Sunday, April 19, 2015

A $70k minimum wage at one company belies the Reagan Revolution

By now, you might have heard the news about Gravity Payments. The CEO, Dan Price, has cut his own salary by $900,000 a year to make it possible for his employees to enjoy a minimum wage of $70,000 a year. At LinkedIn, Dustin McKissen says that this is a brilliant strategic move, garnering national publicity and giving a positive image to Gravity Payments. At Seeking Alpha, Dana Blankenhorn shows us that a $70,000 minimum salary is quite reasonable in a payment processing sector that is on fire for investors. This actually makes sense for a young startup where the CEO owns most of the equity in the company, anyway.

The move also places a spotlight on inequality in a different way. The move shows us that the inequality resulting from the Reagan Revolution is unsustainable. Let's see if we can put this into historical perspective. The Economic Policy Institute notes the following trends in CEO pay:
"From 1978 to 2013, CEO compensation, inflation-adjusted, increased 937 percent, a rise more than double stock market growth and substantially greater than the painfully slow 10.2 percent growth in a typical worker’s compensation over the same period. 
"The CEO-to-worker compensation ratio was 20-to-1 in 1965 and 29.9-to-1 in 1978, grew to 122.6-to-1 in 1995, peaked at 383.4-to-1 in 2000, and was 295.9-to-1 in 2013, far higher than it was in the 1960s, 1970s, 1980s, or 1990s."
In addition to that, economist Dean Baker points out that between 1941 and 1969, the minimum wage kept pace with productivity. He also notes that if wages matched productivity over the last 30 years, the minimum wage would be about $16 per hour, not $7.25 an hour we see now. He also notes that a public policy decision to suppress the minimum wage came into effect in the 1980s, you know, during the Reagan Revolution:
"How was it decided to break the link between productivity growth and the minimum wage? It is not as though we had a major national debate and it was decided that low-wage workers did not deserve to share in the benefits of economic growth. This was a major policy shift that was put in place with little, if any, public debate."
In the 1980s, we saw the seeds of inequality planted as if it was common sense, rational economic policy. What we saw in September, 2008, is that the supply side economics makes no sense. Supply will only meet demand, and if the demand is not there, employers will look for demand somewhere else.

The move by Mr. Price to raise the minimum wage at his company makes several points that may or may not already have been noticed. In order for CEOs to enjoy a 295 to 1 compensation ratio, everyone else has to earn less, far less, in order to support that kind of salary. The bump from $40k to $70k is life-changing and will generate demand, directly and indirectly.

More to the point, the demand generated by raising the wages of workers is far greater than any tax cut that has ever been proposed. Mr. Price understands that his customers and their customers will want to work with a company that treats their employees well. This is a fact that has been difficult for executives at Wal-Mart to understand.

A large group of workers earning $70k a year is going to create a lot more demand than the same group earning $40k a year. It's simple math. No amount of fiddling with the tax code is going to change that fact. It is also worth noting, as Mr. Price did, that people are not commodities like coffee and copper. Commodity values decrease or increase in proportion to demand. They are quite passive since they lack any brains or intelligence. People are not commodities in the sense that if you pay them more money, they get more interested in the work and worry less about the money. They can become more productive, increasing their value.

CEOs are often a great example of a class of people who find ways to work less for more money at the expense of other people, regardless of performance. On the other hand, the average worker will work harder when paid more. He will be more creative because he's not stressed out about money. The employer paying higher wages will create competition for his open positions and will find more talented, loyal employees than otherwise. It's a win-win for everyone.

But you won't hear any of this from any conservative in Congress. That kind of talk doesn't play to their base - the top 0.1%.
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