Wage Plan Can't Fix Poverty In L.A. (Demo)

On March 25, 2015, Christopher Thornberg writes in the Los Angeles Times:

Confronting unyielding poverty rates and economic inequality, Los Angeles city and county political leaders are debating whether hiking the minimum wage is a good idea. My firm, Beacon Economics, analyzed the effects of a jump from the current $9 state minimum wage to $13.25 within the city by 2017 as proposed by Los Angeles Mayor Eric Garcetti.

Our report was underwritten by the Los Angeles Area Chamber of Commerce, which will certainly lead some to accuse us of acting as a mouthpiece for the profit-minded business community. But that’s not the case. Lifting families out of poverty ultimately helps everyone — including business owners. The focus of this debate should be on whether higher minimum wage is an efficient way of achieving this laudable goal.

It is true that many of the working poor here have low-paying jobs. But this does not by extension mean that all workers earning less than $13.25 an hour are among the city’s or county’s poorest households. In fact, half of such workers live in households where total earnings are above $55,000 per year — the county’s median income. They may be teenagers working part-time jobs, or servers or salespeople who earn much more in commissions or tips.

A citywide minimum wage isn’t targeted well enough to have much of an effect. Many working poor Angelenos hold jobs outside the city limits, and they wouldn’t see any benefits from a higher minimum wage. Similarly, half of those who would get a wage hike don’t live within the city of Los Angeles. While the latter are indeed among the working poor, helping them should be the purview of their local government, not L.A.’s.

How does this all add up? Under the city’s current proposal, less than one dollar out of every four would end up in low-income households in the city of Los Angeles. No matter how you look at it, that’s a low rate of return.

That might not matter if the economic costs were small. But they aren’t. Food service firms will see their base costs rise 8% to 12% as a portion of total revenues, as will social assistance firms (5% to 7%) and retail operations (3% to 5%). These firms will have no choice but to raise prices and reduce the size of their workforce to stay in business.

These problems are magnified because local businesses will have competitors in cities not subject to the new minimum wage. More than one-third of businesses in Los Angeles are within two miles of the city’s border. Companies considering opening or expanding business in the region will, over time, settle where labor costs are lower.

If other parts of the county also raised their minimum wage, that might mitigate a portion of the damage. But unincorporated areas of Los Angeles County and a handful of cities still represent only a small fraction of the broader regional economy.

Our model doesn’t suggest that, on net, Los Angeles will lose jobs if the minimum wage goes up, but rather that job growth here will take a substantial hit. That would be a blow to a region still trying to climb out of the fiscal hole formed during the Great Recession.

Other researchers looking at the mayor’s proposal suggest that somehow a minimum wage increase will grow the Los Angeles economy. This flies in the face of logic. At its core, an increase in the minimum wage is a transfer of wealth from one group (employers and their customers) to another (workers with hourly pay below a certain level). Such transfers may be fair, even socially desirable, but they do not increase the size of the economic pie. When it comes to raising the minimum wage, economists debate the magnitude of the negative impact, but there is no generally accepted literature suggesting such moves ever measurably increase economic activity.

Los Angeles’ working poor do need help, and our political leaders should explore ways to assist them directly and alleviate poverty. But the current minimum wage proposal won’t accomplish that. The benefits are far too diffuse and the costs to economic growth are far too high.

http://www.latimes.com/opinion/op-ed/la-oe-0325-thornberg-minimum-wage-20150325-story.html

What we, as a society, need is to look at the economic inequality problem from a different perspective. That perspective includes the realization that the purpose of a for-profit business corporation is to “maximize profit” by striving to keep labor input and other costs at a minimum in order to maximize profits for the owners or to stay competitive. They strive to minimize marginal costs, the cost of producing an additional unit of a good, product or service once a business has its fixed costs in place, in order to stay competitive with other companies racing to stay competitive through technological innovation. Reducing marginal costs enables businesses to increase profits, offer goods, products and services at a lower price (which people as consumers seek), or both. Increasingly, new technologies are enabling companies to achieve near-zero cost growth without having to hire people. Thus, private sector job creation in numbers that match the pool of people willing and able to work is constantly being eroded by physical productive capital’s ever increasing role.

