WASHINGTON, June 9, 2015 — Democratic presidential candidate Bernie Sanders wants to reduce income inequality in America. He wants to tax the most successful Americans and give the money to the poor; he wants to raise the minimum wage; he wants to break up the big banks.
His policies are based on what I call the “chocolate milk syndrome.”
When my three children, who are close in age, were very young, they would come into the house on a hot summer day thirsty. “We want chocolate milk” they would scream. So I sat them down at the table and put three identical size glasses in front of them. I then filled each glass with about the same amount of chocolate milk.
Surprisingly, their primary concern was not the absolute amount of chocolate milk in their glass, but rather the amount in their siblings’ glasses. As long as neither sibling had more, they were happy. If one sibling got slightly more, the others complained wildly until the glasses were even.
“What’s the difference how much she got as long as you are content with how much you have?” I would often ask. But they just wanted to make sure no one got more chocolate milk than they had. As long as no one got more, each was happy.
It seems that Bernie Sanders’ economic policies suffer from the “chocolate milk syndrome.”
Sanders wants to raise the federal income tax rate to 90 percent on marginal income for those who have very full glasses. He wants this even though it would reduce the amount of investment capital going into the economy and turn it into consumption for people who have less, who can’t afford the amenities that Sanders believes are essential.
The long term result of this would be a stagnant economy, possibly a stagflation similar to the one we experienced in the late 1970’s.
Sanders wants to raise the minimum wage. Some of his supporters think the minimum wage should be $15 per hour, which totals $30,000 per year paid to an unskilled worker. This would be the wage even if that worker’s efforts added less than $30,000 to the employer’s bottom line. After all, they argue, look how much more chocolate milk other people have, with no concern for who actually contributed what to chocolate milk production.
Raising the minimum wage would hurt the people Sanders is trying to help by dramatically reducing the number of jobs available to them. Either, like small businesses in San Francisco, employers would vanish and take their jobs with them, or they would find ways to replace labor with capital goods.
McDonalds long ago got rid of busboys and dishwashers by replacing them with disposable dishes, and reduced the number of cashiers and the need for them to be numerate by replacing cash registers with computer screens. At the same time they dispensed with the need for moderately skilled cashiers and replaced them with kids who didn’t even need to be literate.
At Applebee’s, a customer might order their chocolate milk by tapping a touch screen rather than talking to a server, and pay with a swipe of a smartwatch. The technology is already there. All that’s needed is to make workers more expensive than the technology that will replace them.
The ripple effect would be worse. Critics of Walmart point out that Costco makes a profit by paying its twice as much. But Costco is able to get the best workers, leaving the least skilled to get a lower wage at Walmart. Raise Walmart wages to Costco levels while demanding only Walmart levels of work, and Costco has to raise its wages to keep its high-quality workers.
If a minimum wage worker earned $30,000 per year then a worker with some experience will want $40,000. Workers with costly skills and education will demand even more. And so it goes.
Consumer prices would skyrocket; jobs would be lost. That’s stagflation.
Sanders wants to break up the largest, most successful financial institutions, which also happen to have very full glasses of chocolate milk. He says that smaller banks would ultimately be safer for the country and easier for the government to regulate. He blames the financial crisis on the lack of government regulation, particularly for the largest banks.
The reality is that the federal government caused the financial crisis. Financial institutions were highly regulated, but given the incentives to follow the government’s perverse lead. In 1995, the federal government set a goal to raise the percentage of households that own homes rather than rent, to 70 percent instead of the historical 62 to 64 percent rate. This meant that up to 10 million new households needed mortgages that averaged $200,000, which many could not afford. This totaled $2 trillion.
Lending institutions were pushed to provide those loans which, because their customers could hardly afford them, were highly risky. Those loans were bundled together in what were later called “toxic” assets.
When the economy slowed in 2007, a string of defaults eventually engulfed many of the 10 million households and most of the $2 trillion debt. Housing values began to fall, and borrowers, who owed mortgages on homes now worth less than the mortgage, began to default. The effects of this ran like wildfire through the financial markets, resulting in the “Great Recession.” Today the home ownership rate is 64 percent.
Breaking up the banks would be disastrous for the U.S. financial system and would the banking system less secure, not more.
Sanders’ entire economic policy is based on the Chocolate Milk Syndrome. What he should realize is that the solution to income inequality is not taking chocolate milk from those whose glasses are full, but rather by providing opportunity for everyone else to put as much chocolate milk in their glass as they desire.