Preventing Low-Skilled Workers from Competing: a $15 Minimum Wage

The campaign for a $15 minimum wage has been in and out of the news over the last few months. It will almost certainly be back in the news again before very long. What follows is a brief analysis of the consequences of enacting such a minimum wage, one which is far above the prevailing market wages of millions of workers.

The efforts underway by the Service Employees International Union, and its political and media allies, to raise the minimum wage from $7.25 to $15 per hour would, if successful, cause major unemployment among low-skilled workers, who are the prospective alleged beneficiaries of those efforts.

The reason is not only the fact that higher wages serve to raise costs of production and thus prices, which in turn serves to reduce physical sales volume and thus the number of workers needed. There is also another, equally, if not more important reason in this case, a reason which is only very inadequately indicated by reference to the substitution of machinery or automation for the direct labor of workers when wages are increased.

This is the fact that a low wage constitutes a competitive advantage for less capable workers that serves to protect them from competition from more capable workers. A wage of $7.25 per hour for fast-food workers, for example, serves to protect those workers from competition for their jobs from workers able to earn $8-$15 per hour in other lines of work. The workers able to earn these higher wage rates are not interested in seeking employment at the lower wage rates of the fast-food workers.

But if the wage of the fast-food workers, and all other workers presently earning less than $15 per hour, is raised to $15 per hour, then these more capable workers can now earn as much as fast-food workers as they can in any of the occupations in which they had been working up to now .

Moreover, the widespread rise in wage rates to $15 per hour will cause unemployment in all of the occupations affected. The unemployed clerks, telemarketers, factory workers, and whoever, who otherwise would have earned between $8 and $15 per hour, will have no reason not to apply for work in fast food, which will now pay as much as any other occupation that is open to them. And since those workers are more capable, it is overwhelmingly likely that to the extent that they do seek employment as fast-food workers, they will be preferred over the low-skilled workers who presently work in fast-food establishments. Thus, the rise in the wage of the fast-food workers will serve as an invitation to the competition of large numbers of workers who do not presently think of working as fast-food workers and who, being better qualified, will almost certainly take away their jobs.

Between less employment overall in the least-skilled lines of work such as fast food, and the incentive created for vastly increased competition for employment in those lines coming from more qualified workers, the effect could well be to close those lines altogether to the employment of workers at the low end of skill and ability. That, of course, would deprive these people of the opportunity to acquire skills and abilities from work experience that otherwise would have enabled them to become capable of performing more demanding jobs later on.

What the demand for a $15 an hour minimum wage represents is a case of low-skilled workers being led to reach for a high-wage “bird in the bush,” so to speak. Unfortunately, at the high wage, there are both fewer birds in the bush than are presently in hand and most or all of them will fly away into the hands of others, who possess greater skills and abilities, if the attempt is made to reach for them.

This must ultimately be the result even if somehow, the present fast-food workers and the like could be enabled to keep their jobs for a time. Even so, practically every time that it became a question of hiring someone new, the new employees would almost certainly be drawn from the ranks of workers of greater skill and ability than those who had customarily been employed in these jobs. Thus, even if not immediately, in time there would simply be no more room in the economic system for workers at or near the bottom of the skills ladder.

No one can question the desirability of being able to earn $15 an hour rather than $7.25 an hour. Still more desirable would be the ability to earn $50 an hour instead of $15 an hour. However, it is necessary to know considerably more than this about economics before attempting to enact sweeping changes in economic policy, changes to be achieved by attempting to organize a mass movement that is based on nothing but a desire for economic improvement and no real knowledge whatever of how actually to achieve it.

George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics. His website is www.capitalism.net. Follow him on Twitter at @GGReisman.

