Tuesday, July 12, 2016

Low Wages Are Bad for the Economy: Parasite Businesses

It has long been recognized that certain businesses that proudly tout their low-wage, low-price models as being “good for America,” are actually using tax revenues to cover business expenses—effectively stealing from us to pad their profits.  They pay their workers so little that most must turn to some form of public assistance to survive.  Outrage at these practices gets muted by economic pundits who describe the necessity of letting the market work its magic and by accommodating journalists who fall for this nonsense.  In fact, there is no labor market at the lowest wage scales.  There, employers have absolute power and there is nothing save minimum wage legislation between workers and abject poverty.

Using Walmart, McDonald’s and the restaurant business in general as examples of what he refers to as “the parasite economy,” Nick Hanauer takes on this issue in a refreshingly straightforward manner.  Hanauer is a Seattle-based entrepreneur and venture capitalist, and the founder of Civic Ventures, a public-policy incubator.  His article, Confronting the Parasite Economy, appeared in The American Prospect.

Hanauer argues that the low-wage model is not only bad for the workers who must endure it, but it is bad for everyone because it is harmful for the economy in general.

“There are two types of businesses in America today: those that pay their workers a living wage—the real economy—and those that don’t—the parasite economy. And all of us who live and work in the real economy should be royally pissed at the way the parasite economy is sucking us dry.”

The real economy depends on consumers earning enough from wages to purchase things beyond the bare essentials and create the demand that generates business investment and hiring.

“The difference between these two economies is stark. The real economy pays the wages that drive consumer demand, while the parasite economy erodes it. The real economy generates about $5 trillion a year in local, state, and federal tax revenue, while the parasite economy is subsidized by taxes. The real economy provides our children the education and opportunity necessary to grow into the next generation of innovators, entrepreneurs, and civic leaders, while the parasite economy traps them in a cycle of intergenerational poverty.”

“The real economy delivers on the promise of capitalism.  The parasite economy relentlessly undermines it.”

The crime of the parasite companies is that they benefit from the demand generated by the wages paid by other companies, but refuse to return that revenue back to the economy by providing enough income to their own workers to participate as consumers.  People earning at or near the minimum wage are incapable of acquiring bare necessities without assistance let alone participating in the economy as consumers.  Instead their employers use their low-wage practices to siphon money out of the economy and into their own pockets.

“These are the real deadbeats of the parasite economy: companies with a business model predicated on a cheap supply of taxpayer-subsidized labor, growing fat on the vast wealth of consumer demand generated by the middle-class wages of the real economy, while leaving employees with little if any discretionary income of their own.”

“….low-wage workers at parasite companies—mostly giant and profitable corporations like Walmart and McDonald’s—cannot afford to robustly consume our products, or most anybody else’s, in return. The parasite economy is simply bad for business.”

Hanauer provides a few examples of how low-wage policies have forced workers to seek government assistance.

“A leading advocate of the parasite economy is the National Restaurant Association (the other NRA), which has worked assiduously to keep wages low. The federal minimum wage for tipped workers, unchanged since 1991, is a shocking $2.13 an hour. Lest you think all those workers are raking in tips, as a small elite of servers in high-end urban restaurants do, the median hourly wage for restaurant servers, including tips, is just $9.25 per hour. Tipped workers are more than twice as likely as the average worker to fall under the federal poverty line, and restaurant servers nearly three times as likely, according to a 2011 study by the Economic Policy Institute.”

“In the fast-food industry, more than half of all families—52 percent—are enrolled in at least one public assistance program, at a combined cost of $7 billion a year. (Until 2013, McDonald’s even provided a “McResources” hotline to help its impoverished workers apply for government aid.) And Walmart  alone, according to a 2014 report from Americans for Tax Fairness, costs U.S. taxpayers an estimated $6.2 billion a year in public assistance to its 1.4 million mostly low-wage workers—coincidentally, an amount roughly equal to the  $6.5 billion a year the company lavished on stock buybacks over the previous decade. Quite simply, McDonald’s and Walmart and other businesses in the parasite economy have grown to rely on the tax dollars of other companies and other workers to indirectly subsidize their payroll—and their immense profits.”

Parasites like Walmart and McDonald’s are big enough and powerful enough to force other companies who might otherwise not be so mean-spirited to follow their examples.  The net result is an enormous burden placed on public welfare programs. 

“Today, a majority of the money we collectively spend on anti-poverty programs doesn’t go to the jobless, it goes to the working poor. According to a recent analysis by the Economic Policy Institute,  69.2 percent of all public benefits go to non-elderly households with at least one working member, nearly half of whom work at least full-time. In 2014, the EITC alone cost U.S. taxpayers $67 billion, directly supplementing the incomes of the working poor and, thus indirectly, the payrolls of their parasite employers. The Child Tax Credit (CTC) cost the federal government another $58 billion; food stamps, $80 billion; housing vouchers and rental assistance, $38 billion—again, all programs that largely benefit families of the working poor.”

“And then there’s Medicaid. According to the Kaiser Family Foundation, total state and federal Medicaid spending cost U.S. taxpayers $475 billion in 2014. Conservatives disparage Medicaid as a costly ‘entitlement,’ but an entitlement to whom? Workers can’t work when they’re sick or dead; that’s why real-economy companies provide their workers with health insurance and paid sick leave. But parasite economy companies pass that cost off to taxpayers.”

