Monthly Archives: January 2012

The Minimum Wage fallacy

One of the more pervasive economic myths is the need for a mandated minimum wage. This belief is the manifestation of an irrational fear. The fear is predicated on the notion that absent a minimum wage employers would pay the absolute lowest subsistence wage. For the sake of argument let us assume this is true. Were this true we would predict the following: (Given) employers strive to pay the least amount possible (Given) the minimum wage is the lowest legal wage, (Conclusion) employers would pay only minimum wage to the majority of the workforce. What do we find if we would look at actual wage data? As of 2006 a mere 2.2% of US workers actually make minimum wage. Therefore we can conclude this argument is irrational and without merit.

 

Would you buy a Kia or a BMW if the government mandated the Kia could not be sold for less than a BMW?

 

Now the argument switches from an “evil employer” focus to a “safety net” focus. The safety net argument presumes ALL workers require sufficient pay to independently support themselves. Not all workers are the same however, nor do they all have the same goals. Many workers (e.g. teenagers) are inexperienced and do not need to work for self-sufficiency. Such workers would be happy to receive a starting wage in exchange for the opportunity to gain work experience while earning some spending money. By “happy” I mean they would prefer that versus no job at all. However “no job at all” is what most of them (and other low-skill workers) encounter because the minimum wage is higher than their productive capacity. With the recent increase in the minimum wage this is exactly what we got. As of 2011 unemployment for those 16-24 was over 50%. It doesn’t make sense to pay someone $7.25/hour for $4/hour work. The net result is that the unskilled and inexperienced never get the opportunity to get their foot in the door to gain the experience they need so they can demand a higher wage. Low starting wages are a stepping-stone to higher wages. Outlawing low wages is like outlawing the 1st grade in an attempt to eliminate illiteracy among 1st graders. Kids don’t stay in the 1st grade their whole life just as the same people aren’t making low wages their whole life.

The minimum wage overprices the unskilled out of the labor market (would you buy a Kia or a BMW if the government mandated the Kia could not be sold for less than a BMW?) thus it reduces the supply of available workers which then drives up wages for the skilled laborers as they are now not having to compete with low priced labor. This is why unions are ardent proponents of the minimum wage. It is not for altruistic “help the worker” sentiments, but rather because it benefits unions by restricting the pool of cheap labor that might otherwise compete with union labor. The best example of this union-government cronyism is the Davis-Bacon Act of 1931.

Perhaps the best argument against the minimum wage though is to accept the assumption that the minimum wage is a good idea. Let us imagine we raise the minimum wage to $40/hour. Surely that would eliminate poverty once and for all! But here’s what would happen – all industries employing workers making less than $40/hour would see their employment costs skyrocket. Those industries that have elastic pricing (e.g. fuel, food, utilities) would be able to pass the higher costs on thus decreasing the gains from the increased wage. Those industries that have inelastic pricing (e.g. discretionary leisure goods) would not be able to increase prices. They would go out of business. This would create unemployment due to the destruction of entire industries.

When the minimum wage is high these problems become apparent, but these same problems nevertheless exist at smaller scales. The irony is that the minimum wage is putatively sold as helping those most in need of government assistance, the unskilled worker, when in fact it actually harms those workers by preventing them from gaining employment. But I guess that’s why they invented welfare. Better to pay someone to do nothing than work for “too little.”

Price Gouging

Economic freedom is a willing buyer purchasing from a willing seller at a mutually agreed upon price without state interference. Curtailment of this freedom occurs if one party feels the terms of the prospective sale are unsatisfactory and so utilizes coercive state force against the other party. When the seller does it we call this “minimum price fixing” (e.g. minimum wage laws, crop price controls, etc.), which makes it a CRIME to sell below a government-mandated price. Likewise a buyer desirous of similar protection will petition the government to invoke anti-gouging laws or “maximum price fixing” which makes it a CRIME to sell above a certain price.

Price gouging is nearly universally reviled. Surely this is one place where we can agree that the government needs to step in, right? Wrong. There is nothing wrong with price “gouging” or “scalping”. These actions are merely manifestations of the law of supply and demand. Supply goes down, price goes up. This attracts other sellers, which thus opens the floodgates of competition, which increases supply and ultimately drives down price. “Gouging” is beneficial for two reasons: (a) it promotes a needs based market driven rationing of a scarce resource and (b) it ensures a consistent supply of a scarce resource.

