San Juan Mountains

San Juan Mountains
San Juan Mountains: Grenadier Range

Monday, June 1, 2015

Robert Reich On The Minimum Wage...Lunacy In Action

I was reading various articles at last week when I came across a gem.  In one short article I discovered examples of both logical contradiction and extreme economic ignorance characteristic of the career politicians who rule over us.  The article was about an old bureaucrat who decided to come out in favor of a $15/hour minimum wage.  Here are a couple of excerpts from the story:
"Former U.S. Labor Secretary Robert Reich is adding his voice to the chorus calling for a pay raise for Americans at the low end of the labor market's totem pole.  In an interview with 'On the Money', the cabinet member under President Bill Clinton weighed in on the fierce debate over the minimum wage. Billionaires like Warren Buffett have held forth on the subject, while big companies like McDonald's, Wal-Mart and Target are under pressure to increase what they pay their lowest-level employees. Earlier this year, both retail giants agreed to pay part- and full-time employees at least $9 per hour.  Reich, who served in the Clinton administration from 1993 to 1997 and is now a professor of public policy at the University of California at Berkeley, supports a wage increase for workers in Los Angeles.  'I think it is a good thing, in the sense that the minimum wage nationally is 25 percent below what it was in 1968, adjusted for inflation,' he told CNBC.  Still, not everyone agrees. The nonpartisan Congressional Budget Office said in a report last year that an increase in the federal minimum wage to just $10.10 an hour could raise the incomes of 16.5 million workers. On the downside, the agency warned such a move could also result in the net loss of 500,000 jobs. For Los Angeles and other cities, Reich dismissed predictions that higher wages will result in fewer jobs, citing the multiplier effect. 'Minimum wage workers, because they spend almost everything they're getting in terms of wages, that spending is local spending that stimulates creation of new jobs in the area,' Reich said."
Did you get all of that?  If not, allow me to help you to understand Reich's lunacy.  Reich begins by asserting his belief that a government law raising the market wage for unskilled labor from whatever the market will bear to a mandated $15/hour is "a good thing."  Why does he believe it to be a good thing?  "Because the minimum wage nationally is 25 percent below what it was in 1968, adjusted for inflation."  Does anybody see a logical connection between Reich's belief that a government mandated wage for unskilled labor being a good thing and the fact that the present minimum wage is lower than it was in 1968?  I sure don't.  What does the one have to do with the other?  If the minimum wage was a bad idea in 1968 it is still a bad idea today.  If the minimum wage was a good idea in 1968 then it is still a good idea today, despite the fact it is somewhat lower today than it was back then after adjusting for inflation.  If the goal is simply to force employers to pay more money per hour for unskilled labor than what the free market would dictate, then the minimum wage is always good regardless of how much more than the free market price it forces employers to pay for labor services.
Economists who do not draw a paycheck from the government understand that forcing employers to pay more than the free market price for unskilled labor services will result in employers paying for less of those services.  The inexorable rule of economics always applies....when the government artificially raises the price of something you will get a surplus of that item and when the government artificially lowers the price of something you will experience a shortage of that item.  Therefore, when government artificially increases the price of labor the economy will experience an increase in the number of people who want to sell their labor services.  But since the higher wages are not the result of market forces, employers will actually end up employing fewer laborers at the higher wage rate.  Unemployment, or a slower rate of increasing employment, will always be the result.  By the government's own report, drawn up by the CBO, the proposed increase will destroy one half million jobs.  How does Reich respond to this economic fact?
Reich reaches into his Keynesian bag of toys and pulls out the old "multiplier effect" theory.  According to Keynes and Reich, when the minimum wage increases as a result of a new government rule,  the aggregate spending in some random geo-political zone also increases proportionately since we all know that the folks receiving the new, higher wage immediately rush out and spend it on stuff.  Then, according to the hair-brained theory, this increased consumer spending magically creates enough jobs to replace those that were destroyed by raising the minimum wage in the first place.  As even a child can understand, if this theory is true it is possible to spend our way to never ending prosperity.  If an increase in the minimum wage to $15/hour will increase consumer spending and create new jobs, why not increase the minimum wage to $1500/hour and make us all rich beyond our wildest dreams?  Socialists, Keynesians, government worshipers and Reich never answer that question.  I wonder why?
Reich's blind spot has to do with the structure of production.  He envisions the entire economy as one lump, with consumer goods magically appearing with no underlying basis for their existence.  Then, people who are suddenly wealthy, because the government has increased how much they make each week, go to Wal-Mart and buy all sorts of shiny new things.  Because somebody has to make more of those shiny new things employment will go up.  The real world is not that way.  For Apple to produce a computer it is necessary for some miner to go into a pit and dig out some iron ore.  That iron ore then needs to be processed into steel.  That steel then needs to be molded into the casing for computer components.  Likewise, some entrepreneur somewhere has to take some grains of sand and convert them into silicon, which is then converted into computer chips.  Apple can never produce a computer without those two industrial processes first taking place.  Now, Mr. Reich, how is increasing the minimum wage for the person digging rocks out of the ground from $9/hour to $15/hour going to result in more jobs?  All his employer knows is that this fellow now costs him 67% more to employ than he did yesterday.  If the mining company is operating on a thin margin it will be forced, all other things being equal, to lay off 2/3res of its mining employees.  That is not going to bring about Reich's desired result of higher employment and those shiny new computers the new higher minimum wage earners want to buy will never be produced because the intermediate steps of production will not allow it.  Reich completely ignores the fact that finished goods do not just magically appear.  Each step of the production process is effected by his new rule and any step that is hindered by the higher wage rate is going to suffer, resulting in layoffs and higher unemployment. 

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