Sorry, Folks, Rich People Don't Create The Jobs

http://www.businessinsider.com/rich-people-dont-create-jobs-2014-6

by Shivetya • 12 years ago

106 114 12 years ago

I wonder how many of these "Job Creators" really believes that the wealthy create jobs, or if they are fully aware it's BS?

wmeredith• 12 years ago

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

― Upton Sinclair[1]

1) http://www.goodreads.com/quotes/21810-it-is-difficult-to-get...

wodenokoto• 12 years ago

As far as I am to understand, most of the 1%'ers wealth is tied up in investments.

And this is why they consider themselves the job creators. They invest in all sorts of companies and markets and without the initial investment to start a company, there wouldn't be anything for the middle-class to purchase with their middle class salary, not to say no one to pay that salary either.

If they just bought gold and hid it in a vault, then I expect them not to consider themselves job creators.

tdaltonc• 12 years ago

If that's the idea, then I guess the members of working class should start calling themselves "wealth creators", "return creators", or "investment opertunity creators."

krisdol2• 12 years ago

It's precisely why high income taxes on the wealthy should exist. With high income tax, they have an incentive to invest more money than they keep (rather than hand it over to the government). With low taxation, they can take a small hit and hoard whatever amount they feel like they should. Not taxing the "job creators" stops making them "job creators". Furthermore, keeping wages low prevents regular workers from ever becoming "job creators".

pdonis2• 12 years ago

As far as I am to understand, most of the 1%'ers wealth is tied up in investments.

And this is why they consider themselves the job creators.

But this is a very inefficient way of creating jobs; that's one of the main points of the article. Most of the 1%'ers wealth is in investments that they do not actively manage. That has to be the case, because a single person just doesn't scale. There's no way any single person can efficiently determine how best to spend billions of dollars. But if you spread the billions of dollars out among thousands (or even millions) of people, they'll find much better ways to spend it--where "better" means "creating more wealth in aggregate".

bkcooper• 12 years ago

The threshold for the 1% is "centi-millionaire," eh? I'm apparently substantially more baller than I realized.

jameshart3• 12 years ago

I guess you, like me, initially read it as an SI prefix, and were a bit confused about someone with a net worth of $10,000 being touted as a one-percenter... I mentally rewrote it as hecto-millionnaire and it made more sense.

But I guess a centipede doesn't have a hundredth of a foot, and it's not like millionnaire/billionnaire follows an SI naming scheme in the first place. Maybe we should introduce a new scale:

megalonnaire

gigalonnaire

...

Successful tech entrepreneurs could rather aspire to becoming binary prefixed mebilonnaires or gibilonnaires.

eCa• 12 years ago

Hecto[1] would have been a better choice for a prefix.

[1] http://en.wikipedia.org/wiki/Hecto-

steveklabnik2• 12 years ago

I'm apparently substantially more baller than I realized.

We all are. The poverty threshhold estimate for 2013 is $12,119/year for a single adult under 65.[1] 49 million people in the US are in 'food insecure households',[2], which means '“limited or uncertain availability of nutritionally adequate and safe foods or limited or uncertain ability to acquire acceptable foods in socially acceptable ways.” 16 million of those 49 are children.[3]

Furthermore, if you don't just look at poverty, but at 'the middle class', whatever that means, as of 2004, the median income for a _household_ was $44,389[4]. The 2011 WSJ "What Percent Are You" calculator says that for a $120,000 income, (which is anecdotally what you can expect as a Bay Area programmer, at least, according to my anecdata), you are in the top 16% of earners. Glassdoor says that it's $100,000,[6], which puts you in the top 19%.

Software development is a very lucrative profession.

1: https://www.census.gov/hhes/www/poverty/data/threshld/

2: http://en.wikipedia.org/wiki/Food_security#Food_Security_in_...

3: https://feedingamerica.org/hunger-in-america/hunger-studies/...

4: http://en.wikipedia.org/wiki/Household_income_in_the_United_...

5: http://blogs.wsj.com/economics/2011/10/19/what-percent-are-y...

6: http://www.glassdoor.com/Salaries/san-francisco-software-eng...

duaneb• 12 years ago

Poverty isn't a great measure as you can be out of poverty without a livable wage.

spindritf• 12 years ago

What about clickbait sites selling demand-side economy story as some sort of revelation despite being heavily represented in the field of economics and government policy for the last hundred years? Do they create jobs? Or just confusion?

While it's true that Americans take less money home, it's not true that compensation has fallen. In fact, "total compensation reflects growth in productivity."[1]

BTW What actually allows trees to grow is the CO2 from the air. That's what they're made of. Partial credit for mentioning water.