A rising price ensures supply never goes to zero by incentivizing reduced consumption. No matter how scarce a good becomes there will always be some of it available to those who truly require that resource because they are willing to pay. If price is artificially suppressed when supply is short this invites those with early information to consume as they normally would, leaving none for those truly in need. Raising prices gives everyone an equal opportunity to partake in the resource even if they are last in the information chain. Some might say the rich have an unfair advantage, that they could buy everything up if we don’t force arbitrary rationing. But this is illogical. The argument is basically that the wealthy are compelled to buy up all expensive goods in short supply. Funny, there doesn’t seem to be a shortage of diamonds or gold watches. Some might then say the “poor” are excluded when price goes up. Perhaps if the price of gas went to $10,000/gallon, but in practice that can’t happen. Prices can’t exceed the level at which the population can pay. If they did the seller makes no money, so he must lower price until people are willing to pay. It will be less burdensome for the wealthy to pay higher prices, but that’s no different than during “normal” times. So if we don’t need government price controls during “normal” times then we don’t need them during “shortage” times.

High prices also afford the seller the ability to ensure continuing access to a scarce resource. For example, when Hurricane Katrina destroyed refining capacity it affected gas prices in Georgia. Gas prices went way up the next day. Surely this is unfair, right, the cost of the gas in the tanks didn’t suddenly go up overnight? No, this means the owner is exercising good business sense. Just think about it. If the station did not raise prices the amount of money they would get at the old price would not be enough to buy an equal quantity of “new” gas. This would only exacerbate the shortage. Raising price on current inventory ensures that the seller can completely replace it with more expensive inventory and outbid other stations if necessary. Sellers can’t provide their customers with a service if they have nothing to sell due to artificial price restrictions. Who do price restrictions help? No one. Or rather it helps the lucky few that buy early but only to the detriment of everyone else.

Even though at face value government control of economic relationships might seem beneficial (“stop those evil gougers”), ultimately unintended consequences end up harming the very people it was purported to help. If anyone has an area that they believe government should exercise economic controls please send me a note at morin.greg@gmail.com and I will gladly do my best to debunk it in an upcoming column.

The “Buy Local” Canard

One of the most compelling economic myths is that of “buy local.” On its face it seems a rather compelling argument: spending money locally keeps local businesses going and keeps that money in the community. Such a policy is easy to praise because we see the positive effects, but what we don’t see (the “unseen” harm referred to by Bastiat) is the sales that did not go somewhere else… and those sales result in less income for “non-locals” by which they can come and buy “local” from us. So, there might be a small temporary uptick in the local economy, but eventually equilibrium is restored. The root of this myth is predicated on a jingoistic guilt trip. The “localness” of a business is elevated to being the sole consideration in one’s buying decisions (e.g. “buy “American” not because it’s the best, but because, well,it’s your patriotic duty!”).

The jingoism argument is that people should buy only goods and services sold within that community. The problem is that “community” is a completely arbitrary distinction. For example, we are told we should “buy American” because it’s good for America. But then we’re told we should buy“Georgian” because it’s good for the state. Then we’re told we should strive to buy “Morgan” because it’s good for the county. Then we’re told we should buy“Madison” because it’s good for the city. So, if we follow this argument to its logical conclusion, then we should then further strive to only buy goods from people that live in our neighborhood, right? And one step further would mean we should only buy goods made by our family members. And finally, finally, the best would naturally be if we only did everything for ourselves. Crazy result,right? This is why it is important that if you are going to make an argument,you understand the logic of the argument and test all scenarios using that logic. If the outcome is deleterious at the end of the logic chain then it must be deleterious along the chain.
You can’t be “buy American” and “buy Georgian” at the same time. Buying from Idaho would be buying American but not buying Georgian, so clearly you can’t buy from Idaho. Oh, right it’s ok to buy “non-locally” if whatever you want isn’t made “locally”. So, if it is sold in Alabama and Georgia, then the more desirable path is to buy from Georgia? Unfortunately this argument presupposes an impossible world. It assumes a world where Business A in Alabama and Business G in Georgia make absolutely identical products, provide an identical level of service and provide identical pricing(free shipping). If every metric of the two businesses were absolutely identical then there’s no upside or downside to buying local. The outcome is neutral because in this hypothetical Utopian scenario it also means an Alabama resident has no more impetus to buy local or from Georgia than does the Georgia resident. But, since there has never been and will never be identical businesses competing, we should make our buying decisions not on an arbitrary metric like geographical coordinates, but rather on differences in what or how something is being sold. Choose based on quality, service, or price, not on arbitrary characteristics.
Exhortations to purchase based solely on arbitrary traits of the business (location, gender, race, religion, etc.) are actually discrimination. It is just as discriminating to choose to only associate with others because of an arbitrary trait as it is to choose to not associate because of that trait. And while I will defend one’s right to associate as they see fit, I also have an obligation to point out the flaws in the arguments made to support those decisions. If a “local” business is so uncompetitive that the only way it can gain sales is to participate in jingoistic appeals, then perhaps it should go out of business to make room for the next guy who can sell a product so good nobody cares about where it’s located.
FOLLOWUP – I received a Letter to the Editor on this column in the Morgan County Citizen which you can see here. Here is my response:
In response to Joe Houston:  I am puzzled. You claim to disagree with my editorial and yet offer no argument (other than dismissive phrases) to specific points raised. Your attempt at refutation is to merely cite positive economic effects as though they are the direct result of “buy local” when in fact they are the result of increased sales. “Buy local” followed to its logical conclusion in all communities cannot increase sales. If you gain $100 in new local sales but lose $100 in non-local sales (because the non-locals are now buying in their local community) what have you gained? The laudable effects outlined in your letter can be achieved through growth based on competition and not on illusory gains dependent on appeals to loyalty. Don’t misunderstand: I’m not saying to NOT buy local, but rather that buying decisions should be based on price, service or convenience and not SOLELY on arbitrary distinctions like geographical coordinates.

