Will reducing the corporate tax rate actually lead to increased wages?

Democrats and others are claiming that the proposed Republican tax package’s reduction in the corporate tax rate is a sham and a ruse to benefit the one percent. It would actually only lead to enriching corporations and have zero effect on wages. A brief review of what real economists say will be refreshing.

Start here with David Henderson’s short post on the subject.

Let me quote the most germane part of Professor Henderson’s post:

So let me explain in simpler words by noting that the key assumption in the above is the assumption of a perfectly elastic long-run supply of capital. Why would it be perfectly elastic? Because capital is quite mobile across countries, so when one country’s government cuts its tax rate on capital, that draws in capital from around the world.

Why does this matter? The greater the stock of capital, the higher is the ratio of capital to labor, and, therefore, the higher is the marginal product of labor, and, finally, the higher is the real wage.

Thus increasing the marginal product of labor, i.e. the value of labor, entails rising wages.

If you follow the link to Professor Mankiw’s blog post you will see that he shows there is a multiplier bonus effect: every dollar of tax cut to capital (on a static basis) raises wages by $1.50.

Bingo. QED. Try explaining this to denialist Democrats with a vested interest in naïve counterfeit economics.    

Troglo

Addendum: it might be helpful to say that there is a tight relationship between the marginal product of labor and wages (total compensation.) Greg Mankiw shows that as the former goes up, so does the latter. See  here  especially point #4 for a fuller, yet still simple explanation.

 

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A call for repeal of Missouri’s prevailing wage law

Why is repeal called for? Prevailing wage laws increase costs borne by the state, municipalities, and school districts and transferred to tax-payers by:

  • artificial, high minimum wages
  • burdensome and expensive regulations
  • limiting competition

This is not complicated. It is basic supply and demand economics.

The most basic axiom of economics is known to us all:  IF YOU REDUCE THE SUPPLY – PRICES WILL RISE.  It’s that simple. Prevailing wage laws reduce the supply of competitive bids, significantly increase the total costs of projects, and indirectly increase the burden on taxpayers. Add in required record keeping (so the state can compute the “true” prevailing wage for each craft in each locality) and the net result is fewer bids from non-union companies and substantial unnecessary costs to projects subject to prevailing wage. All this is well documented in the academic community as are the fraudulent claims of harm if prevailing wage legislation is repealed.

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Please note that Wednesday there will be a hearing in Jefferson City by the Senate Interim Committee on Labor Reform, Senator Dave Schatz, Chairman. It will take place in the Senate Lounge at 1 pm. You can testify whether you will be present or not. Simply fill out this form:

http://www.senate.mo.gov/17web/wp-content/uploads/2015/10/WitnessAppearanceForm.pdf.

Scan and email it to Senator Schatz, at dave.schatz@senate.mo.gov

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Before getting into economic analysis below, I think it might be worth mentioning how unfair prevailing wage laws are. At least minimum wage laws, however harmful, apply to all workers. Prevailing wage laws apply only to construction workers. Both laws create unemployment, but prevailing wage laws tax all to benefit only a chosen, privileged few. How can this abuse of government power be called fair?

You won’t hear supporters of Missouri’s prevailing wage law mentioning unnecessary red tape or the unjust “transfer of wealth” effects of prevailing wage.  Instead they disguise the real effect of prevailing wage by suggesting that less experienced workers, higher injury rates, lower wages, less health coverage and the effects of “harmful competition” will result if the prevailing wage law is repealed. They will also speak glowingly about higher increased earnings and taxes and the economic benefit that accrues from the “spending cycle” which results, they claim, from the higher prevailing wage rates.

Proponents of prevailing wage will also claim that there is a downward spiraling “multiplier” effect to all wage earners when prevailing wage laws are repealed. This claim is sometimes backed by studies, commissioned by the supporters of prevailing wage, that disregard and ignore the economic value of the savings that accrue from the repeal of prevailing wage.  They ignore the fact that these savings, either in form of reduced taxes to citizens or reduced cost to the state, it will reenter the economic cycle for other uses: e.g., other labor projects, other purchases, other services, etc..

For example: One recent study claimed that repeal of prevailing wage in West Virginia would reduce construction income (wages) by $31 to $47 million and result in a total loss of $51 to $77 million in wages, after application of the “multiplier effect” (spending cycle).  This study also claims the reduction of income and sales tax revenue to West Virginia of $4.5 to $6.8 million. Such studies ignore the effect of the economic benefit (for wages and other expenditures) of alternative utilization of the savings on construction wages as well as the multiplier effect of such alternative uses.   In addition, the income and sales tax revenue that would be derived from these alternative wages and expenditures is ignored.