[1] http://www.nber.org/digest/oct08/w13953.html

Jtsummers2• 12 years ago

BTW What actually allows trees to grow is the CO2 from the air. That's what they're made of. Partial credit for mentioning water.

  But what actually grows and sustains trees is the combination
  of the DNA in the seed and the soil, sunshine, water,
  atmosphere, nutrients, and other factors in the environment
  that nurture them.

Pretty sure they cover CO2 in that list under the broader category of atmosphere.

taeric3• 12 years ago

The source essay for this is equally as good of a read. If not better, honestly.

taeric3• 12 years ago

Oddly, I posted it and it got turned into a dead link. :( I'm not even sure what that means. I'm assuming I messed up the posting.

paulhauggis• 12 years ago

It's like saying: you didn't earn that PhD, since we all pay tuition that fund the school, we all earned it for you.

it seems it's cool these days to never give the "rich" any credit. When hey leave, and take many of the jobs with them, will we still be parroting this nonsense that they don't create jobs?

Jtsummers2• 12 years ago

That's not really analagous to Hanauer's thesis. His point is that believing the rich, on their own, to be the job creators is absurd. That it's the entire economic system that enables job creation, and the wealthy are only one component. And given his attitude in the original essay [1], he doesn't deny them their credit, he just thinks "Job Creators" is a loftier title than they deserve.

[1] http://www.politico.com/magazine/story/2014/06/the-pitchfork...

hansy• 12 years ago

For anyone interested in learning more about the growing inequality gap in America, I recommend watching the documentary "Inequality For All" (http://imdb.com/title/tt2215151/).

ancap6• 12 years ago

I have not seen the movie but it is laughable that almost without fail the voices for "equality" are those who are quite rich themselves. Just look at the cast for that movie.

ceallen• 12 years ago

And if they were poor, they'd just be people jealous of the success of others. Ad-hominems are an easy way to sidestep discussion.

sp3325• 12 years ago

Russell Brand: When I was poor and I complained about inequality people said I was bitter, now I'm rich and I complain about inequality they say I'm a hypocrite. I'm beginning to think they just don't want inequality on the agenda http://www.theguardian.com/commentisfree/2013/nov/05/russell...

ancap6• 12 years ago

To anyone reared on the political orthodoxy of the moment... "higher wages cause higher unemployment,"

This is not political orthodoxy at all this is economic law. Anyone who understands the basic principle of supply and demand knows that higher price lowers demand. http://www.economicpolicyjournal.com/2014/06/asian-community...

jameshart3• 12 years ago

or does lower demand raise prices? And you focus on the fact that demand falls but ignore that supply increases. All economic 'law' says is that price and quantity for supply and demand are correlated - all other things being equal. But when other things change, they move the supply and demand curves and the equilibrium price will move. It's possible to have things change in the marketplace which cause the demand or supply curves to shift in a way which increases both the price of labor AND the quantity of labor exchanged in a market at the same time - meaning that wages would go up and unemployment down.

The open question for politicians is whether it's possible for them to enact policies which cause that. And the open question for economists is whether that would actually be a good thing.

ancap6• 12 years ago

or does lower demand raise prices?

No. Draw a supply and demand curve. Shift the demand curve to the left (representing lower demand). Clearly the lower demand causes lower prices.

But when other things change, they move the supply and demand curves and the equilibrium price will move.

And that is exactly the problem. Raising the minimum wage does not cause "other things [to] change." It is changing a single variable. With just a rudimentary understanding of economics the result is lower demand for labor (unemployment).

bitJericho• 12 years ago

There are many cases where higher prices raise demand.

ssmoot3• 12 years ago

Yes, but better wages don't necessarily equate to higher prices.

During the domestic auto bankruptcies it was a bit grating to hear people ramble on about the "high" wages of union workers being at-fault for the domestic's inability to compete.

Considering domestic vehicles are already generally less expensive than imports, just how much more less expensive do they need to be to get people to buy them? If union labor represents $1,000 of every Malibu sold, and union wages were cut in half across the board, and that savings was passed onto the consumer with a $500 lower MSRP, would that move significantly more vehicles?

I'd like to think common sense would say "of course not". The price is already (generally) very competitive.

It's like basic reasoning skills go out the window in these discussions.

To make the argument higher blue-collar wages are a problem, first you (you'd think obviously) need to quantify the impact of those wages. Is it 2% of the cost? 5%? 10%? 20%? Would killing the retirement benefit, and cutting the base salary in half drop that ~$60 total compensation package to $35? If labor compensation is 10% of the cost of a $30,000 vehicle, you can now theoretically (if the savings aren't simply reinvested elsewhere, or disappear in management bonuses) drop the price of the car to $28,750.

All of those "savings passed onto the consumer" assumptions seem real unlikely to me. But even then, is that $1,250 savings going to move more product?

