People who have read this blog for any length of time are familiar with some of my preoccupations–civic literacy and civics education, climate change, competent governance, and job creation. (Admittedly, I have a lot of “hot buttons”…)
I have been fairly consistent in my approach to most of these issues over the years, but I’ve changed my tune when it comes to growing the economy and creating jobs. I used to be persuaded by the argument that significant raises in the minimum wage would lead to job losses–it seemed logical that forcing a business to pay more to worker A would leave that business with fewer dollars with which to hire worker B. What I didn’t understand was the unspoken caveat: all things being equal. In the real world, it turns out that all things aren’t equal.
What the real world evidence shows is that paying workers a living wage–and thus providing them with a modicum of disposable income–is what creates jobs. As I now understand, demand is what creates jobs, not the beneficence of the factory owner. The guy who owns the widget factory isn’t going to hire more workers to make widgets if no one has the money to buy them.
A recent article in The Week emphasized the point
For many years, rich oligarchs have posed as the engines of the economy — the entrepreneurs whose beneficence and wise decisions create economic prosperity. In a 2019 article for Fox News, Sally Pipes, president of the right-wing Pacific Research Institute, called for Americans to “celebrate America’s job creators” during Labor Day. “Let’s honor the people responsible for that grandeur — namely, the profit-seeking entrepreneurs and business people who make our economy hum,” she wrote.
This is bunk. The real engine of the economy is the dollars in the pocket of the humble average citizen.
The article goes further, however. Most economists now recognize that putting additional money in the hands of workers stimulates demand, but they tend to think of that demand in the context of a fixed economic capacity–as a mechanism for getting to full employment in existing factories and other enterprises.
In reality, as Skanda Amarnath and Alex Williams argue at Employ America, spending also affects overall capacity. A factory, for instance, is not some immortal thing — at a minimum, it must be continually maintained because of entropy and ordinary wear and tear on equipment. To remain competitive, it must be regularly upgraded with the latest production technologies. But businesses will logically invest in new capacity only if they see a market for the goods and services that capacity would produce. This is especially true with respect to high-tech manufacturing investment, which is very complex and expensive — taking over half a decade to pay off.
Amarnath and Williams argue that slack demand afflicted America’s economy well before the 2008 recession, and that it is only surging again now because of the huge boom in sales of computer products–a boom generated by two things; the pandemic surge in working from home, and government transfers to individuals, also due to the pandemic.
All of the available evidence confirms that giving poorer people more money generates economic growth. When you give rich people more money–through Republican policies like deregulation, union busting and especially the numerous, generous tax cuts so dear to GOP hearts–they disproportionately save it, rather than spending it and boosting the economy.
As the article says, cash in the pockets of the working poor isn’t just good in in a humanitarian sense (giving people money they need to live.) It’s good because spending those dollars is what will keep businesses humming, investment high, and the economy healthy.
The multiplier effect rules.
Well said. Thank You
This is one element of the equation and I would argue it’s just as important to have sensible regulation, access to education, unions, and other mechanisms to ensure the dollars one has to spend are for goods and services that don’t cause harm to others.
One other thing to consider is that the stock market is not the economy and, in fact, no longer seems relevant to economic growth. The supply siders have been outed as masters of deceit.
Really good posting. Econ 101 is all about idealized markets where, when prices/wages rise, less of that quantify is demanded. Most people stop their economic education there (including, on the intellectual level, some economists!). But that is just the beginning of the economic journey. The rest is about probing the idealized assumptions of Econ 101 – i.e., ceteris paribus (are all these “other things” really equal and do they align with Econ 101’s idealized assumptions?). In the actual world, strange things happen. For example, providing child care assistance to the poor actually increases employment among the poor (actual UK experience). Most people don’t just sit at home when they have more resources. Raising the minimum wage has very little effect upon employment of low wage workers (remember these earnings are mostly spent and therefore increase aggregate demand) but they have a huge effect upon the welfare of millions of people. The real world list of “anomalies” is a long.
