June 7, 2018

Higher min wage replaces crappy jobs with good jobs, as banks shift funding from unprofitable to profitable businesses

As we near the end of the Reaganite neoliberal period, and enter into a Bernie-led populist period, it's crucial to wake everybody up to the orthodox myths of the past several decades -- some of which have become so ingrained that we don't even question them, even those on the opposition left.

At the highest level, there will be a shift in values, principles, and priorities -- away from the Reaganite priority of "profits over people". That priority has led to all sorts of policies that have crushed wages while sending profits through the roof: making workers compete against each other to enrich their employers, deregulating corporations so that they can form anti-competitive cartels that fleece their workers and consumers, off-shoring manufacturing to cheap labor colonies or hauling in millions of immigrants to be exploited as cheap labor, and so on and so forth.

As we move toward the principle of "people over profits," the policies that stem from the new priority will run up against all kinds of naysaying from the beneficiaries of the old order. That is not important, since they will never be converted. The group that we do need to concern ourselves with is people who sense that something has gone wrong, but they aren't sure whether the new way is going to be better than the old way. We do need good convincing arguments for them.

That's equally true for grassroots voters as for politicians -- as Gen X and Millennials become more represented in government, displacing the Me Generation of Silents and Boomers, politicians will become more open to arguments for a whole new way of running our society, after it has fallen into such undeniable disrepair.

One such policy I've written about before is tariffs -- we will enact them far more broadly than the ones that Trump has placed on steel from certain countries, which is not a whole lot different from what George W. Bush did back in 2002-'03. The main worry is that tariffs will raise prices to consumers of goods that use steel in their production process, as the producers "pass along" their higher cost of materials to their consumers.

That will not happen in a sector that has competition among firms, since one firm that tried to jack up its prices to pass along their higher costs, would price themselves out of the market, as their competitors who did not jack up their prices would steal market share from the greedy firms. Hence, tariffs lead to lower profit margins, as materials costs increase while prices to the consumer stay roughly the same.

If the sector is not competitive, that is a reflection of the Reaganite model where we have deregulated society so much that corporations can get bigger and bigger, swallow up all their competitors, and merge vertically so that they control all steps of the production chain. That monopolistic status allows a small group of wealthy and powerful people to dictate terms to everybody else. Obviously in the new order, they will be broken up in order to restore competition -- among businesses, to benefit their workers and consumers, as their own profits fall from their currently inflated values.

This point about "higher costs" being "passed along" generalizes.

Nowhere do we see Reaganite hysteria about higher costs on such open display as with raising the minimum wage. Neoliberals claim, just as they do about higher costs of materials, that higher costs of labor to the employers will result in higher prices to consumers, in order to pass along those costs. But for the same reason as before, they are dead wrong: higher wages mean lower profit margins, not higher prices for consumers, due to competition among businesses on the dimension of price.

They make a related claim on phony humanitarian grounds, that raising the price of labor will result in less of it being purchased -- in other words, the affected workers would be employed for fewer hours, or maybe fired altogether, apparently bungling the attempt by the wage-hikers to make their status better. This argument does not appear for materials because that stuff is not human, and there are no heartstrings to tug about under-utilized quantities of steel if its costs were to rise.

Some well-meaning proponents of raising the minimum wage say that the quality of labor will improve if it is paid a higher price. I get the reasoning, and it may be true, but we have to make stronger arguments than this one. First, employers do not care about higher quality labor at a higher price -- if they did, they would still be employing Americans rather than sending the work to be done by cheap slaves in Indonesia, or bringing Indonesian immigrants here. And second, we are not going to accept the framing of "what's in it for the employer?" -- that has been the prevailing value system for the past 40 years, and we see where it's gotten us. We're going to assume that the quality of labor is no better or worse when it is paid more.

The naive supply-side view is a non-starter since "buying less labor" would mean the employers are now short-staffed -- if they reduce the man-hours of their workforce, in order to keep payroll expenses the same in the face of a higher minimum wage, then their output takes a nosedive. That would slash their revenues, and total profits. They could not squeeze more productivity out of their workers since they're getting paid the higher minimum wage unconditionally -- the government doesn't require them to work 50% harder in order for the minimum wage to go up by 50%.

So, the best-case scenario for employers is that they keep the number of man-hours the same as before -- to avoid plummeting output and total profits -- and eat the higher labor costs in the form of lower profit margins. But they still stay in business, turn a profit, and enjoy high social status as employers and managers and stockholders, rather than as workers.