Probably not. While there are always exceptions, most people who aren't already considering a domestic vehicle aren't making their decision on price alone. Price isn't even the primary concern for someone who purchases a Camry over a Malibu (obviously; and there's nothing wrong with that).

So yeah... I don't think increased wages for the average worker have a whole heck of a lot to do with higher unemployment. And there are a lot of business advantages to being an employer who takes care of their people IME. Especially when applied to software development (you'd think here of all places that would be glaringly obvious).

I think your comment is needlessly snarky. You could as easily suggest that "Anyone who understands basic economics knows that higher wages increase purchasing power" (in the short-term at least). Furthermore that the people in the lowest pay brackets are the ones most likely to spend it in ways that benefit the overall economy. Which is why (as distasteful as feels sometimes) extending unemployment insurance is one of the most economically beneficial and stimulating things you can do in times of recession. Those dollars are going to get spent, and they'll get spent where they'll be most effective at creating new jobs.

ufmace2• 12 years ago

I think he's talking about the labor market here. Conventional microeconomics would suggest that increasing the price of labor by setting or increasing a minimum wage would reduce the demand by employers for the product, human labor.

That may be true in the limited case, but the argument is clouded by questions like whether increasing income of all of the employers' customers would allow the employer to do more business or raise prices, thus potentially increasing their demand for labor to compensate.

I can't see any doubt that this would happen, but the extent is hard to determine. How much will the average consumer's wages actually increase, and how much of that will be taken up by increased prices in other goods they buy? If they end up with more money, what will they do with it - save more, buy higher-quality goods, buy luxuries? So the overall effect on any particular business is unknown.

stephencanon• 12 years ago

If you actually cared about understanding supply and demand you would know:

“supply and demand" is really a theorem about microeconomics and you’re on shaky ground when you start trying to apply it to macro phenomena. People do it all the time, but that doesn’t make it valid, because…

“supply and demand” requires that everything else in the market is held constant; you can’t make that assumption for macro phenomena, and you especially can’t do so when discussing wages.

“supply and demand” as commonly quoted is a theorem that depends on certain assumptions about the demand curves of the goods in question, and it’s at least not obvious that the demand curves for labor satisfy those assumptions.

Looking at your other comments, you don’t really seem to be interested in understanding anything, however, so I’ll let you resume your regularly scheduled trolling now.

ancap6• 12 years ago

The fact that minimum wage increases unemployment is clearly demonstrated at a micro economic level. Reading the link I previously posted an actual case study of small business owners who, in their own microeconomic sphere, will have to fire workers due to increases in minimum wage.

Looking at your other comments, you don’t really seem to be interested in understanding anything, however, so I’ll let you resume your regularly scheduled trolling now.

In other words, "My logic cannot counter, so I will resort to insults."

mturmon• 12 years ago

Well said, thanks. It's galling because the commenter is both very certain, and wrong, to make such claims without taking the macro situation into account. It's not just one independent variable.

clavalle7• 12 years ago

This simplistic brand of economics is killing us. It is infecting otherwise intelligent people and causing wholesale policy mistakes that is hurting everyone.

It is the equivalent of taking a physiology course and diagnosing your friends' medical conditions -- it is not that simple.

There is a whole system that needs to be taken into account and simple models, while useful in a limited sense, do not even come close to creating an accurate picture of reality.

sharemywin2• 12 years ago

But how much will demand go up for products and services in the area? How much of the owners profits goes to taxes and investments that will now get spent on things like restaurants.

richcollins5• 12 years ago

Nobody creates the jobs, they exist to be discovered. If you adopt the viewpoint that other people create jobs for you then your fate is not in your own hands.

People want things. If you can create something that other people want and they can create something that you want, you both have a job.

bryanlarsen5• 12 years ago

You missed a key qualifier: if you can create something that other people want and can afford.

richcollins5• 12 years ago

They can afford it if they can create something of value that you're willing to accept in return. If they can't then that is the real problem. You have to ask why they can't create enough wealth to trade for the things they want / need.

taeric3• 12 years ago

True, but almost to the point of nonsense. Consider, nobody created the job of iPad attachments. Yet, if it didn't exist those jobs wouldn't either.

ancap6• 12 years ago

The line of reasoning of this article can be applied to all things and by extrapolating out the logic it becomes evident how absurd the logic really is. Examples:

1) Mr. Gates did not create Microsoft... someone else built the garage he started in; OR his parents created him and therefore they created Microsoft (or an infinite number of other rationales)

2) The engine malfunctioning did not cause the airplane to crash, gravity caused the plane to crash

jgh• 12 years ago

No I don't think that's quite right. He very clearly is saying that the entrepreneur alone is not responsible for the success and growth of a company because they also need customers and employees and etc etc.