Supply side “trickle-down” economics have never been a thing except possibly at the far end of the Laffer Curve.
Consumer spending represents 70% of the GDP in the US.
Business investment is 18% of the GDP in the US.
Stands to reason that increasing demand in consumer demand is the best way to stimulate the economy.
Look, it’s always been about demand. Businesses don’t hire employees based on tax breaks – they hire employees because they need them to produce a product or service for which there is a demand.
Again – I think the best and most politically “do-able” solution is to pass an $11 hour minimum wage and an Earned Income Tax Credit that pays with each paycheck to get workers up to $15 an hour or so based on family size. This is far more palatable than a straight $15 an hour minimum wage or a UBI.
Employers need skilled workers. Workers need a job that pay a decent wage. Poor people need an on-ramp into the mainstream economy that helps them to learn job skills and life skills. Let’s figure out how to make work pay.
Kurt,
The supply-siders used their B.S. Friedman theory to justify de-regulation, the destruction of publicly-funded entities like schools and the elimination of labor unions. These corporate wolves simply want ALL the money. They are so narrow minded that they don’t see that consumers need money to consume. Fighting over the minimum wage is a fool’s errand, because history shows that for every increase in the minimum wage, unemployment drops and profits increase. DUH! Why? Because as noted in everything above, low-wage workers spend EVERY dime on food, shelter and personal items. And when they have a little disposable income left over they buy other stuff like clothing. All of that buying creates the jobs.
Imperically, hiring is a function of demand for products and services. Everything else Republicans use to contest minimum wage increases is a flat-out lie.
Speaking of Republicans… The new Georgia election “laws” are a major step toward fascism and who better to lead the way in Georgia than Mr. Redneck himself, Bryan Kemp. Well done, Georgians. You elected a Nazi to be your governor. But the polls show that over 70% of Georgians disapprove of every element of the draconian law. Tell me, how does that work in a real democracy?
Keynesian economics, including spending on WWII, brought us out of the Great Depression. Milton Friedman economics defeated the malaise of the 1970s. President Biden and Democrats understand that, in 2021, Keynesian economic theory is back in play.
John Maynard Keynes lives on!
This is so basic and obvious to me. The only reason to believe in trickle-down is if you are at the top of the pyramid, pure self interest. Henry Ford knew it, pay the workers enough to buy Ford products and everyone benefits.
“Trickle-down” has always been a bunch of bull. (I’m having a difficult time resisting suggesting exactly what might be “trickling” down.) Once you have everything, what is there left to buy, so of course, they are going to hoard their money.
In any case, I’ve watched wage suppression and union-busting since the 1980s, and we are all suffering from the effects. For example, I grew up in the ’50s and ’60s in a mixed working-class and white-collar neighborhood. My mother didn’t work outside the home, and the only mothers in my neighborhood who did work were the single moms and those who wanted to work. These days, none of those women would have that choice. No one in that social bracket can afford to live on one paycheck. Nor can they afford childcare, and paid maternity leave is fought for tooth and nail. Business doesn’t want to pay a living wage and they push off the costs of low wages onto the backs of grandmothers, relatives, and the government.
Don’t get me started.
And George H.W. Bush awarded Milton Friedman the Presidential Medal of Freedom.
He stands in the halls of fame with creatures like Rush Limbaugh, Jim Jordan and Devin Nunes, patriots all.
During his press conference yesterday President Biden clearly said what’s been reported here for a long time. The world has become starkly divided between democracy and autocracy which defines our allies and enemies. Unfortunately, we now have a country divided similarly between Democrats favoring democracy and Republicans promising donors autocracy and delivering extreme dysfunctional filibustering and compromised voting processes in the states.
The enemy is no longer across the seas.
I hate to disagree with you, Pete, but our Secretary of State was at NATO where they are all beating the war drums aimed at China and Russia, including an increase in their nuclear arsenal. They also plan on spending trillions to deter Russia and China from taking action against us.
Has anybody seen any evidence of aggression from either of those two countries?
