Minimum wage and trickling down: I don’t understand why those benefits don’t trickle

So I have been reading various and sundry critiques of minimum wage laws, and I have questions, and in particular, questions about the ideology driving the suppositions. Now, I am a mere, lowly planner who has only taken four classes in labor economics (including one offered at the PhD level), so I understand that I could never ever possibly understand the super-hard economics at the basis of These Things. So please, explain what you can to me, Internet, but using only small words.

The basic idea is that wage floors leave some people willing to worker lower wages out in the cold, as the wage floor forces employers to offer a minimum wage, and at that wage, the employer simply won’t hire an additional person, or they will let people go, because they do not value the additional labor at the price the wage floor sets.

This means that POOR PEOPLE SUFFER DAMN YOU because employers have absolutely positively no way of ever ever paying people slightly more except by screwing labor…even though corporate entities’ top managers and CEO are making eleventy billion dollars a year and the margin fits easily into many of the bonuses we routinely see handed out. I can credit the concern that a small business owner with a small number of employees can’t swing it, but there are plenty of corporate employers in these metro markets whose objections that they could never, ever pay their low-wage labor slightly more strike me as utterly disingenuous and self-serving. Take adjuncts: universities could pay them more; it’s just that labor oversupply means universities don’t *have* to. So they don’t, and they use their money for other stuff, like obscene salaries for administrators.

But that’s actually not my question.

Why don’t benefits from minimum wage laws trickle? We are supposed to believe that putting gigantically large sums of money in the hands of a few people (capital) trickle, trickle away down to us all…but putting marginally more dollars in the hands of a large number people has no trickle down potential at all, none whatsoever, supposedly. But don’t those minimum wage workers go out and buy things and generate more economic activity, so that employers will have more demand for labor, thereby potentially offering new, higher paid opportunities for other low-wage workers? Why isn’t that trickling?

According to this same school of economics, when wealthy people get made better off, the benefits trickle down! When a billionaire buys a private jet, it helps us all. It’s like magical rainbow snow–those benefits just trickle upon us from on high, and everybody should be ever so grateful. (Pukes, narrowly missing the keyboard). But if you make a larger group of poor people marginally better off, there’s no trickling. None! Impossible! That money just gets sucked into Democritus’ void, never to return to anybody in any form. Poor people buy things, and some save money, so it’s not like the move means absolutely positively no new capital investment is possible. Poor people can and do save. When they put money in banks, banks aggregate and use that capital, so…

So increased incomes to rich people are inherently good (because trickle, trickle, trickle), but increases in wealth to poor people is meaningless, according to the “pain and suffering school” of minimum wage writing. Somehow, the dollars know whose hands they are in, and they just won’t act the same for a large number of poor people the way they will for a small number of vastly wealthy people.

Who mourns for the CRA, other than the CRA?

I’ve not posted much about the decision to kill off state funding for CRAs (Community Redevelopment Authorities) in California, largely because I haven’t really known what to think. I have students who tell me that the CRAs are absolutely crucial, but I’ve never seen any evidence of it. For example, California taxpayers chucked a lot of money into LA Live via the Community Redevelopment Authority, and we didn’t even get a bus bench or a street tree out of the deal as far as I can see. And every time I say “why can’t we pursue a TOD near this or that Blue Line station” the response is that “those are outside the authority of the CRA.” So really impoverished areas are not targeted?

So in my experience–not in my research area, but in my experience in LA–the CRA in LA puts money into already viable projects in places the extra money isn’t needed and refuses to advocate (or doesn’t advocate very well) for community design factors in addition to the project’s internal amenities in return for public investment. Stated that way, CRAs seem to be in the business of giving gifts to developers and not asking for much in return. I have nothing against developers, but I also don’t know why some deserve gifts from taxpayers for building something they’d probably build any way (and if they didn’t build it, something else could go up there) and not providing street amenities.

Two recent Op-Eds echo my impressions. Like I said, I don’t study CRAs so maybe I am being grossly unfair, but others share my assessment.

Bill Fulton in the LA Times notes that the CRAs have had every reason to avoid real risks:

When the governor proposed eliminating redevelopment, I was the only mayor in California who supported him. I did it because I believe redevelopment needs serious reforming. Despite decades of incremental improvements to the law, cities still find “blight” where there is none. They have used redevelopment to do anything and everything because the law has allowed them to and they have felt they had no other options. The result has been that one of every eight property tax dollars in the state has been going to redevelopment agencies through “tax-increment financing,” a system that sends any increase in property taxes after land is redeveloped back to the agency instead of to county coffers.

Janet Denise Kelly writes in City Watch LA’s Minorities Not Mourning Death of CRA:

The 20 year anniversary of the 1992 Los Angeles Riots is nearing. This period brought great travesty to the City and South Los Angeles in particular where buildings burned and people rebelled against social and economic injustice. Since 1992, there have been promises to rebuild South Los Angeles and to target areas for business growth and job creation. Those promises have been modest at best or maybe even lip-service to appease community members.

Crenshaw Boulevard has seen growth with the new stores, the renovations of the Baldwin Crenshaw Mall, and new restaurants like Post and Beam and Buffalo Wild Wings. The USC area has had a total makeover because of its proximity to downtown. These areas because of their political influence and middle class residents have been able to wrangle in businesses and housing developments to position them for more growth in the future.

However, the most blighted communities are still struggling due to the remnants of the 1992 uprising and have been fighting for a piece of the redevelopment pie for years to rid themselves of high concentrations of liquor stores, smoke shops, or problem business that prohibit economic progress.