Hanauer wishes to make sure we realize that low wage policies result from choices made, not from economic necessity.

“While there are parasite companies and parasite jobs, there are no parasite industries or occupations, and there is no line of work worth doing that cannot command a living wage. For every Walmart, there’s a Costco. For every McDonald’s, there’s an In-N-Out Burger. For every single mom waiting tables at the local diner for $2.13 an hour, there’s a healthier, wealthier counterpart earning $13 an hour or more (soon to be $15!) in Seattle or San Francisco or in the thousands of real-economy businesses nationwide where management understands that the ‘minimum wage’ is meant to be a minimum, not a maximum.”

To make his point, Hanauer compares Costco with Sam’s Club, Walmart’s big-box equivalent.  Costco is well known as an employer that pays its workers well; Walmart is well known as a employer that doesn’t.

“To the casual observer, the two chains look virtually identical: cavernous warehouses stacked high with pallets of heavily discounted goods, from groceries to apparel, electronics to major appliances, and everything in between. Both chains earn a substantial portion of their profits from annual membership fees ($45 a year at Sam’s Club, $55 at Costco), and both chains offer myriad other discounted services to their members, from insurance to travel to banking. Together, the two chains dominate the warehouse retail category: Sam’s Club claims the largest geographic footprint, with 652 stores located throughout the U.S. and Puerto Rico, compared with Costco’s 492 stores. But Costco is the perennial market leader in paid members (currently 84 million, while Sam’s Club had 47 million in 2012), gross revenue ($113 billion in 2014 versus $57 billion), and pre-tax earnings ($3.2 billion versus $2 billion).”

“Glassdoor.com, which relies on worker-reported data, lists an average wage for a Sam’s Club cashier at less than $10 an hour, while a Costco cashier earns nearly $15. Costco’s wages may start only a couple bucks an hour higher than at Sam’s Club, but Costco quickly rewards workers for their loyalty and experience. A 2008 article in Slate reported that a Costco cashier with five years’ experience earns $40,000 a year plus benefits—enough for a two-cashier Costco family to find themselves firmly ensconced in the American middle class, enough to pay into the federal treasury rather than draw out of it.”

Labor costs at many large corporations are not as large as one might expect.  A study performed in 2011 estimated that at that time Walmart could have raised the minimum wage paid to its employees to $12 per hour and maintained its income if it only raised its prices by 1.1%.  Would anyone have even noticed?  Another study estimated that the burden of a $15 wage on McDonald’s would force them to raise prices by about 10% in order to maintain income.  Would the world come to an end if a dollar meal cost a dime more?

If the answer is to raise the minimum wage dramatically, what are the consequences? Economists like to assume an efficient labor market and predict that workers will suffer job losses.  Some economists actually take the time to look at data and arrive at more optimistic conclusions.  Hanauer prefers to use his high-wage home state of Washington as an example.

“Washington has long recognized the fundamental law of capitalism—that when workers have more money, businesses have more customers and hire more workers. That is the model that we have been following here, and our economy has been booming as a result. At $9.47 an hour (indexed to inflation), Washington state’s minimum wage had long been the highest in the nation, and as one of a handful of states with no tip penalty, our tipped workers already earn four and a half times the $2.13-an-hour tipped minimum wage in much of the rest of the country.”

“And yet according to Bloomberg, high-wage Seattle supports the second-highest concentration of eateries per capita in the nation—trailing only even-higher-wage San Francisco. And according to the Paychex IHS Small Business Jobs Index, Washington also enjoyed the highest rate of small-business job growth in the nation, while even higher-wage Seattle ranks second by major metropolitan areas.”

Seattle, in 2014, passed the first $15 minimum wage in the nation, one that would be reached over a period of a few years.

“Restaurateurs and right-wing think tanks warned of ruin. Businesses would close. Workers would lose their jobs. The invisible hand would punch us in the mouth. But it never happened. “

“As the Puget Sound Business Journal recently reported in a front page story titled ‘Apocalypse Not: $15 and the Cuts That Never Came,’ six months after the first wage increase went into effect, Seattle’s restaurant industry is growing faster than ever. Even celebrity chef Tom Douglas, who had warned that Seattle could lose a quarter of its downtown restaurants, has continued to add restaurants to his local empire. ‘Douglas has now changed his mind about the law,’ the PSBJ reports, ‘saying he was “naïve” to think that restaurants would raise pay on their own.’ That he was. And then on February 15, 2016, The Seattle Times reported that ADP’s national survey of economic vitality ranked Washington state number one in the country for both wage and job growth. And you thought higher wages killed jobs. Not hardly.”

Essentially every nation is concerned about low demand that has caused slow economic growth.  At the same time businesses have used their power to implement policies that have allowed them to drive wages ever lower in real terms.  Can they not realize that this will not go on forever?

There is a solution to slow growth.  All one has to do is put more money in the hands of consumers.  The easiest way to do this is a significant rise in the minimum wage.  Experience has shown that such a rise will cause a ripple effect generating increased wages well above the new minimum level.  Let’s do it!

The interested reader might find these articles informative:

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