00.07.2016 by Nick Hanauer - There are two types of businesses in America today: those that pay their workers a living wage-the real economy-and those that don’t-the parasite economy. And all of us who live and work in the real economy should be royally pissed at the way the parasite economy is sucking us dry.
Here in the real economy, we solve the problems, build the things, and pay the wages that make America great. When politicians of both parties promise to attract “good jobs” to their districts or states, they’re talking about the kind of real-economy jobs that pay a decent middle-class wage-jobs that provide the income, benefits, and security necessary to participate robustly in the economy as a consumer and taxpayer. It is the real economy that drives both production and demand, and that fills our tax coffers with the money needed to educate our children, maintain our infrastructure, invest in research and development, fund our social safety net, and provide for the national defense.
But in the parasite economy-where companies large and small cling to low-wage business models out of ignorance or habit or simple greed-"good jobs," and the economic dynamism they produce, are in short supply. This is the economy in which tens of millions of Americans work for poverty wages with few if any benefits, often in the face of abusive scheduling practices that make it impossible to plan their life from day to day, let alone month to month.
The difference between these two economies is stark. The real economy pays the wages that drive consumer demand, while the parasite economy erodes it. The real economy generates about $5 trillion a year in local, state, and federal tax revenue, while the parasite economy is subsidized by taxes. The real economy provides our children the education and opportunity necessary to grow into the next generation of innovators, entrepreneurs, and civic leaders, while the parasite economy traps them in a cycle of intergenerational poverty.
The real economy delivers on the promise of capitalism.
The parasite economy relentlessly undermines it.
If, as many on the right are wont to do, we divide our nation into one of “makers” and “takers,” it’s not the working poor who deserve our derision, but the low-wage businesses that exploit them. These are the real deadbeats of the parasite economy: companies with a business model predicated on a cheap supply of taxpayer-subsidized labor, growing fat on the vast wealth of consumer demand generated by the middle-class wages of the real economy, while leaving employees with little if any discretionary income of their own.
To be clear, I am not making a moral argument for the real economy (though there is surely a moral argument to be made), but rather a cold and calculated economic appeal based on self-interest properly understood. You see, I am an entrepreneur and venture capitalist invested mostly in technology companies that pay the sort of middle-class wages that enable our workers to fully participate in the economy as consumers of other companies’ products. That’s the way a market economy is supposed to work. We buy your products. You buy ours. But low-wage workers at parasite companies-mostly giant and profitable corporations like Walmart and McDonald’s-cannot afford to robustly consume our products, or most anybody else’s, in return. The parasite economy is simply bad for business.
At best, a worker earning the federal minimum wage of $7.25 an hour can barely manage to the pay the rent, buy some groceries, and maybe a bus pass, leaving little disposable income for anything else. No restaurants. No hair salons. No health club or yoga studio memberships, let alone the latest tech gadget or service from one of my companies. In business, the first, second, and third most important thing is demand. If demand is high, almost any other obstacle can be overcome. Workers earning $7 or $8 an hour cannot demand most products and services. They can barely subsist.
As an entrepreneur and investor, I have founded or financed 35 companies across a wide range of industries: manufacturing, retailing, software, e-commerce, robotics, health care, financial services, and banking. I know a thing or two about sales and customers. And I have never been in a business that considered minimum-wage workers earning $10,000 to $20,000 per year as our target customer. Except for pawnshops or payday lenders, a typical business’s core customers very likely earn more than minimum wage. It is demand from middle-income workers that supports the small local businesses that create 64 percent of new private-sector jobs and 49 percent of all jobs in America. So a fair question to ask is:
If no business wants customers who make $7.25 an hour, why in the world would we tolerate-or even worse, subsidize-businesses that pay their workers so little?
A leading advocate of the parasite economy is the National Restaurant Association (the other NRA), which has worked assiduously to keep wages low. The federal minimum wage for tipped workers, unchanged since 1991, is a shocking $2.13 an hour. Lest you think all those workers are raking in tips, as a small elite of servers in high-end urban restaurants do, the median hourly wage for restaurant servers, including tips, is just $9.25 per hour. Tipped workers are more than twice as likely as the average worker to fall under the federal poverty line, and restaurant servers nearly three times as likely, according to a 2011 study by the Economic Policy Institute. Ironically, in its 2014 edition of “Consumer Spending in Restaurants,” the NRA notes that “[t]he primary influencer on consumer spending in restaurants is disposable income.” American households earning less than $30,000 a year-about a third of all households-make up only 15 percent of all restaurant spending, the NRA reports. Can you imagine how much more profitable the restaurant industry would be if one out of three Americans had more disposable income to spend at restaurants? The NRA appears to want every American to eat in restaurants-except restaurant workers.