Is Sara Lee a trailblazer, an exception, or yet another corporate taker?

My brilliant planning students at USC often take exception to my unwillingness to believe that urbanism* will save the world, and, in particular, my disagreement with Chris Leinberger that urban places will necessarily lead us back into economic growth.

One objection comes from my homey, Dima Galkin, who edits (beautifully) all my manuscripts before they go anywhere, based on this news story from the Chicago Tribune about Sarah Lee moving back downtown, explicitly to reurbanize:

Sara Lee’s decision to move back to the city is part of a trend. Although it would be more cost-effective to stay in the suburbs, many companies have said that their moves are tied to the recruitment of workers who want to live and work in the city.

“We believe that a downtown location will provide MeatCo with an environment that will be energetic, foster breakthrough thinking, create revolutionary products, offer fresh perspectives and own the market,” Chief Executive Marcel Smits wrote in the email to employees in October.

We unfortunately do not have good data on the “many companies” component here. Because the evidence we have so far is that Chicago, rather than gaining population, lost a lot of population over the last decade. Which means this move on the part of Sara Lee is not necessarily chasing population, but a particular demographic. Which is fine, but isn’t really evidence of saving the world, per se. It could do something to stabilize downtown.

More to the point, the story strikes me as tragic more than progressive, unless you are a hardcore urban-suburban ideologue and think people who live and work in suburbs are bad and deserve what’s coming to them:

The Downers Grove-based company is cutting as much as half of its staff as it relocates between 500 to 650 employees to the city by early 2013. Sara Lee had about 1,000 area employees in January.

Combined with:

Sara Lee Corp. will receive between $5 million and $6.5 million in city incentives to headquarter its meat business at 400 S. Jefferson St., Mayor Rahm Emanuel announced Thursday.

The actual amount of incentives, which will come from the city’s tax increment financing fund, will depend on the number of jobs created. The aid still needs to be approved by the Community Development Commission and City Council.

So Chicago is giving a company that has been teetering on a insolvency for years $5 to $6 million to downsize by roughly half–a net job loss to the region of 500 people–to move the other half of the jobs to downtown, and

“This is a huge win for the City of Chicago, as Sara Lee Corporation has chosen the city to be the home of the new North American Meats company,” Mayor Emanuel said. “The new company will bring these high-paying jobs to the city, as well as its first-class brands and leadership in this key sector.”

Okay. I guess in Mayor Math, this does make sense.

For those who hate suburbs, we should probably note that Downers Grove was established in 1832. The City of Chicago was incorporated in 1837. So, like many of Chicago’s ersatz suburbs urbanists like to treat as whipping boys for sprawl, Downer’s Grove was a place first that then became subsumed in growth.

It’s tough for me to reconcile the payout of incentives with some sort of market process where the city’s inherent spatial advantage, conveyed by reurbanization, just won the day. It strikes me more as a story where a company, planning to split brands anyway, was looking for some good PR to wrap its downsizing in, combined with a mayor who wants to run for president, not unlike his regional peer Barack Obama, on an urban platform.

Regionalism is, apparently, not alive and well in Chicagoland, if the city and its ambitious mayor is willing to pay $5 million to aid in net regional job loss. For years, we had the argument that healthy suburbs required a healthy downtown. Does that not work in reverse when downtowns might be the winners?

*Isn’t urbanism just inherently valuable, I respond. Does it have to wrapped in progressivist, modernist rationales of world-saving in order to be legitimate?

Natural resource dependence

Resource and Energy Economics is has a manuscript on the economic growth associated with natural resource rich areas:

James, A. & Aadland, D., 2010, The curse of natural resources: An empirical investigation of US counties, Resource and Energy Economics.

From the abstract:

Research consistently shows that natural resource dependence tends to be associated with lower economic growth. However, the studies typically focus on differences across nations or states. We fill a gap in the literature by testing the so-called resource curse at a more disaggregated county level. Our results show clear evidence that resource-dependent counties exhibit more anemic economic growth, even after controlling for state-specific effects, socio-demographic differences, initial income, and spatial correlation. A case study analysis of Maine and Wyoming, and the counties within, highlight the growth effects of specializing in natural resource extraction.

I like the idea they have here, of testing counties, but I have some problems with the execution. They argue that looking at counties lessens the problems associated with differences in state regimes, which is true–there are over 3,000 counties.

They cover several theories on the resource curse, including “Dutch Disease”–where specialization in sectors unrelated to manufacturing minimizes that sectors’ growth potential via returns to scale and production externalities. There’s also what you might call the ‘trustafarian’ idea, where resource endowments cause people and governments to be overconfident in their economic returns, so they do not invest other sectors or human capital to the degree they should.

The authors also briefly bring up institutional differences, include a weak discussion of the role of civil strife. Here is where I have problems.
In other fields, such as sociology, the “curse of oil” or diamonds hinges on how the resources tie the economy to past colonial economic arrangements (with global corporations instead of imperial governors), concentrating wealth into privileged classes (often market-dominant ethnic majorities) who then use control over the military to enforce their economic hegemony. This cycle systematically impoverishes the remainder of the population and suppresses other possible avenues of economic growth.

It’s for me hard to tell what effect James and Adland really find here with their association between lower growth rates in resource dependent counties in the US in terms of testing these theories. We don’t really have an explanation here; it seems quite clear to me that in the presence of property regimes, different sorts of resources have different returns, and there’s no reason to believe that value or profit stays in the place it is created: ranch owners are corporate and asset wealthy; ranch workers are most assuredly neither.

I’m also not sure that we can treat agriculture as a natural resource endowment in the way diamonds and oil are.