The result is that the price of products and services are extremely competitive as consumers will always seek the lowest cost/quality/performance alternative, and thus for-profit companies are constantly competing with each other (on a local, national and global scale) for attracting “customers with money” to purchase their products or services.

But seeking the lowest labor cost results in millions of people who, dependent solely on their wage incomes, suffering financially because they can not earn more than the competitive rate of wages, and struggling to avoid falling into poverty conditions. As a result we have a problem because the vast majority of the population are wage slaves because they have no other means to earn income.

While the role of business corporations is to efficiently produce products and services, which produces wealth and thus income to those who own the corporations, business corporations should also act justly and serve and enhance the community well-being. This should be a proper function of government regulation to ensure that corporations do not disregard the health and welfare of the people and their communities. This then is the moral basis upon which a minimum wage boost is advocated.

The problem that advocates for solutions to economic inequality have is that their mind-set is limited by ONLY thinking in terms of human productive input––as in labor’s contribution––while failing to understand that fundamentally, economic value is created through human and non-human contributions. Those who OWN business corporations know that the productive capital factor input represents upward of 98 percent of the total contributions. In concentrated capital ownership terms, roughly 1 percent own 50 percent of the corporate wealth with 10 percent owning 90 percent. This leaves 90 percent of the people scrambling for the last 10 percent, with them dependent ONLY on their labor worker wages to purchase capital assets. Thus, we have the great bulk of the people providing a mere 10 percent or less of the productive input. Contrast that to the less than 5 percent who own all the productive capital providing 90 percent or more of the productive input, and who initiate and oversee most of the technological advances that replace labor work with capital work.

As a result, the trend has been to diminish the importance of employment with productive capital ownership concentrating faster than ever, while technological change makes physical capital ever more productive. Corporate decision makers know this, whether in the United States or China, or anywhere organized assemblies of people engage in production. Technology is an easier and faster way to get a job done. Because technology increases the profitability of companies throughout the world, technology always has the advantage over human labor when the costs of them are the same. But because this is not well understood, what we as a society have been doing is to continually shift the work burden from people labor to real physical capital while distributing the earning capacity of physical capital’s work (via capital ownership of stock in corporations) to non-owners through make-work job creation, minimum wage requirements, and welfare programs. Such policies do not function effectively.

Boosting the minimum wage will result in either increasing prices, reducing job opportunities, or replacing labor completely with “machines,” which are becoming more and more sophisticated every day. While there is no question that people need a livable income, and the greater the more financial secure and affluent one can be, but to put the focus entirely on boosting the minimum wage is not the solution we should be seeking.

The REAL solution is to lift all legal barriers to universal capital ownership access by every child, woman, and man as a fundamental right of citizenship and the basis of personal liberty and empowerment. The goal should be to enable every child, woman, and man to become an owner of ever-advancing labor-displacing technologies, new and sustainable energy systems, new rentable space, new enterprises, new infrastructure assets, and productive land and natural resources as a growing and independent source of their future incomes. This would enable our business corporations to operate more efficiency and competitively, while broadening wealth-creating ownership participation, creating new capitalists and “customers with money” to support the products and services being produced. This can be achieved with any reduction in wages or benefits.

The thinking of those advocating ONLY a boost in the minimum wage is the result of being stuck in one-factor thinking––that is, the labor worker. While they often tiptoe around an understanding the relationship between economic inequality and concentrated ownership of productive capital asset wealth, they remain, at least publicly, oblivious to the most powerful and increasingly productive factor––non-human physical capital (the land, structures, tools, machines and robotics, computerization, etc.) that is responsible for 90 percent of the production of the products and services needed and wanted by society. Their focus should be on broadening personal ownership of capital asset formation simultaneously with financing the growth of the economy, instead of just talking about the continued concentration of capital ownership and the dire consequences for labor workers or the limited financial good that a minimum wage boost would create.

We desperately need a national discussion on the topic of the importance of capital ownership and how we can expand the base of private capital ownership simultaneously with the creation of new physical capital formation, with the aim of building long-term financial security for all Americans through accumulating a viable capital estate.

This is the approach necessary for business corporations to best serve their constituencies — customers, owners, and employees — instead of just constantly concentrating more wealth ownership among a tiny minority.