Romney is Focusing on the Wrong Mechanism

Coming off derogatory remarks he recently made about the underclass in America, Republican presidential hopeful Mitt Romney apparently felt the need to throw them a bone. Last week, he reaffirmed his support for linking regular increases in the minimum wage to the rate of inflation. Given that Romney has held this position since he ran for governor of Massachusetts in 2002, one could assume that he really believes the proposal would go a long way to helping the working poor. But, what he is really doing is focusing on the wrong mechanism to help them.

On the surface, Romney’s proposal seems reasonable. As prices increase, so should wages. After all, aren’t Social Security benefits indexed for price inflation?

However, the first realization that must be acknowledged is that government economic policy causes the price increases that allegedly make the minimum wage necessary for some to live a minimal existence. In other words, if the federal government would simply live within its means and cease using the Federal Reserve to monetize huge amounts of debt and maintain artificially low interest rates there would be little or no need for a minimum wage.

As the late, Austrian economist, Murray Rothbard pointed out in his book, The Mystery of Banking, from the mid-eighteenth century until 1940 prices in the United States actually fell on average from year to year with the exception being during war years. Since 1940, the Federal Reserve which became responsible for maintaining price stability and the value of the dollar through monetary policy oversaw a decline in the dollar’s value by more than 93 percent. That calculates to a 1506% annual rate of inflation change! It’s no wonder we have become a society with a low savings rate and two partners working to make ends meet.

What was the difference between these two economic epochs in our nation’s history? The first had a Gold Standard and the second was based on a fiat dollar standard.

The bottom line is that minimum wage laws are a reaction by politicians to their own historical bungling of the economy. If Mitt Romney and his ilk really wanted to help the working poor in America they would endorse a sound money policy instead. In particular, a gold backed currency that would alleviate the ability of politicians and central bankers to devalue the dollar and cause price inflation by printing money and running deficits. In short, a return to the Gold Standard would stabilize and eliminate the need for a minimum wage.

Romney Does Dislike the Working Poor

Many on the Republican right do not trust Mitt Romney.  That’s a foregone conclusion.  Recently he made a policy statement which will only increase that mistrust.  Last week Romney announced that his position on the federal minimum wage has not changed.  When he ran for governor of Massachusetts in 2002 he affirmed his support for the state’s minimum wage and proposed linking automatic increases in it to inflation; as a Republican candidate for president in 2008 he affirmed his support for the federal minimum wage and you guessed it, took the position that it ought to automatically increase based on inflation.  With his latest pronouncement, it appears flip-flopping Mitt is immoveable when it comes to his stand on government wage rate fixing.  This policy of his is consistent with his distaste for the poor since it will hurt them the most.

You see, government price fixing of any variety simply doesn’t work.  Most of the time it hurts those it was intended to help the most – the working poor.  In the 1970s, Richard Nixon placed ceiling prices on beef.  The price of beef continued to rise anyway and many small plans went out of business because they found themselves selling on smaller and smaller margins.  Many of the working poor lost their jobs.

Rent controls are another form of government price fixing that always ends in disaster.  Because there is no incentive to provide decent housing at below market rates, laws mandating artificially low rent levels produce squalid units and shortages in housing for those that need it the most – again the working poor.

So it is with minimum wage laws.  Their intention is good, but they always hurt those they are meant to help – the working poor.  By fixing the minimum price for labor above market value, employers are less willing to hire workers.  Looking at a simple supply and demand graph, where the vertical axis represents price, it is easy to see that when the minimum wage is north of equilibrium the quantity of workers supplied is greater than the quantity of workers demanded.  This equals more unemployment and particularly more unemployment at the lower end of the socio-economic ladder.

Now imagine as Romney proposes, the minimum wage increasing with the rate of inflation.  It would increase every year and given how much new money has been created out of thin air by Ben Bernanke at the Fed, an increase in the minimum wage based on price inflation could be significant very soon.  As the minimum price of labor continues to rise above the market price hiring would become even more scarce at the lower socio-economic level.
At the end of the day, you have to question the commitment to the free market of any candidate that endorses the minimum wage let alone indexing it to the rate of price inflation.  Price fixing of goods and services by government is what ultimately destroys socialist states.  Besides that, it mostly hurts the working poor.  Given Romney’s recent remarks about that group, it is consistent that he would support the minimum wage.

 

The Minimum Wage is Subterfuge, Repeal It!

The Greenspan/Bernanke recession has made things bad all over.  Last Tuesday, I drove to my local Convenience Center for Collecting Residential Trash and Recycling only to find it closed.  In an effort to further cut costs during these economic hard times, my county has cut back on the number of days these centers are open from five to four.  I am sure that many Americans have similar stories whether it has to do with government services, the number of tellers in your local bank, or the number of folks flipping burgers at your local fast food shop.  Spending is down and revenue is scarce so government and business are cutting back on expenses.

