Supply/Demand question...

[Postman]

Thom Hartmann (Air America Radio Host) has on his show every so often an economics professor from SMU. His name is Ravi Batra. Mr Batra argues that one way out of this mess is to RAISE WAGES.

Let me explain.

Batra argues that the source of Supply is "productivity" and the source of Demand is "wages."

The current economic problem is rooted in the Alan Greenspan/Ronald Reagan economic model of trickle-down economics.

Up until Reagan took office, productivity and wages pretty much tracked each other. When Reagan declared war on the Middle Class with his economic policies, productivity continued to rise but wages remained flat or stagnant.

To fill the spending gap left by making less money, people went into debt. Credit cards, refinancing of homes, etc., etc..

Batra and Hartmann both say that one way to help solve the problem would be to RAISE WAGES.

[Syrinx]

1. sounds good to me!

But I got a do-over in Economics 101, with an easier professor. :)

Yes, I think we should raise wages. I hope President Obama will govern from the left, with Congressional help. I've got big hopes, but ...?

[Recursion]

2. IMO supply/demand is the wrong model

The notion of "supply and demand" is a model that pretty much only applies to goods that have certain characteristics:

1) They are all alike
2) They are easily transported
3) They have a definite economic utility

Things like, say, horseshoes, nails, bales of wool, pigs, etc.

Once you start talking about more complex things like labor the entire model breaks down. That doesn't stop economists from pretending the model still works, but it really doesn't.

[Postman]

4. IYO what is the "right" model?

The above Demand/Supply "argument" was just one piece of a pie. Hartmann and Batra also argue that US Trade Policy needs to change (tariffs).

Free Trade is a joke. American workers cannot compete with slave wage earners in poor or dictatorial countries.

[Warpy]

9. Supply and demand rarely work for labor

because when the supply goes down, bosses figure out ways to avoid using labor that they might have to attract with higher wages. Strategies include but are not limited to mechanization and mandatory overtime for workers they do have.

Labor has to be supported either by near universal unionization or government intervention if it's not going to be part of a race to the very bottom of the economic pile, first charged and last paid.

Batra is correct of course. The reason we're in a crisis right now is because the demand side has been strangled for decades by conservatives who think the economy works from the top down.

[pinqy]

10. Where on earth are you getting that idea from?

While Supply/Demand models are certainly easier with competitive goods, there's no reason why the models can't be applied to any good or service. The math just gets more complicated, is all.

Do you have any kind of cite to research that supports your assertion?

[GliderGuider]

3. That sounds kind of, um, inflationary...

Unless our goal is simply to keep things limping along for another decade or two, it's time to start thinking about what a zero-growth economy might look like.

[Postman]

5. What do you mean?

[GliderGuider]

6. You mean how do I define a steady-state economy?

I mean an economy in which there is no growth in GDP, physical resource consumption, waste generation or wages. The implications of such an economy are significant, because implementing one voluntarily would require everyone living under it to accept non-material definitions of success and progress, and no growth in population.

I don't think such an economy is possible except in small, isolated regions. However, the manifest unsustainability of economies based on perpetual growth seems to make such an outcome inevitable. Given human nature and the kind of economic system we already have in place, such an outcome is likely to be involuntary.

For a more complete description see: http://www.eoearth.org/article/Steady_state_economy

[HamdenRice]

7. He's absolutely correct. Productivity has soared the last few decades

with computerization. When productivity increases, it's basically "only" a distribution question as to who claims the increases in productivity -- labor or capital (or even land, as rent/real estate values).

For the last 2 decades capital has claimed almost all the increases in productivity because of the poor bargaining power of labor, especially non-unionized labor.

Without more of the increases in productivity going to labor, there wasn't sustainable demand to purchase the stuff made available by increased productivity.

The economic "masters" need to learn the lesson of Henry Ford which were forgotten in the 20s and of the New Deal which were forgotten in the 80s, 90s and 00s.

[Citizen Number 9]

8. Ah, HamdenRice, you bring up some excellent points,

but what is the resolution of the questions you pose?

How can labor improve it's bargaining power in the information age?

What portion of productivity is labor willing to support?

Are Henry Ford's lessons "sustainable"?

Across the board, workers do not appear to be improving their value. If that goes on long enough, capital will decide to go elsewhere.

[regnaD kciN]

11. Great idea, but...

How do we go about raising wages, when each corporate leader's success is defined on how he or she keeps costs down, and jobs can be outsourced to India or China for pennies on the dollar?

It seems to me it would require some fairly draconian and "socialist" new laws. And while I'm not opposed to socialism in principle, I'm curious as to how to get it through the 2009 Congress. And, even if we could mandate, say, a 20% increase in wages (to make up for all those decades of productivity growth and wage flatlining), how many companies would just go bankrupt rather than increasing their payroll by that amount?

Don't get me wrong -- I agree that increasing the salaries of American workers is crucial to getting us out of this mess. I just can't see how in the world to do it.

[Postman]

13. Tariffs.

If a dollar of labor went into making a pair of shoes in the US and the same pair of shoes made elsewhere took 20 cents of labor, then impose an 80 cent tariff on the shoes so it benefits not the manufacturer for having made those shoes outside of the US and incentivise them to reinvest in manufacturing in the US by avoiding import costs....

One of Hartmann's arguments for the situation we are in is the fact that we don't make anything anymore and that manufacturing, making things, is what produces wealth.

If I promise to cut your lawn if you wash my car, nothing is produced and the only thing going on is money changing hands, no wealth is created. A service economy doesn't work and doesn't create or support a Middle Class.

A piece of wood is just a piece of wood until labor is applied to it and a table is made from that same piece of wood creating something of value.

Get rid of the "Free Trade" policies that are nothing more than an arbitraging of labor.

PS. Ravi Batra has suggested that the Minimum Wage be raised a dollar per year until it reaches 10 dollars per hour and then index it to inflation.

[Joanne98]

12. It's a demand problem! The people that demand can't buy anything!

A better term would be DEMAND DESTRUCTION and if the wealthy don't CURB THEIR GLUTTONY HABITS.... The world will change ANYWAY!

[unlawflcombatnt]

14. Batra is absolutely right

I've read 2 of his books, and he makes more sense than any other economist I've ever read.

He's one of the few that isn't funded by big-money interests.

It's wages that fund the consumer spending that creates the demand for production. Without that demand, there is no production. With failing demand, there is declining demand for production, declining demand for labor, and loss of jobs as a result.

We don't need to put more money in the pockets of bankers so they can squirrel it away somewhere.

We need to put more money in the pockets of consumer-workers, so they can spend it into the economy to create the demand for production that fuels American production, creates jobs, and puts upward pressure on wages.

[Hawkowl]

15. 100% RIGHT!!!

I've been screaming this for years. Every time minimum wage is hiked the economy grows! This current call for everyone to take concessions is only going to exacerbate and prolong the Bush Depression as people further tighten their belts and forego spending.
I am absolutely dumbfounded that nobody mentions this.