Good Intentions

In Good Intentions, Walter Williams, a noteworthy economics professor, discussed the unintended consequences of those good intentions.  He detailed his own youth, education, and job history compared to what was possible today (early 1980s).  Education had degraded since his time, seeing a dramatic rise in administrators at the cost of resources to the classroom.  Furthermore, efforts to give control of education to parents was foiled by teachers' unions and government.  Where he had a job as a teen for a $1/hour, a modern teen could not be hired for less than $3.35/hour.  That minimum wage, intended to protect the youth from an employer who would take advantage, limited the number of teens who could be hired.  Rather than get job experience - even for a pittance, the teen was instead unemployed.  Then there was the licensing scam.  Many governments required a license to participate in an industry.  He gave the example of driving a cab.  In Philadelphia, it cost $20,000 to get a license and thus be an independent cab driver.  By contrast, Washington D.C. only required $50.  Unsurprisingly, vastly more cabs were available in DC and there were more independent cabbies.  All too often, government efforts to assist the citizenry results in exactly the opposite.

Highly recommended.

Minimum Wage is Always Zero

Unfortunately, the real minimum wage is always zero, regardless of the laws, and that is the wage that many workers receive in the wake of the creation or escalation of a government-mandated minimum wage, because they lose their jobs or fail to find jobs when they enter the labor force. Making it illegal to pay less than a given amount does not make a worker’s productivity worth that amount—and, if it is not, that worker is unlikely to be employed.

Thomas Sowell

Whenever someone talks of raising the minimum wage, I think of this quote from Thomas Sowell.  Is it better to raise the wages and thus shove the least productive into unemployment or abolish the minimum and let employers pay what the employee will accept.  No person will voluntarily accept a job that does not make them better off and no employer will hire an additional employee if that does not make them better off.  The minimum wage is just a case of self-declared do-gooders deciding what is 'fair' according to them, without regard to the market, the employee, or the employer.

Along those same lines, taxing the rich does not improve the lot of the poor.  It may please some to see the wealthy punished through taxation, but it harms the economy.  The government is always less efficient in spending money than private individuals.  Had the money remained in the hands of the wealthy, they would invest it with an eye toward profit or spend it on goods, both of which spur growth.  By contrast, government will spend it with no concern of a financial return, which is how we get expensive boondoggles with huge cost overruns.

You cannot help the poor by destroying the rich. You cannot lift the wage earner by pulling down the wage payer. 

Abraham Lincoln

Making Machines Competitive

Robots are coming to a burger joint near you

CNBC

Here is an article that talks all about the efficiencies of replacing human fry cooks with a machine named Flippy because cooking burgers is just repetition.  Unmentioned is that machines long ago ate into a far more complex repetitive task of assembling automobiles.  Why has it taken so long to move into the burger flipping efficiency?  That would be the ever expanding minimum wage and the associated costs of human employees.  It is no coincidence that California is the first to see inroads by Flippy.  Get rid of the government-imposed cost burdens related to human employment and Flippy would have no market.

 

Unlike how telephone operators and horse-drawn carriages were replaced by new technologies, this is a case of government driving up the price of a product - low-skilled wage labor - to the point that machines became competitive.  Rather than providing more money to low-skilled workers, the minimum wage is going to put them in the unemployment line.  If one believes that the intent was to improve the standard of living of those on the bottom rungs, then this is a clear case of unintended consequences.  On the other hand, if government wants more citizens dependent upon it, perhaps this is the intended - though unstated - goal.

Minimum Wage on Steroids

Maybe we should just go to a $150/hour minimum wage with no phase-in period and let the Fed figure out how to make it work.

 

You'd have a big burst of inflation, nobody would lose their jobs, a lot of old debts would be wiped out, and we'd be better off for it.

Matthew Yglesias, Twitter

This may just be a thought experiment or a way of demonstrating the general folly of the minimum wage.  Many respondents took this seriously and Yglesias may mean it seriously.  I hope not.  But, for the sake of discussion, let's suppose the government set the minimum wage to $150/hour, effective immediately.  How would that work?

