Raising the Minimum

I found this story http://t.money.msn.com/now/californias-minimum-wage-hike-may-be-a-harbinger on the MSN newsfeed today. I was impressed at first by the boldness of the move but after seeing the details, namely that the increase would be incremental I am now underwhelmed. Although the increase would take almost 2 years to reach the $10/hr. target, the California Chamber of Commerce was howling nonetheless.

Increasing the minimum wage would be a relatively painless way to shift the economic gears into, well, 2nd gear from where we are today. The reason it would significantly improve our economy is that at present there are too few dollars chasing too many goods. Recently, it was reported that the income gap between the richest and working class Americans is the highest it has been since the robber-baron days of 1928. So much of the Gross Domestic Product (GDP) is “earned” by the richest Americans that the “consumers” are left with little to demand goods. It is impossible for those with annual incomes exceeding $350,000 to make significant demands on production. In other words, if you’re rich enough you already have everything you could want so you just can’t spend a whole lot more. Although finished goods are by historical standards cheaper than ever before, there is still not enough demand to raise the capacity utilization above 70% http://www.census.gov/manufacturing/capacity/index.html. This means that in the aggregate, U.S. manufacturers, regardless of the amount of investment capital that is thrown at them, cannot expand their factories and hire more people because they can already produce 30% more product with the people, plant and equipment they have.

Wages and profits are a “zero sum game”. That is, for every dollar added to wages, a dollar is lost to profits, generally speaking. Floyd Norris reports this phenomenon in the New York Times http://www.nytimes.com/2013/08/10/business/economy/us-companies-thrive-as-workers-fall-behind.html when he points out that wages and salaries as a proportion of the GDP are at their lowest level (42.6%) since 1929 while corporate profits, at 9.7% of GDP are at a historical high (the “flip side” of the equation). It must also be noted that there are some very high wage earners out there so statistically speaking there is a tremendous amount of low wages to pull the average down. President Harry Truman nearly DOUBLED the minimum wage in 1949 http://t.money.msn.com/now/c_article.aspx?cp-documentid=252398349  setting it at $.75 from $.40 per hour. None of the calamity predicted by the US Chamber of Commerce came to pass; in fact the 1950s are generally regarded as a period of unparalleled prosperity in US history.

“What about the inflationary impact of all those high wages”, a banker might ask. There would certainly be some inflationary impact to such a dramatic increase as Truman made. However, although the Labor Dept. reported that nearly 1.3 million workers were immediately effected by the Truman wage increase, the 1950s are not known to be significant inflation-wise. Since there is so much excess productive capacity already, a whole lot more goods could be produced without significant cost. Also, since US profits are at a historically high level, business could easily absorb the increase in wages and at the same time enjoy a tidal wave of demand.

This seems to be a perplexing situation. It’s pretty clear that it could be a win-win-win situation. Higher wages would spell increased standard of living for millions of people, higher sales would spell increased profits (with a smaller profit MARGIN, however) for business, and higher sales and purchases would spell dramatically increased revenues for Federal, State, and Local governments. It doesn’t happen because unfortunately the balance of political power in the USA has tipped too far in favor of large corporations. Without a check on their power, they cannot be brought to do what is in their best interest in the long run.