As for your plane crash analogy, http://en.wikipedia.org/wiki/Chain_of_events_(aeronautics).

eloff• 12 years ago

I think here there's some truth to both propositions (why are people so black or white in their thinking when the world is always shades of grey?)

Clearly without demand (consumers with money) you can't create jobs in the economy. Just as clearly, without entrepreneurs willing to take the risk and put in the effort, and the investors who fund them, you can't create those jobs either. So the truth of the matter is that economics is complex, and you need plucky entrepreneurs, wealthy investors, and consumers with lots of disposable income to create jobs, among a whole host of motivations, cultural and societal influences, international trade and agreements, infrastructure, even healthcare, and other human factors.

bryanlarsen5• 12 years ago

The analogy the original article used was that of entrepreneurs and investors to seeds: a seed is a vital component to the growing of trees, but far from sufficient.

hnnewguy• 12 years ago

This is all "chicken and egg" stuff; does the demand for goods create jobs, or do the jobs create demand for goods? I think it's both.

Regardless, the premise is flawed. Rich people don't create jobs, smart and ambitious people do. There just happens to be some overlap between those groups.

snowwrestler3• 12 years ago

I think it's plenty arguable that rich people create jobs.

For example: if rich people don't create jobs, then how can it be their fault that there are not enough jobs? If jobs really come from the middle class, why hasn't the middle class created more of them? It would be in their self-interest to do so.

Arguing that wages for middle class jobs should go up raises the question of where that wage money should come from. The answer is capital, i.e. rich people.

Societies without rich people are also societies that struggle to create well-paying jobs. The USSR and China attempted to eliminate rich people by adopting a communist economy. What happened is that the people in the government were the only ones who got rich, and the government was the only source of jobs. That is not a coincidence.

Since the end of the 20th Century, both Russia and China have relaxed government control of capital, and the result has been an increase in both rich people and well-paying jobs in those countries.

Finally, consider technological innovation; a rich source of job creation. It is created by investment, sometimes seemingly far-fetched or speculative investment. Google and the iPhone are two examples of products that were not guaranteed success, and were even dismissed by some industry experts when released. Each has directly created thousands of jobs and indirectly enabled at least tens of thousands more in supporting or related fields.

But before there was Google or the iPhone, there were rich people writing checks to the people who envisioned them.

BTW this is NOT an argument against a higher minimum wage. In fact I think the questions of "where jobs come from" and "what is the ideal minimum wage" are only very loosely connected.

edits: spellings

clavalle7• 12 years ago

Holy smokes, where to begin...

if rich people don't create jobs, then how can it be their fault that there are not enough jobs?

No one is blaming rich people. They are blaming the system (aspects of it, at least) that we have collectively created.

If jobs really come from the middle class, why hasn't the middle class created more of them?

Much like fire needs heat, oxygen, and a fuel a successful business needs entrepreneurs, capital, and demand. If the middle class doesn't have disposable income that limits available capital and demand for creating and sustaining a business by middle class entrepreneurs.

Arguing that wages for middle class jobs should go up raises the question of where that wage money should come from. The answer is capital, i.e. rich people.

Creating value creates money. That's how this whole thing works. It doesn't have to come from rich people, it comes, ultimately, from profit.

The USSR and China attempted to eliminate rich people by adopting a communist economy.

You are jumping a bit far, there. I don't think anyone is advocating communism.

But before there was Google or the iPhone, there were rich people writing checks to the people who envisioned them.

Capital doesn't have to come from rich people. Just as centralization of economic control is inefficient and ultimately harmful in communist systems you cite, it is just as destructive in a capitalist system.

snowwrestler3• 12 years ago

The terminology makes it very difficult to have a productive discussion. "Rich people" are not rich the way that Asian people are Asian. A rich person is simply a person who has the legal right to direct large amounts of wealth.

Conversely, every piece of wealth has at least one person who has the legal right to direct it.

So when you make a statement like "It doesn't have to come from rich people, it comes, ultimately, from profit," it's a somewhat meaningless distinction because every piece of profit is controlled by a person somewhere. A rich person is just a person who has the legal right to direct large amounts of profit (i.e. wealth). Therefore their decisions will have larger effects on job creation.

Ultimately it doesn't matter that jobs are created by rich people. What matters is what policy steps we can take to improve job creation, wages, and opportunity for U.S. citizens. Unfortunately actual policy discussions are too frequently railroaded by framing arguments like "do rich people create jobs."

talmand5• 12 years ago

I understand the concept that a business such as Wal-Mart can easily afford a sudden rise in minimum wage as that's almost always the example used. That, or another similarly large and successful company.

