March 5, 2013

Minimum wage: Bad Economics by Peter Burrows

Since the beginning of recorded history, governments have tried to fix prices.  Hammurabi, the King of Babylon  four thousand years ago, is best known for the Code of Hammurabi, a detailed set of laws that included ridged controls over prices and wages. For instance, a field laborer was to be paid eight gur of corn per year, while a herdsman was to receive six gur. (The best definition of a “gur” I could find was that it equaled about eight and a half bushels.)

The history is sketchy, but historians say Hammurabi’s kingdom was in a period of long term decline when these laws were issued. Cause and effect? Who knows, but probably.

Since governments are really good at creating inflation, most of the price controls in history have attempted to stop prices from rising.  The Roman ruler Diocletian issued his famous Edict 2300 years ago that set the prices on over a thousand items. He was trying to stop the inflation that had set in after years of government overspending and debasement of the coinage used to help pay for the spending. He blamed the inflation on the “avarice” of merchants and speculators. Sound familiar? Lots of bloodshed followed.

Today we know that general inflation is always a monetary problem caused by too much money created by the government, so we would never resort to imposing wage and price controls and blaming greedy merchants and speculators, right?  Wrong. Richard Nixon imposed wage and price controls on Sunday, August 16, 1971.

The stock market, composed of sophisticated investors schooled in the folly of wage and price controls, greeted this news with a big raspberry on Monday, the following day, right? Wrong. The Dow Jones Industrials went UP almost 4%, a big one-day move.

If thousands of years of disastrous results with government price fixing can’t drive home the lesson, than it must be that human nature is hardwired to distrust free markets. That, plus  the tendency of people in positions of power to believe in their own superior judgment, means we will always have laws that mandate at least some prices and wages, the consequences be damned.

Minimum wage laws are today’s most obvious example of this ancient folly. At the heart of the matter is a failure to appreciate that the laws of economics are as fundamental as those of physics.

For example, most people support minimum wage laws, yet if you ask them if they think people should be paid more than they earn, they’ll look at you like you’re crazy, but that’s what they want employers to do. In the real world, workers who can’t earn the mandated wage are fired or never hired in the first place.

How not having a job reduces poverty is a mystery to me, but raising the minimum wage is always justified as a means to alleviate poverty.  It may be true that a fulltime worker can’t support a family on the minimum wage, but so what? Poverty can’t be ended by waving a wand or passing a law.

Furthermore, employers are under no moral obligation to pay their employees a living wage, a get-rich wage or a minimum wage. They must pay a competitive market wage to attract the workers they need, but no more.

In my opinion, people who think workers are not being paid enough have the moral obligation to start their own businesses and pay whatever they think is “enough”. Passing a law that forces someone else to pay higher wages only results in fewer workers with jobs, for which minimum wage pushers should take full responsibility, but don‘t. As I have noted previously, it’s easy to be generous with somebody else’s payroll.

If we want to eliminate poverty, and we all do, raising the minimum wage won’t do it. Anybody who thinks otherwise doesn’t know the first thing about economics, which is: You cannot consume what isn’t first produced.  Even hunter-gatherers starve if Mother Nature stops producing nuts and berries.

Imagine everybody is paid in one-dollar bills.  At the end of the week, would people take home their pile of one-dollar bills and eat them, weave them into clothes, or stuff them into their car’s gas tank?  Of course not.  They exchange these dollar bills for goods and services, the more dollar bills, the more goods and services can be consumed.

In essence, people work for goods and services for which they must produce goods and services. The dollar bills are only a medium of exchange.

Raising the minimum wage attempts to circumvent this economic law by adding to the pile of dollars without any corresponding increase in the pile of goods and services produced, a shortcut to prosperity that is just not possible.  Put another way, the minimum wage puts the cart before the horse: It mandates consumption before production.

It is a sad commentary that such bad economics has been going on for so long, with such disastrous results, and so few object.  Much of the problem is that it’s an emotional issue. People feel good about raising the minimum wage because they think they’re doing good.

Dwight Lee, a professor at Southern Methodist, wrote in the Wall Street Journal last Feb. 21 that Maxine Waters (D-CA)  had this to say about the Fair Minimum Wage Act of 2007, which raised the minimum to $7.25 from $5.15:  “When we pass this bill, we will all feel better about ourselves.”

Oh, my.
“Half the harm that is done in this world is due to people who want to feel important. They don’t mean to do harm; but the harm does not interest them. Or they do not see it, or they justify it because they are absorbed in the endless struggle to think well of themselves.”
― T.S. Eliot