The MIC is worried they won’t be able to spread imperial capitalism on the rest of the world since China will soon be dominating the world’s stage. Instead of looking within for the answers, the USA turns its sights on blaming or finding a bogeyman.
Jack Ma, Chinese owner of Ali Baba in 2017 said it all:
“Ma was asked by CNBC’s Andrew Ross Sorkin about the U.S. economy in relation to China, since President-elect Donald Trump has been talking about imposing new tariffs on Chinese imports.
Ma says blaming China for any economic issues in the U.S. is misguided. If America is looking to blame anyone, Ma said, it should blame itself.
“It’s not that other countries steal jobs from you guys,” Ma said. “It’s your strategy. Distribute the money and things in a proper way.”
He said the U.S. has wasted over $14 trillion in fighting wars over the past 30 years rather than investing in infrastructure at home.
To be sure, Ma is not the only critic of the costly U.S. policies of waging war against terrorism and other enemies outside the homeland. Still, Ma said this was the reason America’s economic growth had weakened, not China’s supposed theft of jobs.
In fact, Ma called outsourcing a “wonderful” and “perfect” strategy.
“The American multinational companies made millions and millions of dollars from globalization,” Ma said. “The past 30 years, IBM, Cisco, Microsoft, they’ve made tens of millions — the profits they’ve made are much more than the four Chinese banks put together. … But where did the money go?”
He said the U.S. is not distributing, or investing, its money properly, and that’s why many people in the country feel wracked with economic anxiety. He said too much money flows to Wall Street and Silicon Valley. Instead, the country should be helping the Midwest, and Americans “not good in schooling,” too.
“You’re supposed to spend money on your own people,” Ma said. “Not everybody can pass Harvard, like me.” In a previous interview, Ma said he had been rejected by Harvard 10 times.
Along those lines, Ma stressed that globalization is a good thing, but it, too, “should be inclusive,” with the spoils not just going to the wealthy few.
“The world needs new leadership, but the new leadership is about working together,” Ma said. “As a business person, I want the world to share the prosperity together.”
Vernon,
I get it.
At the same time I think it a $15 an hour minimum wage is problematic for multiple reasons:
1. It’s a problem politically
2. It’s a problem for business owners – particularly service industries and small businesses such as restaurants, and hospitality, that have already been hit hard
3. It will eliminate jobs
4. It doesn’t account for number of dependents in a household
A significant increase in the minimum wage is doable. Then use the EITC to get low-wage households out of poverty.
I recall seeing a Fox News segment during the primary season in the run up to the 2016 election. They had on an ivy league economist. At one point, they asked him which of the many candidates would be best for the economy. (They were completely comfortable that he would name one of the Republicans, of course.) He did more than surprise them: his answer was Bernie Sanders. “Why?” they wailed, stunned. He noted simply that Bernie would put more money into the hands of the poorer people, and they’d spend it.
“The guy who owns the widget factory isn’t going to hire more workers to make widgets if no one has the money to buy them.”
Exactly.
The awful time between 1932 and the early 1940’s didn’t happen because factory owners were stingy. No one had money in their pockets so factories shuttered.
Even the federal government [after FDR got into office] couldn’t pick up the slack all by itself. The war effort gave the economy the needed shot in the arm: private business rose to the occasion BECAUSE it had the chance to sell its wares — even though it was to a single buyer — the federal government. [Republicans would pay for revenge against Japan while they had refused to help the economy for its own sake — they shackled FDR’s efforts.]
And likewise, the booming 1950’s and 60’s didn’t happen because of the generosity of employers [or the government] but because people had money to spend.
Todd,
I think that Jack Ma’s comments about investing in war instead of infrastructure at home were insightful also.
That said, the answer to your question, “Has anybody seen any evidence of aggression from either of those two countries?” is a resounding “YES”.