But what about that mom and pop store on the corner? Am I to understand that they could afford the new employment costs if suddenly it were to be doubled, or close to it? How long does it take for the new economic benefits of the store paying out more money per week to employees to offset the new costs? Can they last that long? Some places are on tough times and on tight margins. Any increase in expenses is potential disaster. Do they raise prices at first because that new positive economic impact doesn't happen immediately, which may actually prevent the positive impact if other local stores have to do the same? Will the customers with more money to spend in their store offset the new higher costs of employing people or will it be a wash?

(If anyone has a source of the economic impact on small businesses, and not the large chains, of doubling the minimum wage I would be highly interested in reading it.)

Because this isn't just about increasing minimum wage, it would increase wages for a great number of people who are not making minimum wage. Would the manager of a pizza shop be happy that his drivers suddenly make more per hour then he does? Of course not, that would mean all wages at the place would need to be adjusted according to seniority and responsibilities. Many wages are structured based on the current minimum wage level.

Plus, it would seem that it would be in the best interest of Wal-Mart to push for doubling the minimum wage. As been shown numerous times, they can afford it. Much of their competition could not.

Not that I disagree with the sentiment, something definitely needs to be done because the current mantra clearly doesn't work. But the issue is far more complicated, as the original essay mentioned points out, then just simply raising the minimum wage. I think raising the minimum wage would, in the end, be a good thing; but I believe there would be a wave of negative consequences, and there are many, that would have to be survived. Many people who are against raising the minimum wage point out those negative consequences, but cannot see beyond them. That doesn't mean they should be ignored.

krisdol2• 12 years ago

Regarding your mom and pop store example: some businesses should fail. If they cannot afford to keep full time workers out of poverty, they cannot afford to run a business that hires workers.

Infinitesimus• 12 years ago

But when that happens, we have both the owners of the stores and their employees joining the unemployment pool. Then what?

talmand5• 12 years ago

You seem to be assuming that it is the decision of the business to keep the employees in poverty.

They might be able to afford to run a business that employees fewer workers, which is the opposite of the intent.

It's one thing for a business to fail due to market forces or poor choices by management/owners. It's another for a business to pushed into closing, thus employees losing their jobs, by a government mandate that attempted to make the employees' lives better.

That's the initial wave of negative consequences that I said would have to be survived before the positive results would come to fruition.

ufmace2• 12 years ago

full time workers

What if somebody doesn't want/need a full time job, or to hire a full time worker? That's one of the things that bothers me about boosting the minimum wage. Force all businesses to pay enough to raise a family of 4 for every job, and people who don't have a family and don't need the money will now have a harder time finding jobs that meet their needs, because nobody can create a job unless they can afford to pay somebody much more than they need.

sharemywin2• 12 years ago

my parents own a small time pizza shop. They have already talked about it they would do. stop offering delivery. A good chunk of costs in pizza are to subsidize delivery and early and late hours. maybe shut down on sundays or lunch. only keep the profitable hours.

bryanlarsen5• 12 years ago

Which means that their competitors who still offer delivery would start making more money, and could afford to hire the drivers that your parents let go...

sp3325• 12 years ago

Since many of their customers will be earning more money, have they considered charging more?

bryanlarsen5• 12 years ago

The article notes that minimum wage increases are supported by many small business associations.

That's because, in most cases, it's the Mom & Pop stores that can afford minimum wage increases more than the big corporations can.

Many of the hours worked in a Mom & Pop store are worked by Mom & Pop. That salary won't change no matter what happens.

Mom & Pop stores are also more likely to be already paying above minimum wage.

As for ability to pay, Wal-Mart does not have the ability to significantly increase pay unilaterally.[1] A minimum wage hike would require them to raise prices. This would allow Mom & Pops to compete with Wal-Mart better.

1: http://ipeatunc.blogspot.ca/2013/07/walmart-workers-cant-be-...

talmand5• 12 years ago

If the owners of the small business don't change their own wages after a minimum wage hike then something is likely to a problem for them. We cannot assume that their cost of living will not increase in some way after the hike.

They may indeed be already paying above minimum wage. But I pointed out that it's likely that many people who are not making minimum wage will see an increase in pay or will demand it. Let's say our small shop has two employees who make $10 an hour. They both now make $15 an hour, good for them. But that extra cost could have been a third employee. Let's say they hire that third employee anyway. Now the original two want a raise because it isn't right that a new hire makes the same as the experienced two.

Granted, very simplified example that's rife with potential issues.

So, if Wal-Mart's costs go up they raise prices. You are assuming that the small business won't have to do the same? Plus, if prices rise to counter the increased employment costs doesn't that eventually put us back where we started?

gerbal3• 12 years ago

First off, most of what follows is anecdotal.

