Matching Seattle’s $15 Minimum Wage Will Breed Poverty

minimumwageBrookings Institution analyst Gary Burtless takes a dim view of Seattle’s $15 minimum wage, to be instituted during the coming years. His concern mainly stems from the inevitability of would-be Seattle business owners and employers setting up shop just outside the city limits, where the minimum wage is anticipated to be much lower.

But Burtless doesn’t have a problem with a $10.10 national minimum wage proposed by President Obama. And he apparently would support Washington state raising its minimum wage to match or more closely match Seattle’s $15 wage floor.

“The risk of this kind of harm is vastly smaller when the minimum wage is increased at the state or national level,” he writes. “If the Administration can persuade Congress to boost the national minimum wage, all employers—inside and outside a city’s limits—will be required to raise the pay they offer to their most poorly paid workers.”

Burtless apparently is not concerned that a $10 or $15 state or national minimum wage will price workers out of the job market — to an even greater extent than is the case now.

If Washington state or Seattle’s surrounding communities boosted their minimum wage to $15, employers would hire workers only if those workers produced at least $15 worth of output. If a worker is being paid $15 per hour, but the extra sales thanks to that worker only amounts to an average of $14 per hour in revenue, that worker is causing the employer to lose money. And therefore the worker likely would be laid off or not be hired in the first place.

To produce $15 worth of output per hour, a worker has to have skills. It could be technical skills, management skills, people skills, verbal skills, or other types of skills. It could be skills, for example, to operate a sophisticated cash register while at the same time communicating effectively to customers. Not everyone has those kinds of skills. The existing minimum wage is one reason why the unemployment rate among minority young people approaches 40 percent. A $10 and/or $15 minimum wage will price even more people out of the job market. Already, in Washington state, the unemployment rate among 16- to 19-year-olds is about 30 percent. That’s because their relative lack of skills prevents them from producing more than $9.47 per hour of output – the state’s current minimum wage.

Whenever anyone tells you that they want to raise the minimum wage to help the poor, be aware that this course of action will mostly harm the poor. It’s a big reason for the poverty and high unemployment among America’s low-skilled and unskilled.

One Intern’s Bizarre Notion of “Subsidy”

minimumwageThere’s a recent Guardian article headlined, “Tax breaks for CEOs pay for million-dollar salaries: CEOs’ salaries are ballooning thanks to tax breaks that turn bonuses into government subsidies for corporate America”.

It makes two laughable assertions: that stock options are a government subsidy to businesses, and particularly bizarre, that the minimum wage is a subsidy to businesses. The latter is positively Orwellian, straight out of the Ministry of Truth: the state is imposing a regulation on you making it harder to run your business, and that’s a favor to you so you should appreciate the good efforts of the state.

Jana Kasperkevic, described as “the fall US Business intern for the Guardian US”, writes that “Many argue that there are two subsidies at work: tax breaks to keep CEO pay high, and a low minimum wage to keep worker costs low.”

Payment in stock options is incredibly complex for accounting and tax purposes, and complex topics can be easy to demagogue, which Kasperkevic faithfully does. To  get a feel for some of the complexity, read this. Here, however, I want to focus on the other main allegation: that the current national minimum wage is a subsidy to employers.

First of all when an employer is coerced by the government into paying a minimum wage above the market-clearing wage, that’s the opposite of a subsidy. It’s a cost – imposed by the government.

What Ms. Kasperkevic probably means to say is that welfare benefits such as food stamps are not only a government subsidy to a particular person, but also to that person’s employer, and faults the employer for accepting that government subsidy.

Kasperkevic doesn’t realize it but she’s actually making an indictment against the government. Her argument assumes that the employer is getting away with paying lower wages than would be the case without the welfare payment, which in turn assumes that if the welfare payment were removed, then the employer would be forced to raise wages by the amount of the welfare payment in order retain that worker. So under this situation the government is creating artificially low wages. Remove the welfare, and wages will rise, she implies.

Whether wages actually would rise is an open question with many factors involved. If not, then Kasperkevic is wrong – the employers are not getting a subsidy; only the direct welfare recipient is.

Meantime, Kasperkevic essentially says that coercing employers to raise wages by boosting the minimum wage would reduce government spending on welfare benefits such as food stamps.