 

 

 

 

 

 

 

Uh Plus Duh May Spell Trouble for Obama

Uh: Headline in The New York Times of Thursday, October 31, 2013: “Voters’ Anger Over Shutdown Is Inspiring Democrats to Run”

Duh: Headline in The New York Times of Friday, November 1, 2013: “Troubled Start for Health Law Has Democrats Feeling Anxious”

Uh Plus Duh May Spell Trouble for Obama: This is because the government shutdown was the result of the Democrats’ adamant refusal to delay the imposition of the Obama health law, which was clearly identified by its Republican opponents as a “train wreck waiting to happen.”

The voters are now seeing that train wreck in the form of a totally botched web site designed to handle enrollment in the Obama program. They are also seeing it in sharply increased health insurance premiums and reduced insurance coverage, results that have occurred because ObamaCare forces medical insurance companies to accept people with pre-existing conditions at the same premiums as people without such conditions. This requirement means that people without preexisting conditions must help to cover the higher costs of insuring those with preexisting conditions. When the costs of providing insurance are increased, premiums must increase and/or coverage decrease to hold down costs, or companies must go out of business.

This carnage could have been avoided, along with the government shutdown, if only Obama and his henchman, Harry Reid, the Democrat Majority Leader of the Senate, had relented and postponed the imposition of ObamaCare. That would have given the members of Congress a fresh opportunity to actually read and study the law they passed without bothering to perform this very elementary and essential aspect of their duties as the people’s representatives.

If the voters have the ability to put two and two together, which, unfortunately, is by no means certain, then perhaps there will soon be a third headline in The New York Times, one to the effect that those responsible for ObamaCare are fleeing to the hills to escape the wrath of the electorate.

Copyright © 2013 by George Reisman. Permission is given to reproduce and distribute this note electronically, provided the present paragraph is included. George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: ATreatise on Economics (Ottawa, Illinois: Jameson Books, 1996; Amazon Kindle Edition, 2012). His website is www.capitalism.net. His blog is georgereismansblog.blogspot.com.

 

 

Leftist Fanatics Responsible for Government Shutdown

In 2010, a Democrat-controlled House of Representatives, without a single Republican vote, passed “ObamaCare” by a margin of 219 to 212. In a staggering act of misfeasance, hardly a single member had read, let alone studied, the 1,900 page law (2,700 pages according to some authorities), which had been dumped into the House only days earlier. The 219 members of that House who voted for ObamaCare were willing to impose massive, and massively expensive, legislation on the American people without any real idea of what they were doing. Had those members been members of the board of directors of a private corporation, their complete and utter lack of due diligence would almost certainly have exposed them to enormous law suits and, quite possibly, criminal penalties.

Largely in consequence of the passage of ObamaCare, the House of Representatives elected later in 2010, contained a substantial Republican majority, which was continued in the elections of 2012, despite Obama’s reelection, and is the basis of the Republicans’ present control of the House.

Today, the Republican majority in the House is exercising its constitutional power over the federal government’s spending by insisting on excluding any funds for the implementation of ObamaCare in the coming fiscal year. This is actually an extremely modest exercise of the House’s power over the budget. It should be seen as giving the Democrats in the House and Senate an opportunity finally to read and study the law they have passed (along with the 20,000 pages of government regulations that have already been written in order to carry out its provisions). Moreover, the elections of 2014 will give the supporters of ObamaCare a chance to present their case to an electorate that can then decide the issue by determining the makeup of the next Congress.

However, instead of agreeing to this very modest and thoroughly justified proposal, the Democrat leadership of the Senate has dug in its heels in a fanatical defense of ObamaCare, to the point of closing down major portions of the federal government in order to implement it, irrespective of not knowing what it is and irrespective of its consequences. The Republican majority in the House does not want to shut down the federal government or have it default on the national debt (which could happen later this month). It is fully prepared to fund the federal government and has repeatedly done so, with the single exception of ObamaCare. It is for the sake of maintaining ObamaCare that the Senate Democrats have shut down the federal government.

The House Republicans should hold fast, even to the point of a default on the national debt, for which the supporters of ObamaCare, not they, would be responsible, if it took place. Their first obligation is to uphold the Constitution of the United States and protect its citizens from a government that knows no limits to its reach and power, as manifested in ObamaCare.