Mind Your Own Business

Ron Paul is frequently accused of having an “isolationist” foreign policy. The media and the other republican candidates giddily overuse that word (perhaps because it has 5 syllables and they think it makes them sound erudite)…but in the immortal words of Inigo Montoya (The Princess Bride),

“You keep using that word. I do not think it means what you think it means.”

Ron Paul’s foreign policy is one of non-interventionism, not isolationism.Isolationism means that a country cuts off diplomatic ties, closes its borders,and invokes high tariffs. That is not what Ron Paul is advocating at all.

Non-interventionism simply means we mind our own business. It means closing hundreds of foreign military bases. If the prospect of closing these bases is held as being “isolationist” then apparently Canada, China, and India are all “isolationist” as they lack foreign military bases. Is it really a threat to national security to close our bases in Germany, bases that are a relic of a war that ended 67 years ago and that exist in a country that poses no threat to us? What is the point? Are we afraid that if we close those bases suddenly Russia will invade Germany? Give me a break. Closing bases doesn’t mean we forego operational readiness. Water covers 70% of the planet, so a strong ocean presence will ensure that we are capable of responding to any threat.
Our foreign policy in the Middle East is a tragic comedy. It is the consequence of unpredictable outcomes that results from operating under the delusion that we are in control. For example, in 1953 the US openly overthrew (operation Ajax) the elected prime minster (Mosaddegh)of Iran, which allowed the Shah to assume power. These actions fomented anti-American sentiment, which culminated in blowback in 1978 with the Iranian revolution and hostage crisis. Iraq, under Saddam Hussein, then opportunistically invaded Iran in 1980 owing to the disarray caused by the nascent revolution in Iran. We didn’t like Iran anymore so we backed our ally Iraq and supplied Hussein with weapons. Russia invaded Afghanistan in 1980. We didn’t like Russia so we supplied the Mujahedeen, led in part by Osama bin Laden, with weapons.Then Iraq invaded Kuwait using the weapons we supplied them with during their war with Iran. That invasion led to US military bases on Saudi Arabian soil.bin Laden despised the bases so he became our enemy. His attacks during the1990s climaxed on September 11, 2001. 9/11 was the culmination of blowback from our foreign policy for the prior 50 years.
Simply recounting these events does not mean that we“deserved” the attacks or that they were “justified”. It merely explains how our interventionist actions got us from Point A to Point B. If I keep poking my brother in the eye until he hits me upside the head with a baseball bat I certainly do not deserve such an extreme reaction, however I’m not totally blameless and innocent. Actions have consequences and they often are not the ones you expect. If non-interventionism had been US policy then the Iran hostage crisis would not have occurred and Iraq would not have invaded Iran or Kuwait. So, there would have been no US-Iraq wars and no US military bases in Saudi Arabia. Without those bases bin Laden would have taken no interest in us.
Imagine if China openly interfered in our elections and installed a puppet communist regime. Imagine then if China established a military base in the US ? Do you not think we Americans would resent this greatly?Of course we would, so why should we expect any different when we do the same to other countries? The path to peace is to mind our own business, maintain a deterring military force, and promote free trade to all countries (sanctions are an act of war). The “selfish” motives of capitalism will ensure peace. Why?Invading and killing your customers is bad for business.