Bob owns a McDonald's franchise where his labor cost is $8,000 a week.  That covers part-time and full-time employees who average out to $10/hour.  Tomorrow, his labor cost will rocket to $17,142.86 for that day.  He will need $120,000 for the week.  Bob's entire cost structure has been thrown into chaos.  No problem.  Bob has kept $120,000 in reserve in case of emergencies and he uses it to pay labor costs for the week.  He raises his prices to reflect the 15 fold increase in his labor costs.  The Dollar Menu is now called the $15 Menu.  During that week, Bob has virtually no business.  In fact, by the second day, he has sent all the employees home since business is so slow.  That afternoon, the delivery truck with the bags of fries, meat patties, paper cups, straws, and all the rest shows up.  Rather than thus usual $5,000 invoice he gets, this one has a $75,000 invoice; costs have skyrocketed for his supplier as well.  Bob refuses the shipment, just like the last 5 McDonald's franchise owners refused theirs.  This same scenario is playing out across the country as the economy grinds to a halt.  After all, every full-time worker is now earning $300,000 per year.

 

A couple of weeks later, the Fed has flooded trillions of dollars into the economy.  The value of the dollar crashes, now worth about what a dime was worth before the minimum wage increase.  People who were holding cash take a big financial hit.  Banks suffer a huge hit as borrowers pay off loans with deflated dollars, thus wiping out the 'old debts' as predicted.  Gold goes through the roof.  Debtors and those holding assets that appreciate would benefit.  Lenders and those holding dollars would suffer greatly.

 

Yglesias has offered an extreme example of raising the minimum wage that demonstrates the destructive power of government setting arbitrary price floors without consideration of the ripple effects of those decisions.  The $150/hour minimum wage would obviously be catastrophically bad but what about the $15/hour minimum wage?  It generates the same negatives just to a much lesser degree.

 

It should be noted that the minimum wage was created with the Davis-Bacon Act of 1931.  It was passed because blacks from the South were migrating north and working for lower wages than white workers.  Even racists want to save money.  With the minimum wage set, the racists couldn't save money by hiring blacks and thus just hired whites.

Bernie Sanders: Economic Illiterate

Looking at Bernie Sander's website and his views on Income and Wealth Equality, I discover that his plans didn't survive some back of the envelope math.

Putting at least 13 million Americans to work by investing $1 trillion over five years towards rebuilding our crumbling roads, bridges, railways, airports, public transit systems, ports, dams, wastewater plants, and other infrastructure needs.

 

Although I thought Obama had already dealt with this with his trillion dollar stimulus - no, wait.  He said shovel-ready wasn't as shovel-ready as he thought.  Okay, this still needs to get done.  That being the case, let's check the numbers.  $1 trillion dollars over a five year period will be $200 billion a year.  That $200 billion paid out as salary to 13 million (he said "at least" so we'll go with the minimum) would be $15,384.62 each.  Wow, that's not much, certainly not enough to raise a family.  And this doesn't even account for the materials needed to do all the rebuilding, so that is a maximum salary.

 

Increasing the federal minimum wage from $7.25 to $15 an hour by 2020. In the year 2015, no one who works 40 hours a week should be living in poverty.

 

$15 per hour would lead to $120 per 8 hour day or $600 per 5 day week.  That would amount to $31,200 a year, more than double what he plans to allocate for workers on his infrastructure project.  Well, let's look at that number.  $15,384.62 a year comes to $295.86 per week and $59.17 per day.  That would be $7.40 an hour, just above the current minimum wage.  Could that be a coincidence?  Extremely unlikely.  Of course, if he gets his minimum wage increase, we'll just have to allocate $2 trillion to the 5 year plan.  Easy as pie.  It will work much better when Bernie spends twice as much as Obama did.  Maybe they are finally shovel-ready?

Creating 1 million jobs for disadvantaged young Americans by investing $5.5 billion in a youth jobs program. Today, the youth unemployment rate is off the charts. We have got to end this tragedy by making sure teenagers and young adults have the jobs they need to move up the economic ladder.

 

They may be disadvantaged youth but they require the new minimum wage too, right?  Therefore, that $5.5 billion divide equally (Bernie is big on income equality) among the million youths would be $5,500 each.  At $15 per hour, that is 366 hours and 40 minutes of work or about 9 weeks of full time employment.  Is this a summer jobs program?  If it is meant to be year round, it will be 7 hours a week.  If not, these disadvantaged youth will be unemployed for 43 weeks of the year.

 

Requiring employers to provide at least 12 weeks of paid family and medical leave; two weeks of paid vacation; and 7 days of paid sick days. Real family values are about making sure that parents have the time they need to bond with their babies and take care of their children and relatives when they get ill.