Intuitively we know that if all labor costs were to be increased by law, prosperity would be harmed, not increased. Aggregate prosperity is improved only by increasing productivity – not by increasing wages.   Increased wages, without an increase in productivity, only transfers wealth and reduces prosperity.  If the opposite were true you would need only to pass a law increasing the minimum hourly rate to $500 per hour and we would all get rich.

Proponents of prevailing wage also claim that all deficiencies or problems of prevailing wage laws can be cured by improving the “paperwork,” the reporting of wages used by the Missouri Department of Labor and Industrial Relations to calculate prevailing wage in each reporting area of the state. Utter nonsense.  First, as any contractor knows, unnecessary labor cost to “pick up a pencil” can increase the cost of construction just as much as an unneeded carpenter picking up a hammer.  It’s the equivalent of government forced “featherbedding”. No one is motivated to add unneeded cost to his overhead and will do so only when forced to by law.

I would like to address two other claims made by prevailing wage proponents in Missouri:

  1. That prevailing wage laws produce “fair and competitive” bidding:  This is a twist on the preposterous claim, often used by proponents of prevailing wage, which maintains that the construction industry is uniquely subject to “harmful competition” that slashes wages and reduces standards. Thus when wages are set by law that such harmful competition is limited. A claim of emotional argument, not objective analysis. Think about it and logic alone will tell you that if the wage portion of a contract is fixed and a low bid is secured, contractors will just as likely look to reduce costs in other areas. Thus grade B materials are used instead of grade A.

It is construction management, performance bonding, monitoring and oversight of construction specifications that ensure that quality and other construction standards are met – not the wage rate.

  1. Lack of prevailing wage laws promotes “unskilled workers”: Proponents of prevailing wage laws maintain that in their absence the training of construction workers is inadequate.  The inference is that the industry depends on unions for an adequate supply of trained workers. There is no evidence that there is more of a market failure in the training of construction workers than in the training of workers for any other occupation group. There are community colleges, private technical institutes and other training resources besides labor unions. In addition there is on-the-job training for less skilled “helpers”, who abound in free market construction contracts. With prevailing wage contracts contractors are motivated to hire union workers rather than less skilled helpers due to the cost disparity between the prevailing pay rate that they are forced to pay and the productive value of helpers.

These and other claims advanced by the supporters of prevailing wage laws are a complete disguise of their real PURPOSE: TO LIMIT COMPETITION BY THE FORCE OF LAW.  This purpose applies to both sellers of labor and sellers of construction contracts. The sellers of labor (unions and other labor organizations) want to limit the competition from others who might offer their labor at a lesser price; and sellers of construction contracts want to limit bidders to only those who pay comparable wages as they do, whether by force of union contacts or the force of prevailing wage laws.

Why is the real purpose (limited competition) disguised behind all these claims? As anyone with the most basic understanding of the way markets function knows: when competition is limited prices rise. It’s basic “supply and demand stuff.”  Added costs due to increased wages are paid by Missouri taxpayers. This results in fewer and lower quality government buildings and infrastructure or other “goods and services” than would otherwise be possible with free-market bids.

Of course proponents of prevailing wage can’t sell a prevailing wage scheme on the singular purpose of raising labor costs so they must attempt to justify the law with false and misleading claims.

 

There are many economic studies by scholars with no dog in the fight that debunk the claims by proponents of Prevailing Wage. You need only rely on your own economic knowledge base to determine that buyers love competition and sellers hate competition.

Reduced competition is what the sellers of prevailing wage are seeking. Don’t buy their flawed arguments that disguise the hidden purpose of Missouri’s prevailing wage law.    

Bruce Hillis

Mexico, MO 65265

573.380.1132 brucehillis@charter.net

August 13 , 2017

 

The Incubation of Brute Political Force

Many if not most rational people agree with Donald Trump’s message (found here) that Fidel Castro was a brutal dictator who oppressed the Cuban people for decades. What’s missing in Trump’s brief statement, and for that matter in most accounts by the mainstream media, is any explanation as to WHY Castro was such a brutal dictator.

What drove Castro to use the brutal force of the Cuban nation state against his own people?

There is no compelling evidence that he took brutal action against everyone.  He used it against those who opposed him.

The question then to be answered is: was his brutality to prevent opposition to his position as dictator, which many intuitively believe; or was it to prevent opposition to the radical leftist-collectivist policies that he strove to implement?

I maintain that it was not due to the fear of having to forfeit his position as dictator.

Given his success in ousting Batista, the brutal and crooked dictator immediately preceding him, Castro would more than likely have enjoyed all the trappings of dictatorship with a luxurious lifestyle and would have long retained his position, with only minor and occasional force.

I suggest that Castro’s brutality was the direct consequence of his philosophy of social order and the policies necessary to implement this philosophy.

Castro was a self-described Marxist-Leninist for whom communism would be the one and only economic system allowed in Cuba.  He was an ideologue who would use any means to achieve his goals.  Brutality was the means of choice because it was his only workable option.