And it’s not just the rise of the service sector that’s to blame for falling wages. America has lost millions of manufacturing jobs since 2000, but those that remain are no longer the golden ticket into the middle class they once were. According to a new study from the UC Berkeley Labor Center, the families of one in three manufacturing production workers now rely on public assistance at a cost of $10.2 billion a year to state and federal taxpayers. Blue-collar manufacturing workers didn’t earn solid middle-class incomes because they were better trained, better educated, or more productive than their service-sector counterparts, or because their employers were larger or more profitable than the giant service companies of today. Manufacturing workers earned middle-class wages because they were unionized, and as their bargaining power declined, so did their incomes.
I used to take parasitic business practices for granted, believing that they were an inherent and unavoidable feature of capitalism. But the more I examined the evidence, the more I realized that this just isn’t true. Some companies just choose to pay their workers as little as possible, and others don’t-while some companies have simply never bothered to imagine that there might be any other way. And yes, some companies reluctantly keep wages low in the face of market pressure from more willfully parasitic competitors. But in the end, all of us-workers and business owners alike-pay the price in the form of decreased demand, higher taxes, and slower economic growth.
And yes, these low-wage business models are a choice. While there are parasite companies and parasite jobs, there are no parasite industries or occupations, and there is no line of work worth doing that cannot command a living wage. For every Walmart, there’s a Costco. For every McDonald’s, there’s an In-N-Out Burger. For every single mom waiting tables at the local diner for $2.13 an hour, there’s a healthier, wealthier counterpart earning $13 an hour or more (soon to be $15!) in Seattle or San Francisco or in the thousands of real-economy businesses nationwide where management understands that the “minimum wage” is meant to be a minimum, not a maximum.
In any industry there are many different strategies for running a profitable business-some of which honor the contributions of their workers and some that don’t. And if these businesses that choose to follow a low-wage model represented isolated incidents, I would shower them with moral opprobrium and leave it at that. But there’s nothing isolated about it: It’s a pervasive pattern that warps the entire economy. Economists have a name for this sort of strategy; they call it “free riding.” And make no mistake-free riding doesn’t come free.
According to data compiled by the Brookings Institution, 73 million Americans-nearly one-quarter of our population-live in households eligible for the Earned Income Tax Credit (EITC), a benefit exclusively available to the working poor. I want to underscore this point. Nearly a quarter of our fellow citizens are poor-not because they don’t have jobs, but because they or their family members do-mostly working for giant profitable corporations. These are people who labor long hours preparing our food, stocking our shelves, cleaning our offices, caring for our children, and performing the many other tasks and services that define our modern way of life.
Today, a majority of the money we collectively spend on anti-poverty programs doesn’t go to the jobless, it goes to the working poor. According to a recent analysis by the Economic Policy Institute, 69.2 percent of all public benefits go to non-elderly households with at least one working member, nearly half of whom work at least full-time. In 2014, the EITC alone cost U.S. taxpayers $67 billion, directly supplementing the incomes of the working poor and, thus indirectly, the payrolls of their parasite employers. The Child Tax Credit (CTC) cost the federal government another $58 billion; food stamps, $80 billion; housing vouchers and rental assistance, $38 billion-again, all programs that largely benefit families of the working poor.
These numbers keep growing; the most recent 10-K filings of food manufacturer Mead Johnson reported that “approximately 47% of all infants born in the United States during the 12-month period [that] ended December 31, 2015 benefited from the WIC [Women, Infants, and Children] program,” which provides food assistance to “those considered to be at nutritional risk, including low-income pregnant, postpartum and breastfeeding women and infants and children up to age five.” It is a national disgrace that the parents of nearly one in two infants born in America require government aid just to meet the daily nutritional needs of their children.
