Monday, May 4, 2015

Warren Buffett's got the minimum wage thing wrong like so many other people


Warren Buffet was chiming in on the minimum wage or should I say, the idea of hiking the minimum wage. This was in response to a question as to whether or not that would be an effective means of fighting income inequality, which he says is "extraordinary" as in, really, really, bad.

Here's what Buffet said:

“I don’t have anything against raising the minimum wage but I don’t think you can do it in a significant enough way without creating a lot of distortions,” Buffett, 84, Berkshire Hathaway Inc.’s chief executive officer, said Saturday at the company’s annual shareholders meeting in Omaha, Nebraska. Those distortions “would cost a whole lot of jobs,” Buffett said.
It's funny. Buffett talks about distortions? Like massive, unprecedented income and wealth inequality is not a distortion? Come on.

Anyway, I'm assuming that when Buffett claims "a whole lot of jobs" would be lost he is inferring that higher wages paid by firms would lead to lower profits and then workers would have to be laid off.

This is fallacy of composition and it's the common error that most minimum wage hike detractors like to invoke.

The problem with that arguement is it simply doesn't hold up in the macro sense. First of all profit is composed of two variables. One is cost (C) and the other is revenues (R).

If wages are hiked then yes, costs (C) will increase, but at the same time people's incomes will rise (all else being equal) and that will translate into higher sales (revenues). Buffett of all people should know this. Revenues are not a constant; they're a VARIABLE. Why is it that all the minimum wage hike detractors can't understand this and focus on costs alone? There isn't an economist in the world who will tell you that higher income will necessarily lead to static or falling sales.

So, in the "macro" environment higher costs (wages) would be offset by higher sales and that would equate to the same or greater profits, which means that no one has to be laid off.

Maybe it's true in the micro sense, that is, if ONE FIRM  is forced to raise its minimum wage then that firm might struggle and be forced to lay people off. However, if it's an across the board hike and everybody's income goes up, sales will not collapse. On the contrary, they would  probably soar and so would profits.

WTF, Buffett??

8 comments:

Tom Hickey said...

The way to answer this argument is through the MMT JG as a floor compensation package that anchors the nominal wage, thereby establishing a benchmark for hiring. If companies wish to compete in drawing workers out of the buffer stock of employed they have to at least meet this benchmark as a total compensation package.

The floor wage that set the benchmark needs to be a living wage rather than merely subsistence pay, which many employers are not even meeting so that workers need to have several jobs and still probably qualify for welfare safety net benefits, especially if they have families.

Need to get progressives like Bernie Sanders who already have a bully pulpit to push this argument.

Ralph Musgrave said...

Some people just aren’t worth all that much, e.g. unskilled, drunks to take an extreme example. I.e. some people can turn out $100/hr of stuff, some $10/hr and some can’t manage $1/hr. And some are totally worthless.

If someone is worth $10/hr and the min wage is $15, they just won’t get employed, by anyone, ever. Of course that deficiency MAY BE curable by training. Or it may not.

Tom Hickey said...

Good point, Ralph and it is overlooked by economic analysis that treats individuals as atoms. This is why economics needs to be supplemented by other fields of knowledge such as sociology for diagnosis and education and public health for treatment.

In the US there is whole underclass that that has been created socially, politically and economically that has never been addressed nearly adequately. It's a huge problem socially, politically and economically, and it is going to adversely affect the entire country until either it is addressed successfully or there is an implosion larger than periodic rioting that eventually is suppressed but never taken as a wakeup call loud enough to get really serious about.

But that will mean large-scale social, political and economic restructuring around a genuine solution rather than the conservative solution of zero-tolerance policing and incarceration or the liberal solution of throwing money.

Tom Hickey said...

BTW, when I say a social problem, I mean cultural as well as institutional. Changing institutional arrangements may be difficult politically but it is doable if the will, vision and ability are there. But changing a culture is difficult in an entirely other direction and it's a longer-term project.

If this were simple to do, it would have been done already. At this point, one wonders if it can be done. but I am an optimist on this, and the US is heading in a bad direction with the current demographics. The country is on the wrong course.

Dan Metzger said...

If the worthless drunk was not employed before, he doesn't count. If he was working, he'll get a raise and add to demand. Maybe he'll buy more booze or a new pair of shoes. Demand still goes up.
Further, the actual value of any particular job is not well calibrated. For example, CEOs.

Chewitup said...

To give Buffett a little credit, he did say that he preferred lawmakers to tinker with the Earned Income Tax Credit which gives tax refunds to those that qualify.

sths said...

Lots of people get it wrong. Buffet when he was younger was terrified of inflation because of government spending. This probably had a lot to do with his father's influence(father thought the fed would cause hyperinflation, probably a goldbug). Buffet saw through the gold thing but I guess the fear of inflation is still strong. The funny thing is his mentor Ben Graham wrote a book Storage and Stability: A Modern Ever-Normal Granary, i think it was linked here or on another blog which basically lays out the case of a Job Guarantee.

Jake C said...

As well as the fact that increased income increase demand on the macro level.It should also be pointed out that workers have every right to demand a higher share of the profits.firms like Walmart and McD could afford to double wages and still wouldn't make much of a dent in their profit margins@Ralph,I disagree.you either pay a man to do a job or you don't.They either do the job or they don't.any days work deserves a livable wage.all labour has dignity.