Yes, terrible consequences can result from upholding principles. The United States has fought wars in order to uphold the principle of individual freedom. The House of Representatives should be willing to risk a default on the national debt to uphold that same principle today.

Few people in public life today have any principles, neither Democrats nor Republicans. Most of them are concerned with nothing beyond favorable “photo-ops” and their standing in the latest public opinion polls. They change their views as though they were outfits of clothing, to be changed whenever doing so will make them look better by some undefined standard. In the same way, they will talk with anyone and negotiate with anyone, no matter how evil and vicious, if they believe that doing so can improve their popularity.

This should imply that if the Republicans do hold fast, the Democrats will yield. The only thing that makes this assessment uncertain is that it well may be that the Democrats in the Senate hate individual freedom and love the augmentation of government power more than they hate or fear anything else. They well may hate liberty more than they fear nuclear weapons in the hands of Iranian religious fanatics or North Korean Marxist fanatics. And if that is the case, then while they would meet and negotiate with the Iranians and North Koreans and in some ways agree to their demands, they will not be willing to be as accommodating to the House Republicans and thus will be willing to bring about an actual default on the national debt.

The only way to deal with this possibility is for the Republicans to do everything in their power to make sure that the American people understand what the issue is. Namely, responsible, knowledgeable legislation consistent with the principle of individual freedom, or reckless, power-grabbing legislation of a kind enacted by Congressmen who might as well have been drunk or asleep as far as their votes for ObamaCare were concerned.

If the American people can be made to understand this, then even a default on the national debt will serve as the basis of a great victory and be well worth the price. It would establish a turning point in American history: the point at which the relentless advance of government power was stopped by unyielding, principled opposition.

There are signs that here and there in the Republican Party, there are some men of principle, men who understand what is at stake and are prepared to do whatever is necessary to remove the legislative detritus that is ObamaCare. If their existence can be confirmed by their behavior in the coming weeks, it will be remarkable indeed, representing a virtual evolutionary leap in the ranks of our country’s politicians.

Unfortunately, Speaker Boehner’s pledge, reported in The New York Times of October 5, to avoid default, implies that the Republican opposition will collapse, isolating whatever men of principle there may be in the Republican Party. The pledge not to allow a default should have come from Harry Reid, the Democrat majority leader of the Senate. Yet, somehow, Reid and the other supporters of ObamaCare are thought to be free of any obligation to avoid a default. Only the opponents of ObamaCare are thought to be under such obligation.

This perverse inequality of obligation is taken for granted as proper in the media and probably by most of the general public. Barring some unforeseen development, it will almost certainly result in yet another Republican capitulation rather than in the great victory that is possible if the Republicans stick to their principles. Let the Democrats and the media think of these Republicans as lunatics if necessary. They are almost always prepared to humor lunatics through compromise. This time, let them compromise their statist principles by giving up ObamaCare for the next fiscal year, for the sake of avoiding a default on the national debt. Surely, there is no moral basis for maintaining a law that was passed by men who did not and could not know what they were doing and which as more is revealed about it, can only be expected to wreak great harm.

 

Copyright © 2013 by George Reisman. George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996; Amazon Kindle Edition, 2012). His website is www.capitalism.net. His blog is www.georgereismansblog.blogspot.com.

 

 

 

September 29, 2013 is the 132nd Birthday of Ludwig von Mises.

Read Reisman’s tribute to Mises on the occasion of his 100^th birthday.

Newly Published: Edith Packer's LECTURES ON PSYCHOLOGY

All of Dr. Packer's pamphlets are now together in a book, at Amazon.com, in Kindle format. Price: $9.99.

The full title of Dr. Packer's book is LECTURES ON PSYCHOLOGY A Guide to Understanding Your Emotions.