And then there’s Medicaid. According to the Kaiser Family Foundation, total state and federal Medicaid spending cost U.S. taxpayers $475 billion in 2014. Conservatives disparage Medicaid as a costly “entitlement,” but an entitlement to whom? Workers can’t work when they’re sick or dead; that’s why real-economy companies provide their workers with health insurance and paid sick leave. But parasite economy companies pass that cost off to taxpayers.
This is a ridiculously inefficient way to run an economy. Complex bureaucracies like food stamps, Medicaid, and housing assistance are expensive to administer, while the relentless task of applying, qualifying, and maintaining eligibility for the various state and federal programs can be a time-consuming and humiliating process for those compelled to use them. Being poor is hard work in and of itself. So why spend billions on a bureaucratic redistribution system when employers could simply pay workers enough to afford food, medical care, and housing on their own?
I am not making an argument against anti-poverty programs; the EITC alone lifted 6.2 million Americans out of poverty in 2013 (more than half of them children), while reducing the severity of poverty for another 21.6 million working Americans and their families. But while the EITC has done an admirable job incentivizing low-wage work, it also has the unintended consequence of incentivizing employers to keep wages low-indeed, a 2010 study by Andrew Leigh in The B.E. Journal of Economic Analysis & Policy finds that “a 10 percent increase in the generosity of the EITC is associated with a 5 percent fall in the wages of high school dropouts and a 2 percent fall in the wages of those with only a high school diploma.”
Why in the world would you pay your workers enough to clothe, house, and feed themselves, a growing number of my fellow CEOs apparently figure, when taxpayers are willing to do it for you?
In the fast-food industry, more than half of all families-52 percent-are enrolled in at least one public assistance program, at a combined cost of $7 billion a year. (Until 2013, McDonald’s even provided a “McResources” hotline to help its impoverished workers apply for government aid.) And Walmart alone, according to a 2014 report from Americans for Tax Fairness, costs U.S. taxpayers an estimated $6.2 billion a year in public assistance to its 1.4 million mostly low-wage workers-coincidentally, an amount roughly equal to the $6.5 billion a year the company lavished on stock buybacks over the previous decade. Quite simply, McDonald’s and Walmart and other businesses in the parasite economy have grown to rely on the tax dollars of other companies and other workers to indirectly subsidize their payroll-and their immense profits. In effect, many real-economy companies end up subsidizing their parasite-economy competitors.
Compare Walmart’s Sam’s Club chain of warehouse discount stores with its rival Costco-perhaps the most elegant (and studied) head-to-head comparison of low-wage versus living-wage business models in America today. In an effort to reverse high turnover costs, a reputation for poor customer service, and stagnant same-store sales, notoriously low-wage Walmart recently made news by raising starting wages at all its stores, including Sam’s Club, to $9 an hour in April 2015, and to $10 an hour 2016. “Bottom line-it’s working,” Walmart CEO Douglas McMillon reassured nervous investors in a recent a blog post. But don’t mistake this minor course correction for a change in business models; Sam’s Club wages remain substantially lower than those at rival Costco.
To the casual observer, the two chains look virtually identical: cavernous warehouses stacked high with pallets of heavily discounted goods, from groceries to apparel, electronics to major appliances, and everything in between. Both chains earn a substantial portion of their profits from annual membership fees ($45 a year at Sam’s Club, $55 at Costco), and both chains offer myriad other discounted services to their members, from insurance to travel to banking. Together, the two chains dominate the warehouse retail category: Sam’s Club claims the largest geographic footprint, with 652 stores located throughout the U.S. and Puerto Rico, compared with Costco’s 492 stores. But Costco is the perennial market leader in paid members (currently 84 million, while Sam’s Club had 47 million in 2012), gross revenue ($113 billion in 2014 versus $57 billion), and pre-tax earnings ($3.2 billion versus $2 billion).
But the biggest difference? Costco offers its average worker the opportunity to earn a living wage, while Sam’s Club does not.
