A Stark Response

by Benjamin Studebaker

Recently I made an argument that the minimum wage should rise. In that argument, I sought to refute some of the things fellow blogger Rick Stark said to the contrary. Stark has done me the great honour of a thorough two part response. It demands answer–either I must concede his expanded, larger argument, or I must explain where I differ with it. Having read both posts in their entirety, I find myself still unconvinced. Here’s why.

Before we begin in earnest, it should be noted that Stark has conceded a fair amount my way. He freely concedes that a higher minimum wage would have no adverse consequences for employment so long as the economy remains depressed–he even concedes that it would be conducive to stimulus:

My issue is not with Mr. Studebaker’s assertion that the minimum wage increase will cause an increase in GDP in the short-run. Now, I stand my intuition that that short-run will be short-lived and that he overstates it.

The claim Stark retreats to is that, in the long-run, we will return to conditions that are not similar to the current context wherein the higher minimum wage becomes a hindrance. He thinks my argument that an end to the depressed conditions so that we might return to a context that is not similar to the current one may require stimulus of this kind an overstatement, because unlike temporary spending increases from the state, a minimum wage hike is permanent and not generally reversed. This means that, in order to persuade Stark, I have to show not merely that raising the minimum wage would help us break free of the depressed condition (my central contention), but that when, at some point in the future, we are out of the depressed condition, higher wages are still economically helpful.

The way I initially conceived of the long-term argument for the minimum wage was to point out how, during the 40’s, 50’s, and 60’s, economic growth was stronger while the wage share (the portion of GDP going to workers) was also significantly larger than it became in the 80’s, 90’s, and 00’s, when both wage share and growth fell. His response to this argument was a criticism of usefulness of wage share methodologically:

Wage share is something of an obfuscatory variable. Using extreme numbers, in an economy where the wage share is 50% and the capital share is 50%, a doubling of wages and a quadrupling of returns on capital will result in a halving a wage share. Workers are twice as well off and this variable will plummet!

I think Stark misses something here–I was not claiming that a reduced wage share means that workers are worse off; I was claiming that the portion of the economy’s supply which workers can support with their demand is necessarily lower when their incomes, as a portion of the economy, are themselves lower. If wage share is 50% and capital share is 50% and you double wages and quadruple capital so that the ratio is one-third to two-thirds, supply is now twice the size of demand and a disequilibrium has been created that must, at some point, be rectified. Stark is liable to dismiss this, however, on the grounds that he has a model that shows lower wages to be conducive to higher rates of capital accumulation–the amount of wealth available for investment. Something must be done about his model, and here’s where the argument begins to get interesting.

There are some methodological differences between myself and Stark that fuel our difference here and make a reconciliation of views somewhat difficult. When I discuss economics, I do it as a political economist in the old style–I reason, as Hume puts it, from effects to causes. I look at different sets of macroeconomic data and try to find reasonable stories to tell about their interrelation. I look at context-specific empirical data and attempt to reason broader, more general theories of interrelation from there. Stark is much more modern–he uses mathematical models to arrive at theories, and then devises empirical experiments (or looks at the empirical experiments designed by others, if such experiments already exist) and attempts to confirm or deny the veracity of his models thereby. In this way Stark reasons more or less universal theories and then seeks their confirmation. His methods also require a lot of mathematics, which poses a difficulty for me in trying to analyse them–while I took a calculus class my senior year of high school, my skills in advanced mathematics are otherwise undeveloped.

This puts me in a difficult position, because what Stark has done in his response is propose a mathematical theory of how capital accumulates which he then tries to confirm empirically with studies. How can I, with a differing methodology, produce a convincing counter to Stark, who believes himself to have a complete mathematical understanding of accumulation? I cannot simply cite studies to the contrary–Stark does not approve of Card and Kruger‘s methodology, and while there are many who do, I am not going to make an extended argument as to why one study should be believed over another; it’s not a sufficiently strong position from which to attack Stark, and I doubt he would be convinced by it. No, regardless of what doubts I might have about his model of capital accumulation’s veracity in lieu of the empirical data I’ve seen, I do not have the mathematical skill to refute it and so must provisionally accept it.

One might think that this means that I’m forced to concede–if I cannot deny that lower wages lead to higher rates of capital accumulation, surely that’s the end of it, right? Not quite. While I cannot credibly refute Stark’s model of accumulation, I can go bigger. I can incorporate his point into my own theory yet still deny his conclusion by denying that accumulation is in and of itself the goal of economics.

In order to do this credibly, I must propose an alternative goal that I can justifiably argue to be distinct from accumulation and to sometimes be furthered by restrictions or limits to accumulation such that a higher minimum wage would be conducive to the end goal of economics without being conducive to accumulation in the long-term (recall, Stark has already conceded that a higher minimum wage is conducive to accumulation in the short-term). The reader may be suspicious that this is about to develop into a green argument (accumulation destroys the environment) or a red argument (accumulation is alienating/exploitative/conducive to inequality). I will do neither. My alternative is simply sustainable growth–the fastest growth rate that the economy will allow over the longest period of time. Accumulation that produces bubbles or other forms of economic crisis disrupts sustainable growth and is consequently not productive–but I must present a theory of how such problems arise from insufficient wages to make it work.