However, it's possible that their profit margins could fall so much that they would no longer be profitable at all, no matter how they tried to re-jigger the man-hours in their workforce. This is the dreaded effect of a rise in the minimum wage causing the disappearance of an individual worker, or their workplace, or their workplace's entire parent company, or even that entire sector of the economy.

Unlike the scare tactics about "higher prices to consumers," which appeals to selfish individualism, this portrayal actually hits people where it hurts -- thinking about the effects on other people. What if we tried to help those poor people by raising the minimum wage, and it only resulted in their getting fired, their business shut down, and that whole sector of the economy going up in a puff of smoke?

I've never heard any well-meaning leftist, or even revolutionary, make the obvious counter-argument (and I was part of the anti-globalization movement circa 2000, so I came into plenty of contact with people and writers who should have figured it out).

Although some businesses will have to shut down when we raise the minimum wage, they will be replaced by new businesses -- or expansions of existing businesses -- that can survive and thrive in an economy where the minimum wage has been raised to $15. The minimum wage god does not close a door without opening a window.

It's actually a far less than divine agent who will come to the rescue -- it will be the banks and other actors in the finance sector. Not, of course, out of generosity, but out of self-preservation. No business starts up with the founder's own money -- they raise money from investors of various types (individuals, banks, etc.), and through a variety of arrangements (taking out a loan, issuing bonds, selling equity shares, etc.). And no business, once it is up and running, continues its ongoing existence with its own money -- it keeps its relationship with the finance sector, however that relationship may change.

The investors in the business do not want to do any work themselves -- they have a lot of money, and want that money to make money itself, rather than sit around losing value due to inflation. They want a return on their investment, and look for opportunities that seem more promising than the available alternatives.

If we raise the minimum wage to $15, that is like a changing selection pressure in evolution. It forces the individuals and groups to either adapt to it, or die out. Those that can meet the challenge will out-perform those that cannot, until the "unfit" are weeded out altogether, and only the "fittest" have survived. And we really shouldn't use scare-quotes around "unfit" -- if your business model sucks so bad that you can't turn a profit by paying your workers a decent wage, you deserve to go out of business. The government does not exist to protect the shitty businesses and shitty businessmen of the world, who can only make it in life if we let them hire slaves.

What is the currency of fitness? The ability to get financing from investors, which again is the lifeblood of the economy. If the minimum wage goes to $15, a whole lot of crappy foodie businesses are going to get shuttered -- those that absolutely require wages below $5 for food prep, wait staff, and the like. Why? Because they will be unable to turn a profit while still following the law, so investors will stop supplying them with loans, buying their stock, or however they're financing them.

And yet all that withdrawn investment will still be in search of some project to invest in -- they don't want it just sitting around idle, not earning a return, and losing value due to inflation. So they either put out a casting call, or maybe they get a knock on their door, to find new projects to invest in. Can you turn a profit in this new climate of a $15 minimum wage? If so, we'll invest in you! Please God, just send us the businesses that can thrive in this new environment, and we'll fund them!

So they find out that some manufacturing plant has been paying its workers at least $15 an hour, before during and after the change to the minimum wage law. Clearly they're able to survive in the new climate, so now they're going to get more funding than they've already got -- maybe they hire more workers at their plant, or open up new plants, perhaps in new parts of America that they weren't even in before.

And that manufacturing expansion will not only create more blue-collar jobs that pay a higher wage than food prep -- those blue-collar workers will need supervisors, plant managers, and all sorts of other white-collar and professional-managerial staff to run the expanded operation. Some may be hired in-house, but others may form their own firms that contract with the plants -- and that opens up a whole new series of projects to invest in, the support services for an expanding manufacturing sector. Now the finance sector is worrying less and less about their money not finding targets.

Unlike informational sectors of the economy, the professional support for a material sector, like manufacturing, grows in proportion to the output of the sector. If you want to produce 10 times as many cars, you're going to have to hire 10 times as many assembly workers, and 10 times as many professionals and managers to oversee that expanded workforce. Whereas if you want 10 times as much digital ad revenue for your search engine, you don't need to hire any more workers or more of their supervisors. You use your existing workers to figure out how to draw more users to your search engine, or how to co-opt or buy out your competitors. They're not producing content, so output is not a labor-intensive process requiring more man-hours to solve a larger-scale problem.

