Posts Tagged ‘profits’


Alan B. Krueger wants the United States to raise the minimum from $7.25 an hour to $12 (“phased in over several years”) but not to $15 an hour.


Research suggests that a minimum wage set as high as $12 an hour will do more good than harm for low-wage workers, but a $15-an-hour national minimum wage would put us in uncharted waters, and risk undesirable and unintended consequences. . .

Although the plight of low-wage workers is a national tragedy, the push for a nationwide $15 minimum wage strikes me as a risk not worth taking, especially because other tools, such as the earned-income tax credit, can be used in combination with a higher minimum wage to improve the livelihoods of low-wage workers.

Economics is all about understanding trade-offs and risks. The trade-off is likely to become more severe, and the risk greater, if the minimum wage is set beyond the range studied in past research.

While conservative mainstream economists want to abolish (or at least not raise) the minimum wage and to rely on the earned-income tax credit (which, remember, places all the burden on taxpayers and none on employers), liberal mainstream economists (like Krueger) suggest mixing the earned-income tax credit with a slightly higher minimum wage.

What both wings of mainstream economists share is a view of the labor market shown above, characterized by an equilibrium wage rate and the existence of unemployment at a minimum wage above that equilibrium rate. That, for them, is the trade-off: a higher minimum wage that will benefit the workers who keep their jobs versus the workers who will be laid off if the minimum wage is increased.

What Krueger and other mainstream economists don’t explain is a different tradeoff: between doing nothing and adopting measures to increase the demand for labor. As all of my Principles of Microeconomics understand, it’s possible to increase both the minimum wage and the demand for labor. As a result, all workers (including those who are currently earning more than the minimum wage) will be better off.

How is that possible? Well, the demand for labor on the part of employers can increase as a result of increases in the minimum wage itself, as poorly paid workers have more money to spend on goods that are produced by other minimum-wage workers. It can also increase through public jobs programs, if government revenues are used to hire unemployed and underemployed workers. (Together, those two effects would shift the demand for labor out to the right, through the point marked B on the chart.)

When mainstream economists like Krueger don’t present that possibility, of hiring the workers private employers are unwilling to take on at a higher minimum wage, they’re failing to present the real tradeoff we as a society face: on one hand, continuing to allow private employers to pay low wages to workers and to lay off any workers they don’t want to keep on if the minimum wage is actually increased and, on the other hand, making sure all workers are paid a decent wage and are guaranteed a job at that wage.

The only risk of doing the latter is to the standing of mainstream economists themselves—and, of course, to the private employers whose profit-making decisions they take as given.


The last time I brought up the issue, I was referring to mainstream economists’ presumption we would forever live in a Goldilocks economy: not too equal and not too unequal but just right.

But, as we know, the Goldilocks economy no longer exists (and hasn’t, for over three decades), as economic inequality has continued to grow.

Well, as Jeff Spross has discovered, the same principle applies to economic growth.

The presumption is, fast economic growth is a good thing. Everyone benefits from a larger economic pie. And slower-than-normal growth is something we should be worried about.

Not so fast. A dark and unpleasant truth is that many economic elites actually have a vested interest in anemic job growth and a slack labor market.

How so? As I explained to my students yesterday, faster economic growth means (usually) tightening labor markets and more worker bargaining power—and, as a result, higher wages. On one hand, those increasing wages mean more worker income and more mass consumption. But they also put the squeeze on profits, and the distributions of those profits to the rest of the economic elite.

To which Spross adds:

Finally, there’s a lifestyle issue at play. If the incomes of everyday workers go up, then elites’ real incomes must go down. The labor they’re buying is more costly. This completely changes where and how the elite can spend their money, and what they can and can’t consume. The rising “servant economy” rests on a wide relative gap between high and low incomes.

Put it all together and that’s why we’re seeing such an intense debate about Fed policy in the current economic situation. It’s not just about interest-rate spreads for banks. It’s about the larger and more complex issue of class bargaining power—inside corporations (between workers and capitalists over the size of profits, and between capitalists and the management to which they distribute a portion of the profits) and outside corporations (not only in terms of the commodities capitalists sell to workers, but also the “booty” they share with shareholders, investors, financial institutions, and others).

As Spross puts it,

Elites obviously don’t want to completely tank the economy. But it certainly works for them if it stays modestly stagnant, maximizing the growth of the pie while minimizing worker bargaining power.

It’s the Goldilocks principle: Don’t run the economy too hot or too cold. Run it just right.