Here’s a partial list – and most of this applies to both countries:
cyber attacks
election meddling
theft of IP
conventional and nuclear military buildup
building alliances in strategic areas
Annexing territory
Kurt, let’s talk more about the issues you raise:
1. It’s a problem politically
– Rebuttal: Most people in the country are behind the increase, even Republicans. It’s just the Republican politicians (and Joe Manchin) that aren’t. This is largely because they can’t give up on the neoliberal platform that exalts the rich. Real people don’t believe it. This is, at best, a minor issue now. Even just 10 years ago, this would have been a much bigger issue, but not anymore.
2. It’s a problem for business owners – particularly service industries and small businesses such as restaurants, and hospitality, that have already been hit hard
– Rebuttal: The places that have already bumped the minimum wage have found this to not be the case. A the piece notes, these are exactly the businesses that see a rise in remand due to the clientele having more money. The experience so far has actually been the opposite: the businesses have done better.
3. It will eliminate jobs
– Rebuttal: It’s possible it might, especially in the short term. I contend, though, that some of those losses will be people choosing to leave the job because they no longer need to work multiple jobs just to get by. Maybe some people drop to only one or two jobs, allowing them more free time and higher quality of life. As in the previous point, whenever demand increases, jobs will return. Experience from places that have done this already indicate that this is a minor short-term issue only, and is beneficial when looked at longer-term.
4. It doesn’t account for number of dependents in a household
– Rebuttal: I don’t understand this one. Can you explain further? What solution or situation would address this? Are you looking for changes to child tax credits or similar? Maybe make the recent changes from the stimulus bill permanent?
I think we need experts in economics who understand that we need a sustainable economy. Our consumptive addictions lead us to destroy the earth’s ecosystems that support the life of the human race. Scientists have now discovered that trees are communicating with each other through their root systems.
I recall a time when neighbors shared tools to help each other out. In small farming communities, farmers would help sow or reap a crop of a farmer who was critically ill. They did this for a farmer’s widow as well. Some would say this is socialism. I say these are acts of compassion and love for one’s neighbor.
Our extremely individualistic culture and the attitude of being totally self-reliant contributes to the excessive consumption. If we destroy the earth’s ecosystems, we will destroy the human race.
We need a green economy that provides living wages to people and sustains the earth’s ecosystems.
I took a degree in economics before going to law school and became acquainted with John Maynard Keynes, who is now and has been since my all time favorite economist. Since then we have witnessed new geniuses to the fold, to wit: Piketty, Stiglitz, Krugman et al (I have excluded Friedman), and all of such outstanding economists as well as all of my economics professors agree that it is aggregate demand that makes the economic world go round.
It is not brilliant CEOs, trickle downers, tax cuts or university business schools named after the titans of finance and industry that account for economic growth. It is aggregate demand. Period. So, ipso facto, it follows that anything and everything we can do policywise to foster economic growth is wise, and the most obvious means of enhancing such growth is to put more withal into the hands of consumers who, unlike the rich and corporate moguls, will spend it and thus give a boost to aggregate demand, more employment, and ironically, more profit to those who now wish to put a lid on a minimum wage that hasn’t been raised for twelve years.
I have concluded that business resistance to higher wages is not just about the costs involved but rather about power in the business-labor equation. Thus some corporations pay decent wages but still resist union representation of their workforce. (See Amazon.) Why? Why aren’t workers entitled to collectively bargain over working conditions, time off, health insurance, safety etc., since wages are only one component in the employment contract?
Whatever happened to the Wagner Act? Why should taxpayers make up the difference for workers who cannot survive on the sub-standard wages they are paid by the rich and corporate class, who transform such savings into shareholder dividends and outlandish compensation to CEOs? I’ll stop short on my laundry list here, but the reader will get the idea – that corporate America would rather suppress demand than give up their privileged and politically protected position in allocating costs in a classic example of favoring investment over labor (which was condemned by such as both Marx and Lincoln, with whom I agree).
I agree with Kurt, though I would add that increasing the minimum wage to $15 across the board not only will cost jobs, it will cost hours. Employers giving part-time workers 25 hours a day, will cut back to 20 and so forth.