Neither company publishes its wage scale, so exact numbers are hard to pin down, but Costco is famous for its generous compensation policies. Walmart is infamous for the opposite. Glassdoor.com, which relies on worker-reported data, lists an average wage for a Sam’s Club cashier at less than $10 an hour, while a Costco cashier earns nearly $15. Costco’s wages may start only a couple bucks an hour higher than at Sam’s Club, but Costco quickly rewards workers for their loyalty and experience. A 2008 article in Slate reported that a Costco cashier with five years’ experience earns $40,000 a year plus benefits-enough for a two-cashier Costco family to find themselves firmly ensconced in the American middle class, enough to pay into the federal treasury rather than draw out of it.
Which brings us to the cruelest irony of these dueling business models: High-wage Costco and its workers are essentially subsidizing through their taxes their competition from low-wage Sam’s Club. But it isn’t just the tax subsidies that are so maddening. Costco employees can afford to shop at Sam’s Club, while impoverished Sam’s Club employees cannot afford to shop at Costco.
This irony is repeated throughout the nexus between the real and parasite economies: Low-wage McDonald’s (just over $8 an hour) is subsidized by higher-wage In-N-Out Burger (about $11.50 an hour). Low-wage Macy’s (about $9 an hour) is subsidized by higher-wage Nordstrom (nearly $12 an hour). Low-wage Kroger (just over $8 an hour) is subsidized by higher-wage Safeway (more than $11 an hour).
In industry after industry, direct competitors are paying employees vastly different wages to perform the exact same job.
But there is little difference between a Sam’s Club cashier and a Costco cashier other than the fact that one qualifies for government assistance while the other helps pay for it.
Both models can be highly profitable-both Costco and Sam’s Club have returned billions of dollars to shareholders. But only one model lifts workers into the Great American Middle Class that is the primary engine of economic growth. So why should we subsidize a low-wage parasite economy when the high-wage real economy offers so much more?
Of course, some will argue that the question is moot-that the labor market efficiently determines wages, not well-meaning CEOs or self-serving policymakers (or meddling know-it-alls like me), and that if a Sam’s Club cashier is worth $15 an hour, then that is what the labor market would force Sam’s Club to pay. “Supply and demand,” and all that.
That is nonsense. Take it from someone who has created dozens of businesses-people don’t get paid what they are “worth.” They get paid what they negotiate. We can all point to examples of CEOs who negotiated far more than they are worth, but there are many, many more people in our country who are worth far more than they negotiated.
That’s because more than any other market, the labor market is distorted by a profound imbalance of power between buyers and sellers; in fact, other than the small share of workers who have a collective-bargaining agreement, the vast majority of workers enjoy little bargaining power at all. Most workers have limited resources and immediate needs-to eat, to pay rent, to provide for their children-while most employers could leave any particular position unfilled indefinitely without suffering any personal hardship at all. As Adam Smith noted in The Wealth of Nations: “In the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.”
So why do parasite employers keep wages low? Because they can. And in recent decades, employers have relentlessly exploited this power imbalance, eroding labor’s share of the economy from an average of 50 percent of GDP between 1950 and 1980 to a ten-year-average of only 43 percent today, while profits’ share of GDP has risen by a similar amount. That’s about a trillion dollars a year that used to go to wages that now goes to profits. But that trillion dollars isn’t profit because it needs to be, or has to be, or should be. It’s profit because powerful people like me prefer it to be, and workers no longer have enough power to negotiate a fairer and more economically sensible split.
Clearly, wages are low in the parasite economy because many employers choose to keep them low and workers lack the power to affect that choice. And in highly price-competitive markets, even the most noble and generous CEOs are limited by the dynamics of competition.
This brings me to an uncomfortable confession, and the part of this essay that is least fun to write: I’m a parasite, too. And I hate it.
I worked my way up through the family business, Pacific Coast Feather Company, one of the largest domestic manufacturers of textile products in the nation. We employ roughly 750 workers in factories across the United States, making pillows, comforters, and mattress pads. And I’ll admit it: I am not proud of the wages we pay many of our workers. We do pay more than 90 percent of our employees above the state minimum wage-and the majority of those minimum wage workers are in California, where the wage floor was recently raised to $10 an hour (and will go to $15 over the next five years)-but at any given time, between 20 and 30 percent of our workforce (around 250 people, give or take) come from temporary labor firms, which very likely do not pay those employees enough to sustain anything close to a middle-class life.