Here is the book's table of contents:

 
Preface

Chapter 1 The Psychological Requirements of a Free Society

Chapter 2 Understanding the Subconscious

Chapter 3 Anger

Chapter 4 The Obsessive-Compulsive Syndrome

Chapter 5 The Art of Introspection

Chapter 6 Toward A Lasting Romantic Relationship, Part I

Chapter 7 Toward A Lasting Romantic Relation Ship, Part II

Chapter 8 Happiness Skills

Chapter 9 The Role of Philosophy in Psychotherapy

Chapter 10 An Interview with Edith Packer on Psychotherapy

About the Author


 
For further information about this book, please click on the book's title, above, or simply click right here.

 

 

 

More Dangerous than the Factory Building Collapse

The recent collapse of a garment factory building in Bangladesh, resulting in the death, at latest count, of more than 1,100 workers who were employed there, has led to international outrage not only against the building’s owner but also against the various retailers in the United States and Europe, many of them prominent, that have sold clothing produced in that building. It is demanded that they assume responsibility for working conditions in the factories that supply them and not deal with factories that do not provide safe and humane conditions and pay fair wages.

Such demands rest on the belief that, if left free of government interference, the profit motive of businessmen or capitalists leads them to pay subsistence wages to workers compelled to work intolerable hours in sub-human conditions. And, more, that the profits allegedly wrung from the workers in this way exist in the hands of the capitalists as a kind of disposable slush fund as it were, at least some more or less substantial portion of which can be given back to the workers from whom they were taken, or used on behalf of those workers, with no negative effect except to deprive the capitalists of some of their ill-gotten gains. It is generally taken for granted that the reason the kind of conditions that prevail in Bangladesh and the rest of the Third World do not exist in the United States and Western Europe is the enactment of labor and social legislation, and that what is needed is to extend such legislation to the countries that do not yet have it.

Every aspect of this set of beliefs is wrong and its consequences are highly destructive, above all to the masses of workers in the Third World who already live close to starvation and who are in danger of being driven into it by needlessly increasing the cost of employing them either by arbitrarily raising their wages or by requiring that they be provided with improved working conditions that must be at their expense and which they cannot afford.

One of the most elementary propositions of the science of economics is that the higher the price of anything, the smaller is the quantity of it that will be purchased. This applies to labor no less than to goods. If wage rates in Bangladesh are arbitrarily increased, fewer workers will be employed in Bangladesh. In that case, workers who would have earned low wages will earn no wages. They will starve. If employers in Bangladesh are compelled to make improvements in working conditions of a kind that do not pay for themselves, the cost of those improvements represents the equivalent of a rise in wage rates. Again, there will be unemployment. The unemployment could be avoided only if workers’ take-home wages could fall sufficiently to offset the cost of the improvements. In that case, the situation would be comparable to making the workers use their already meager wages to pay for improvements that they simply cannot afford.

These are not outcomes that the advocates of imposing labor standards want. What they want is higher wages and better working conditions. Their problem is that they do not realize what is actually necessary to achieve these results.

What will achieve these results is leaving business firms in Bangladesh and throughout the Third World alone, to be as profitable as they can be. (It should be obvious that the loss of a factory building and its machinery was not profitable and that while it may be legitimate to denounce the building’s owner for criminal recklessness and negligence, it is simply absurd to denounce him for seeking profit, when what he actually achieved, and could only achieve through such conduct, was total loss.)

The high profits that can be earned in a Third World country, if not prevented by too many obstacles, will be heavily saved and invested, mainly in that Third World country. As the experience of Taiwan, South Korea, and now even mainland China  shows, a generation or more of such a process results in a vast accumulation of means of production in the country—i.e., numerous new factories, with better and better equipment. This results in an intensified competition for labor and thus rising wage rates. As wage rates rise, workers can more and more afford to accept lesser increases along with improved working conditions of a kind that must be at their expense.

Economic freedom, not government interference, is the road that the wealth of nations travels.

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Copyright © 2013 by George Reisman. This article may be reproduced electronically provided this note is included. George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996; Amazon Kindle Edition, 2012). His website is www.capitalism.net. His blog is www.georgereismansblog.blogspot.com.

