Growth is negatively impacted when financial assets and rents
are accumulated by a small minority of higher level executives and majority
owners who have a limited amount of capacity to spend it all. Said a different
way: there is only so much stuff you can buy. So most of the money accumulated through inequality
does not go into growth-generating consumer spending.
Typically that excess money ends up in financial markets of
some sort: stock market and other financial games that do not contribute to
economic growth, per se, when transformed into speculative bubbles. Of course,
not all the climb of the market of financial instruments is speculative, as
corporate assets, expected profitability and dividends are (or should be) the real
drivers of the underlying value of a stock.
A major purpose of issuing stock is raising capital to invest in assets and company growth. If the human resources of a company are not considered assets but rather, easily tradable commodities, then maximization of profits (the fiduciary duty of business executives) logically dictates a policy of wage suppression. When wages can be maintained low, profitability increases
and higher dividends are paid out. Increasing and steady dividends make for
higher stock prices. And with a higher stock price, executive compensation
climbs, and so on and so forth in a self perpetuating cycle. This
falls under the classic category of market failure, i.e. a condition in which
an imperfect structural allocation of resources creates inefficiencies and
negative social outcomes—such as stagnant national economic growth. A structural situation
like this typically requires third party intervention and direction, hence
minimum wage laws.
But avoiding speculative financial market bubbles and
decreased consumer spending are not the only reasons to intervene in the
natural tendency for wage suppression by free enterprise. As Nick Hanauer has said, by maintaining the
price of labor below the threshold of “living wages” many individuals and
families, even when working much more than 40 hours a week, are forced to rely
on public assistance for various basic needs, including housing, food and
health. In other words, wage suppression shifts the true price of labor to the
taxpayers. This is an egregious example of corporate welfare.
There is no substitute for money as a social program, as
Daniel Patrick Moynihan famously argued. All instances of public assistance
such as Medicaid, food stamps and public housing tend to erode the value of wages.
In a counterintuitive and contradictory way, large businesses suppressing wages
at a level under “livable income” are taking advantage of welfare and
“socialist” programs, while groups and personalities pushing for a higher
minimum wage are in fact advocating capitalist economics by defending the basic
mechanism for distributing rents under such economic model: the salary.
The slowing pace of productivity has been blamed by many as
the culprit of anemic GDP growth over the last few years. But income inequality
is as culpable if not more, and the good news is that policy can change that,
both materially and in expectations. This is not a case where the boss
threatens the employee to fire him when said employee asks for a raise. This is
leveling the floor and giving a raise to America, in order to give the economy
a boost.
Metrics and indicators can be confusing and are open to
interpretation. Mark Twain was famously eloquent about that: Lies, damned lies
and statistics—the three ways to obfuscate the truth. Yet some probable
consequences of raising the minimum wage can be inferred. Inflation will
increase and stock market indices will be impacted adversely and naysayers will
read these metrics as negative. Thinking it through, though, gives us a more
mixed analysis. Negative interest rates and deflationary pressures are creating havoc in Europe and Japan. Experiments in cities around the country have not found that a
rise in the minimum wage leads to sustained unemployment. Increased inflation
will be more prevalent in the service sector, as manufacturing in the US is a
relatively small portion of the economy. Interest rates on treasuries will
increase, benefitting retirees and boosting the value of the dollar even more.
This in turn will put downward pressure on the cost of imported goods, counterbalancing
service sector inflation, but affecting exports. And finally, as disposable
income in the less affluent sectors of society and the middle class increases,
GDP growth will expand and pressure on social welfare programs will
decrease.
Depending on which noisy or quiet metric is focused upon at
any given moment, the “economy” will be viewed, written about or politicized as
prosperous or in the tank. But the growing level of income inequality is unequivocally
unsustainable and certainly needs to be addressed. Not to do so most definitely
will eventually bite the economy in its xxx even harder. America is not a
household, and its budget accounts are different. America is not a business,
and its operations work differently. America is a nation with a national
economy; and America needs a raise.