Today, I co-chair the board with my brother; a non-family CEO manages the day-to-day operations. But like many other business owners in the parasite economy, I feel trapped by the low standards and competitive dynamics of our highly price-sensitive industry. The retailers we sell our product through are viciously price-competitive; if our prices inch higher than our competitors’ on pillows and comforters of comparable quality, we’d lose the bulk of our market share in a New York minute. I desperately want to pay our workers a living wage, but while labor only accounts for a fraction of our costs, we just couldn’t compete against manufacturers paying at parasitic wage levels. No doubt our better-paid workers would be more productive, happy, and loyal, but I fear the labor cost differential might be too great and our margins too small for us to survive.
And yet.
If every company paid a reasonable wage, everybody would benefit as a result. Every worker would benefit from higher wages. Every company would benefit from higher worker productivity, lower turnover, and from increased demand for goods and services, without being squeezed by low-wage competitors. Every community would benefit from the jobs created by that extra demand. Every taxpayer would benefit from decreased need for poverty programs. Imagine an economy in which every worker could afford to treat themselves daily to a fancy espresso drink-how great would this be for Starbucks, even if Starbucks had to pay its own workers a little bit more, too?
If you give the poorest Americans a raise, they will spend that money within their community. We have plenty of data to back this up. When San Jose increased its minimum wage by $2 in 2013, the organization Puget Sound Sage reports, registered businesses in San Jose increased by 3 percent in the year after the raise, and small-retailer registration increased by 19 percent. Furthermore, unemployment decreased by a full percent, and more than 4,000 jobs were added in the restaurant and hospitality sector alone.
Which brings me to my main point. We could collectively solve the problem of the parasite economy quickly and fairly, simply by raising the federal minimum wage back to a reasonable level-say $12 to $15 an hour. And the ironic part is that everyone would benefit-even the companies that currently pay low wages.
Markets are defined by rules; indeed, no high-functioning market economy is possible without the effective rule of law. Some of these rules are necessary to prevent companies from cheating-for example, the enforcement of standard weights and measures. Some of these rules are necessary to protect the health and safety of consumers, such as food and drug standards. And some of these rules are necessary to prevent companies from gaining an unfair advantage by externalizing their costs-such as dumping toxic chemicals rather than paying the cost of safe disposal. In a very real sense, that is exactly what parasite companies are doing: externalizing their costs. They pay their workers so little that that they are forcing the rest of us to pick up part of the cost. And in the process, these parasite companies gain an unfair labor cost advantage over their higher-wage competitors, setting off a downward spiral of lower wages and lower consumer demand.
A race to the bottom isn’t how you build an economy; it’s how you take advantage of it.
So let’s stop conflating collectivism-which is bad-with collective action-which is indispensable to the success of every social human endeavor. Collective action can enable individuals to take actions they know are beneficial-for themselves and others-but that they feel constrained from doing by themselves. Throughout the 1970s, most National Hockey League players refused to wear helmets, despite the known risk of serious head injuries. Some players went helmetless out of vanity, or fear of being ridiculed, while others believed that wearing a helmet imposed a slight competitive disadvantage. In 1969, one player admitted to Newsweek: “It’s foolish not to wear a helmet. But I don’t-because the other guys don’t. I know that’s silly, but most of the players feel the same way. If the league made us do it, though, we’d all wear them and nobody would mind.” A decade later, the NHL began requiring helmets, and now every player-and the league as whole-is better off as a result. Both the NHL’s helmet rule and the minimum wage are forms of collective action; they solve collective problems that no individual could solve on his or her own. Collective action is not anti-capitalist or anti-market; in fact, a functional market would not be possible without it.
Yes, the parasite economy is a choice. But while there are some individual bad players, it is largely a choice that we as a nation have collectively made. In Washington, D.C., and in state capitols nationwide, we have chosen to erode the minimum wage and the overtime threshold and the bargaining power of labor. We have chosen to sit quietly by as corporate America has stripped workers of the benefits that define what it means to be middle class. We have chosen not just to tolerate the parasite economy, but also to subsidize it.
But the great news is: Collectively, we can make a different choice.
