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President Obama buttered up the American taxeaters with his syrupy State of the Union address on Fat Tuesday night by tabling a massive stack of new spending proposals that are selling like hotcakes with folks who will never have to pick up the tab. If enacted, these proposals will pancake employers, batter investors, and will flip employees from the frying pan into the fire.

Additionally the president audaciously asserted that all his profligacy would add not a single dollar to the deficit (repeating a broken promise he made more than five trillion ago). So naturally the chorus of progressives who have been on the Obama bandwagon long before it started carrying a tune were out trumpeting the president’s big easy plans to put more people on the gravy train. They are proposing an expensive party to let the good times roll while our economy remains in the gutter, our debt rises past the high water mark, and the levee is about to break. We may already be swamped, so plugging holes wherever we can kind of feels like perhaps we’re just rearranging the decks chairs on a sinking ship, if you’ll excuse the cliché.

In Walden, Thoreau MardiGraswrote, “There are a thousand hacking at the branches of evil to one who is striking at the root, and it may be that he who bestows the largest amount of time and money on the needy is doing the most by his mode of life to produce that misery which he strives in vain to relieve.” When we watch progressives push for policies that will hurt the people they purport to help and exacerbate our current problems, it seems appropriate to spend time calmly rooting out the fallacies in their economic sophisms. But economics is a ‘dismal science’ and taking time explaining basic economic principles at this late hour may be more delusional than progressives who believe we can eliminate poverty by giving poor people money. It seems especially silly to invest time elucidating simple economic concepts bound up in terms like price, wages (which, we should never forget, are a kind of price), capital, supply and demand, etcetera, when egalitarian sentimentality is in the saddle and riding the world down the road that’s paved with good intentions.

Like tossing chum into the water, I suspect the White House threw out the proposal for a minimum wage increase knowing it would start a theoretical feeding frenzy in which countless big and little fishes from the various schools of economics will take the bait. In the weeks ahead, much time and talent will be wasted explaining the logic and realities of economics to people have no need for such things as logic or realism in the affairs of mankind. I myself cannot help but get hooked, so I will thread together some juicy bites about wages and welfare from the big kahunas in the sea of writers on the right. However, permit me to attempt to approach the subject from a different perspective, antipodes away from the head-on approach we often take.

KeynesianCartoonThe portly prince of paradox G.K. Chesterton suggested that we often only see ‘the fronts of things’ and that the real trick was to get behind them to see how things really work, as one would climb up the steps up into a clock tower to see the face of the clock from behind and all its working parts; its sprockets and springs, wheels and balances. But anything too complex is likely to cause more bewilderment and confusion than provide understanding and insight into its functioning. So we must be careful not to get too complicated as we unpack the concepts that appear terribly simple from the other side. It is a terribly complex task to simply explain basic economic terms and concepts like productivity, profit, inflation, but as economist Friedrich von Hayek suggested, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

GearsHumility rather hubris is the key prerequisite for comprehending economics’ curious task of teaching men that unlike an erecter set that one can construct, economies grow organically like gardens. And you cannot fool mother nature or tell her what to do. The natural laws of economics are not as easily discerned as, say, the law of gravity, but before Newton got hit in the head with an apple even gravity was tough to explain. “If man is not to do more harm than good in his efforts to improve the social order,” Hayek warns us, “he will have to learn . . . not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants.” The task is to create favorable conditions for growth rather than trying to add leaves to a tree with hammer and nail. When people approach economics believing that a nation’s economy can be masterminded the way an architect imagines and designs a superstructure, we are apt to  build only a costly Tower of Babel that must collapse.

Leonard Read’s famous little essay ‘I, Pencil‘ tells the enchanting story of a how a pencil comes to market:

I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles which manifest themselves in Nature an even more extraordinary miracle has been added: the configuration of creative human energies—millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human master-minding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.

Those who believe a market can be masterminded are prone to make the mistake of the overanxious brownthumb who believes that plants can never have too much fertilizer and end up killing the very fragile sprouts they were hoping to help. To carry the analogy as step farther, believing an economy can be directed by a mastermind is like believing a gardener can get rid of the weeds by shouting at them. Ironically it is we who see economics as organic gardeners who are attacked for not caring about growth of our most vulnerable and tender perennials. Those of us who are confident that humility toward the economy and culture is the right approach toward helping a civilization reach its fullest flourishing are dismissed as reactionaries who are clinging to ‘failed policies of the past’.

