September 28, 2006
Taxes, Wage Controls, and Underconsumption II Posted by John Steele Gordon at 01:30 PM EST Several points:
1) The studies that Fred Smoler mentions hardly demonstrate that minimum-wage increases “have been shown to have little or no effect on economic growth.” They demonstrated (I assume, I can’t say as to the quality of the studies) that a particular minimum-wage increase in a particular place, at a particular time, under particular conditions did not have much discernible affect on the unemployment rate at that time and place. That does not exactly make them a worthy successor to Adam Smith’s The Wealth of Nations or Lord Keynes’s The General Theory of Employment, Interest, and Money.
As I pointed out earlier, economics is not a laboratory science, and we must take our data where we find it—from the real world—and that means the data is always going to be full of noise, making interpretation difficult at best. When you add in the fact that politicians seldom if ever have the slightest reluctance to use economic data tendentiously and that political reporters are usually stone-dumb ignorant regarding both economics and basic statistics (not to mention the basic techniques of tendentious statistical manipulation), the noise is deafening.
2) Mr. Zeitz writes, “I’m sure Mr. Gordon would agree that the construction of even a modestly enhanced welfare state would require steep increases in taxes or, at least, a repeal of the Bush tax cuts.” Yes, it would, but I don’t advocate a modestly enhanced welfare state. I advocate helping those who need help by means other than a minimum wage, which helps few who need it (full-time, low-skilled workers supporting families) and many who don’t (high-skilled and high-paid union workers). In a perfect world (which, in case someone hasn’t noticed, isn’t the one we live in) a negative income tax could be easily financed out of other federal welfare programs it would replace and out of corporate welfare programs that should never have been implemented in the first place. Even in this all-too-imperfect world, a minimum wage is a lousy way to help those who really need the help, mainly because it doesn’t help them very much if at all.
I don’t mean to be flippant (well, okay, yes I do), but Moses did not bring down from Sinai the concept of a minimum wage. It is not sacred. If there is a better way to accomplish its ostensible goals, we should use it.
3) He writes, “We began this discussion by remembering Henry Ford, who blazed new trails in paying his workers $5 a day and granting them a 40-hour work week. He did these things in the 1910s and 1920s, when the distribution of wealth and income was alarmingly uneven, contributing ultimately to the crisis of underconsumption that helped fuel the Great Depression.”
I think it’s a stretch, to put it mildly, to say that the uneven distribution of wealth in the early twentieth century led to underconsumption, which led to the Great Depression. It was a bit more complicated than that. As for what caused an ordinary recession to spiral into an economic calamity, I would, with characteristic modesty, recommend Chapter 16, “Fear Itself,” of my book An Empire of Wealth.
But here let me suggest one cause. The real villain in causing the Great Depression was . . . Henry Ford!
In 1900 30 percent of the cropland in the United States was devoted to fodder crops—hay, oats, etc.—to feed the tens of millions of horses and mules that powered local transportation and agricultural equipment. As Ford’s revolution in both local transportation and agricultural equipment (the Fordson tractor took over from horses during the First World War, as the horses were shipped to Europe to be slaughtered alongside the soldiers), the demand for fodder crops relentlessly declined. More and more land was given over to producing food for humans. The extraordinary demands for American produce during World War I masked what was happening. But as Europe, and European agriculture, began to recover, farm prices here began declining as supply increased more rapidly than demand. Rural America went into depression (and rural banks began to fail in large numbers) long before urban America did.
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