Elizabeth Warren is Wrong on Just About Every Economic Policy She Advocates
By Patrick Trombly
There is no American politician more closely associated with “progressive” economic causes than Massachusetts Senator Elizabeth Warren. The senator is widely regarded by the political Left as an expert on financial issues, is a self-professed champion of the “working poor,” and is a proud, finger-wagging chastiser of the 1 percent and Wall Street. Her cause is to lift up the least powerful and protect them from the most powerful. She appears to genuinely believe in this cause, and has made several policy proposals that she believes will serve it. Because of her position and the public’s association of the senator with this cause, it is assumed that the policies she proposes will in fact serve it, and that anyone who supports the same causes should get on board and support her proposed policies.
Senator Warren’s stated objective of helping the least powerful is laudable. The problem is that, though well-intentioned, many of Senator Warren’s proposed policies would actually harm the very people whom she intends to help, while her other proposals represent distractions from the real threats to the least powerful, and thus have the effect of allowing these threats to continue. By occupying the seat of defender of the least powerful while advocating policies that would harm the least powerful, the senator has become a danger to her own cause. Below are three examples.
Minimum Wage / “Fight for $15”
Senator Warren has long advocated an increase in the minimum wage, to $15/hour, on the premise that raising the minimum wage will lift the wages of the working poor — people presently earning, say, $9 per hour. The problem is that that is not how minimum wage, or any other price floor, works. The minimum wage is a price floor. A price floor does not magically lift prices, but merely establishes a legal minimum price below which exchanges are not allowed to take place, rendering exchanges that would have taken place at lower prices illegal.
Much in the way that a $15 minimum price for a hamburger would not raise the price that people pay for a McDonald’s hamburger from about $2 to $15. A $15/hour minimum wage would not raise the price that McDonald’s franchises will pay for unskilled labor. Instead, it would force McDonald’s franchises and other employers of low-skilled individuals to replace staffs of several low-skilled employees with staffs comprisingfewer, skilled employees, and/or to automate. In either case, some low-skilled workers presently earning $9/hour to $11/hour would lose their jobs, or have their hours cut significantly back, to make room for the fewer, higher-skilled laborers and/or robots. While Senator Warren may not intend for this result to occur, it is what would occur if her policy recommendation is adopted. Her proposed policy would transform millions of working poor people into unemployed poor people.
Similarly, Senator Warren has recently proposed restrictions limiting the ability of lenders, known as “payday lenders,” to make short-term, fast-approval, unsecured loans to consumers with marginal or no credit histories. Much in the way that Senator Warren disapproves of the wages that low-skilled workers are paid, she disapproves of the interest and fees charged on these unsecured loans to high-risk borrowers. However, interest rates are similar to wages in that they often behave like prices. Interest rates often react to restrictions the same way prices do. And much in the way that outlawing employment of people at wages below $15/hour does not lift anyone’s wage to $15/hour, outlawing high-rate loans does not lower the rate on anyone’s loan. Instead, it prevents loans that would have been made at high interest rates from being made.
In other words, such a policy denies credit to the very people whom Senator Warren claims to want to support — even though those very people have determined that they have a borrowing need. Whatever it is that they need or want to purchase with the borrowed funds will be denied them, whether it is the rent payment, a medical prescription, dental work, car repair, or some other expense. As with the “Fight for $15,” Senator Warren may not intend for this result to occur, but it is what would occur if her policy prescription is adopted.
Senator Warren and others have pointed out that since the early 1970s, and especially since the mid-1990s, there has been a growing gap between the top 1 percent of the top 1 percent and everyone else, in terms of income and wealth. The underlying causes are quite simple. Generally speaking, the groups with the most wealth tend to generate their income through ownership and trading of financial assets priced in dollars. Everyone else tends to generate their income through wages and salaries paid in dollars. Meanwhile, the central bank has, to an ever-increasing degree, been expanding the supply of dollars, thus perpetually devaluing wages and salaries while inflating the prices of financial assets. This is why real wages have been stagnant for decades while investment returns on real estate, stocks, and commodities have skyrocketed.
In 1971, the last vestiges of the gold standard were abandoned, leaving the Fed free to expand the money supply according to a goal of “price stability,” which it defines as being “mildly inflationary,” but which, curiously, ignores the prices of assets, including some of the very assets directly financed with the newly issued and loaned money, such as houses and stocks.
Since the mid-1990s, naturally deflationary forces such as the end of the Cold War, the liberalization of China and freer trade have — under these definitions — given the Fed increasing room to expand the money supply without triggering significant inflation of the prices that are included in its consumer price metric. This has offset the deflation, and thus the gains in workers’ purchasing power, that the above-mentioned world events should have brought about. This has also made saving more difficult, and, in the short run, less attractive, with the obvious result that the savings rate for the last 20 years has been half the savings rate in the prior 20.
After a generation of low savings, about 40 percent of Americans don’t have enough set aside to cover a surprise $1,000 expense. There is nothing novel or complex about this. Inflating the currency to enrich the already-wealthy at the expense of everyone else is a centuries-old trick, infamously employed by John Law in France in the early 1700s, and many others. Moreover, the boom-bust cycles that also result from inflating the currency via the lending channel create unnecessary volatility in job markets, as employment opportunities are created and then destroyed in boom sectors such as construction in the 2000s and oil drilling in the 2010s.
What does this have to do with Senator Warren? Her position on the Banking Committee gives her an audience with the Chair of the Federal Reserve on a regular basis. Yet she has never taken the opportunity to raise the issue of monetary inflation and its ill effects. Instead she has focused on the Fed’s decisions not to “break up big banks” or “bring bankers to trial” for various misdeeds. Some of these misdeeds are real, but none related to what Senator Warren contends are her main concerns: wage stagnation and income inequality. Indeed, whether most deposits are held and most loans are made by 10 banks or 10,000 banks won’t change income and wealth inequality if the banks are members of a protected cartel that creates money out of thin air and loans it into the financial system. Senator Warren’s efforts in this respect use up attention and energy that could otherwise be devoted to understanding what actually causes the wage stagnation and inequality: the systematic and perpetual wage and savings devaluation, and asset price inflation, conducted by our central bank.
We should not quarrel with Senator Warren’s stated goal of protecting the least powerful in society, but we should take issue with many of Senator Warren’s proposed strategies to achieve her stated goal — because they don’t work. If Senator Warren wishes to achieve her stated goals, then she should re-think her policy objectives, become familiar with basic economic principles, and adjust her policy prescriptions accordingly, especially with respect to the central bank.
Patrick Trombly is a Senior Vice President with a commercial bank in New York City.. The opinions expressed are his own and do not reflect the positions of the firms for which Patrick works or has worked.