When the economy does recover from its depressed state, the various businesses presently saving capital in banks rather than investing it will suddenly invest a great deal of capital that was previously idle, either directly or through the banks and financial institutions that manage said money. Because there has been excess saving the last few years, the result will be a pile of pent up investment suddenly unleashed. There will be a surplus of accumulated capital; too much money will chase too few workers, goods, properties, and machines, and so inflation will begin to consume its value. At this point, the minimum wage begins to work in favour of fighting inflation–if surplus capital is tied up in paying higher wages, it can chase fewer goods. Over-investment is lessened.

I expect Stark will notice that the Federal Reserve can simply raise the interest rate to put a damper on investment. A minimum wage hike does not have to do the job. But if he makes this argument, he is implicitly conceding that we use the interest rate all the time to limit the rate of capital accumulation, and that capital accumulation is not the primary objective. This undermines his argument (which, if we recall, claims that because capital accumulation is best served when wages are low, there should be no hike in wages). All this would mean that once the economy returns to normal, the higher minimum wage would switch from being stimulus during the bust to a damper during the boom–the right policy in both scenarios. If Stark denies this and argues instead that it only transfers the inflation from being caused by surplus investment to being caused by surplus consumption, he implicitly denies any difference in economic efficiency between consumption by wage earners and investment from capitalists, which again undermines his thesis.

I see one move left for Stark, however–he can pull back even further, and argue that in the long, long run, eventually the surplus capital moves through the system and the higher wages represent only a cost on investment, an inefficiency that holds back growth. What can I say to that?

If we follow Stark’s argument through to its conclusion, the optimal scenario for accumulation is if everyone works for a subsistence wage. Stark denies that he wishes for a subsistence wage, but claims his denial is due solely to the fact that people would not be willing to work for the subsistence wage and that he has other, non-economic reasons (presumably egalitarian) for preferring wages above subsistence level. There are, however, sustainable growth reasons for that preference.

In the long, long-run, too much accumulated capital will attempt to sell too much to too small a market due to the economy’s top-heaviness. Too much accumulation of investment capital will come at the expense of creating a sustainable market the demand for which that capital supplies. Inevitably, the surplus capital will invest itself directly in the creation of demand by lending itself out to consumers, gradually placing them in a position of unsustainable debt and triggering the next crisis years or decades down the line.

Stark’s model for maximising accumulation does not consider the long-term costs of debasing the purchasing power of the labourers. If we decide to pay 95% of workers $5 an hour (call this, for the sake of argument, the subsistence wage), and give the remainder back to the capitalists to invest, profits will be very high and capital will accumulate very quickly, but we will still have the problem of finding a market for the goods produced. The only way to sustain the system (assuming it to be closed) is to take larger and larger portions of the profits and devote them not to ordinary investment in the future of the economy (research, technology, hiring, construction of infrastructure, and so on) but to the lending of funds to the underpaid workers so that they can provide adequate demand through their consumption.

Why does it seem in the interest of capital to lend itself to the worker to aid in his purchasing but not to pay itself directly to the worker as a wage? Because it appears capital will profit from the interest charged on the loan–but this is an illusion, because the worker’s wages are too low for there to be a realistic chance not only of the interest on the loan being repaid, but the principle itself. Eventually, as the debt accumulates, it becomes obvious that most of it is completely worthless, and when that moment comes, what appeared to have been invested capital lent out becomes capital long since consumed. Capital will pay the worker the wage he requires one way or another, either through wages or through loans the worker will never repay. The trouble is that in the latter case, capital is deceived about its own financial position, and so the system is both unstable and unsustainable.

The only way for an economy to get away with low wages in the long-run is for it to continually find larger external markets–it becomes dependent on exports. This is what China is doing; it grows its economy very swiftly by paying its workers next to nothing and then exporting the product to markets in other parts of the world. The important thing is that the Chinese economy could not self-sustain; if it could not export to the rest of the world, it would find itself loaning its own capital out to its own workers as a substitute for wages until they became too indebted and the whole mess blew up or raising wages so as to make its growth sustainable, albeit slower than at present. We are not dependent on Chinese manufacturing; China is dependent on western demand. The only self-sustaining model that does not require ever-increasing exports is one in which wages rise proportionally with the size of the economy as a whole. In the last few decades wages have lagged behind, and this can only lead to two possible scenarios:

  1. The broader rate of economic growth eventually reduces to be in equilibrium with the rate of wage growth.
  2. The economy continually blows up every generation or two due to the replacement of wages by lent investment capital.

One final point–it does not follow from this that you can raise wages to infinitely high levels, because just as the capacity of the economy to demand supply must keep up with the expansion in supply, capacity of the economy to supply demand must keep up with expansion in demand. A disequilibrium between the two results in the aforementioned replacement of wages with credit in the case of lagging demand; it results in inflation in the case of lagging supply. I argue that the point of optimal equilibrium–the right balance between growth in wages and growth in supply such that the economy grows at the greatest rate for the longest time–presently requires a higher wage in light of the fact that we just had a credit-fuelled economic blow-up.

To put it in Econ 101 terms, just as supply must equal demand, the rate of growth in one must be matched in the other for healthy, sustainable economic growth.