Proving Nick Hanauer Right

I have previously cited Nick Hanauer, the billionaire who has repeatedly pointed out that the belief–embraced by the GOP–that raising the minimum wage depresses job creation is a fallacy.

As Hanauer has emphasized, this economic theory has cause and effect backwards: jobs are created by demand. (If you aren’t selling your widgets, you aren’t hiring more people to produce greater numbers of them.) Pay workers a living wage, putting disposable income in the hands of people who hadn’t previously had any, and increased demand will boost both job creation and the economy.

I get an email newsletter from Axios, (link unavailable) and a recent one included a report on fast-food industry earnings that certainly seems to confirm Hanauer’s thesis.

Between the lines: The fast-food industry’s biggest tailwind is coming from a surprising source — the increased pay of low-wage workers.

After trailing higher-paid workers for years since the financial crisis, earnings for the bottom 25% of workers have been growing at a rate much faster than the national average, and weekly earnings for the bottom 10% of full-time workers have grown even faster, data shows.

Generally, rising wages would be seen as a negative for the industry, but coupled with stable gas prices, the increasing paychecks of low-wage workers means more money spent at fast-food and fast-casual restaurants.

Be smart: Goldman’s research team estimates 70% of the industry’s sales growth over the past 5 years can be explained by rising wages, lower gas prices and a boost from third-party apps like GrubHub and Uber Eats.

Traditional economic theory says that if I have to pay employee A more, I will have less money available and I will thus be unable to hire B.  That makes all kinds of sense–all else being equal. What real life tells us, however, is that all else isn’t equal. As the Axios report shows, the increase in buying power more than compensates for the increase in payroll.

You would think that a political party devoted to the theory that cutting taxes will  generate revenue sufficient to pay for those cuts would understand this.

The theories may be similar, but reality can be a cruel mistress: when the issue is raising the minimum wage, real-world outcomes demonstrate that Hanauer’s approach works, but when the issue is tax rates, the Republican approach– cutting taxes on rich people– doesn’t.

As Paul Krugman has written,

In late 2007 the Trump administration pushed through a large tax cut, whose key component was a drastic reduction in the tax rate on corporate profits. Although most economists were skeptical about claims that this would do wonders for economic growth, conservatives were ebullient. Lower tax rates, they claimed, would give American corporations the incentive to bring back trillions of dollars invested overseas, and foreign corporations a reason to invest huge sums in the U.S.

And Republican politicians bought this argument. Even Susan Collins, the most moderate Republican in the Senate (although that isn’t saying much) declared herself convinced that the tax cuts would pay for themselves.

Krugman followed those opening paragraphs with graphs and statistics demonstrating rather dramatically that the tax cuts did not pay for themselves.  Not even close.

For example,Krugman says

Business investment was 13.2 percent of G.D.P. before the tax cut went into effect. It’s now … 13.5 percent. That’s a rise of around 0.3 percentage points, or less than a tenth of what the tax-cut advocates predicted.

As a result of the GOP’s 2017 tax cuts, deficits and the national debt have ballooned. Republicans would have marched on Washington with pitchforks if debt levels this steep had been generated by a Democratic Administration.

Real-world evidence says: pay working people a living wage, and everyone benefits.

Give the rich a tax cut, they sock their savings away in a tax haven, and no one else benefits.

15 thoughts on “Proving Nick Hanauer Right

  1. “Traditional economic theory says that if I have to pay employee A more, I will have less money available and I will thus be unable to hire B.”

    This self-serving claim by big business and corporate heads is a cover-up of the basis in fact that paying employees higher wages would cut into their unconscionable profit rate. Too many of them depositing those unconscionable profits in offshore banks to avoid paying their lowered tax rates which must be found elsewhere; usually from the low-paid workers who cannot afford to buy those widgets.

    “Give the rich a tax cut, they sock their savings away in a tax haven, and no one else benefits.”

    These simple truths have increased since Citizens United went into effect and our government was put on the auction block. Repeating them often enough might eventually result in bringing out those voters who sit at home on election days.

  2. JoAnn,

    Of course. It’s the lie that’s been perpetrated since the invention of money. Republicans embrace lies, because they are (1) morally bankrupt, (2) Think that God will provide for the poor, (3) Think that everyone will believe them and (4) Enjoy screwing working people for the sake of their enrichment.

    Other facts are that families making less than $50,000 per year spend EVERY DIME on food, shelter, clothing and transportation. Pay them $60,000 per year and they will do more of the same. But that flies in the fast of the quarterly report lie that capitalists and financiers are compelled to keep telling by their stockholders.

  3. For more than 30 years, our Neoliberal world has cut taxes on the rich, and it does one thing only…”As a result of the GOP’s 2017 tax cuts, deficits and the national debt have ballooned.”

    Corporations used the cash to buy back stocks which have elevated the stock market. Period.

    The only reason wages are growing at the lower levels is the demand for employees. When retail starts paying more, the fast-food employee heads to greener pastures.

    Both political parties have espoused voodoo economics because they don’t write the tax cuts…accountants and tax lawyers write them for the industry.

    Until we have a political class who work for the people, the Donor Class will benefit from everything in Washington. You heard this in the Democratic debates from the “No we can’t.” crowd. Pathetic.

  4. It’s no mystery why increasing the pay of lower-paid workers increases, rather than decreases, employment. If a pay raise lowers corporate profits, this shifts money from those who save more to those who (by necessity) spend more. This increases aggregate demand.

    Within reason, this doesn’t appear to reduce investment. Investment opportunities increase so long a demand is increasing.

