Bill Moyers interviews the American Enterprise Institute’s president Arthur C. Brooks on how to fight America’s widening inequality.
“The problem is we have a bit of a conspiracy between the right and left to have people now who are tending to be more part of the machine…We need a new kind of moral climate for our future leaders.”
Bill Moyers seems a bit light on the economics of the Walmart situation. Raising the minimum wage would reduce welfare payments to Walmart employees, but WMT is a rational entity with the primary goal of maximizing profits and shareholder value. An increase in the minimum wage would increase the appeal of automation and result in a reduction in staff numbers, causing an increase in unemployment, or alternatively WMT will pass on the additional cost in the form of increased prices to consumers, causing a rise in inflation. The only sustainable long-term solution is not an easy one: to increase economic growth and employment so that market-driven wage rates rise. Interference with the pricing mechanism in a market — whether through legislated minimum wages, price controls or Fed interest rates — is misguided and unsustainable. It may defer but also amplifies the original problem.
This man has no idea what he’s talking about. In some states we have massive growth and massive wage increases. According to his “beliefs” businesses would rather shut down than pay people a higher wage. That’s simply false. Businesses do whatever they need to do to stay open and make a profit, They will not shut their door because wages go up by a few dollars.
Higher wages do NOT cause the economy to collapse. If this were true, high growth (and high wage) states would have collapsed a long time ago.
Every statement this man makes can be proven WRONG by looking at high growth states.
Correlation does not equal causation. I am sure that you will find exceptions where the minimum wage was raised and employment went up. But economic theory tells us to expect it to go down.
Herbert Hoover, for instance, pushed for higher wages to counteract the impact of the 1929 market crash. Unemployment soared.
This is incorrect. Hoover did not raise wages, but instead asked industry to keep wages from falling further. Deflation (a Depression) was coming. To suggest labor costs caused a problem that began with a stock market crash seems a little too silly for me. Unemployment went up because the economy tanked and it always goes up when there’s a recession (or depression).
Regardless, according to theory, cites and states that have high wages (http://money.msn.com/investing/5-cities-where-wages-are-soaring) should see higher unemployment. That’s not the case. Look at the facts, not the (flawed) theory.
Where I live we have higher wages than any state in the region and our unemployment rate is at an all time record low. According to theory, this is not possible. Idaho (#1 in the link above) has an unemployment rate of 4.5%.
“Look at the facts, not the (flawed) theory.”
Repeat after me: correlation does not equal causation.
I will post a reference for Hoover when I get back to my library at the office.
The effect of higher wages on inflation.
https://twitter.com/prchovanec/status/494248485383049216
Colin,
The flaw is in economic theory that says that the market must be left to work things out. The market is not a natural phenomenon. Humans created the market when they began to shift from hunting and gathering to herding and farming about 10,000 years ago. Settleing on land produced settlements, settlements became towns, then about 6,000 years ago the first cities with signs of centralised administration.
From the emergence of the first real markets archaeological evidence shows that most of the wealth gravitated to the few who understood how to pull the levers to direct wealth to themselves.
The first industrial revolution was in C12th China. It would be easy to blame its demise on the Mongol conquest of China, or was it because there were not enough people earning enough to create the consumer demand that sustains the innovation and economic development?
Why did the second industrial happen in England in the C18th? Don’t look for the answer in economics books. Look in history books. When Napoleon described England as a Nation of Shopkeepers, he intended to point to a weakness, without recognising that it was the source of England’s economic strength. A Nation of Shopkeepers requires a Nation of Shoppers. The reason the 2nd Industrial Revolution happened in England (and the reason it did not die out as it had in China) was that a large proportion of the population earned enough money to create the demand that made mass production and industrial development viable.
Economists are fond of selectively quoting Adam Smith to support their ideological stance. They never quote what Smith described as a ‘self-evident maxim’, that ‘Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.’ He continued…’in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.’
We are still in the mercantile system. Economic theory and politicians claim that the way to revive an economy is to provide incentives for those who provide employment. In reality the incentive they need is demand for the goods they produce and that requires a population with sufficient money to create that demand.
Do not look to conventional economic theory to explain why the Japanese economy has stagnated for decades when they have some of the most succesful companies in the world and in the 1980s the future was described as ‘the Japanese century’. Abe might tell you that the missing arrow in his quiver is that Japanese companies are flush with cash, but Japanese workers do not earn enough to create sufficient domestic demand to create growth, much less dynamism in the Japanese economy.
Domestic demand created the economic conditions for the Industrial Revolution in England in the C18th. China is now trying to work out how it can engineer a spread of incomes to enough individuals to shift its economy from reliance on exports to reliance on domestic demand as the main economic driver.
Maybe in the C21st economists will recognise the true drivers of economic dynamism. They could start by going back and reading the bits of Adam Smith they have chosen to ignore because they do not coincide with their ideology.
Colin, When Henry Ford raised wages, did he see higher unemployment, more automation etc. Later he said that higher wages was the best cost savings idea he ever had. Ford proved the theory is nonsense a long time ago and yet we’re still debating that untruth.
Henry Ford was no socialist: The Story of Henry Ford’s $5 a Day Wages: It’s Not What You Think
I spoke too soon. The Henry Ford nonsense must be called out. According to Forbes, a car cost around $450. At $5 a day, a worker could buy a car in 90 days.
A person working at say Wal Mart would have to work a year or two to afford a car today.
Then there’s Costco. It pays nearly twice what Sam’s Club or Wal-Mart pays and its turnover is very low compared to the very high turnover at WMT. WMT workers are also on government programs which forces tax payers to subsidize their low wages. If you hate higher taxes, you hate WMT.
The market is an abstract in the same way as mathematics is, but both can help to promote our understanding of the world. Adam Smith held that the self-interested behavior of individuals can achieve efficient allocation of society’s resources. The primary function of the market is to share price information equally among all participants. I am in favor of both strong regulation and strong markets. What I am opposed to is corruption of the market mechanism by monopolies, crony capitalism, government interference with the price mechanism — Fed manipulation of interest rates, for example, and first home-buyers subsidies — and unequal access to price information — as with high-frequency and insider trading.
Adam Smith pointed out the broad rule: the aim of production is consumption. But nowadays people also treat the accumulation of wealth (and power) as a goal in itself, so there may be exceptions to the rule. Production and consumption are two sides of the same coin. Production without consumption is wasteful and consumption without production is profligate. We need to encourage both production and consumption — through strong markets and effective regulation (simple regulation with the emphasis on quality rather than quantity).
I disagreed with everything you wrote previously but agree with everything you wrote here. How is that possible? 😉