Reich: “Pay workers more than they’re worth” … say, what?

Former Secretary of Labor Robert Reich thinks so …

Reich is a smart economist, so I can’t imagine he really believes his own mumbo jumbo:

Excerpted from Instead of New Deal, workers get raw deal

For most of the last century, the basic bargain at the heart of the American economy was that employers paid their workers enough to buy what American employers were selling.

That basic bargain created a virtuous cycle of higher living standards, more jobs and better wages.

Back in 1914, Henry Ford announced he was paying workers on his Model T assembly line $5 a day – three times what the typical factory employee earned at the time.

Ford knew it was a cunning business move.

The higher wage turned Ford’s autoworkers into customers who could afford to buy Model Ts. In two years, Ford’s profits more than doubled. 

That was then.

Now, Ford  is paying its new hires half what it paid new employees a few years ago.

The basic bargain is over – not only at Ford but all over the American economy.

In the years leading up to the Great Crash, most employers forgot Henry Ford’s example.

The wages of most American workers remained stagnant. The gains of economic growth went mainly into corporate profits and into the pockets of the very rich.

* * * * *
Corporations don’t need more money.

They have so much money right now they don’t even know what to do with all of it.

They’re even buying back their own shares of stock.

This doesn’t create a single new job, and it doesn’t raise the wages of a single employee.

Get it? Corporate profits are up right now largely because pay is down and companies aren’t hiring. But this is a losing game even for corporations over the long term. Without enough American consumers, their profitable days are numbered.

After all, there’s a limit to how much profit they can get out of cutting American payrolls or even selling abroad. European consumers are in no mood to buy. And most Asian economies, including China, are slowing.

We’re in a vicious cycle. The only way out of it is to put more money into the pockets of average Americans.

A basic economic principle is pay “market prices” for inputs and to add inputs – like labor – whenever its “marginal profitability” is greater than zero.

That means, if an added (“incremental”) employee doesn’t contribute enough to cover his / her costs, the company is worse off than if it hadn’t added the employee.

That’s economics 101.

Reich says to discard that principle and just pay employees a lot – whether or not they cover their associated costs.  Just pay them because they might be stimulative to the overall economy.


More of this in subsequent posts

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