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CPE Articles, Essays and Position Papers

PROGRESSIVE ECONOMIC PRINCIPLES: Creating a Quality Economy

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The Second Flaw:

Failure to Create Quality Customers

In most competitive business environments, there is a conflict between managing for a profitable business and paying adequate wages to create a quality consumer. Owners want to pay employees as low as possible to increase their profits. This results in the creation of inadequate customers. To compensate for this effect, the government’s domestic spending agenda helps under-paid workers by providing such programs as education, medical, and retirement benefits etc. that they cannot afford to purchase. Perversely, it is usually these same conservative business owners who oppose these benefits! Labor unions, labor laws, minimum wages and labor regulations offer assistance in overcoming this major problem in our world today. However, quality customers can only be created by paying wages high enough to sustain and enhance every worker’s ability to purchase quality goods and services. Therefore, we should develop standards for a quality customer minimum wage instead of the present understanding and application of just a minimum wage.

There is no such thing as a competitive labor market, not with billions of people in poverty and low cost slave labor. These people do not make good customers. This is a major global problem. The challenge is running a business – microeconomics – with a customer base drawn from a fully employed and adequately compensated work force. There should not be any significant competition within any industry based on basic hourly wages, for the same job within a geographical region. Competition should be based on many other business factors including labor utilization. Competition for labor, based solely on low wages, reduces the number of customers and their ability to buy more goods and services.

There is a myth that wages should be left to the free market mechanism. This natural inclination of a business owner-manager is to either minimize his labor force or pay less for labor so he can make more profit. Corporate downsizing and offshore flight to cheap labor markets provides classic examples of this decision-making. Granted, these are correct business decisions for increasing profit. But, if all businesses in the economy implemented these policies, their sales will retreat drastically because their customers would not be well paid enough to buy their goods and services. This was basically the cause of the great depression in the 1930’s and the many other severe economic conditions that preceded it.

The world’s production systems can produce enough for everyone – supply – but the demand is not there because the people do not make enough to buy it. When mass production is accompanied by mass consumption, a more evenly spread distribution of wealth occurs. Since wealth is tied to both production and consumption, the economy thrives.

Therefore, businesses should not compete based on the payroll cost of individual workers. They should compete on the many other factors of business such as, labor utilization, marketing, operational efficiencies, management, innovation and quality. Henry Ford was the first to get this right, by almost doubling the daily wages of his workers, so they could buy his Model-T. The economists and businessmen of the day thought this was going to be an economic disaster. They were obviously wrong.

The argument is that the price of goods will substantially increase if wages are raised. The labor cost component is not the only component in the pricing mechanism. A reasonable increase in wages (fringe benefits) does not increase prices at the same rate. It is usually much smaller. Also, wages are deductible so any increases are partially paid by reduced taxation. Therefore, prices can go up somewhat but customer demand goes up also, creating more employment as well as a better economic and community environment. There are rising wages in the current capitalistic system but not enough to create an adequate diverse consumer base.

What currently hides this flaw – creating the quality customer – is consumer debt – credit cards, equity lines of credit and the necessity for working spouses. The government has helped to abate this problem with substantial government employment. The great depression was caused when the public had no access to credit when the Fed tightened monetary policy because their wages could not sustain the economy.

As capitalism gets more efficient it generally requires less labor to produce all the needed goods and services. Of course, this means less customer purchasing power – demand. Thus far, capitalism in the United States has solved some of this problem through innovation and the creation of new goods and services, some of which did not exist a few years ago. But, successful capitalism still might mean a larger government involvement both on a fiscal and monetary basis. In the end, creating quality customers through higher wages is paramount to keeping up demand for goods and services and completes the recirculation cycle.