Spreading the wealth [u]

Republicans blocked a bill in the Senate to raise the federal minimum wage to $10.10. Can you say ‘filibuster’? Against the measure we have this:

The proposal before the Senate throws cold water on job creation and it adds to the burdens businesses are already facing.

That comes from Wyoming’s Mike Enzi.

Let’s think about that for a moment. How do jobs get created?

I can come up with a better mousetrap that consumers want. So I build a manufacturing center that needs employees. Steve Jobs introduced a smartphone and then the tablet. Both gadgets are gobbled up by millions of customers around the globe and require thousands of people to assemble and market. There is a difference, however, in mousetraps and iPhones. The former is not a new product. It’s an improved version of an already existing category. If I hire workers to build the better mousetrap, we can assume that workers manufacturing the existing ones will get laid off. Have I therefore created jobs? Apple, on the other hand, revealed a brand new product, one that had not previously existed, though it borrowed from existing technologies.

But regardless of whether or not a product is revolutionary or evolutionary, its success in the market depends on people buying it. Which leads us to a thought experiment.

Suppose that there are 10 people. One has 90 percent of the combined wealth of the ten; the other nine share the remaining 10 percent. That one person has enough money to buy hundreds of new iPhones. Yet he needs only one, perhaps two. The bottom nine don’t have enough money to purchase a single iPhone. Their wages are too low.

However, if the bottom nine, or even another five, shared half the combined wealth of the ten, they, too, could afford to buy an iPhone. Instead of Apple selling one or two, it sells as many as ten, shall we say. The company needs more employees to manufacture and sell ten phones than just one phone.

We arrive at a fundamental point. If the incomes of the many increase, more goods and services are purchased. On the other hand, if most of the income flows into the one percent, fewer goods and services are sold.

So, there are both virtuous and vicious cycles. Spreading wealth creates virtuous cycles; concentrating wealth creates vicious cycles.

In the end, it’s all about demand, and our economy—indeed, most of the world’s economies—suffer now from inadequate demand, because an ever increasing share of wealth lands in too few bank accounts. And since the rich can buy only so much, money circulates at a lower rate.

Raising the minimum wage distributes wealth away from those who hoard and toward those who will spend. The increased spending leads to more jobs, and so on—a virtuous cycle.

Inequality, then, stifles job creation.

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UPDATE (April 30, 2014):

Then there is this from the New York Times article linked above:

“So let’s talk about the 800-pound gorilla here in the Senate chamber,” Senator John Cornyn of Texas, the Republican whip, said Wednesday morning. “This is all about politics. This is all about trying to make this side of the aisle look bad and hardhearted.”

One needn’t try very hard. Charles Pierce, writing for Esquire:

Can we just drop the pretense now and admit that one of our two major political parties is perfectly fine with pauperizing the American middle-class in order to “redistribute” wealth upwards? Can we please lay the myth of the Republican moderate to rest, at least on this issue? The only Republican to vote to open debate was Bob Corker. Susan Collins of Maine, still terrified that some alderman from Aroostook in a flannel shirt and three-corner hat will primary her, voted to let the increase die. Naturally, the dimmer bulbs in the chandelier struggled to shine.