“Should the US increase its minimum wage?”
In a competitive market place it is unlikely that we would see the current large disparity between incomes and wealth, although we would see disparity naturally. There is just no way that the pool of candidates able to run the few hundred of our largest companies is as small as it appears (human beings are de facto mass clones of each other) – in a competitive market place the pool of those capable of running a company would drive the price down.
Additionally, if we had rationale collective bargaining between labour, management and capital it is unlikely that a great many workers would be earning as little as they are in relation to the whole. Unfortunately, neither those in charge of labour nor those in charge of capital and/or management have always been rationale.
The death of capital is ultimately the death of the return on capital: the “amount of return on capital” retained by capital should be proportional to the expected future growth in expenditure. The two need to be in harmony. Capital needs to be reinvested to maintain the balance between the accumulation of capital and the growth rate of economy wide expenditure.
As income inequalities increase, the potential growth rate of expenditure falls, meaning the return on capital falls, meaning the greater the amount of capital allocated to non productive assets will likely increase (in order to protect return on each unit of productive capital) as capital becomes surplus to productive capital investment needs.
Additionally, in order to maintain the return on capital within production, the return allocated to capital would need to increase and the amount allocated to wages and other costs to fall – we end up with an unstable system with accumulating imbalances between income and capital and within income itself. In a sense the outsize salaries of top executive could be considered in part a reward for increasing the return on capital in a weakening paradigm.
At the moment, if we raise the minimum wage, all we may end up doing is squeezing the middle ground as corporations look to maintain the return on capital – lower wage increases for the rest and possibly price increases for the consumer. All systems end up reflecting their choke points, or the ability for one group/segment to control what happens. This is anti competitive and leads to anti competitive outcomes, and in the context of the purest form of capitalism, to the death of capitalism itself.
So the overall income inequality and its consequences for economic growth and financial stability are retained. Unfortunately the model we have is one focussed on maximising consumption while maximising inequality, which just does not compute. The life of the economy is being squeezed out of it like the proverbial orange.
Where does the world go? Well, it either gives up the ghost and cuts back expenditure to levels capable of being financed by current income and wealth distribution, which means large cuts in output or large falls in prices and hence large falls in the value of capital. The crisis that started in 2007 was really a crisis of capitalism brought about by our consumption culture, income/wealth inequalities and other global economic structural imbalances. All that we have achieved since then is time, but the imbalances remain and the risks to the return on capital, in the context of income and wealth inequalities, have increased.
If you have ever read War & Peace you will have been taken back to a time when income and wealth distribution was probably a great deal worse than they are now. What differentiates this and that period is democracy, and I feel that the battle for the control of income and wealth inequalities may well end up being waged in the political sphere.
If wealth and income inequality continue to widen, the risks to financial assets increase, placing emphasis on hard (property) and hard productive assets (land). The dynamics of the imbalances suggest an increasing risk of a movement back towards the social structures of pre 20th century Europe. The only issue here is that the political systems are totally different and ultimately capable of changing the dynamics.
The question is, whether it is the political status quo that takes the initiative to address the problem in the machine, or whether we will see the rise of a new more extreme political movement (i.e. the demagogue) aiming to redress these imbalances. The lesson that I draw from the Rob Ford debacle is that perhaps the conditions for the risk of the demagogue are already in situ, which is of course a dangerous thing. Too much attention has been focussed on supporting asset prices as a solution to what ails the system as opposed to the roots of the cause.
It is terribly important that we appreciate the importance of the engine that enables efficient allocation of scarce resources and that would ordinarily allow for balance as opposed to equality, and the difference between an efficient outcome and the skewed corrupted one we currently have.
We are by no means anywhere near through the current crisis, and I say this, largely because we have yet to see any real political impact. I think we are slowly finding out how sensitive the system of “efficient and open” markets is and how open it is to corruption.
For richer, for poorer (The Economist)
“The unstable history of Latin America, long the continent with the biggest income gaps, suggests that countries run by entrenched wealthy elites do not do very well. Yet the 20th century’s focus on redistribution brought its own problems. Too often high-tax welfare states turned out to be inefficient and unsustainable. Government cures for inequality have sometimes been worse than the disease itself”
U.S. Income Inequality: It’s Worse Today Than It Was in 1774 (The Atlantic)
On the Evolution of Income Inequality in the United States (FRB Richmond)
Inequality Watch (site)
Also from Depth Dynamics