While some people could become ineligible for welfare under this scenario, many other people would become newly eligible for welfare due to being laid off. If the minimum wage were raised from $7.25 to $10 per hour, a worker only would be retained if he or she produces more than $10 per hour of output. While many people have the skills to produce just above $7.25 per hour of output, they don’t have the skills to produce $10 per hour of output. In that case the employer would be losing money on that worker, and the latter would be laid off (unless the employer for some reason is fine with losing money).

So a higher minimum wage would result in more unemployed people, creating new demand for welfare benefits. Spending on welfare benefits, therefore, likely would not go down, but up. The reality of a minimum wage hike would be the opposite of what Ms. Kasperkevic implies.

A higher minimum wage can only avoid unemployment if all of the working population is skilled enough to produce output above the minimum wage. For example if the minimum wage is $7.25 per hour and all of the working population is skilled enough to produce, say, at least $11 per hour of output, then raising the minimum wage to $10 likely won’t produce unemployment.

But alas, large segments of the U.S. working-age population aren’t skilled enough to produce $11 per hour of output let alone $7.25 per hour of output, especially minority youth and those who can’t speak English. And it shows: unemployment among black teens is a mind-boggling 42 percent. Raising the minimum wage would boost that unemployment rate even higher (all other things being equal). And it would boost demand for welfare even more.

So in addition to a minimum wage boost being a cost, not a subsidy, to employers, it would be the kiss of employment death for low-skilled workers.

A Real-Time Account of Free Markets Eradicating Poverty

factoriesA few months ago we had a post, along with a video animation, on how free markets wipe out poverty and boost the overall standard of living. Lest one is inclined to think that it’s “just a theory”, read this recent account (“China: A Billion Strong but Short on Workers”, WSJ, 5/1/13) that puts that notion to rest. It’s yet more proof that free markets aren’t an ideology, but rather the natural order of things when government gets out of the way.

Following are excerpts from the above-mentioned account:

“Ms. Cui is contributing to China’s tightest labor market in years, putting upward pressure on wages that already are rising in the double digits annually.”

“The average monthly income for migrant workers rose 12.1% from a year earlier.”

“Creating jobs in hair salons and insurance companies, instead of in steel mills and soccer-ball factories, helps fuel growth in the world’s second-largest economy.”

“When the bra maker set up a factory in southeastern China’s Jiangxi province more than a decade ago, hundreds of people lined up outside looking for work. Today, the manufacturer for Wonderbra and Elle Macpherson Intimates struggles to find enough workers to operate its production lines at full capacity.”

“For years Top Form competed for labor with factories moving inland to take advantage of lower costs.”

 

How Free Markets Help the Poor

(To watch a video animation of the following, click here.)

Do you know what’s by far the most powerful force in lifting the poor out of poverty and raising the incomes of everyone else? Free markets. The government getting out of the way and letting businesses flourish results in jobs and rising wages.

No, it’s not labor unions that make wages rise. They only help a relatively small segment of workers at the expense of everyone else. If anything, they impede business creation. And that’s a tragedy, because the more businesses there are, the more competition there is for labor.

In order to attract the best workers and prevent them from working somewhere else, business owners are forced to raise wages and benefits. The result is an overall rise in the general wage rate and standard of living.

Let me illustrate. Start with a poor country. There are lots of people either unemployed or working in the agricultural or low-wage informal sector. But then the government opens the area to foreign or domestic investment. A shoe factory moves in, and people get jobs. Because it’s low-skilled labor, the jobs aren’t high-paying but they pay a lot better than what the people were earning before.

More factories move in and more people get jobs. And then, another factory moves in and finds that it’s having a hard time hiring good labor. So how does it attract workers? You guessed it: it’s forced to raise wages.

But it doesn’t stop there. In order to prevent their workers from going to the other factory and to hire new workers, all of the other businesses have to raise their wages as well. The average income and standard of living of the population go up.

In addition to enjoying higher wages, the people are learning new skills. There are more semi-skilled and even high-skilled people around. That attracts the attention of industries that require higher-skilled labor, like assembly plants and parts manufacturers. They pay even higher wages in order to attract top talent. Pretty soon more of them move in, and the low-skilled manufactures can’t compete so they move out, to other areas of the country where low-skilled and low-wage labor is still abundant. Then the virtuous cycle begins there, too.

This is happening in places like China and India. Just a few of decades ago southern China was poverty-stricken. Now it’s becoming a bustling and prosperous high-tech metropolis, thanks to this process of businesses competing for labor, and ultimately thanks to the government’s decision to let the free market flourish.

