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Taxes, Regulations, and Minimum Wage (Krugman)

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PostPosted: Sun Feb 07, 2016 8:03 pm    Post subject: Taxes, Regulations, and Minimum Wage (Krugman) Reply with quote


Economists understand productivity is mostly influenced by the labor and capital inputs, along with technological improvements.

“In the survey, 94% of economists said weak capital spending had a “large” or “modest” impact. Workers need the innovative equipment and modern supply chains to increase their output per hour, but the capital spending dearth means that isn’t happening. “The drop in capital investment has reduced the growth of [the] capital-to-labor ratio.”

Increased government regulation was cited by 64% of economists as having a large or modest impact. “Tax and regulatory policies have restrained investment and innovation.”


Also, I may add, raising the minimum wage will make capital relatively cheaper than labor. Capital spending will increase and employment will decrease (or shift, e.g. to production of capital equipment). However, to ensure employment, tax and regulatory burdens should be reduced.


Reducing tax and regulatory burdens should have a positive effect on business start-ups and expansions. And, it’s possible, ptoductivity gains went to taxes and regulations rather than to (higher) wages or (lower) prices.

Raising the minimum wage should reduce employment, reduce other production costs (e.g. turnover), raise consumption (workers with high marginal propensities to consume), attract idle labor, raise capital spending & employment, raise productivity, and raise prices (although, real income of low-wage workers rise and real income of high-wage workers fall).


Moreover, I may add, small businesses aren’t thriving, like in the past, to become big businesses. More progressive middle class taxes and more regulations, along with greater legal burdens, may be major factors why business start-ups are in decline and more businesses are being destroyed than created. However, big businesses can more easily absorb taxes, regulations, and legal burdens. Many U.S. multinationals have less competition and more market power to thrive, particularly many high-tech firms, which have huge profit margins, little or no debt, and lots of cash.

Profits Without Production
Paul Krugman
June 20, 2013

“Economies do change over time, and sometimes in fundamental ways.

“…the growing importance of monopoly rents: profits that don’t represent returns on investment, but instead reflect the value of market dominance.

…consider the differences between the iconic companies of two different eras: General Motors in the 1950s and 1960s, and Apple today.

G.M. in its heyday had a lot of market power. Nonetheless, the company’s value came largely from its productive capacity: it owned hundreds of factories and employed around 1 percent of the total nonfarm work force.

Apple, by contrast…employs less than 0.05 percent of our workers. To some extent, that’s because it has outsourced almost all its production overseas. But the truth is that the Chinese aren’t making that much money from Apple sales either. To a large extent, the price you pay for an iWhatever is disconnected from the cost of producing the gadget. Apple simply charges what the traffic will bear, and given the strength of its market position, the traffic will bear a lot.

…the economy is affected…when profits increasingly reflect market power rather than production.

Since around 2000, the big story has been one of a sharp shift in the distribution of income away from wages in general, and toward profits. But here’s the puzzle: Since profits are high while borrowing costs are low, why aren’t we seeing a boom in business investment?

Well, there’s no puzzle here if rising profits reflect rents, not returns on investment. A monopolist can, after all, be highly profitable yet see no good reason to expand its productive capacity.

And Apple again provides a case in point: It is hugely profitable, yet it’s sitting on a giant pile of cash, which it evidently sees no need to reinvest in its business.

Or to put it differently, rising monopoly rents can and arguably have had the effect of simultaneously depressing both wages and the perceived return on investment.

If household income and hence household spending is held down because labor gets an ever-smaller share of national income, while corporations, despite soaring profits, have little incentive to invest, you have a recipe for persistently depressed demand. I don’t think this is the only reason our recovery has been so weak — but it’s probably a contributory factor.”

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