Industrial Insight

wages stagnate while companies hold cash? | February 15, 2013

February 15, 2013

The Wage Repression Lie For Dummies

By Jeffrey Snider

If zero or near zero interest rates provide no return on holding cash, profit-seeking businesses will surely mobilize said cash, at least in theory. However, there is a parallel complication to that theory. As much as businesses are penalized by holding cash, they are afforded the opportunity to invest financially.

Going back to the Flow of Funds Report, nonfinancial corporate businesses were indebted to the tune of $7.11 trillion, on average, in 2007. By Q3 2012, that same business segment increased the level of borrowed funds to $8.37 trillion (+17.6%). Notice that the increase in cash levels is very close to exactly matching the increase in debt levels. The ratio of cash to debt in 2007 was .1676, while the ratio of cash to debt in Q3 2012 was .1674.

A capitalist system produces those wealthy stockholders, but their paper wealth was predicated on actually producing productive wealth. If productive wealth is the only measure of economic and monetary success, producing wealthy people actually requires productive investment leading to successfully increasing the living standards of all participants. Goods and services are produced more efficiently and cost effective, wages are proportionally assigned according to profit potential and wealth generation leads to the rising tide of economic health.

Given all the financial interference, this new modern system has delinked (quite intentionally) profits from wages. The emphasis on financial over productive is the limiting factor here. Increasing minimum wages will not change that fact, it will only increase the cost of production and reduce future profit expectations in the segments that are most affected (while favoring perhaps less profitable industries and segments that are not as affected). The economy generates no additional value or wealth from federal interference in market mechanisms.

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About author

I'm the executive vice president for a steel casting trade association, the Steel Founders' Society of America. I've got a crazy wife, five crazy children, three crazy people that married into the family, and two crazy fun little grandsons.







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