A similar thing happened in America as well. To once again get low unemployment and rising wages for the poor, the government has got to get out of the way.

*** Update – May 6, 2013 ***

The above is by no means just a theory. It’s what’s happening in practice. All of the above is reflected in this news article.

Following are excerpts:

“Ms. Cui is contributing to China’s tightest labor market in years, putting upward pressure on wages that already are rising in the double digits annually.”

“The average monthly income for migrant workers rose 12.1% from a year earlier.”

“Creating jobs in hair salons and insurance companies, instead of in steel mills and soccer-ball factories, helps fuel growth in the world’s second-largest economy.”

“When the bra maker set up a factory in southeastern China’s Jiangxi province more than a decade ago, hundreds of people lined up outside looking for work. Today, the manufacturer for Wonderbra and Elle Macpherson Intimates struggles to find enough workers to operate its production lines at full capacity.”

“For years Top Form competed for labor with factories moving inland to take advantage of lower costs.”

 

Romney/Ryan the “True Progressives”?

The Economist magazine has an article on how to reduce inequality while maintaining economic growth. They call it “True Progressivism”. Among their prescriptions are:

* Eliminating tax subsidies for the wealthy like the mortgage interest deduction
* Means testing of entitlements, which Republicans always propose but Democrats always shoot down
* Cracking down on teachers unions
* Ending government bailouts of big companies

Wow – who would have thought Romney/Ryan are the “True Progressives”?

Not unexpectedly, in the article The Economist doesn’t t admit that the above prescriptions are much closer to the Romney agenda than the Obama agenda – in fact they’re anathema to the Obama agenda.

What’s wrong Economist? Can’t you bring yourself to say that in order for these things to have a shot at happening, Romney/Ryan are the way to go?

Waiting with baited breath to find out who The Economist endorses this time.
Update: Wouldn’t ya have guessed it: they endorsed Obama.

A Silly Graph

The graph in question, highlighted by Washington Post blogger Ezra Klein, purports to depict current and future public debt. (“Tax Cuts, Wars Account for Nearly Half of Public Debt by 2019”) But the graph is silly. In fact, I would have thought that Klein grabbed it from The Onion.

The graph tries to show that most of the debt comes from tax cuts and the military. Yet it doesn’t mention anything about entitlement spending, which comprises about two-thirds of government spending – and which is by far the biggest factor driving the debt. The military, by contrast, comprises one-fifth of government spending. (Click here for the source, table 6.1.) Again, the graph makes no mention of entitlement programs – a tremendous omission, perhaps done deliberately.

Tax cuts? That’s like blaming your massive credit card debt on the raise you didn’t get. Or put it this way. If Ezra Klein were a spendaholic and came and told me his credit card debt is massive because his raises weren’t high enough, I’d take a few steps back, thinking he must be batty. Now don’t get me wrong – I don’t think he’s batty because he’s thinks the same thing vis-a-vis government debt. I just think he needs to re-take or take (if he’s never taken it before) Economics 101.

One other thing. After the Bush tax cuts, tax revenues…went up! Way up – from $1.8 trillion in 2003 to $2.6 trillion in 2007. So even with the tax cuts, we got a mega-raise.

Journalistic Malpractice at PBS Frontline

If there were a clearer case of journalistic malpractice, I can’t think of one at the moment. This isn’t just media bias. It’s out-and-out journalistic malpractice bordering on deceit.

This evening the PBS series Frontline broadcast a program called “Money, Power and Wall Street”. It’s about the origins and consequences of the financial crisis that began in 2008. Just from the title, you know it’s dripping with bias.

Still, in order to try to maintain a facade of impartiality, and given that the program’s funding comes from American taxpayers of all political persuasions – not just from leftist taxpayers – you would have thought that Frontline would have at least briefly acknowledged the very popular and very convincing argument that the U.S. government had a significant hand in causing the financial meltdown.

During the program when the topic of subprime mortgages was introduced, which everyone agrees was at the crux of the financial meltdown, the narrator said that the subprime market went from being a very small niche market to a huge one. That begged the obvious question that surely was on the mind of any discerning viewer: how did the subprime market get so big?

This is where the journalistic malpractice really kicked in. Frontline totally ignored why the subprime market got so big. That’s because if they were to explain why it got so big, they would have had to discuss the Community Reinvestment Act (CRA) and the fact that banks, Freddie Mac and Fannie Mae, and other lending institutions were required by law to make loans to subprime borrowers. (Click here or here for a smidgen of the voluminous literature on the subject.)

