Do Conservatives Oppose Investment and Productivity?


The minimum wage in California and for some New York workers is now on track to reach $15 per hour sometime over the next decade. Predictably, conservative critics were quick to forecast that the plans will destroy job growth in both states, even though the best peer-reviewed research has found no relationship between previous minimum wage increases and reduced employment.

One argument conservatives are trying to sell is that a higher minimum wage will hurt workers by speeding up automation—in other words, that businesses will seek to raise productivity by investing in machines, which will displace human labor. This is a bizarre line of argument, since conservatives have argued for years that cutting taxes on corporations and capital income will ultimately benefit most workers because these cuts will encourage companies to invest in capital, raising workers’ productivity and wages.

In other words, conservatives are now telling workers that they should fear productivity growth when it comes from a higher minimum wage, but welcome it when it comes from corporate tax cuts. This makes no sense.

It’s impossible to overemphasize how important a role the investment-productivity-wage sequence plays in conservative supply-side economics. This sequence forms the basis for the Tax Foundation’s economic model, which supposedly shows that tax cuts on corporate and capital income strongly boost economic growth and wages. American Enterprise Institute (AEI) experts have argued that it is actually workers—not shareholders—that pay the corporate income tax since it reduces investment in capital, which “may lead to lower capital per worker, lower worker productivity, and lower real wages.” Other conservative organizations have argued similarly.

But the main way capital investment increases productivity is through automation and technological change. Otherwise, capital investment in the restaurant industry for example, would amount to buying more and more microwaves instead of better ones. It’s no coincidence that the recent high point of capital investment—the late 1990s—was also the recent high point of productivity and technology growth. If a corporate tax cut successfully increased capital investment, it would take the form of tablets at fast food restaurants and research on driverless cars.

Of course, tax cuts on corporate and capital income have a poor record of increasing investment or wages—as shown by study after study.

But more investment and productivity should benefit workers in the long run. People have feared technology would eliminate the need for human labor for centuries, yet time and time again productivity growth has found new uses for it. In 1900, 41 percent of Americans worked in agriculture, compared to just 2 percent in 2000. Instead of mass unemployment as agricultural jobs disappeared, the 20th century saw the share of adults with a job rise as technology and new consumer demands created new, more productive jobs.

Similarly, technological change has historically meant higher wages and higher living standards—not mass unemployment. This goes for workers in the middle as much as toward the bottom. Technological change and lack of skills do not explain the growth of wage inequality over the last three decades—the decline of unions, the falling real value of the minimum wage, changes in corporate behavior as a result of tax policy,  and globalization, however, do explain it. Further, job growth for low-skilled workers has been more robust than for middle- and high-skilled workers over the last three decades.

Past performance does not guarantee future results, but the evidence points to the pace of automation slowing down if anything. Faster automation growth should, by definition, translate into faster productivity growth since automation means producing more goods and services with fewer hours of human labor. But productivity growth has been slow over the past few years, most of it a result of declining capital investment (that said—slow productivity growth has far outpaced practically non-existent real wage growth).

Of all the reasons more conservative economists and researchers have trotted out to oppose a minimum wage increase, a fear of automation should not be one of them. This is especially the case for supply-side conservatives, who typically argue for increasing capital investment and raising economic productivity. They cannot simultaneously argue that productivity growth is good, but only when it comes in the form of tax cuts for the wealthy.

Brendan V. Duke is the Associate Director for Economic Policy at the Center for American Progress.

Morning Consult