Socialism, especially where a citizenry has been exposed to any semblance of capitalism, even if only crony capitalism, can only be imposed via force. Without force, natural cooperation, the formation of capital and voluntary exchange emerge.  Capitalism, the antithesis to socialism, is achieved in the absence of force.  Natural cooperation and voluntary exchange must be stamped out for pure socialism to survive.

If dictator Castro had embraced capitalism or even crony-Capitalism, Trump would have surely tweeted a different, more gentle message.

The questions remaining unanswered are: what portion of natural cooperation and voluntary exchange will a Trump administration attempt to stamp out via the abuse of private property rights and the imposition of trade restrictions and tariffs; and what version of brute political force will be used to achieve Trump’s philosophy of economic nationalism?   Bruce-thumbnail

Bruce Hillis

 

 

Canadians now wealthier than Americans

Serious food for thought

The Toronto Globe & Mail cites a report from Environics Analytics finding that the average household net worth in Canada in 2011 was $363,202, while the figure for American households was $319,970. The difference is in real estate holdings, $140,000 in favor of Canadian households. The author of the report cites Canadian fiscal conservatism, avoidance of our subprime disaster, and Canadian rejection of the income tax deductibility of mortgage interest. The Canadian unemployment rate is lower than ours as well.

What havoc has been wrought by Fannie, Freddie, Barney Frank, Chris Dodd, and the whole crew of pandering, vote-buying politicos of all stripes responsible for the recent economic crash and the nosedive in our national net worth.

A penny for your thoughts

Our family was getting into the minivan at a gas station the other day when I spotted a penny on the ground. I nudged my 8-year old son to turn back and pick it up. He shook his head, “You can’t buy anything with that,” and continued to his seat inside. I glanced over to a fellow pumping gas just across us, likely about 70ish, who had heard my son just as clearly as I, and we both had a chuckle. I then reluctantly agreed aloud, “You know, he’s right, though.”

My grandfather turned 96 this spring. I fondly recall many of his stories about growing up decades ago, roaming the Midwest in search of work in the 1930’s. A factory in Chicago, a local egg route, and as a farm hand in the Dakotas for the wage of a dollar a day.

People expect a dollar to be a store of value. It is to some degree, at least for short to intermediate periods of time, anyway. But long term, what a crap deal holding a buck is. If my grandfather had taken a dollar from a full day’s hard work and stuck it in cookie jar and pulled it back out today, he’d still have a dollar, sure, but what he could buy with it now is a lot less. Back then, it would buy a few loaves of bread, now only about half a loaf (this despite the great advances in agriculture, delivery, and food processing which should drive prices DOWN!)

What a bad deal to work so hard, to prudently save for a rainy day, just to have a lot of that value rot away. That penny my son found too worthless to pick up now was worth a few pieces of gum decades ago.

Government spends more than it takes in, passes laws to make credit too easy, and sets up back-stopped mortgage-buying enterprises, so more money is printed one way or the other. And that feels good to those getting the benefit of the new money, so they can buy more stuff than they could otherwise afford. The economic indicators look perpetually positive, and we feel magically wonderful as a nation since everybody has been “making more.”

But there’s a back side to this gravy train. Food prices are creeping up and savers are earning no interest; no wonder we are scratching our heads. Maybe some of us are starting to realize that value is evaporating from our own pockets. However it’s nothing new in human history: you can’t create value out of thin air; value is just sucked in from somewhere else; in this case, holders of dollars…or pennies…or, in my son’s case, those who have become indifferent to a penny.

By the way, after he refused that small coin, I reached down and put it in my own pocket before getting into the driver’s seat. As I always do, I examined the coin’s date, not as a collector, but because pre-1982 pennies are mostly real copper, so the melt value is about 2 cents – it awards me more than a penny’s worth of pleasure finding those (pre-1964 dimes and quarters have 90 percent silver- so hold onto those, too.)

Somewhat ironically, a few minutes later at a garage sale, my son found a toy he had been really wanting for his stuffed animal collection for the giveaway price of 10 cents. …”Ya know, son, if it’d been a dime we’d found, I could help ya out…”

Steve Spellman

The Case for Capitalism Education

Guest post by Kel Kelly

Few people understand what Capitalism actually is and how it works. If they did, they would almost certainly not continue to vote for the policies they currently support, and they would not experience today’s economic problems.

Capitalism is blamed for most of our economic ills. But in fact it does not exist. Capitalism is defined by free markets. But markets are not free when they are taxed, regulated, subsidized, mandated, hobbled, and otherwise manipulated. Government interventions in the economy were not for the purpose of fixing so-called “market failures.” They were implemented for political gain. But these interventions necessarily caused more problems due to the law of unintended consequences. Today we are “fixing” so much that our economy is breaking down. Continue reading