Journalists and producers with a modicum of journalistic integrity, even if they leaned left, would have at least briefly mentioned that well-established line of thinking.

Based on what I watched, Frontline didn’t even mention the name Barney Frank in the whole discussion, let alone Freddie Mac or Fannie Mae – all players who were instrumental in promoting the continuation of loans to subprime borrowers.

One speculates as to why they would ignore it. It’s either deceit or ignorance or both. Deceit if the producers of the show were familiar with that line of thinking, and privately acknowledged that it even made some sense, but chose to not present that information because it wasn’t consistent with the agenda they’re trying to promote. Ignorance if the producers of the show have been so conditioned by leftist viewpoints over their lifetimes that they’re mentally incapable of understanding how any arm of the government, except perhaps the military and CIA, can do any wrong, leading them to dismiss the whole CRA angle outright – and ignore the question of how the subprime market got so large because they have no idea themselves how that happened.

Journalistic malpractice, while unfortunate, is a fact of life in a democracy. It’s inevitably going to happen in societies where there’s freedom of the press. People can choose not to patronize or fund the entity committing the malpractice. But what’s galling is when journalistic malpractice is carried out by entities that people are forced to fund through their taxpayer dollars. That goes against everything a free society should stand for. Taxpayer-funded entities should be bound to the highest of standards. Instead, in this case, PBS has been captured by leftists trying to foist an agenda. As the people forced to finance such entities come from both sides of the political spectrum, such taxpayer-funded entities should lose their subsidies, or barring that, be required to hire reporters, editors and producers on both sides of the political spectrum.

Journalists have a professional obligation to present all significant angles of a story. That’s woefully lacking in Frontline. It’s far from a news program. And it doesn’t bill itself as an opinion program. So propaganda program is a more apt description. “Money, Power and Wall Street” easily could have passed as a Michael Moore production.

The principal Frontline interviewer, by the name of Martin Smith, was fond of using the term “crap” while interviewing his subjects, in characterizing the subprime securities that caused the whole mess.

Mr. Smith, your manner of presentation of the issue at hand falls into that category, too.

* * *

BTW, here are some names behind the content of the above-referenced program:

  • Producer – Callie T. Wiser
  • Web Design & Development – Jordyn Bonds
  • Senior Digital Producer – Sarah Moughty
  • Director of Development – Sam Bailey
  • Director of Digital Media/Senior Editor – Andrew Golis
  • Managing Editor – Philip Bennett

Where’s Your Job? You Killed It, Dude

Apart from “Dude, where’s my welfare money,” a slogan or mantra for the age of Obama is, “Dude, where’s my job?”

It sums up both the sorry state of the economy, and the gimme-gimme-gimme entitlement mentality that’s fueling the sorry state of things.

A counter-slogan for the age of Obama should be, “Dude, you killed your job.”

Read on here.

 

 

 

 

A Proposal for Mr. Buffett

I have a proposal for Warren Buffett and his fellow billionaires like Bill Gates: Pool your tens of billions, and give that money to the U.S. government to reduce the federal deficit. Taken together, you may breach the $100 billion mark – a significant chunk of change, even when talking about the deficit.

Do it IMF-style, where there are conditions. I.e., if the government takes the money, it has to use it to pay down the debt rather than spend it. Like the IMF, disburse it in tranches, so that if the government isn’t living up to its commitment, then you can withhold the remaining funds.

Of course, you always could give your tens of billions without conditions, given that you seem to have a lot of faith in how the federal government spends its money, based on your campaign to raise taxes. But I would think that even you would realize that that’s like putting your money down a black hole (which should make you think twice about your eagerness to raise taxes).

Isn’t it obvious even to left-of-center people like yourself that the more money government takes in, the more it spends as opposed to pay down debt? That’s why I would think you would be reluctant to give your riches to the government without conditions. (And that reintroduces the irony of why you’re so eager to surrender your money to it through taxation.)

It’s telling that you are admirably giving so much of your wealth to charity, instead of to the federal government. You must think that charities are better stewards of money than the federal government. Why are you so willing to surrender your – and other folks’ – wealth to the government through taxation with no strings attached, but you don’t seem to be willing to give to it voluntarily? It must mean you don’t totally trust the government with your money – you have much more trust in private foundations and/or the private business sector. So why the campaign for higher taxes? It doesn’t make sense. Or if it does, please explain.