So, unlike the phony info-tech bubble of today's economy, where there are so few targets to invest in, but where each one gets a giant amount of investment -- in one with an expanding manufacturing sector, there will be ever more white-collar, possibly tech-related businesses ancillary to manufacturing that will provide plenty of targets for investment. That will make it less volatile as well -- you won't have all your eggs invested in FAANG's basket.

That's what the economy was like before Reagan -- a gigantic middle class that was plugged in, somehow, to manufacturing, and financed ultimately by the New York banks who were central to the New Deal coalition of FDR (a patrician from New York). Here is a reminder of the inflation-adjusted value of the minimum wage, which stayed near $10 (in today's terms) for most of the 1960s and '70s, only plummeting during the Reaganite era since then, losing around 30% of its value by now:

Once we start laying out this grand yet straightforward vision of how things will be after Reaganism, it will convince most normal people and keep them from worrying about the arguments made by neoliberal fear-mongers.

It will also get some buy-in from at least one of the major elite sectors of society -- finance. There will be no re-alignment without at least some degree of elite support. That doesn't mean giving the banks everything they want -- they've already been getting that. But just because they're a central sector of the dominant coalition doesn't mean they will get to dictate terms. They were central to the New Deal coalition, yet they still had Glass-Steagall and other regulations reining in their behavior. They accepted that, relative to the alternative where they were not a central member of the coalition -- where they would face even worse treatment.

After Reaganism, the elites of the material sectors will be the losers, as their profit margins get crushed. Some, like food service, will mostly vanish from the economy altogether, just like in the good old days. The workers in these sectors, however, will thrive for the first time in most people's living memory. The natural enemies of the material sectors are the informational sectors, and we can already see an opening to include them so that they get a central seat in society's planning, unlike today where they are part of the opposition coalition (Democrats under Reaganism).

They will face more regulations than they have recently, but other sectors will be regulated even more heavily -- steep tariffs that force manufacturers to bring plants back to this country instead of cheap labor colonies, jacked-up minimum wages (which will not affect the finance sector since they don't hire armies of low-paid slaves), and the like. Material sectors control the dominant party of the Reagan era, informational sectors are in the opposition.

As the populist mob begins to really howl for blood -- a trend that will absolutely explode during the next killer recession, due before November 2020 -- the elite sectors that control the opposition party had better get out in front of things, and provide an off-ramp for a decent chunk of the elites before they wind up in the guillotines.

The FDR New Deal model is exemplary, not the neoliberal Obama model where trillions of central bank liquidity has been given to the 1% to play around and gamble with, rather than financing the expansion of manufacturing or other sectors that pay high wages to the bottom 50% of the class pyramid.

If the Democrats refuse to follow history's orders, the elite sectors that control it should withdraw their support and start up a new party with most of the old Democrats carrying over, plus large swaths of former Trump voters jumping on the populist bandwagon. Call it the Populist Party.

Hopefully it doesn't come to the death of a major party that refuses to re-align itself, which would parallel the lead-up to the Civil War. In the meantime, the finance sector should be leaning as hard as they can on the Democrats to re-align in a New Deal direction, where although no sector got away with murder like they did during the bygone Gilded Age, the finance sector elites did better than the manufacturing sector elites, who had to put up with rising wages, labor unions, and de-globalized supply chains.

Related post: Raise the minimum wage to $20 to defeat the GOP and steal the immigration topic from them. This is just a special case of rising wages, whatever the cause -- say, if we directly outlawed employers from hiring foreigners, who are only hired now to undercut American wages.

There should still be some kind of laws against hiring cheap foreigners -- they can only be employed if they are paid 50% more than an American, say, like a tariff on foreign labor. But most of the problem is on the low-wage end, where simply raising the minimum wage would have the exact same effect as outlawing the hiring of foreigners -- but crucially, without turning the issue into one about race or ethnicity, and only referring to class and economics.

In today's world, making it primarily about race or ethnicity would make it too toxic. And indeed most of the liberals and Democrats used to support bans on hiring cheap foreigners, but only when it was framed as a class issue. Once the conservative culture warriors took it into an issue about ethnicity, they alienated the other side, and the issue lost its bipartisan consensus. We can only restore that bipartisan support if the issue has no ethnic connotations, and is only about raising the standard of living for working and middle-class Americans.

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