'America's Raise' Wholly Ignores the Real Story of U.S. Income

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"Every addition to capital gives to labor either additional employment, or additional remuneration." - John Stuart Mill, Principles of Political Economy, p. 92

According to news accounts from last week, Americans got a 5.2% raise in 2015. Census bureau data revealed a median household income gain of $2,798 to $56,516. The responses from editorialists were fairly predictable.

On the left the earnings increases signaled President Obama's supposed genius as an economic steward, along with increased labor leverage over management. Such analysis points to people who've never run a business. Those who've actually met a payroll know very well that it's extremely expensive to underpay workers simply because high rates of employee turnover greatly decrease business profits and productivity. Henry Ford "overpaid" his workers not thanks to unionization or increased worker leverage, but because annual turnover rates that exceeded 300% were sapping Ford Motor Co. profits.

More modernly, Starbucks offers its baristas health insurance not out of love, but because its stores benefit from experienced baristas. Deloitte offers increasingly generous family leave policies (are you listening Donald Trump?), Netflix unlimited vacation, and Google all manner of on campus services simply because happy and loyal employees are a principle driver of the success of each business. Politicians need to realize that well-run businesses don't need a law to shower their workers with high pay and benefits. It's common sense to do so.

The analysis of the income data from the right wasn't much better. Where there had supposedly been slack previously, the median income gains supposedly sprang from there being more job openings than there were workers for the first time in a while. By this analysis, wages in depopulated Detroit are higher than they are in Silicon Valley thanks to the latter being flooded with willing workers relative to empty Detroit.

Those on the right have also spilled gallons of ink on commentary about low rates of labor force participation to make their case for a terrible economy. They need to move on. Lower rates are generally a sign of progress. Women and children used to work in factories until investment in factory production enhancements soared such that women and children no longer rated exponentially more productive factory jobs.  They were happily able to stay home while husbands shouldered the higher-paying work burden made more lucrative by increased investment. Rest assured that if the right succeed with their laudable goals of lower taxes and regulations, worker productivity will soar alongside even lower rates of labor force participation. It's a sign of wealth when fewer members of the population need to work.

Beyond that, analysis from the right about supply/demand imbalances furthers the false notion popularized on the left that management and ownership are out to exploit labor; squeezing every ounce of work out of them for as little as possible until job openings outnumber available workers. Yet as the U.S. labor experience has revealed for at least 100 years, and probably longer, the most successful companies and best CEOs almost invariably go out of their way to shower their workers with perks and higher pay as a way of keeping them around.

Getting to the truth about income, good companies, good jobs and rising wages are a function of investment. Always. Good companies and jobs aren't finite, there's not a limited supply of them such that labor and management are constantly at war with one another; in fact the only barrier to soaring income is a lack of investment that makes it less feasible for companies to invest in productivity enhancements. Raises spring from the latter as investment authors enhanced productivity per worker that drives higher pay per worker.  

Moving to specifics, the tractor greatly reduced nominal farm employment, but plainly increased productivity per farm worker. The computer and the internet have similarly increased the productivity per man hour of workers in the more modern, office-based economy of today. Think about what the car, plane, telephone and internet have done for the salesman trying to reach as many customers as possible. Think about what technological advances 100 years ago meant for the hourly value of factory workers trying to create as much product as possible. Savings and investment drove all of this.  The main reason Ford was able to pay his workers such high wages was because feverish reinvestment of limited profits in his assembly line made each factory worker a great deal more productive per hour.

Investment is the key here. All the talk about supply/demand curves for jobs and evil management is the stuff of the academically minded untouched by the real world.  

All of which brings us to an essential point made by venture capitalist Peter Thiel in his excellent 2014 book, Zero to One. Thiel noted that "the value of a business today is the sum of all the money it will make in the future." Thiel's casual observation of what is undeniably true is too often forgotten in modern times by economists, academics and editorialists: when investors commit capital to a new or existing business, they do so based on projections of the business's future value. To say that investment is the driver of productivity enhancements that boost wages is a statement of the obvious, but it nonetheless requires stating given what's happened to the dollar since the 21st century began.

Indeed, what left and right properly pointed out about the median income news is that income was even higher in 1999. So if we ignore for now just how easy it is to twist statistics, the simple truth is that Americans got a raise in 2015 to levels that would have distressed the 1999 worker. Even more interesting is the sad reality that the 1999 dollar was quite a bit more valuable than the one in 2016. Deep thinkers view the mere mention of gold as low rent, but the dollar bought roughly 1/279th of an ounce of gold in 1999 versus less than 1/1300th of an ounce in 2016. Gasoline back then retailed for about .98 cents a gallon.

The above figures hopefully remind us that modern income gains are somewhat illusory, but they're most useful for explaining what has been sixteen years of wage stagnation. More than elite thinkers would ever like to admit, 21st century wage stagnation has sprung from a lack of investment. Unquestionably. Because when investment soars, so does worker productivity and wages. Companies very much want to give out raises. But when investment lags, so does productivity, and with it so do wages stagnate.

How does all this apply to the dollar? Readers need only reference Thiel's quote. When investors commit capital to a commercial idea, it's based on the projected amount of dollars the company will earn in the future. But since the 21st century began, the dollar has lost a lot of value. The left ascribe investment to greedy capitalists, and while that's silly, is it any wonder based on their characterization that wage-boosting investment would have declined since 2000? The right talk up an incentive economy, but investors respond to incentives too. What's the incentive to invest if any presumed returns are going to come back in devalued dollars?

The answer to the supposed riddle of slow wage growth is staring us in the face. The problem is neither side can move beyond partisanship and false perceptions to see what is obvious. Investment is always and everywhere the source of rising worker productivity, and subsequently rising wages. A weak dollar under Republican and Democratic presidents since 2000 has rendered wage-boosting investment a fool's errand. What a shame that neither side is willing to talk about the dollar. Any discussion of income is devoid of meaning without it.


John Tamny is editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He's the author of Who Needs the Fed? (Encounter Books, 2016), along with Popular Economics (Regnery, 2015).  His next book, set for release in May of 2018, is titled The End of Work (Regnery).  It chronicles the exciting explosion of remunerative jobs that don't feel at all like work.  

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