I’ve received some feedback, questions, and arguments against yesterday’s post. If you haven’t yet read the post, I urge you to scroll down a little bit and read this first. I’ll go argument by argument on this one…
This cannot work- you’ll just increase the wage disparity between rich and poor!
On face, it might appear this is the case. After all if you allow the lowest wages to decrease, mathematically the disparity grows. First, I would argue that the wage disparity has never been higher. Right now, you have 10% of the population making $0 income because they have no job. You have another 7% of the population unable to work as many hours as they are willing to supply. Implement Rockwell’s solutions and those numbers are eliminated and mathematically the disparity has to go down. In addition, two years ago at 5% unemployment still had the largest income disparity in US history (because of this intervention).
So what would happen if you eliminated price controls on wages? Yes, wages would go down for those working by the hour or in an unskilled profession. The important thing to note, however, is the wage would be determined by the equilibrium point where the worker believes the wages are good enough that working outweighs not working. Therefore, it’s not going to escalate down to third world levels because nobody can survive in this country on say $1/hour.
Now remember, the average American household makes approximately $50,000 annually. Assume with these changes, the average income drops to $40,000. This means people are able to pay less for goods and services. Businesses will have to lower prices or will go out of business. This will affect profitability and businesses will have to cut the salaries of its higher paid workers to even things out. Since they are paying less overall wages, it will even itself out at their bottom line. This is how an efficient market works. It doesn’t matter how much money you’re making, but how much that money can buy you. Lower wages across the board causes no net change to purchasing power.
I just don’t buy that upper income workers will be affected!
Ok, what is an upper income worker? They are people who own businesses. They are people at the top of the corporate ladder. They are professionals like doctors, lawyers, and engineers. If exactly half the population (say those below $50k) is affected, there is simply not enough willingness from companies to keep higher income at the same level. Look at the most successful American corporations. Wal-Mart caters to those looking for the lowest prices. Exxon-Mobil sells the same quantity of fuel to people regardless of their income level. Google depends on the advertising demand of the masses. Ford sells more auto models below $30,000 than above. You cannot lower the income base of half the population without adversely affecting their bottom line. If these companies see their profits go down, they will lower their largest expenses. This will lower their highest paid employee’s incomes, and affect the price they’re willing to pay to suppliers. As this goes up and down the economy, it will inevitably lead to lower income for all but no net change in purchasing power.
In today’s political environment, these changes cannot possibly be made!
This may be true, but I don’t think it is impossible. I think it will just happen much slower than anticipated because powerful interest want to maintain status quo. The fact remains, however, that unemployed workers want work now. Many are unemployed because they have an unrealistic expectation of what employers will pay them. They’re still living on the belief that the economy will recover and things will go back to the way they are. This will never happen because credit conditions will never be as elevated as they once were. Say these people are unemployed for a year… suddenly they’ll take any work that allows them to feed their family. This is why we see PhDs taking jobs behind the retail counter. This is why we see union employment being affected worse. Eventually, workers will demand work at the equilibrium price and employers will be more than happy to supply it. Market forces can push towards these solutions and hopefully create the political will to lift these barriers. Based on trends, the public has no appetite for more government intervention (like the stimulus plan). Eventually they will realize less government is best.
Can we solve this with tax cuts?
These tax cuts might spur the economy short term and temporarily reduce unemployment. However, once the money is spent and taxes inevitably have to rise (and they do unfortunately) it goes right back to the structural problems we have today. Keep in mind, manufacturing jobs have been declining for a long time now and have been largely replaced by construction and retail jobs. Now that construction and retail have reached a point far above sustainability, we have to fill those jobs somewhere. Thus no matter what short term efforts are applied, it will do nothing to fix the structural problems.
What are these structural problems? It’s a world where the supply and demand of labor cannot hit an equilibrium point which leads to a market price. Labor intervention has become so deep and ingrained that it’s creating the equivalent of a price floor. Remember my example on real estate… if you lower the price of your house enough, eventually you’ll have a surplus of buyers. Keep prices of real estate high enough (like they are today) and you’ll have a shortage of buyers.
The labor market is no different. Flood the market with more money and it might create a short term illusion that creates incentives for some hiring. Where unemployment will be solved for the long term is where there is allowed to be an equilibrium between the supply workers are willing to supply and the employment businesses are willing to provide. Government can keep housing prices artificially high through tax credits but won’t get the market truly moving until housing equilibrium is hit. The labor market is no different.
OK……….i am going to over simplify this and expect to be roundly critiziced but, I don’t believe we have “efficient markets” and therefore reject your assertion of reaching market “equilibrium”. Just take a look at Rockwell’s impediments and just about every one of them relates to government intrusion in the market. These of course is just some examples where bigger government distorts normal market activity……there are plenty of others. In the “share the wealth” philosophy of BHO, equilibrium is an unnatural and contrived state. I know Muwabi does not like tax cuts, but at the risk of being labeled a right wing idealogue can we dust off the Laffer curve and “supply slide” economics for just a moment? There are a few things that will fuel our recovery and the first is encouraging innovation and that can be done with tax cuts….put more money in everyone’s pockets. Look at the Kennedy and Reagan tax cuts, and the reduction of cap gains tax in 1997 as examples. I know the Laffer curve has a number of critics like highly respected, Nobel Prize winning, NYT column writing Paul Krugman for one, but in each of these examples it worked……tax cuts actually grew revenues. Give me just one example where government action, other than tax cuts, actually encouraged the economy. You are right that taxes will need to eventually rise, but miss the key point. They will rise by a growing and recovering economy not by increasing tax rates.
The other action that will fuel recovery is reduced government spending…….not the B/S freeze garbage that BHO, the community organizer trained imposter, is touting, but real reductions. How dumb does he think we are?
Your dream of efficient markets and equilibrium is fun to talk about Danny but will never happen in the era of big goverment. Unfortunately, that is the field we must play on. That said, give me and everyone else more of their own money to spend and I can ensure we will spend it much more efficiently then big government……much too simple of a solution I suspect. By the way, this is has been the conservative party of “NO’s” position for months/years. NIpping at the edges of out of control government labor polices will get us nowhere. I suspect you don’t agree.
Say, I like the new site Danny, just one comment though………..most dems will not be able to solve the simple math question. they are not really that good at math. recall that gving health coverage to 50 million uninsured, eliminating pre existing conditions and increasing overall subsidies will in fact reduce total health care costs…..those numbers just don’t add up.
It’s so lucky for me to find your blog! So shocking and great!