I've worked at a couple of mom-and-pop businesses. Most of our customers at a couple of the places were people working at or just above minimum wage.

Were our customers to have their income doubled it would be great for the business. More customers with much more disposable income? That sounds fantastic. And in turn the cost of higher wages for the employees is smaller than the reward from a more prosperous customer base. On a $2 cup of coffee for instance, the wage cost is somewhere between $0.15 and $0.50.

A customer making $8/hour would balk at a $3 cup of coffee, but a customer making $16/hour would have no issue with it. Even accounting for a 15% to 25% increase in cost all the way down our supply chain, we would still come out the better for it. As would most businesses.

Even businesses were wages are the majority of the expenses wouldn't be hurt. If the cost of a service is 75% labor wages, and that cost doubles, you need to raise the price of that service by 35%, right? But your lowest income customers have a 100% increase in income. Probably a multi-times increase in disposable income. That's good for business.

The problem with competing with walmart has little to nothing to do with labor and wage costs. It has to do with Walmart's highly optimized supply chain and one-stop-shopping at very low prices. Doubling of wages would have very little impact on the dynamic between Walmart and smaller businesses.

Though smaller businesses may benefit from a consumer base with more disposable income having to be less price conscious and not having to shop at walmart out of economic necessity.

overgryphon• 12 years ago

For many small businesses, increasing the minimum wage would increase the cost of their employees but not increase the income of their customers. These businesses would see an increase in expenses but none of the benefits of a consumer base with more disposable income.

Walmart wants a higher minimum wage because their consumer base includes minimum wage employees.

pdx2• 12 years ago

Speaking for myself and my wife. We debated for years whether to get a house cleaner. Finally, we have made the leap and have somebody come over once every two weeks to clean. However, if that house cleaning company were to raise their rates 35% to compensate for increased wages, we would go back to cleaning our own house, without question.

I suspect that kind of thing could quickly make some businesses that had been viable, no longer viable.

talmand5• 12 years ago

Well, it seems many people's logic about small businesses disagrees with your example about customers at or slightly above minimum wage. With the "if Wal-Mart raised their prices then small shops could compete better" kind of thing. Not that I'm saying your wrong or anything, just pointing out obvious problems with such examples. My own included.

How do you know there would be a 15% to 25% increase in costs in the supply chain? Could it be more? Could it be less? Would it be possible that with a minimum wage hike that the individual costs for some parts of the supply chain the rise in costs could be much higher? Depends on the businesses involved. Meaning, what's good for one business is not necessarily good for every business.

What if a store has to raise their prices not by 35%, but more like 60% because of increased costs from their supply chain. That figure seems to only assume the prices are raised only to cover increased wage costs, and not considering new costs across the board. But hey, they still come out ahead right? What about taxes? Anybody getting this new increase in pay going to get hit with more taxes? I never see any of these articles discuss that aspect of it at all.

I'm sorry, but your logic seems overly simplified because it would seem to support the notion that since raising the minimum wage is good for everybody then why not just raise it to $50 an hour or $100 an hour? The original essay argues against that because it's a complicated issue.

JackFr• 12 years ago

Me, I'm a wage slave, but I do have a friend who put up his savings, borrowed money from a bank and built and opened a car wash. He hired a dozen or so young men and women who staff it, while he is an owner/manager.

He has been successful -- he judged the demand for a car wash correctly. Probably not a %1'er, but as a local small business owner is able to live a comfortable middle class life.

Certainly without customers and without the bank he could not have succeeded, but I think it's ludicrous to say the 'economy' created the jobs. There are some agents within the economy who 1) recognize opportunities for profitable activity and 2) direct resources these opportunities. I think it's reasonable to describe these people as job creators.

gerbal3• 12 years ago

This argument isn't about people starting small businesses, but rather about millionaires patting themselves on the back for being wealthy. Many of whom think of themselves as job creators because they have a maid and a gardener while getting richer by being clever on the stock market.

akmiller2• 12 years ago

But it's certainly reasonable to assume most of his customers are middle class individuals with enough discretionary income to spend on occasional car washes. The articles point is not that your friend doesn't deserve credit in creating jobs, but the initial creation is only one part. Sustaining those jobs requires sustaining the customers and to do that they must maintain enough discretionary income to spend on car washes. With the income disparity ever increasing it's easy to see the middle class fading and as that happens so shall your friends car wash business.

lnanek2• 12 years ago

Wow, a business article saying money sitting in a bank account does nothing? Are they that clueless? It is leveraged many times over and invested and used by the bank. Putting a dollar in the bank lets the bank pretend they have forty.

chrisbennet• 12 years ago

We were taught in school that a bank takes deposits and lends them out as loans but that's not how it really works. When a bank makes a house loan for example, the house is added to their balance sheet and it becomes an asset that they can lend again, minus a fraction.

