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Era of Great Enrichment is on the Decline

Deidre McCloskey’s recent treatise (How the West (and the rest) Got Rich) on was a thoughtful essay on the power of liberty and its impact on economics. For the most part, McCloskey did a fine job explaining classical liberalism (“worthy of a free person”) and how the Great Enrichment — our uplifting out of poverty — really came about only when man began to have the liberty to think new ideas and create them.

There was one section, however, where Ms. McCloskey was incorrect. She indicated in passing the right had championed “Social Darwinism” and put forth concepts like eugenics — but this is incorrect. The idea gained footing during the Victorian Era due to the evolutionist Herbert Spencer, and it was promoted by progressives such as Teddy Roosevelt and Woodrow Wilson in the United States. The idea that people should be left by the wayside in a “survival of the fittest” kind of mentality is particularly repugnant and certainly not one espoused by conservatives or libertarians. Conservatives and libertarians are notoriously more generous; liberals don’t take their own money and give to the poor — they take other people’s money and give to the poor.

Consider for a moment too, the idea of wealth input. When people like Bernie Sanders suggest that wealth is unfairly going to wealthier people — well, how do you determine how much should go to each person? Should it really all be the same? Is that equality? Should LeBron James get the same as the least talented player in the NBA? We should be focusing on the equality of opportunity — the quality that you put in is equal to what you get out of it.

For example, Bill Gates make tens of millions a year and he pays several people $1 million or more a year because they are worth it to him. If Gates paid only the minimum wage, other companies would snap the employees up because of their talents . Gates, in paying some of his employees large sums, has recognized their worth because they are generating whatever output was satisfactory to Gates — for example, a strong ROI for the year.

On the other hand, if minimum wage advocates insist on paying $15/hour just for the sake of paying $15/hour instead of $7.50, why should they? Why should the employer be forced to take on the extra cost if the output isn’t worth $15/hour, if they aren’t generating that kind of value? Thus, with that kind of imbalance, the employer must make changes in other areas of his business to make it work — whether it be one or more fewer job overall, price increases, etc.

If people aren’t being paid $100,000 because they are not worth it to their company of employment, that’s a part of business. But it is patently unfair to make arbitrary wage increases in the guise of “fairness.” Why is it fair to some but not others? Why are the people earning $500,000 not suddenly getting $600,000 if others making less get arbitrary wage increases? Why are they excluded? Is that fair? That is why such policies are inherently unfair. The employer should be able to determine, on his own, to pay what his employee is worth and what his employee can generate — without artificial wage policies or government coercion.

It’s difficult to own a business and stay in business when the government comes along and makes changes to how the company is allowed to be in business in the middle of the game. That is patently unfair and unequal. These types of actions stifle a business’s freedom to do business, which is why McCloskey’s era of the “Great Enrichment” is proving to be on the decline.

The Minimum Wage and Middle Income Workers

One of the unintended results of minimum wage theory is how the artificial wage increase affects those workers who were not recipients of the government’s generosity. The sudden jump to $13 or $15 an hour for the lower income workers does not translate into the same sort of wage increase for the middle income workers — and this act breeds contempt. Those that have worked hard and earn a decent wage see below them receive this pay increase, and they understandably now want the same kind of jump. And why shouldn’t they? Should they be able to demand the same wage treatment? Will this beget a slippery slope? Or does this expose the very reason why government should stay out of the business of picking winners and loser among workers in the private sector?

Minimum Wage vs Minimum Hour

The following is a short version of a recent talk by Ben Eisen regarding the minimum wage issue as a poverty-fighting tool. It is undeniable that the percentage of full-time workers in poverty is much less than part-time workers. “He explained – using sound economic theory and admirable coverage of empirical findings – that the minimum wage is as effective a tool for fighting poverty as is gasoline as a tool for fighting fires.

One of the stats that Ben cited is that only three percent of workers who work full-time year ’round live below the poverty line, while sixteen percent of workers who work only part-time live below the poverty line. (I can’t recall if Ben’s stats are for Canada or the U.S., but because the general trend no doubt holds in nearly all countries, whether Ben’s specific stats are for Canada or the U.S. doesn’t matter for purposes of my post here.)

Here’s a mental experiment (one that I might have offered, in some form, in the past): suppose that Pres. Hillary Clinton or Pres. Bernie Sanders – displaying to the public her or his courageous opposition to poverty – cites the stat that Ben mentioned and then proposes that government outlaw part-time work. “Because every worker should be able to live decently upon his or her earnings,” proclaims the president, “and because working full-time enables a worker to earn more income than that worker earns when working only part-time, it shall hereby be the law of the land that every worker must be employed full-time.”

I’m pretty sure even the most ardent supporter of the minimum wage would balk at such a proposal. But why? What’s the difference between minimum-hour legislation and minimum-wage legislation? If government dictates that each worker shall be paid no less than $X per hour, and if this diktat has no effect on workers other than ensuring that no worker is paid less than $X per hour, what reason is there to suppose that if government dictates that all jobs shall be full-time jobs that this diktat have any effect on workers other than ensuring that all workers will now be employed full-time – and, hence, that the number of people living in poverty will fall?

