taxes, or (1) lower wages, or (2) higher wages. Everything else, in their hypotheticals, remains the same. In such a world, tax policy can make a huge difference. But that’s not the real world, because in the real world, higher wages may cost the employer more, but it also gives her employees, as well as all the employees in surrounding businesses, more money to spend at her establishment. In the fantasy world, higher taxes equal lower profits. In the real world, higher taxes pay for the infrastructure the employer relies upon to get her goods to market (roads, rail, air), to make her contracts enforceable (courts), to educate her employees (schools and state universities), and more. But we’re never presented with that, because Republicans live in a binary sound-bite world. It’s easier to fit “lower taxes = higher profit” on a bumper sticker than to explain the realities of a complex economy.

    In short, everybody should be required to play SimCity before they’re allowed to discuss fiscal policy.

  6. “the consequences associated with government intervention in the markets have damaged/destroyed more societies than wars!”

    Classical cultural cognition. (culturalcognition.net) A statement made without the pretense of evidence, repeated here because it’s what a group of us would like to be true. And inclusion in that group is deemed to be more personally rewarding than the truth.

    The truth is that competition and regulation favor the consumer, not the business. That’s why capitalism cannot exist without them. That’s why capitalists hate them. They’re what stand between the capitalist and easy wealth.

    Private business ownership of the means inspires the owners to wish for huge guaranteed returns on their investment. Workers would like all of the wealth that their labor produces. Successful businesses balance the two. When owners find a way to take unearned advantage, the workers, through their superior number of votes, impose competition and regulation.

    That is until SCOTUS judges that money is also free speech, and should have an equal say in protecting itself from competition and regulation. The end of capitalism.

  7. It’ll be interesting to see how Washington State’s experiment with raising the minimum wage to $15/hour turns out.

    I like the idea that dramatically raising the wage will attract young people and that the innovative companies will *ultimately* follow THEM, not the other way around. I’m no economist, but it doesn’t surprise me that “hip” companies don’t want to start up in places that are stigmatized with an image problem, poverty, and are just behind the times.

    Sadly, I sort have to put Indianapolis in this category. I think no matter how affordable Republicans OR Democrats make it for companies to do business in this state, many companies will just never relocate here. It seems to me like companies who want employees who think “outside the box” just don’t come to Indianapolis, which for all the real quality of life here and the city’s many selling points, is still a very “inside the box” city…. (Don’t want to romanticize Seattle, though. A terrible city in many ways. Especially if you’re not white or Asian.)

    Speaking of the Northwest, the flip side to some of the progressive economics there is that in cities with great PR like Portland — where even waiters make $8/hr + tips (a decent living for the restaurant biz) — customers tip less and employers just send you home earlier. Part of me wants to believe that that makes innovative restaurants a little shakier (read Anthony Bourdain on the effect of Hurricane Sandy on restaurants in Manhattan if you don’t think restaurants are shaky…. most of them are about 2 days from going out of business.) On the other hand, the last time I checked, the urban Northwest had no trouble attracting innovative entrepreneurs in the foodie business.

    Unfortunately, Democrats undermined a lot of their rhetoric for raising the minimum wage when they supported NAFTA twenty years ago. I never really have figured that out. Seems like Ross Perot was right pretty much 100% of the time.

    Slap a $15 tax on tobacco, alcohol, and face tattoos — there’s a way to improve life for impoverished Hoosiers. Seems like no matter how bad poverty gets, there’s always money for another fifth of whiskey on the fridge top.

  8. Maybe it’s time that both political parties admit that they have no understanding of the economy and that the effect of their economic policies are a mystery to them and everyone else and completely unpredictable. That’s not to say they are not quick to take credit when something positive happens or quicker to blame (in the case of the republicans) President Obama when something negative happens. Net zero.

  9. When I left the restaurant/waitress life in 1985, I made $2.01 an hour plus tips. I had to claim 8% of my sales on tips whether I made 8% or not. In 2014, waitress make 12 cents more an hour – $2.13. I had medical insurance and most of my checks were 0 or minus amounts. Rent for a studio was $240 a month.

  10. Clearly, DALEB, the economy is more influenced by innovation than politics. So, talk like jobs, jobs, jobs is more about campaigning than results. However, results seem to side more with Democrat administrations than Republican. I personally think that when Republicans finally ditch the right shoulder and head back to the middle of the road, results will be more even between the two parties.