The cause of this current circumstance is well known.  For too long Americans and their government spent money like crazy – money neither group had.  To their credit, many Americans seem to have learned their lesson.  The national savings rate is at an all time high somewhere around seven percent.  These Americans have sobered up and are paying down loans and building nest eggs for the future.  In spite of Washington’s irresponsible spending to coax the American people to spend our way to recovery, they haven’t and as a consequence prices for everyday items have generally fallen.  This is what happens when a Federal Reserve induced bubble pops.  The prices of overvalued items and assets fall.  Logically, what should happen as well is that wages should fall by a comparable amount.  As companies were “doing well” during the boom, wages rose as a consequence.  Thus, as prices decline so should wages as a consequence.

But, thanks to our ever benevolent leaders in Washington, wages are about to go up this week.  On Friday, the federal minimum wage will increase from $6.55 per hour to $7.25 per hour.  Of course, this increase is meant to help the economically underprivileged among us cope with the ever increasing price of things.  But, three questions immediately arise: 1. Hasn’t the rate of inflation as reported by the Bureau of Labor Statistics actually gone down in the last year?  Seems like an odd time for a raise in the base wage? 2. Given the current unemployment rate, should Uncle Sam be raising the cost by more than ten percent on business to hire and retain employees?  3.  Why do we need a minimum wage in the first place?

As to the first question, prices have generally fallen in the last year according to government statistics, but official Washington doesn’t care because it believes that if people have more money they will spend it and lift us out of recession.  What they don’t take into account is that the minimum wage hurts employment and thus income.  In our current market high wages have caused a surplus of workers.  Consequently, many are getting laid off.  An increase in the minimum wage at this time will only aggravate unemployment because the base wage is artificially high and not determined by the market.   

Think about this, isn’t it better to have 20 people working at $3.63 per hour than 10 people at $7.25?  Those 10 unemployed folks would be on the public dole in some form – unemployment benefits, food stamps, direct payments, Medicaid – these government expenditures forces the Fed to print more money which causes price inflation thereby hurting not only those on minimum wage but those receiving the welfare.  This puts political pressure on Congress to raise the minimum wage again.  A vicious circle ensues and that is the problem with government central planning of the economy – it needs to enact new programs to offset the unintended damages of its old programs.

Agreed, there is no way of knowing exactly how many more people would have jobs without the minimum wage.  But, one thing is clear there would be more.  Simple mathematics validates this point.  Another thing is that hard workers would be rewarded and sloths would be punished without a government mandated base wage.  As a former business owner I was frustrated that I couldn’t pay my most valuable employees more because scarce resources were needed to pay others a minimum wage.

As to the second question, it seems particularly stupid to raise the minimum wage at a time when businesses are struggling, unemployment is up, and we need wages to adjust down with prices so as to bring recovery.  Small business must eventually lead the way when the circumstances are right for economic recovery.  Raising costs on small business is going to delay those circumstances further.

Lastly, and most importantly, generations of politicians have socialized us to believe that the minimum wage is just, compassionate, and necessary to help millions of Americans provide at least a minimal existence for themselves and their families.  According to minimum wage apologists, millions of Americans would be naked, on the streets, and on the brink of starvation without the benevolent mandate from the government.  What they fail to understand is that government policy causes the price increases that make in their words the minimum wage necessary to live a minimal existence.  Murray Rothbard has pointed out that from the mid-eighteenth century until 1940 prices actually fell on average from year to year with the exception being during war years.  A couple of conditions were at play then that don’t exist today.  The regulatory state had not been born yet thus industries produced an ever increasing supply of goods to keep price inflation at bay and the gold standard restrained the government’s propensity to devalue the dollar through deficit spending.

Since 1940, the Federal Reserve which is responsible for maintaining price stability and the value of the dollar has actually been responsible for the dollar losing more than 93 percent of its value.  The bottom line is that minimum wage laws are a reaction to the government’s historical bungling of our economy.  If policymakers really wanted to help the poor in America they would eliminate most regulations on business and institute a sound money system.  In particular, a commodity backed currency would alleviate the ability of politicians and central bankers to devalue the dollar and cause price inflation by printing money and running deficits.  In short, we would return to the days when prices remained at the very least truly stable.

On Friday, when the minimum wage increases by more than 10 percent it will be applauded by politicians and pundits alike.  But, keep in mind, if the policymakers were really doing their jobs, there would be no need for the minimum wage in the first place.  Time will only tell how high the Congress and president will raise the minimum wage in the future to offset all the inflating that has taken place over the last two years.  It will be a lot and it will hurt as many people as it purports to help.