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We see it on a daily basis. Contemporary capitalism is out of control.

The latest example is Valeant Pharmaceuticals International, which buys up existing drugs and raises prices aggressively, and does nothing to develop new drugs.

Valeant defended itself, saying in a statement that it “prices its treatments based on a range of factors, including clinical benefits and the value they bring to patients, physicians, payers and society.” It says patients are largely shielded from price increases by insurance and financial assistance programs the company offers, so that virtually no one is denied a drug they need. . .

If “products are sort of mispriced and there’s an opportunity, we will act appropriately in terms of doing what I assume our shareholders would like us to do,” he told analysts in a conference call in April.

What’s happening? Clearly Valeant’s strategy is undermining the usual rationale of the American pharmaceutical industry, that it “needs” its exorbitant profits to fund research and development.

It spends an amount equivalent to only 3 percent of its sales on research and development, which it views as risky and inefficient compared to buying existing drugs.

It also pays very low taxes, “because it is officially based in Canada, although Mr. Pearson operates from New Jersey.”

And it makes its profits not just by raising prices, but by laying off workers in the companies it purchases and by accumulating a mountain of debt to finance those purchases.

Everyone, of course, knows the counterargument: that Valeant is just one bad apple in the barrel. But it’s operating according to the rules of a system that every other major corporation follows in the United States: individual decisions that maximize the private gain of a few at the expense of everyone else, both consumers and workers.

The problem is, J. Michael Pearson is giving a bad name to the pharmaceutical industry and to capitalism as a whole. Surely, other heads of corporations should want to rein him in, because he’s generating bad publicity for their system (and, in addition, he’s forcing them to give up some of their profits to pay for inflated drug prices for their employees).

On the other hand, they don’t want to touch him, out of fear that their own profitable operations—on both Main Street and Wall Street—will be subject to public scrutiny and regulation.

So, the tiny group at the top, who make decisions that affect the rest of us, are caught in a bind.

Meanwhile, capitalism continues out of control.


As if to confirm what I wrote last night, here’s James Surowiecki on what the tiny group at the top could do, out of self-interest, to rein in rent-seeking profiteers like Valeant:

In place of closed distribution, the F.D.A. can require companies to make samples of their drugs available to competitors. The F.T.C., as Anderson argues, should be more aggressive in limiting mergers among generic-drug makers. And the U.S. and other developed countries should also adopt an arrangement known as regulatory reciprocity: if a drug maker has approval to sell a drug abroad, it should be able to sell that drug here, and vice versa. Safety concerns may rule out importing drugs from just anywhere, but there is no good reason for a company selling a drug in, say, Germany to have to spend time and money to get the right to sell it here. Foreign competition has played a central role in holding down retail prices in industries ranging from automobiles to consumer electronics. It’s time drug prices were subject to the same rules. Shkreli has said, since the backlash, that Turing will roll back the Daraprim price increase. But the fate of toxoplasmosis sufferers shouldn’t depend on the egomaniacal whims of a “pharma bro.”

Of course, these kinds of measures would make drug companies anxious, but they should be doing all they can to encourage competition, if only out of self-interest. If market forces and smarter regulations can’t limit price gouging, then drug makers could be subject to more drastic measures, like price controls or compulsory licensing—a system that compels companies to license drugs to other manufacturers. The Turing scandal has shown just how vulnerable drug pricing is to exploitative, rent-seeking behavior. It’s fair enough to excoriate Martin Shkreli for greed and indifference. The real problem, however, is not the man but the system that has let him thrive.


In the United States, there are now somewhere between 270 million and 310 million guns, according to the Pew Research Center. That’s almost one gun for every person in the nation.

While we spend a lot of time discussing Second Amendment rights and gun-control measures, the fact is guns are big business in the United States.


According to the U.S. Bureau of Alcohol, Tobacco, Firearms, and Explosives, U.S. gun manufacturing has more than tripled since 2001 (from 2.9 million to 10.8 million total firearms produced).


Meantime, as Jim Tankersley explains, gun manufacturer profits have risen as well.

The stock market shows that story. If you’d bought shares of Sturm, Ruger & Co. in 2009, they’d be worth about 10 times as much today. That’s a slightly better return than if you’d bought Apple.


And while some U.S.-manufactured guns are exported (a bit less than 400 thousand in 2013), that was more than made up for by firearms imports into the United States (more than 5.5 million in 2013).

You want to understand the escalation of gun violence in the United States? Just follow the money. . .


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