You should at least be demanding better accountability from the government in exchange for pledging your support for higher taxes. You have some great leverage – why don’t you use it? Or, are you satisfied with how the government is currently spending your money? If so, then why are you making your donations to private charitable foundations rather than to the government? It’s quite contradictory.

If I were a billionaire (keep dreaming, bub), I would try to set up a deal where I’d pledge my money to the federal government in exchange for it using that money to finance Social Security reform where the program is transformed from a spending program into a savings program via personal savings accounts (PSAs). But I understand that the likes of you and Mr. Gates, being left of center, probably aren’t too thrilled with government-sponsored PSAs. (Plus you’d get beaten up by your friends on the left, who’d accuse you of being handmaidens of Wall Street PSA money managers.)

But one thing you are in favor of is reducing the national debt, correct? So let me repeat: Pledge your billions to the federal government in exchange for it committing to using that money as seed money for paying down the debt, and committing to using its tax revenue (in addition to grants from you) to pay down the debt.

I doubt right-of-center billionaires would go for this idea because they don’t have as much trust in government being a good steward of money. But you seem to have more trust based on your willingness to raise taxes. So see what your left-of-center billionaire friends think of the idea. Who knows – it may even be the beginnings of the U.S. government getting its fiscal house in order.

If you’d be worried that imposing conditions would be perceived by the general public (especially the Left) as plutocratic, i.e. billionaires telling the federal government how to spend its money, then pledge the money with no conditions. Of course, in that case, two-thirds of the money would go toward redistribution, and most of the money redistributed wouldn’t be going to the poor.  (I.e., two-thirds of federal government spending now goes toward redistribution rather than toward traditional government services, and most of the recipients are middle class or rich.)

In that sense I could see why you’d rather give your money to charities rather than to the government.

And that should make you reconsider your desire to raise taxes on the wealthy.

Predictions: Did it Happen?

Jump back three years ago, October 8, 2008, on the eve of Barack Obama’s election to president. An article in the American Spectator by Peter Ferrara reviewed a newly released book by Steve Moore, Art Laffer and Peter Tanous, titled The End of Prosperity.

Writes Ferrara,

The book explains in full detail the economic disaster that will befall America if it takes a sharp left turn to neo-socialism under the leadership of the far left President Barack Obama, the ultraleft Speaker of the House Nancy Pelosi, Senate Majority Leader Harry Reid with 60 liberal Democrat Senators, and their pal the ultraliberal Howard Dean heading the Democrat party.

He continues,

One of the insights of the book is that a major factor already tanking the stock market and leading foreign capital to flee America is the threat of the economic policies promised by Obama. Obama proposes increases in every major federal tax, on savers, investors, employers, small business, big business, and anyone who would start a business. Obama also promises to add additional federal spending of almost $1.5 trillion over the next four years ….That would be on top of all the spending increases already scheduled for our exploding entitlements and other programs. Obama also promises a massive increase in regulatory controls….These retrograde economic would ultimately produce a deep, long term decline in America’s standard of living, particularly for the middle class and working people. America would actually fall behind countries around the world.

Ferrara indicated that what happened under President Carter was a precursor to what was to happen under Obama:

The poverty rate actually started increasing in 1978 during the Carter years, eventually climbing by an astounding 33%, from 11.4% to 15.2%. A fall in real median family income that began in 1978 snowballed to a decline of almost 10% by 1982. Average real family income for the lowest income 20% declined by 14.2%. Indeed, during the Carter years (1977 to 1980), real income declined for every quintile, from the lowest 20% to the highest 20%.

So, three years later, here in October 2011, were the predictions of Ferrara, Moore, Laffer, and Tanous correct?

If you were an Obama supporter, you would have laughed off their predictions as being absurd. But how wrong you would have been. Their predictions were excruciatingly on target. As discussed three posts below, the poverty rate is the highest it’s been since 1993. And average real family income has declined to levels not seen in 15 years.

Seems, though, that the authors were a bit off on their prediction that Obama would add additional federal spending of almost $1.5 trillion over the next four years. It turns out that Obama has added at least $3 trillion in additional federal spending in three years. (The amount by which our national debt has shot up during that time.)

Ferrara’s article was presciently titled: Prepare for the Worst.

The Obama-Pelosi-Reid episode is proof positive if you let big-government policies flourish, the consequences are tragic. We need new leadership. Fast.