That sounds very compassionate but increases the cost of labor.  How?  Let's break it down.  Looking at my minimum wage employee who is paid $31,200 a year, even if he and all his family is perfectly healthy, I am only getting $30,000 of labor, the other $1,200 going to his paid vacation.  Since I don't get those 80 hours of labor, I have to amortize that over the rest of the year.  It works out that I am really paying $15.60 per hour.  What if he takes all 7 paid sick days?  Now he is costing me $16.05 per hour.  Gads, what if he is out for the 12 week paid family medical leave too?  Now he is costing $21.31 per hour.  Sure, that is the worst case scenario but any woman in her childbearing years will use most or all of her 12 weeks.

 

With this huge and continuous shift of costs onto employers, is it any wonder that manufacturing is moving overseas?  As the cost of labor domestically rises relative to foreign labor, the issue becomes the cost of shipping.  With the proliferation of free trade agreements that erase tariffs, that cost is dropping.  Voila, China becomes the new manufacturing hub of the world, increased shipping costs are more than offset by the reduction in labor costs, and corporate profits skyrocket.  Corporations can move.  They will only stay while it is profitable to do so.  Bernie's prescriptions will accelerate the exodus.  Oh, but Bernie thought of that.

 

Reversing trade policies like NAFTA, CAFTA, and PNTR with China that have driven down wages and caused the loss of millions of jobs. If corporate America wants us to buy their products they need to manufacture those products in this country, not in China or other low-wage countries.

 

Not only is Bernie going to more than double the minimum wage, he's going to engage in protectionism.  The Smoot-Hawley Tariff Act of 1930 was supposed to get Americans to buy domestically manufactured goods and spur growth after the 1929 market crash.  Instead, it cut imports and exports by half through a trade war.  Didn't do the Great Depression a bit of good.  But maybe it will work for Bernie.  The World Trade Organization - of which we are a member - is going to love that.  Ignoring all that, let's just ponder where this goes.  The price of all goods in the US is currently based upon the importation of a large percentage of our manufactured goods.  Merely undoing that will cause the price of goods to rise dramatically as US labor costs are already higher than overseas.  Add to this the greatly increased labor costs.  To make up for this upheaval, corporations are going to have to raise prices dramatically.  And though government will have been the architect of the disaster, business will be blamed for gouging and being greedy, just like is happening with Obamacare now.

 

At the end of Bernie's proposed path is an economy worse than what currently exists, perhaps a great deal worse.

Do you buy more if the price goes up?

It is common sense that as the price of a good goes up, the less of it will be bought by consumers.  In fact, that is part of the law of supply and demand.  Rising prices depress demand while falling prices depress supply.  Or, conversely, Rising prices encourage supply and falling prices encourage demand.  Simple, right?  The important part to this is that prices rise or fall to a point where supply equals demand.  If there are 100 eggs and 200 hundred egg buyers, the price will rise until 100 egg buyers are priced out of the market.  Or, to take it the other way, if there are 200 eggs and only 100 buyers, the price will fall until another 100 buyers are lured into the market to buy the excess.  This price mechanism is part of Adam Smith's invisible hand.

Let us suppose the government got involved in the egg market and decided that, despite there being 200 eggs and only 100 buyers, the price of eggs should be 20% higher?  What would happen?  Well, some of those 100 buyers would be priced out of the market and there would be even more unsold eggs.  So, though the egg sellers have plenty of eggs for sale, they can't sell them because the government has instituted a price floor, a minimum price beneath which the good cannot be sold.  The market now has surplus eggs that will rot on the shelves.  The egg sellers who manage to unload their eggs on some buyers will be very appreciative of the government move since it has increased their profit per egg but those who are stuck with unsold eggs will not thank the government.

 

Happily, the government isn't putting in price floors, right?  Not as explicitly as the above example, certainly.  Actually, it is.  The minimum wage is a price floor and it has an identical impact on the labor market as it does in my fictional egg market.  The lucky eggs who get a job with the higher minimum wage will thank President Obama for his caring.  The unlucky eggs who don't get jobs will sit on the shelves and add to the youth unemployment rate (the minimum wage is almost exclusively for teens and college students, not family breadwinners, despite what the media reports).  So there is the tradeoff: have many people with a job getting $7.50 an hour or have fewer people getting $9 an hour while the rest have no job at all.

 

Government cannot tinker with the price of goods without impacting either the supply or demand, almost always in a harmful way.  The minimum wage should be zero.