budu3• 12 years ago

Had he been born in Africa, Hanauer points out — where the potential customers for his entrepreneurial efforts would have barely enough money to survive — Hanauer would likely be selling fruit by the side of the road

Africa in not a country. It's a continent with 50 plus countries, some with a middle class with decent spending power. So there's a high probability that Hanauer would in fact not be likely to be selling fruit by the side of the road growing up in a middle class family (as he did in the US) in an African country.

wavefunction• 12 years ago

What is the probability of growing up in a middle-class family in Africa? There is nothing fallacious or incorrect about what Hanauer points out.

ritchiea• 12 years ago

In the article he wrote "had I been born in Somalia or the Congo," where I don't believe there is much middle class or societal structure at all.

GioM• 12 years ago

Unless it's been revised, the actual article (not the business insider summary) says "Somalia or Congo", not Africa. See page 3 of the link below.

http://www.politico.com/magazine/story/2014/06/the-pitchfork...

pdx2• 12 years ago

It will be interesting to try to see what happens in Seattle after passing the $15 minimum wage. It will take years to fully implement, which will mask the cause/effect, unfortunately.

I do this thought experiment. If I write every person in America a check for one million dollars, who have I actually helped? In my thought experiment, the prices of everything will instantly rise to compensate for the increased wealth, and everybody will be exactly where they are now, just with more zeros on all their bills and paychecks.

I suspect that rent prices in Seattle, which are already high, will rise very rapidly, to relieve these workers of their extra income. That the wage increase will take place over a few years time is unfortunate, as this effect will be deniable by those who choose to deny it. But this is what my gut is telling me will happen. So, amusingly, it will be those evil 1% landlords, who will actually win, not the minimum wage workers, who will be exactly where they are now.

okaram• 12 years ago

If you write a check for 1M to every person in America, you help the poorest; if I have $0 I cannot afford anything; you give me 1M now I can get about 1/300M of the total of things.

I assume rents (and other things) will rise even more in Seattle, but not to take the whole increase; the 1% will always make lots of money, but hopefully the bottom 10% gets a slightly higher piece of the pie

Istof• 12 years ago

this is called trickle-up economics

asgard10243• 12 years ago

I think you are wrong, because you assume that the ability of people to exert power (to influence prices, for example) is independent on income. But that's probably not true.

So for example, in your thought experiment, some of the people could start a business with that million of dollars (invest it), and become more independent. That would be competition (or substitute, depends how you look at it), and it would prevent from rising the real price to the original level. If you suddenly give everyone a big sum of money (which is resources), you actually equalize power.

brg• 12 years ago

The minimum wage hike, coupled with property tax increases for transit, bridge tolling, and lack of effective transportation options will result increased investment and growth in the Eastside of the Seattle Metro region.

Bellevue is already undergoing a economic boom, and thanks in no small part to the action of the Seattle city council and King county I don't think there is an end to that in sight.

true_religion• 12 years ago

In my thought experiment, the prices of everything will instantly rise to compensate for the increased wealth, and everybody will be exactly where they are now, just with more zeros on all their bills and paychecks.

Well that's true if America is a closed economy without connection to the rest of the world.

I could say that manufactured good prices shouldn't increase too drastically as they are made elsewhere, but that'd only be assuming that everyone in the US continues living their life as they already have.

But this is a revolutionary change, so it ought to have revolutionary outcomes.

Possibility #1: US loosens immigration controls as everyone is cash-rich. A flood of Mexican and Canadian immigrants enter the country to become the new middle and lower classes. Prices normalize rapidly after a brief spike.

Possibility #2: Seeing the writing on the wall, Americans flee their country en masse, taking up residence everywhere in the world from Europe to Africa to Asia. These cash-rich Americans take advantage of the fact that local prices elsewhere can't change to compensate for their newfound wealth. The US dies.

This is ofcourse all assuming that everyone can offload their cash into something valuable before the US economy goes into a slump, making American dollars less valuable.

skybrian• 12 years ago

If you're going to do a thought experiment you need to think a little deeper. Most home owners would be able to pay off their mortgages and own their homes. All student debts would be easily paid off, and then some. Much inequality (outside the 1%) would vanish temporarily, since the difference between 1 million and 1 million and a small amount of savings isn't that much.

People would try to spend their money, resulting in much more demand, bottlenecks, and shortages. Of course this leads to inflation, but it also means the recession is over. Businesses would run out of everything and try to expand to try to meet supply, but their suppliers would raise prices too, maybe too high to make a profit. It would be a chaotic situation and people on fixed incomes would be screwed once the money runs out. It's hard to plan a business under these circumstances, but I'm sure some people would be smart enough to figure out a good plan.