    Steady government supports good economics, not creates it. When our confidence in good government returns, the stage will be set for solid growth for all, not just redistribution up.

    http://mobile.nytimes.com/2014/09/17/upshot/you-cant-feed-a-family-with-gdp.html?smid=fb-nytimes&smtyp=cur&bicmp=AD&bicmlukp=WT.mc_id&bicmst=1409232722000&bicmet=1419773522000&_r=0&referrer=

  11. One of the interesting results (or side-effects) of raising the wage in Oregon has been the professionalization of jobs in the restaurant biz out there. It’s way harder to get hired as a waiter or bartender somewhere like Portland right now, and not just because a lot of people have moved out there. Brewpubs and eateries are deluged in applications, since in a solid restaurant or bar you’re basically making $30/hr in a lot of cases, with an $8.95/hr wage plus tips.

    In Indiana and Kentucky, I’m not trying to be harsh, but basically you’ve got a lot of crackheads and addicts getting food service jobs because it’s quick money and usually really easy to get hired. (At $2.14/hr, with customers paying most of your staff’s wages, why not take the risk and hire some pretty unskilled labor?) I think in a lot of businesses around here, you see the results: a super-high turnover rate, generally pretty low-quality and unhappy employees, constantly having to train new ones, which translates to some bad service and more perilous businesses…. I just mention Indiana and Kentucky because I did my time in the restaurant biz here and saw it up-close.

    Most restaurants above the level of Denny’s are constantly on the edge, so I totally see where a lot of managers are coming from when they defend the $2.14/hr wage. But guaranteeing your employees more money can lead to the same kind of company loyalty that makes other companies work better.

    When I waited tables in downtown Louisville, it was always great to see the Tea Party people come in from out in the country. Every time there was a hunter’s and bowmen’s convention at the big conference center, you could just count on working for free. Apparently they thought tipping was un-American. That said, even when I worked for $2.14 an hour and tips, I was making way, way above minimum wage on average, and spent fewer hours doing mind-numbing work to make it. So I don’t totally bash the availability of low-wage but generally easy-to-get restaurant jobs. If the wage gets jacked up, I’d support it, but there’s all kinds of trade-offs to consider. The dynamics of the food service industry are just strange.

  12. Oh for heaven’s sake, waiting tables is one of the hardest and most thankless positions you can ever work. I’ve worked in factories, offices and professional services and I never worked as hard physically as I did waiting tables and in factories. $2.13 + tips is not a livable wage for people that have college loans or children to feed, clothe and house. Defending low pay is ridiculous with those arguments. McDonald’s corporation in Europe and Australia pay far more than minimum wage because, by law, they have to. The only reason we allow it here is because those corps buy the politicians that write the laws and we’re too big of cowards to revolt.

  13. Well, Aging, it’s an experiment I’d like to see. Watch the management cut the staff down to 2 or 3 where they might have had 5 or 6 waiters or more, then you really find out how hard work is. I’ve been there. I’ve waited on 50 people at a time in a busy pub because the manager was too cheap to bring on another waiter at even $2.14 an hour. Business was certainly not lacking in that economy. Made 200 bucks a night, anyway, so I wouldn’t say waiting tables is always thankless.

    They pay waiters a big wage in Europe, and tipping them is an insult, but to be honest, I’ve had crap, surly service every time I’ve been in Europe. I’m in favor of raising the wage, don’t get me wrong. But if anybody is *actually* working for $2.14 an hour, they need to quit ASAP, because that restaurant is not worth working for.

  14. A small business style pub is not a major corporation which is the example I used. They are exempt from minimum wage laws aren’t they? They are exempt from the ACA so why defend your view with apples vs oranges?

  15. @Aging: I can’t stand McDonalds (for many reasons) and would love to see McDonald’s raise their wage. But last time I checked, it was very popular with poor people, who spend a lot of their low wages there.

    I probably I agree with you on a lot of corporate issues. But I also wish we’d see a bigger push for consumer responsibility, which I hear very few people talking about. I think that would ultimately be more effective than ramming regulations down company’s throats.

    But, pipe dreams.

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