A recent article from our yellow journalist friends at Salon.com furthers the website’s tradition of economic illiteracy and unoriginality. The article, entitled “The 4 biggest right-wing lies about income inequality” was written by the economist Robert Reich, and as the title suggests, attempts to debunk several alleged economic myths. What makes this article significant is not the complete lack of economic understanding displayed, but that it was contrived by a person who has no small influence in the field. Reich is currently a professor of policy at the University of California, Berkeley. He was a member of Barack Obama’s economic advisory board, and has also contributed to such esteemed publications as the Wall Street Journal, the Atlantic, and the Harvard Business Review. Despite his reputation among economists, Reich’s Salon article is poorly argued, badly written, and espouses common misconceptions that should be above someone of his education. Many of his arguments are commonly made by people on the left and in this post, I am going to address them one-by-one.
The first lie (or so he claims) is that CEO’s are America’s Job creators and that they should be exempt from taxation. Reich argues that “the middle class and poor are the job-creators through their purchases of goods and services. If they don’t have enough purchasing power because they’re not paid enough, companies won’t create more jobs and economy won’t grow.” If all firms just paid their employees higher wages, they would not gain any more purchasing power since the market price for goods would also increase correspondingly. Higher nominal wages do not create higher real wages. The arguments he presents for the first two supposed “lies” are essentially the same. Reich writes that, “We’ve endured the most anemic recovery on record because most Americans don’t have enough money to get the economy out of first gear. The economy is barely growing and real wages continue to drop.” Social liberals like Robert Reich never tire of bringing up the long misconceived fact that real wages have either dropped or remained stagnant over the past fifty years. Although Reich fails to cite where he got this information, he is most likely referring to the often-quoted statistic regarding household incomes, which have only increased by six percent over the last fifty years. Many social liberals have suggested that this is evidence of wage stagnation. However, if you look at the average income earned per individual over the past fifty years, the numbers tell a different tale. Individual incomes have actually increased by a whopping fifty-one percent since 1969 when adjusted for inflation.1 There is also further evidence to suggest that people today are now working less than they did in 1960 to earn the same amount of goods.2 Real costs of living in the United States have generally decreased over the past decades, at least for individuals. The reason why the statistics regarding real income per household suggests stagnation is because of the decline in household size. As the standard of living has increased over the decades, people are more likely to live on their own instead of relying on their parents or siblings to supplement their incomes. As the number of individuals per household declines over time, so does income per household, and thus it appears to the uncultivated economist that wages have not increased since the 1960s, which is demonstrably false. Robert Reich’s argument and many others similar to his are based on misleading reading of statistics about real incomes. This is an amateurish mistake, and one that I suspect Reich may have intentionally overlooked for the purposes of the Salon.com article and to further support his own ideology.
In debunking the second supposed lie, Reich writes that, “Meanwhile, most American workers earn less today than they did forty years ago, adjusted for inflation, not because they’re working less hard now but because they don’t have strong unions bargaining for them.” Everything about this statement is incorrect. Not only have workers’ real wages not deceased over the past forty years, but workers indeed have been working less. There are more part-time employees in the work-force than there have been forty years ago, and since many labour statistics do not distinguish between full-time and part-time employees, it may appear that workers today earn the same as they did four decades ago for the same amount of work. However, part-time employees generally work less than full timers and thus their wages should not be compared on the same basis. Also, American workers today earn much more in employee benefits than workers forty years ago. When medical and dental coverage, unemployment insurance, and retirement benefits are taken into account, worker compensation rose by about a third from 1980 to 2004.3 Contrary to what Reich claims in the article, unions are not responsible for the creation of wages and benefits, nor do labour unions create wealth in general. Unions do nothing but siphon off wealth created by others. When a union succeeds in securing higher wages and benefits for its members, it always comes at a cost, which is usually passed onto the consumer. For example, If the coal-miners’ union gets a higher wage for coal miners, the market price of coal goes up. If a department store chain bargains for a higher wage for cashiers, then cashiers become more expensive and thus fewer will be employed. Those people who champion labour unions do not understand that higher wages for union members always comes at the expense of higher prices for goods in that sector, as well as lower rates of employment. Many firms will actually pay their employees more than the equilibrium wage in the market for the sole purpose of keeping the labour unions out.
Robert Reich’s third economic myth that he tries to debunk is that nothing should be done for lower-income children in America. This seems to me like nothing more than a twisted depiction of libertarian ethics. A desperate strawman. Nobody seriously argues that poor children should not be helped in any way and denied a proper education. In fact, the state of many schools in poor areas of the United States is indeed deplorable and the children who attend them truly deserve better. It’s difficult to disagree with Reich on this fact. However, the failure of American public schools is more an indictment against government ineptitude and a bloated and incompetent bureaucracy than it is against wealthy people. Try again, Reich.
Reich saves the last economic myth to drop his bombshell of idiocy. He claims that raising the minimum wage does not contribute to unemployment and that it will actually benefit workers by giving them more spending money. Reich’s arguments can easily be refuted with only the most basic economic understanding. When a price is artificially raised beyond the market equilibrium, then supply will increase and demand will decrease. If the equilibrium wage in a market for shit-shovelers is x dollars per hour, increasing the minimum wage in this market simply means that the shit-shovelers are now more expensive to hire and fewer will be employed. The minimum wage, regardless of how high it is set, will not benefit someone who is unemployed. Sadly, the greatest victims of high minimum wage laws are young people. Since only 2% of workers above the age of 24 currently work a minimum wage job4, those people who are just entering the workforce are placed in the most disadvantageous position, lacking the skills and experience to justify the high price for their labour. If the labour of a high-school student has a value of 7$/hour, that student is unlikely to find a job in a state whose minimum wage is set at 10$/hour. Such is the plight of any worker whose labour is worth less than what the law demands an employer may pay him. Ironically, the poorest people in society have the most to lose from minimum wage legislation—the very people whom these laws are intended to help. Reich cites a study done by IRLE which lists unemployment rates across the United States as independent of the minimum wage laws. However, comparing data from the US alone would naturally differ a lot less than comparing data from the US to other countries with different policies. Most Canadian provinces have minimum wage rates that are a higher percentage of output per capita than American states. Canada correspondingly has a higher unemployment rate, a higher average duration of unemployment, and a lower rate of job creation than much of the United States.5 Nations such as Hong Kong and Switzerland do not have minimum wage laws and have a much lower unemployment rate than the United States and Switzerland especially has one of the lowest unemployment rates on earth.
Switzerland is pretty awesome.
Robert Reich’s call to action at the end of his article, “Don’t listen to the right-wing lies about inequality. Know the truth, and act on it” sounds like something I would read on a social justice warrior blog. It’s like a Smokey the Bear slogan for socialist retards. Reich’s poorly written article is definitely befitting of it though. It’s just one of the many gems you can find on Salon.com.
1 U.S. Bureau of the Census, "Changes in Median Household Income:
1969 to 1996," Current Population Reports, P23-196, p. 1.
2 http://econpapers.repec.org/article/fipfeddar/y_3a1997_3ap_3a2-24.htm
3 Alan Reynolds, Income and Wealth, p. 64.
4 U.S. Department of Labour, Bureau of Labour Statistics, Characteristics of Minimum Wage Workers: 2004, (Washington: Department of Labour, Bureau of Labour Statistics, 2005), p. 1 and Table 1.
5 Jason Clemens, Measuring Labour Markets in Canada and the United States: 2003 Edition (Vancouver, Canada: The Fraser Institute, 2003)
