On a recent Saturday morning I was catching up on some reading and happened across an article by Eric Levits in the Daily Intelligencia chronicling a recent speech given by Janet Yellen. And that same day in the New York Times there appeared an article about “cleaner” Wal-Mart stores (that’s not the real story).
Janet Yellen was quoted as saying that we may have to move away from pre-crisis orthodoxy, as we look back at the impacts of the Great Depression and the “stay-flation” of the 1970s. In other words, we need a new economic game plan. I think it’s fair to say that the economic concerns drove much of the Trump/Sanders support during this election cycle.
Ms. Yellen was essentially stating that, as a result of the Great Recession, we appear to have moved away from prior orthodoxy that an economic shock like the Great Recession will only impact demand on a short-term basis, and will have no long-term impact on the economy’s capacity to produce goods and services. It now appears that the long-term supply of labor has declined, pushing working-age laborers onto the sidelines of the economy. Ms. Yellen’s proposal is to run a high-pressure economy, one that prioritizes high demand and a tight labor market over keeping inflation and deficits in check. The logic goes something like this: if business sales increase, capital spending occurs and the labor market tightens, which, in effect, draws in whomever is sitting on the sidelines.
Now let’s turn to Wal-Mart stores. As reported in the New York Times on October 15, several years ago Wal-Mart began to see a decline in store sales and customer satisfaction, with “only sixteen percent of stores … meeting the company’s customer service goals.” What did Wal-Mart do? As previously widely reported, it raised wages. At that time, I commented that Wal-Mart had adopted Henry Ford’s theory of “pay them more and they buy cars.” An economist might describe Walmart’s actions as implementation of “efficiency wages,” a well-known concept among economists. Many small business owners know intuitively that if you pay more, you generally get harder-working, more loyal and likely more productive employees. In addition, because you are offering higher wages, it is significantly easier to hire replacements for those who don’t perform satisfactorily.
The business mantra for years has been that cutting costs is the route to profitability. This can be true cyclically, as businesses need to periodically evaluate their costs to ensure that they are in line with the local marketplace and the revenue of the organization. In my view, no policy or philosophy can be adhered to for long periods without review and analysis. That said, given Ms. Yellen’s view (which I would call theoretical) and Wal-Mart’s view (which I would call practical and pragmatic), the idea that raising wages may, in fact, increase demand makes great sense.
The next question is, how do you do that? Should there be a government-mandated increase in the minimum wage as we have seen in states like New York, Oregon, California, etc., or should governments structure tax policy or other economic policies to encourage this behavior? A few thoughts that I have posited previously are now worth a second look. One thought is to offer tax credits to younger workers who obtain an education in high-demand fields (which tend to be geographic in nature), and require that they move to those geographic regions (where they have the best chance of employment) to qualify for the tax credit. Another possibility is to offer a tax break, on a dollar-for-dollar basis, to shareholders who increase employees’ wages, for which they would receive profits from the business (tax-free dividends).
We need to be looking at what the next president and Congress can do in order to create higher-paying jobs in the United States. This is not just an issue for the employees, but for business owners as well. At some point, wage stagnation will result in dramatically decreased demand for goods and services, and that would likely create a long-term recession.
Mr. Owens is a former member of Congress representing the New York 21st and a Senior Advisor to Dentons.
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