The fact is there is a huge demand for unskilled workers that has driven up wages far beyond what the minimum wage of $7.25 would be if had been adjusted for inflation, i.e. $8.90. If you get hired to stock the shelves at Kroger part-time, you will be paid $10 an hour with regular increases to $12 an hour. Kroger will also provide health care and other benefits.
While Kroger might bump up pay to $15, you might lose regular pay increases and health care and other benefits so the employee ends up with less. That’s what Amazon did. The company took a strong stand for $15 minimum, which resulted in a $1 or $2 more per hour for some of its workers. At the same time Amazon, eliminated lucrative attendance and production bonuses for those same workers. As a result, Amazon got a PR boost (even got praise from Sen. Bernie Sanders) while it was actually paying its employees LESS.
Todd, I would agree with you concerning the USA beating the War Drums. The War Drums are required by our Wall Street-Security-Military Industrial Complex.
For the most part China and Russia have kept their military at “Home”. This is in stark contrast to the USA which has military bases all over the world.
Marine Corps General and twice Medal of Honor Smedley Butler said it best back in the 1930’s:
“The trouble with America is that when the dollar only earns 6 percent over here, then it gets restless and goes overseas to get 100 percent. Then the flag follows the dollar and the soldiers follow the flag.”
Neoliberalism Economics demands the highest possible return and it must be protected. Paradoxically, as the Multi-National Corporations seek out the cheap labor markets and send American jobs there, our MIC is bloated defending the system.
Paul Ogden, I would like to disagree with your conclusions. Kroger is going to find out that it still takes the same amount of hours to stock the shelves. They might figure out a way to automate it but I suspect they would rather spend $15 per hour than a $100,000 for a robot, since most big corporations plan about as far ahead as the next quarterly report, and big capital layout would hurt the next quarter’s report. Most businesses are going to spend as little as they can on ANYTHING until they see quality drop they start to lose business. You even cite the perfect example with Amazon, of the games companies play. While Amazon gets a lot of headlines as a large employer, it is still just a small percentage of the total jobs out there.
I think we have been in so many corporate budget meetings where we need to cut costs and the biggest cost is labor, so cut there, but the reality is so few of the jobs in the entire economy are at the bottom end of the wage scale, that the change to $15/hour is minuscule, unless you happen to be one of those people with that low paying job.
I’m a little weary of folks who don’t run a business, especially a small business, claiming that $15 an hour isn’t going to have an negative impact on jobs – and everyone who says otherwise is a heartless capitalist who drives his Lambo home at the end of the day and rolls around in his gold coins.
I agree that wages need to increase significantly on the low end.
John H.,
Regarding political: You can get an $11 (maybe even $12) an hour minimum wage that phases in through congress right now, probably with bipartisan support. Not so much for $15 an hour.
Regarding Job loss: I was trying to find the GAO study that indicates significant job loss at $15 an hour – but far less at $11. It also said $15 an hour would pull a lot of people out of poverty.
Regarding number of Dependents: The point is that if you are single, no kids and making $15 an hour that’s very different than if you are a single mother of 2 kids making $15 an hour. If you had an $11-$12 min wage and an Earned Income Tax Credit that paid out with every paycheck, you could boost family income based on the number of dependents.
I am far more enthusiastic about making work pay than paying people not to work. Politically there’s also much more support on the center right for an expanded EITC.
I think we could get the $11-12 minimum wage and expanded EITC through this congress and get it done – possibly with bipartisan support. Potentially you could even phase in the expanded EITC faster than the min wage hike – so it would get money in paychecks much faster that a $15
an hour minimum wage alone that phased in over 5 years, for example.
Paul O,
Cumulative real wage growth over the past over the past 40 years for the bottom 10 percentile has grown just 6.5% (1979-2019)
For the 50th percentile it’s been 8.8% growth over that same time period
For 90th percentile it’s been 41.3% real wage growth.
Keep in mind that this has been during a major technological boom where productivity has increased dramatically – even at for the bottom 10%. Higher wages are possible without inflation and presumably without job loss if it weren’t for the fact that businesses have become “addicted” to low-wage work. Because labor at the bottom 10% has been so cheap, everything else (rents, leasehold improvements, marketing, technology, executive pay, etc.) has been able to increase over the past 40-50 years. Compare a McDonald’s today to a McDonalds 50 years ago and you will see my point.