Put differently, if government can work miracles when it dictates hourly wages, why can’t it work miracles when it dictates hours of work?”

More Minimum Wage Hikes Mean Future Woes

On Wednesday, January 6, Mayor DeBlasio proclaimed a $15/hr minimum wage for the public workers in New York City. The cost for such a plan is expected to be more than $200 million over the next five years. Both De Blasio and Gov. Cuomo seem intent on playing the role of wage-crusader during their respective terms — but only for some New Yorkers.

Just like DeBlasio, Gov. Cuomo announced in early January that “he would provide a $15-an-hour minimum wage to some 28,000 state university workers.” And last November, “the governor made New York the first state to set a $15 minimum wage for public employees; he also took steps to secure $15 an hour for workers at fast-food chain restaurants.” DeBlasio, too, has sought other ways to provide more generous benefits. Late in December, he announced that NYC “would begin offering six weeks of paid parental leave to 20,000 city employees.”

The problem is that these minimum wage hikes not only add to the budget woes, it also creates inequalities between the public and private sector (except for fast-food workers). How is it good for New York that a McDonald’s open next door to a pizza shop with a $5 minimum wage difference? And how can Cuomo attract more businesses to New York state with costs that are already the highest in the entire country — when he is going to make them even higher?

Here in New York City, a minimum wage hike for public workers would mean that New York City will pay more for its labor than it currently has calculated to pay, in order to produce the exact same product or services. Looked at it another way, to then keep to the operating budget, NYC will get less goods and services for the taxes it receives. This would result in a bigger budget deficit — because of having to spend more overall to maintain the current goods and services.

Minimum wage hikes no one anyone except the pockets of the public sector workers, while pushing the budget on an even more unsustainable trajectory. The rest of the taxpayers will be expect to either 1) have yet another tax increase in the near future or 2) see diminished services. Neither of these scenarios benefits New Yorkers.

Cafe Hayek and the Minimum Wage


CHayek
On a recent post over at Cafe Hayek, my friend Don Boudreaux discusses the merits of minimum wage policy. A gentleman, Mr. Hutcheson, wrote in to chide the writers, saying that Boudreaux and others “who argue that the minimum wage destroys some jobs miss the point.” Mr. Hutchinson insisted that the real point is “the amount of harm to low income workers compared to the benefits of going to other low-income workers.”

Boudreaux correctly responded that minimum wage legislation is unethical because the government strips “some people of economic opportunity in order to artificially enhance the opportunities available to other people.”

Although Don’s response is certainly correct, I do not believe arguments of fairness, morals, or constitutionality carry much weight with the standard liberal position espoused by Mr. Hutcheson. I believe that he needs to understand that raising the minimum wage hurts everyone, as other individuals and the economy as a whole are outright harmed by such policy by much more than than those who are helped. This can be seen by realizing that the money that is now going to a higher minimum wage WILL NECESSARILY cause one or a combination of the following:

1) In an attempt to offset the higher minimum wage, the business will fire or refuse to hire other employees. Especially from the poorest among us, many individuals. will either lose their job or not be able to get jobs at all moving forward. The cost of raising the minimum wage is just like the cost of raising a commodity. For instance, consider the scenario where the price of apples — a basic pantry item for most everybody — goes from $1.50/pound to $2.00/pound. Fewer people will buy the apples, or people will buy fewer apples overall. So it is also with a higher minimum wage; if a unit of labor costs more,fewer units of labor will be purchased overall. As a result, the economy will likely contract because of the loss of jobs resulting from a wage hike.

2) The business can simply earn less profit. If more of the earnings must go to the cost of labor, the business earns less profit overall. For some minimum wage advocates, perhaps that is the actual goal — to keep businesses from earning too much at the top. But in reality, the loss of business capital (from both large corporations to small mom and pops) means there is less money to grow the existing business, or for future business endeavors. Whether it is reinvested directly back into the business with equipment upgrades or growing the business through new employees or expansion, earning less money for the company creates a ripple effect. The less a company can earn, the less it can help grow the economy. Impeding its ability to do so, through the imposition of mandated wage increases, is harmful.

3) In order to offset the increased wage cost, a business, if possible, can choose to raise its prices. This will attempt to ensure that the company earns the same amount as before. But the effect of the price increase is negative. As prices increase, supply and demand dictates that some customers will simply not buy (reducing GDP) and the rest will have their standard of living go down (because they are paying more just to have the same product as before).

Every one of these responses — cutting jobs, loss of business capital, and raising prices — are bad for the employees and the economy as a whole. Though the minimum wage hikes sound good in theory, in reality, economies don’t exist in a vacuum. These types of policies hurt more than help. The three aforementioned points overwhelm anything positive going to minimum wage recipients; in reality, it is a bigger net cost to the system.

Would ⅔ of the population still support the minimum wage it if they understood how devastating it would be both to the most economically disadvantaged people and to the economy as a whole? People have continuously been pitched the false idea that the economy improves because minimum wage recipients will spend their extra money. Minimum wage policy is an impediment. Economics 101 reminds us that in fact, it is more stimulative for the economy that the employer keep the money and reinvest it than for the worker to merely spend it. That is how you grow the economy.