You don’t have to be an economist to understand it, but as far as simple concepts go, it sure seems to elude quite a few folks.
When you provide financial assistance or otherwise institute policies aimed at bolstering the economic prospects of families that don’t have much money, those families tend to spend more of the incremental dollars they come across than their well-to-do counterparts.
Again, it’s not complicated. But I doubt the problem is rooted in complexity or in economists’ penchant for couching things in formalized language (e.g., “marginal propensity to consume”).
Rather, the problem is this: Money, influence, and power go together like the peanut butter and jelly that lower-income families too often have to eat for dinner. Policymakers, and especially those who influence them, generally aren’t poor. And people who have money naturally want to protect it, no matter what they might say publicly about the necessity of creating a more egalitarian society.
When you combine that with an especially unforgiving version of capitalism, you end up with America in the 21st century. Throw in a pandemic and a totally inept federal response to the public health crisis, and you get widespread societal discord, amplified by endemic racism and misogyny, both of which contribute to inequality of opportunity, which, in turn, ensures the system continues to perpetuate itself.
I bring this up because the world’s largest economy is arguably at a make or break moment. Ironically, the left-for-dead US manufacturing sector is exhibiting signs of resilience as the crisis rolls on, due to shifting consumption habits and the fact that factories aren’t generally considered “frontline” in the epidemic.
The problem is that the manufacturing sector simply doesn’t play a large role in explaining the variability in US GDP (or non-farm payrolls for that matter). Indeed, as Goldman wrote in July of 2019, “the contribution from manufacturing to GDP volatility has fallen from 60% in the early 70s to 20%.”
What accounts for that? Well, a trio of factors. For one thing, manufacturing output as a share of GDP has fallen off a cliff over the past seven decades.
Additionally, better inventory management techniques have reduced volatility in the sector, while the non-manufacturing economy isn’t as correlated with factory activity as it was in the past.
It’s the services sector that matters, and the pandemic simply decimated that part of the economy. The figure (below) shows the unemployment rate for manufacturing versus the jobless rate for leisure and hospitality.
The unemployment rate in leisure and hospitality is still above 16%. The gap with the manufacturing sector has closed, but remains in excess of 11 percentage points (!).
That’s extraordinarily problematic for a variety of reasons that are self-referential and thus prone to feeding off one another. The wage disparity between manufacturing jobs and leisure and hospitality positions is huge.
Obviously, there are academics who have spent decades studying trends like these, and I don’t purport to have gone to any great lengths to analyze this data beyond the trends apparent when you simply plug it into a spreadsheet.
So, the point here isn’t to deliver any kind of definitive take. Rather it’s simply to say that the largest part of the US economy is still reeling, and the folks who work in the services sector are not compensated well, even when they have a job.
That latter point suggests services sector employees came into the pandemic in an especially precarious financial position. As noted here at the outset, people whose reality is generally defined by some form of economic precarity are also those with the highest marginal propensity to consume. Closing the loop, the US economy is a consumption-driven economy and what’s consumed are overwhelmingly services.
Hopefully you can see how that setup has the potential to create a self-fulfilling prophecy in the absence of intervention.
What kind of intervention? Well, the kind that would ameliorate all of the problems embedded in what I’ve outlined above. Yes, restoring American manufacturing would help, in that it would create a larger pool of relatively high-paying jobs. But that isn’t going to happen overnight, and it won’t happen at all if what you mean by “manufacturing” are old-economy, smokestack positions. Those jobs aren’t coming back to America. Period.
In the services sector, employers need to be compelled to pay higher wages. It’s just that simple. Or at least it is at the aggregate level.
I’m a reasonable person, so I understand that you can’t pay every low-skilled worker in the economy $30 per hour and I also understand (better, I’d argue, than anyone else writing daily for public consumption) that there’s plenty of nuance to be had, especially in food services, where bartenders and servers at upscale establishments are making quite a bit more than the official figures capture due to cash tips.
But at a common sense level, it is ludicrous to suggest, for example, that companies like Starbucks, Walmart, and Amazon can’t pay employees more than they do without somehow being derelict in their obligations to shareholders. I’m a shareholder in all three of those companies and never once (not one time) have I worried that the long-term investment case would be materially impacted were management to announce an initiative to raise wages substantially.
I’m not suggesting those companies haven’t made efforts to raise wages (they obviously have, and they’re keen to let everyone know about it when they do). But it’s not enough. There has to be a tipping point beyond which corporate America either decides, or is compelled by the government, to pay the average employee an amount that, inclusive of any benefits offered, is consistent with employees having the economic wherewithal to have a modest house and raise a family with some modicum of dignity.
I imagine most well-to-do Americans would think it crazy if the average Starbucks barista made $30 per hour. And maybe it is — crazy, I mean. But pause for a second and do the math. $30 per hour, eight hours per day, five days per week, works out to $4,800 per month. That’s less than $58,000 annually, before taxes. Long-time readers know I don’t have any children, but I think I’m correct to suggest that raising two kids on $58,000 per year would be exceptionally challenging, if not downright scary (from an economic perspective, I mean). In a two-income household where both parents were making nearly $60,000 per year, the situation would be much more tenable, likely even comfortable, depending on where you lived.
But here’s the thing: That’s a hypothetical. Nobody that I’m aware of makes $60,000 per year serving lattes at Starbucks or pointing people to the right aisle in Walmart. And yet, a disproportionate amount of economic activity is accounted for by consumption that takes place at restaurants and retail stores. The people doing the eating and the shopping are, by and large, not making much more than the people serving the food and stocking the shelves, precisely because they are the same people (in an economic sense).
How is that sustainable? It’s circular to the point of absurdity. The people providing the services for meager wages are in most cases the same people consuming them when they’re not providing them.
And speaking of circular, that brings us full circle to where we began nearly 1,200 words ago. This is why supply-side economics doesn’t work. Handing out tax breaks to the rich can’t possibly make an impact because the rich aren’t generally participating in this not-at-all virtuous loop, unless it’s to pay nearly as much for one Starbucks drink as the barista “crafting” it makes in an hour.
If you think any of that is going to change just because America (narrowly) decided to cancel “Celebrity Apprentice: White House Edition,” you’re wrong. The next four years will witness a return to sanity and, hopefully, a restoration of civility, but for everyday people, the economic reality will be the same as it ever was, if not worse depending on how efficient the COVID-19 vaccine rollout goes.
I’d be remiss not to note that there are a few lawmakers in the House that would change this overnight if they had the support of their party’s leadership. But they don’t. Because, again: Money, influence, and power go together like peanut butter and jelly. And the real, would-be difference makers on Capitol Hill are short on all three, especially relative to their more senior, centrist colleagues.
Empower the 4.