Meanwhile the cost of housing, education and healthcare has skyrocketed during that same period. Home ownership and education, along with income are three of the four cornerstones of the middle class (Income, education, home ownership, and future orientation). People are seeing “Middle Class” erode right out from under their feet like a section of Highway 101.
We can’t re-align expenses for a business that have happened over 50 years by increasing wages over 3-5 years without causing job loss. It’s not possible. However, what we are doing now is not sustainable.
Just about anything one sees propounded in fox News can be reversed in order to find the truth.
Old man ford, whatever his faults were, (not going to go there) raised the pay of his Model T workers, so that they could afford to buy just what they were making, I’ve read.
OK – FORD MYTH – sorry to repeat –
Ford discovered that AFTER THE FACT
He increased wages to keep people from quitting, which they did in droves. Taking people from the farm and shoving them in a factory doing repetitive work, in lousy conditions (pre-unions, pre-OSHA) was untenable for most of them. The turnover rate was so high, he resorted to that old-school supply and demand idea – if you offer enough money, people will work in inhumane conditions.
Ford neither cared about workers, nor was he this brilliant man (he almost bankrupted his company trying to exist on making high-powered cars for the rich and didn’t want to make the Model-T) – Ford was smart enough to recognize what was happening, and learned to love the Model-T and higher wages.
As I decided while taking Professor Ed Rhodes’ course of “Economics for Public Affairs” graduate course at the Bloomington Campus SPEA (Now O’Neill SPEA) Building almost 30 years ago, and wanted to get a T-shirt made that said it – “Ceteris Is NEVER Parabus”
Oops – “..Paribus” (lesson – always check your spelling before posting, especially when claiming an IU Graduate education)
Len Farber – that same econ. course I mentioned above brought me in touch with a different theory of why Henry Ford paid workers twice what other manufacturers paid. The theory was equally dismissive of the idea Ford had either generosity or some practical thought that the working classes should be able to purchase what they made, for the sake of the general economy. Some economists called it the “anti-shirking” wage, whereby Ford knew his workers would allow themselves to be nearly worked to death for a wage that afforded their family a near-middle-class wage, and (he hoped) eschew organizing a union for improved wages and working conditions. thankfully, the working classes of the early twentieth century eventually discovered their strength in collective bargaining, even at Ford, and autoworkers joined the middle class. Until recently, that is, when corporate-directed globalization and recession-driven concessions contracts have put U.S. workers in competition with impoverished workers in developing countries, to determine who will accept the lowest standard of living and environmental, health and safety regulation, in exchange for insecure employment.
Whatever Ford’s motivations and wherever we were along the spectrum of unionization, the issue is how much his workers were taking home, and $5 a day generated cries from his fellow members of the rich and corporate class that he was a socialist, communist etc., all of which is immaterial to the issue of how much – and $5 a day was a good wage for that day. Yes, he kept his workforce intact in performing their repetitive tasks, but that is also immaterial to the issue.
As to those who argue that small businesses will be adversely affected by a raise to $15 an hour, it’s working well in Seattle and is far below the $25 minimum hourly wage in Geneva, Switzerland. Perhaps such owners need a new business plan or a raise in prices or more efficiency in the distribution of their goods and services in a business climate in which they would not be disadvantaged because their competition would be operating under the same wage environment, and it is conceivable that the bump in demand occasioned by the increase in wherewithal in the hands of people who spend it would pay for itself without any great damage to small businesses as in Seattle.
Paul and Dan; about Kroger, did they actually increase wages and benefits and did they accomplish this by installing and encourage use the Self-Checkout lanes and only 1 or 2 cashiers working? I’m asking seriously. I am aware that those Self-Checkout lanes cut down on the number of cashier employees and also aware of the large increase in the number of those stocking shelves to meet the needs of shoppers. Is this a trade-off to maintain profit levels?