Jobs v Wages v Taxes v Growth: Part 1 - The Frantic Menace

There are many competing theories on the best ways to grow our economy.  As with most things, I tend to look for the ways that provide the most growth with the least government involvement.  Fortunately for me, these two seem to be complimentary. 

A debate I witnessed this morning included the following statements:

1.  Wages need to rise so that consumers can spend more money and grow the economy.
2.  Taxes need to rise so that the government can spend more money and grow the economy.
3.  Companies are stockpiling too much money here and overseas.  If they aren't going to spend it, that money should be taxed.  This will encourage spending or increase tax revenues.
4.  Taxes need to fall so companies will invest more in the US, creating new jobs, with better wages that will grow the economy.

Over the next 4 installments we'll cover these statements with some common sense analysis. 

Wages Need to Rise!!!

Every few years the cry goes out, the poor are getting poorer.  Companies are being greedy.  Bad corporations are turning the working class into serfs and only paying them MINIMUM WAGE.  Solution:  Raise the minimum wage.

What really happens.  The reality is that wages do not decrease, but over the past 40 years, the spending power of our wages have significantly decreased.  Inflation, most often caused by poorly managed monetary policy, overspending in Washington, and artificially depressed interest rates causes the value of the US Dollar to decrease.  Goods and services however, have a value that is not directly tied to the value of the dollar.  Meaning that as the value of the dollar falls, the price must rise to match the REAL value of the good or service. 

Monetary Policy - Let's say there are 1000 Dollars available to the world and everyone wants Dollars.  The value of that dollar would rise.  The supply is limited, the demand is high.  Basic economics.  Now, let's say that the government is printing trillions of dollars in order to spend more money.  This has two consequences (there's that word again):  First the dollar is now less valuable because they're abundant.  Instead of being rare like gold they become like blades of grass.  Second, the demand goes down because they're less valuable.  If you know what a feedback loop is then you can probably see the danger this causes.  Does this ever happen?  Look at Germany post World War I and Argentina not too long ago.

Back to the real topic.  Won't raising wages increase spending by consumers?  On a micro level, yes, but when looking at the economy as a whole, probably not.  Let's say you manage the payroll for company X.  You have $100,000 to work with.  Pretending that benefit and payroll tax costs do not exist you can either hire 2 people at $50,000 per year or 4 at $25,000 per year.  Let's say the level of employee you need is rather low.  The lower the level of employee the LARGER the supply of workers for that position.  In a pure economic system this supply and demand curve would drive the cost of wages down and you could hire more workers for greater production.  As the complexity and the needs for the position rise, so does the supply of workers qualified to do that job shrink.  This makes the necessary wage higher.  The other side of the equation is, what level of output would be required.  This may also determine the number of employees required.  If 3 employees are required to produce enough to support $100,000 in payroll, and each additional employee will increase production, then hiring 4 employees may produce enough additional capacity to support an additional employee, who may then increase production to a point to support yet another.  When you're running a company, you have to look at the diminishing return of each additional employee added.  For example.  Three employees may help you gross $200,000, but a fourth would only increase that total by $50,000 and a fifth may only increase it further by $25,000.  If the cost of employing the additional employee is less than the added value then you should obviously not add that employee. 

Now, let's introduce artificial controls.  Let's say the government steps in and says, wages are too low, you must increase your pay to a minimum of $30,000 per employee.  Suddenly you either have to trim your staff down to 3, improve the efficiency of all 4, or raise your prices to sustain the additional cost.  Most markets are priced very competitively.  If you raise your prices, you lose business.  If you increase productivity, there's a chance you lower prices by increasing the supply in the marketplace.  What have you gained?  So, you're only recourse is to cut a position. 

Here's what it boils down to.  At a given level of production, a company is only going to spend a certain amount of money on wages.  Artificially raising wages per person is not going to increase the total, but it will increase it for those people who remain employed.  For the person who gets laid off, that doesn't really help much, does it?

Don't get me wrong.  Rising wages that do so on their own will increase spending in the overall economy.  When they're not offset by rising production or price levels supported at the same production levels, what you wind up with is a recipe for lower overall employment and stagnant overall wage levels.  So, how do you get wages to increase without harming the overall economy?

More importantly, do we want to live in a country where the government decides how we run our businesses?  How much we have to pay employees?  If we can't compete on a scale of wages, then we won't get the best qualified people, regardless of the position.
More to come in Part 2 - Attack of the Government Drones