  5. The party of wealth cares about wealth. They just as soon not have the wealthy populace cluttered up with the poor and middle class because they don’t donate so what good are they?

    They and bankers (who make money by handling the wealth of the wealthy) have made up the rules that allow the wealthy to donate more lavishly and published them under the nom de plume of “economics”.

    We need to do the same for the people who build the economy, the workers who are the consumers who are for all intent and purposes we, the people.

    The first rule of the real economy is that the government has very little to do with the economy. What business cycles really are are the effects of innovation. For instance the current record business expansion is not due to Trump but to Obama who restored our economic rules from the last redistribution attack by Bush. What is the cause of this prosperity? Computers following Moore’s Law and the revolution that they have created in monetizing data. What will be the next extension of prosperity if we get rid of Republicans? Conversion of our energy infrastructure to sustainable as well as the labor required to bring about the necessary compression of civilization to a significantly smaller area of earth above rising seas and with weather still conducive to human habitat.

    What Democrats will bring us is not workers to serve the wealthy but vice versa so prosperity grows in terms of the number of people who live more satisfying lives from it, not workers enslaved to the wealthy because they make up the rules.

    All we need is courage, faith in ourselves and our labor, and the unity to stand replacing the divisiveness that makes us too easy to manage.

  6. No. No. No. No pay raise for workers. All they would do is salt it away in an offshore bank. They’d buy back stock. They’d spend it in Monaco. They’d use every penny of it to open another drapery factory in Bangladesh. They’d use it to open up another cocaine mule route from Mexico. They’d buy another judge and a half-dozen Congressmen. They’d spend it on a penthouse for a third mistress. And no, they would not repatriate that $25 they left in Tijuana.

  7. Ms. Kennedy: my phone recently died. When I got another one, your blog did not transfer to my new Facebook account. Can you “refriend” me so I can resume reading & responding to your writings? My phone number is 317 260-1800. Thank you. Vicki DuBois

  8. Vicki,

    If you go to the blog, you will see a “subscribe” link. Subscribers get a link each morning to that day’s blog post. If you have any problem subscribing, email me and I will add you.

  9. “Give the rich a tax cut, they sock their savings away in a tax haven, and no one else benefits.”

    For the life of me I cannot understand why this is such a hard concept to fathom. It stems from elemental human nature mixed with a large dose of easy to understand greed. Davis Stockman tours the country speaking out on the evils of what, as a young OMB Director, he helped orchestrate during the Reagan Administration based on the fallacious “Laffer Curve”.

    Other than throwing out the bumbs that still push this totally hackneyed idea out of office what more do we need to see to be motivated to trash this system once and for good?

  10. There has always been money to made off of exploiting people if you can get labor desperate enough to do it. 80% of us have been in a recession for the last 17-20 years. Bailing out banks and not raising minimum wage got us Trump. The economy, stupid…all over again. We’re sinking into 3rd world country safety and crime with no middle class and a baby-doc leader.

    Thanks for what you do! I also follow Nick, and I follow Asher Edelman as well.

  11. We are certainly living the good life. Now everyone can have at least two minimum wage jobs to support their families. Now that wages have gone up by $0.73 per hour, they might not even have to work full time at that second job (or maybe that’s the third job).

  12. The theme of today’s blog is old news. I took two semesters of Labor Economics in my quest for a degree in economics and demand was known long before then to be the final arbiter of economic growth, and how do you stimulate demand? Simple. You put more wherewithal in the hands of those who are going to spend it, thus fattening the relative positions of all those in the chain, from corporate producers, their shareholders and executives, their financiers, those who produce such goods and services, and even consumers who will enjoy lower prices due to the efficiency in the scale of production of such goods and services.

    Of course, conventional thinking is that the less wages you pay, the greater the profit, but this is untrue and corporations and their financiers know it, so the only reason I can see why they hang on to this old and unproven model has to do with power, i.e., cheaper wages play into who exercises power in the productive process, and with state governments that do nothing for the rights of labor while passing right to work laws and those in national government who refuse to increase the minimum wage in a conspiracy with such corporate actors in return for financing of their campaigns, it becomes plain that more than mere money is involved and that corporations will sacrifice a bit of profit in order to maintain control over a cowed workforce.

    The answer, of course, is federal legislation composed of a new Wagner Act, Fair Labor Standards Act and other such union-friendly legislation – and acts with teeth. Likelihood that such relief is likely under a Trump administration? Less than zero. Likelihood under a Warren administration? One hundred percent, assuming a Democratic House and Senate. Our task for 2020 (in addition to electing a Democratic president? Elect a Democratic Congress.

  13. ” . . . the belief–embraced by the GOP that raising the minimum wage depresses job creation . . .”

    The fallacy is the idea that the GOP actually believes any such thing. They don’t believe it because they’re not economic fools.
    They TELL us they believe it because they don’t want to say, “What the donor class wants the donor class gets — and they want 1] to pay their employees as little as possible, 2 ] huge tax breaks and 3] tax loopholes that allow them to park any monies they’re not using for their day-to-day expenses overseas where taxes are even lower than here.”

  14. Interesting statistic that I learned last week. The top 10% (income) spend 76% of their income. The bottom 90%? They spend 102%. This is why trickle down economics DOES NOT WORK. For years I’ve asked my high net worth clients what they’d do with a $10,000 check. They’d SAVE it. But, the lower net worth ones? They have loads of things to spend money on. It’s just plain old common sense. Something the Republicans seem to be entirely lacking in!

Comments are closed.