 

“Tax Expenditures”: Not Taxing Is Allegedly Spending

Runaway government spending is among the most important economic problems of our time. It is absolutely urgent that it be brought under control and progressively reduced until it is sufficient to provide for no more than the essential government functions of defense and justice. Only then will the citizens have the greatest possible individual freedom to decide how their earnings are spent and the greatest possible motivation to increase their earnings and improve their standard of living.

As recognition of the importance of bringing government spending under control has grown, the enemies of individual freedom have seized upon a tactic which they hope will avoid the necessity of reducing government spending, indeed, will allow them to go on increasing it, under a fraudulently created appearance of reduction. The tactic is described by the words “tax expenditure.”

A tax expenditure is a tax that the government has the power to collect but chooses, for any reason, not to collect. More precisely, a tax expenditure is a fictional, non-existent tax accompanied by an equivalent fictional, non-existent expenditure. Although the government does not actually collect the tax, the fact that it has the power to do so is used as the basis for pretending that it does collect the tax and that it uses the proceeds to make an expenditure that goes to those from whom it has chosen not to collect the tax. In this way, the taxes that are not collected are treated as though they were collected and then used as a subsidy paid to those from whom they were not collected. In effect, the government’s not taking is alleged to be giving. Its not taxing is alleged to be spending.

Examples of tax expenditures recently provided by The New York Times are the taxation of capital gains and dividends at lower rates than ordinary income; allowance for deductions from taxable income of the payment of interest on home mortgages, the payment of property taxes, state and local income taxes, charitable contributions;  and the absence of taxation on employees for health insurance and pension benefits paid for by employers on their behalf. All in all, according to The Times, “Tax expenditures cost the federal government more than $1 trillion a year in lost revenue.”

When one recalls that in World War II, there was a 90 percent bracket in the federal income tax, and that the government has it in its power to impose such a tax rate on everyone but presently chooses not to do so, then it becomes clear that by the logic of the concept, the cost of tax expenditures to the federal government is not just $1 trillion, but many, many trillions. It is, in fact, everyone’s entire income and wealth.

The philosophical principle underlying the concept of tax expenditure is that we are all serfs or slaves in the power of our Lord and Master the Almighty Government. It owns us and all of our income and wealth. All that we earn and possess, we do so by virtue of its largess, by virtue of its giving to us what we may have believed was ours to begin with.

The concept of tax expenditure is as hostile to the principles on which the United States was founded as any concept can be. It flies in the face of the fact that here, in this country, government is supposed to be the servant, not the master; that it is the people who support the government, not the government that supports the people; and, above all, that what the people have earned and saved, they hold by right, not subject to any arbitrary appropriation by the government.

What the government does not take, even though it may have the power to take it, is not something that the government gives. It is the property of the individual citizens who earned it. They do not receive any of it from the government by virtue of the government’s decision not to take it from them.

To claim that government spending will somehow be reduced by reducing tax expenditures is a moral outrage. Its only possible meaning is increasing taxes, which will allow government spending to continue on without reduction, indeed, with possible increase.

When, for example, the government taxes capital gains and dividends at a lower rate than ordinary income, it is not giving anything to the people who pay the capital gains and dividend taxes. On the contrary, they are giving money to the government; they are giving the taxes they pay. The fact that they are giving the government less money than it would like to receive and has the power to take, does not change that fact. If the tax rate on these incomes were increased, there would be absolutely no reduction in government spending. But the government would be in possession of additional funds with which to continue its spending and possibly increase it.

To reduce government spending means to reduce the money the government pays out, not to reduce the money it has chosen not to take in. The first is a reduction in government spending; the second is an increase in taxes. Confusing the two is of benefit only to con men who worship an omnipotent state.

Copyright © 2013 by George Reisman. Permission is hereby given to reproduce this article, royalty free, in digital/electronic format, provided only that this biographical note is included. George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996; Kindle Edition, 2012).  His website is www.capitalism.net. His blog is georgereismansblog.blogspot.com. See his Amazon.com author’s central page.