Stagnant wages are a collective-action problem that Pacific Coast Feather Company cannot solve on its own; but if Congress were to solve it for us by gradually raising the minimum wage for all American workers-including those of our competitors-it would be no problem for us at all. In fact, it would be fantastic-not just for workers, but also for my family business. Obviously, the three million hourly workers currently scraping by at or below the $7.25 federal minimum wage aren’t buying many new pillows-and neither are the tens of millions of Americans earning just a few bucks more. Nineteen percent of American workers currently earn under $12.50 an hour; 42 percent earn under $15. Every dollar an hour amounts to another $2,080 in annual income. In 2010, Americans spent $740 million on pillows. How many more would be sold if half of America could afford one more pillow per year? Sure, the price of a new pillow might rise a few pennies to cover the higher labor costs. But what a trade-off! What a difference! What a great nation in which to sell pillows!
Given a choice between a high-wage America and a low-wage America, I’d happily choose higher wages. But I can’t make this choice on my own. I need you to make me do it. I need you to level the playing field by forcing me and my competitors to raise our wages, so that one low-wage employer can no longer drag the rest of us down with him. I need you to raise the minimum wage.
Many readers will claim this is all a pipe dream, that it could never work in practice. But in fact, it is working-right where I live, in Washington state. Washington has long recognized the fundamental law of capitalism-that when workers have more money, businesses have more customers and hire more workers. That is the model that we have been following here, and our economy has been booming as a result. At $9.47 an hour (indexed to inflation), Washington state’s minimum wage had long been the highest in the nation, and as one of a handful of states with no tip penalty, our tipped workers already earn four and a half times the $2.13-an-hour tipped minimum wage in much of the rest of the country.
And yet according to Bloomberg, high-wage Seattle supports the second-highest concentration of eateries per capita in the nation-trailing only even-higher-wage San Francisco. And according to the Paychex IHS Small Business Jobs Index, Washington also enjoyed the highest rate of small-business job growth in the nation, while even higher-wage Seattle ranks second by major metropolitan areas.
Why are small businesses booming here despite our high minimum wage? Because that’s how capitalism works!
Our minimum-wage workers spend so much more on the things that drive small businesses than they ever could while earning just $7.25 an hour. They eat at restaurants. They get haircuts and manicures. They send their mom flowers on Mother’s Day.
When workers have more money, businesses have more customers. And when businesses have more customers they create more jobs.
In 2014, Seattle took its high-wage model one step further, passing the first $15 minimum wage in the nation. Restaurateurs and right-wing think tanks warned of ruin. Businesses would close. Workers would lose their jobs. The invisible hand would punch us in the mouth. But it never happened.
As the Puget Sound Business Journal recently reported in a front page story titled “Apocalypse Not: $15 and the cuts that never came,” six months after the first wage increase went into effect, Seattle’s restaurant industry is growing faster than ever. Even celebrity chef Tom Douglas, who had warned that Seattle could lose a quarter of its downtown restaurants, has continued to add restaurants to his local empire. “Douglas has now changed his mind about the law,” the PSBJ reports, “saying he was ’naïve’ to think that restaurants would raise pay on their own.” That he was. And then on February 15, 2016, The Seattle Times reported that ADP’s national survey of economic vitality ranked Washington state number one in the country for both wage and job growth. And you thought higher wages killed jobs. Not hardly.
It is appealing to believe that the parasite economy will eventually correct itself. Or that a few high-road employers will set an example that will eliminate it. But trust me when I tell you: This is wishful thinking. I know because I am one of those employers. People, like me, when faced with brutal competitive dynamics, will not pay workers a living wage unless all of our competitors do the same. And the only way that will happen is if citizens like you require employers like us to do it. Until then, corporate America will continue to build its record profits on the backs of cheap labor.
“I do not prize the word ’cheap,’” President William McKinley once said. “[Cheap] is not a badge of honor. It is a symbol of despair. Cheap prices make for cheap goods; cheap goods make for cheap men; and cheap men make for a cheap country.”
In the absence of collective action, the parasite economy will continue to pay parasite wages, cheapening the real economy with it. But when we lift wages through reasonable increases in the minimum wage, everyone prospers-and more than just financially. Dezi Bonow, the head chef at Douglas’s new Carlile Room, told the PSBJ that $15 is a particular boon to kitchen employees, who don’t get tips. “It legitimizes cooking as a craft,” he said.
Imagine an economy where all work is honored as craft, and all craftsmen are compensated accordingly. Imagine a country where no labor is dismissed as “cheap.”