So this is not "back where we started." It's a big reset that changes just about everything and probably a big disaster if it's sprung onto people without warning.

On the other hand, if properly planned and at a smaller scale, it could have some good effects. Giving an equal amount of money to everyone would work better than giving it to banks.

nickthemagicman• 12 years ago

What constrains landlords rent prices?

If you increase the minimum wage won't the landlords just subsequently increase rent?

So essentially increasing minimum wage is just funneling money to landowners?

dragonwriter• 12 years ago

What constrains landlords rent prices?

Competition.

If you increase the minimum wage won't the landlords just subsequently increase rent?

Yes, they will -- as will people selling other goods that are in demand by the people receiving more income. Under any reasonable assumptions about supply and demand elasticity, those receiving more income as a result of the minimum wage increase will still be better off after considering the specific inflation in the price of certain goods and services resulting from the greater income received by them as a group, but not by as much as a pre-increase analysis that ignored the market-specific inflation would suggest.

So essentially increasing minimum wage is just funneling money to landowners?

One effect of increasing minimum wage will be funnelling some money to landlords and others selling goods and services to the people receiving increases, while funnelling some money away from those selling goods and services to the people and corporatiosn paying the increases. (Often times, those will be the same people, though different specific goods and services.)

CWuestefeld2• 12 years ago

Unlike Hanauer and other 1%-ers, middle class people spend almost every penny they make, and this spending becomes revenue for companies started and owned by people like Hanauer.

The same is true for the rich as well. Much of what they earn is consumed directly. But for anything that's not, it's surely not being hidden under a mattress (they didn't get to be rich by losing out to inflation). Instead, these people are investing it or saving it.

If they just save it in a bank account, then the bank is (less the fractional reserve portion) loaning it back out to somebody else, probably providing the means for a non-rich-person to finance a house or a car or a new business. That is, it's being spent by the person taking out the loan.

If they invest the money, then it's providing the capital for business, which is even better. That business might spend it (there it is again - spending) to buy new machinery, or they might expand operations and hire more workers, etc.

Any way you slice it, other than the part that's held back in fractional reserve, the large incomes of the rich do get spent. Either they spend directly, or they let someone else use it for their own spending.

asgard10243• 12 years ago

Depending on what you mean by "spending". I see spending as an irreversible process, where someone actually decides how to convert resources to products. You could say the more you do that, the bigger the economy.

However, rich people don't engage in this sort of spending as much. Lot of their "spending" is in reality just circulation of money through rent extraction. And it's important for them to do that, because that allows them to keep their power. For instance, if they loan it to a person, that person becomes dependent on them.

Your idea is based on flawed premise that one has only two rational options what to do with money - invest (in a narrow sense, to make actual decision how to convert one resource to another) or consume. In reality, there is a third option, which is similar to saving, that is investing money in power grabbing and rent extraction. While saving doesn't give you an advantage to other players, the rent extraction may.

This was already explained by Marx long time ago, when he described the capitalist as someone who wants to create more money from money he has through profit from investment. And more recently this was explained by Piketty, that you can have a situation in economy where rich people try to "invest" into rent extraction and not producing more goods or services.

CWuestefeld2• 12 years ago

Be that as it may, it's not the claim the article was making. The claim was that rich people don't lead to growth because much of their money sits idle, and thus cannot "trickle down" by being used in the economy.

The moral effects that you outline aside, you seem to agree that the portion of their money that the rich don't spend themselves, they're allowing to be spent by another person. Thus while you may dislike the moral implications, you seem to agree with my assessment that the claims of the article are incorrect.

nileshtrivedi• 12 years ago

So if the billionaires are putting their wealth in savings, isn't it because they are getting good returns on it, implying that there is demand for capital in the form of loans? What is to say that this isn't what the economy needs?

pdkl95• 12 years ago

There seems to be a lot of people equating investment (often by the rich or owners of business) with people returning all/most of their wage income back to the economy (the poor or middle class that spend their paychecks directly).

If these activities are the same, I assume you would agree that they should also be taxed the same? If so, we should really get rid of "capital gains" taxes and tax those profits as regular income. Otherwise there would be a severe bias introduced into the economy from the uneven application of taxes.

/or, maybe there is something different about investments after all...

joelhaus• 12 years ago

The academic term for this area of economic study is Marginal Propensity to Consume[1]. It's defined as:

  "The proportion of an aggregate raise in pay that a 
  consumer spends on the consumption of goods and 
  services, as opposed to saving it."

I don't think it's very controversial.

[1] http://en.wikipedia.org/wiki/Marginal_propensity_to_consume

Sorry, Folks, Rich People Don't Create The Jobs

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