Monday, April 30, 2012

Mike Bloomberg gives another display of his ignorance of economics by vetoing the prevailing wage bill

By vetoing New York's prevailing wage bill, Mike Bloomberg shows once again that he has zero grasp of economics. How in the world does reducing or limiting the income of people create more jobs? Maybe under a slave system, but that's about it.

The fact is, low wages lead to less job creation, not more. Cutting or limiting the income of workers hits businesses where it hurts most--in demand for the very products they produce. When incomes fall or stay stagnant, so do sales. Marshall Auerbach eloquently explains this economic fact in a terrific post here.

I am baffled as to why this is so hard to understand. The total of all things produced in an economy is equal to the income paid (received). The two are identical. That means, when you talk about limiting or shrinking someone's income you're also talkng about limiting or shrinking the total output of goods and services (real wealth). Moreover, it's pretty hard if not impossible to create jobs when output is slowing or shrinking. Unless of course, you're freakin' Houdini.

Sadly, this is not Mike Bloomberg's first display of gross ignorance when it comes to the economy. He put on a terrific dumb show back in November when he gave a speech about the state of the U.S. and how we've gone off the track in terms of fiscal responsibility, blah, blah, blah; how the debt has zoomed to who knows how many thousand per every man, woman and child, blah, blah, blah and how we've run out of money (I'm puking now). Don't worry, he definitly used all those well-worn, yet massively stupid cliches in abundance, I can assure you.

Back then it was just a speech, nothing more. We could listen to it, get sick, and forget about it the next day. This time, however, it affects people's lives. Vetoing the prevailing wage bill ensures that the wages of city workers--who are already having a hard time making ends meet--will not be sufficient to allow them to live decent lives now or in the future. And why is he doing this? To "be competitive." Yes, it'll be a competitive race to the bottom ensuring that all workers earn less and less and less until there's no money to pay for anything that Mike's cherished businesses produce. Then Mayor Bloomberg, er...Houdini...will have to magically come up with a way to keep those businesses from going out of business.

The more I see of Mike Bloomberg the more I feel he has been a terrible Mayor and the more he convinces me that having a businessman in government is a horrible idea. Government should not be about profits, it should be about the public purpose.

Mike Bloomberg took over the city at a time when it was still flying high on all the positive momentum left over from the economic boom of the 1990s. It made him look good, but it had nothing to do with his leadership. Then came 9/11 followed by the financial crash and what did Bloomberg do? He doubled down on Wall Street, giving massive tax breaks to the likes of Goldman Sachs, Morgan Stanley and other, big, financial firms while closing schools, firehouses, senior centers, shelters and other important city departments and services. Now he vetos wage increases for workers saying it will "create jobs" even as his cuts have led to the layoffs of thousands of teachers, cops and firemen.

Great economics, Mike...great economics!


dave said...

can i collect my share of the debt now?(and future debt) i am married and have 2 children, would like their share as well. where the hell is it?

Matt Franko said...

Sorry Dave, there is not enough to go around because of morons of the stripe of Bloomberg here who are in charge at the Federal level...


Ralph Musgrave said...

For the first time in the history of planet Earth, I disagree with Mike Norman. If everyone’s wage in dollar terms was halved tomorrow (or doubled), and entrepreneurs’ remuneration, i.e. profits, were also halved / doubled, there’d be little effect on anything. And if prices were halved / doubled at the same time, there’d be absolutely no effect: certainly effect on demand. No country can make itself better off just by paying itself more dollars / yen / Euros.

Of course there may well be SOCIAL justification for re-distribution from rich to poor, but that’s another matter. Also there is the fact that the poor probably spend a higher proportion of any increased pay than the rich, but I dealt with that point under the previous post below.

mike norman said...

Ralph, one time in the history of the planet earth that you disagree with me? Still a pretty good track record! ;)

I agree that it's only a question of distribution, but I was speaking in the context of job creation, which was rationale for Bloomberg's decision to veto the bill.

Further erosion of worker income at this point will do nothing for job creation. In fact, it will result in the oppposite due to its effects on demand.

On the other hand, ensuring higher incomes for business owners and entrepreneurs will result in demand leakage to savings. That's it.

Anonymous said...

Ralph: "If everyone’s wage in dollar terms was halved tomorrow (or doubled), and entrepreneurs’ remuneration, i.e. profits, were also halved / doubled, there’d be little effect on anything. And if prices were halved / doubled at the same time, there’d be absolutely no effect: certainly effect on demand."

And yet debts will still be denominated in the same dollars they were before this happened. So if prices are halved universally, the burden of debt service effectively doubles. Even if all debts are adjustable-rate arrangements and the interest rate is cut in half, too, that doesn't mean the debt itself is halved.

Considering the incredible prevalence of private debt right now, I am a little baffled how anyone could think changes in money value — instantaneous or not, universal or not — will not affect demand.

Anonymous said...

(For simplicity, assume I said "changes in prices" in that final sentence above; "money value" was taking it in a separate direction that I wound up deleting.)

Tom Hickey said...

Mike, you are giving in to Ralph to easily. There are also economic reasons that MMT economists, especially Bill Mitchell, have documented in terms of unemployment and underemployment as a high-cost negative externality. When true cost including the negative eternality that is being socialized is computed, the economic rationale becomes clear.

Tom Hickey said...

@ Anonymous at 10:49

Right. Neutrality of money is being assumed, when a credit-based system is the reality — a point that Minskians like Steve Keen are now driving home. I mention SK in particular because he is getting wide media exposure.

Ralph Musgrave said...

Anon, You’re right. I forgot the effect of debts doubling or halving in value. To be more exact, it’s not debts as such that matter because for every debtor there is a creditor. So if the behaviour of a debtor, given a rise or fall in the value of their debt is the exact mirror image of the behaviour of the corresponding creditor (to over-simplify the issue) there’d be no net effect.

Of more significance (per dollar of debt) is the behaviour of those private sector entities holding monetary base (e.g. those who have just sold Treasuries). Given falling prices, these people will see the value of the net financial assets rise, so they’ll presumably spend more. In contrast the “debtor”, i.e. the central bank won’t do much, so on balance there is a stimulatory effect. The economist Arthur Pigou recognised this effect, and it’s sometimes called the “Pigou effect”, as you many know.

BTW, I wish people wouldn’t call themselves “Anonymous” because some people with this name are dummies and some are brilliant, and it would be nice to know which “Anonymous” one is addressing. If you called yourself “Anonymous2587” for example, would you still be able to conceal your identity?

mike norman said...


I feel pliant today. ;)