BabelWhen progressivism is your faith, you’re more likely to believe that the right architect hasn’t been anointed yet, the right ones to lead us to the promised land just haven’t come along yet, or they haven’t been given enough power yet, or haven’t been funded properly. It is exceedingly difficult to demonstrate the disastrous effects of fallacious policies to people who believe that an economy or a society can be directed by the decrees of all-knowing experts and know-nothing politicians with good intentions. Almost every page of history contains another version of this lesson.

Richard M. Weaver in his book Ideas Have Consequences suggest that in developed civilizations there is a tendency to forget how we got here and to thereby undermine the foundational truths on which the civilization is built. The typical man “conceives the world to be a fairly simple machine, which, with a bit of intelligent tinkering, can be made to go. And going, it turns out comforts and whatever other satisfactions his demagogic leaders have told him he is entitled to.” But when the machine breaks down, they seldom question whether those demagogic leaders are to blame for trying to defy the laws of economic gravity.  Burke  remarked that “An ignorant man, who is not fool enough to meddle with his clock, is however sufficiently confident to think he can safely take to pieces, and put together at his pleasure, a moral machine of another guise, importance, and complexity, composed of far other wheels, and springs, and balances, and counteracting and co-operating powers….Their delusive good intention is no excuse for their presumption.” He declared it “vain presumption” to think that government could provide for all our necessities.

But it is so easy to posture as a sentimental humanitarian that is always professing their loyalty and love for people in poverty. Some people are striking that pose earnestly—they do indeed really care deeply—but others just want the self-righteous feeling that comes from being a poser. In his book Modern Culture, Roger Scruton best explodes this phony showy gesture:

Sentimental feeling is easy to confuse with the real thing, for, on the surface at least, they have the same object. The sentimental love of Judy and the real love of Judy are both directed towards Judy, and they involve tender thoughts of which she is the subject. But this superficial similarity makes a deep difference. The real focus of my sentimental love is not Judy but me. For the sentimentalist it is not the object but the subject of emotion that is important. Real love focuses on the other: it is gladdened by his pleasure and grieved by his pain. The unreal love of the sentimentalist focus on the self, and treats the pleasures and pains of its objects only as an excuse for playing the role that most appeals to it.  It may seem to grieve at the other’s sorrow, but it does not really grieve. For secretly sentimentalists welcome the sorrow that prompts their tears. It is another excuse for the noble gesture, another occasion to contemplate the image of a great-hearted self. . . Hence the object of sentimental love is given no security, and will find himself quickly replaced in his lover’s affection when the script requires it. The sentimental lover of Judy pretends to acknowledge her value, but in fact he has assigned her a price.

One of the easiest ways to make libertarians, conservatives and moderates look like heartless capitalist pigs is to pen them into a position of having to oppose proposals that appear to help the poorest among us. In politics nothing is easier than posturing like you’re sincerely trying to help the poor by showering them with money. Almost nothing can be harder than having to be the one to explain how compassion can backfire. “We can no more grant that good intentions are enough in dealing with men than we can grant that they suffice a chemist who is handling high explosives,” wrote Irving Babbitt in 1924, the year Hitler was sentenced to five years in prison for participating in the Beer Hall Putsch (he served only eight months).

Perhaps the best starting point is to make clear that we all want progress. “But progress,” C.S. Lewis foresaw, “means getting nearer to the place where you want to be. And if you have taken a wrong turning, then to go forward does not get you any nearer. If you are on the wrong road, progress means doing an about-turn and walking back to the right road; and in that case the man who turns back soonest is the most progressive man.” Before we go further down a road that may be leading us off a cliff, let’s seriously consider each of the steps President Obama proposes we take. For example, let us ask these simple, straight forward questions: When unemployment is already high and on the rise, is it wise to make it even harder for job creators to afford and keep current employees?  The new high costs of Obamacare businesses owners are being asked to shoulder are already causing countless companies to cut the hours of their employees or shed those employees altogether. Should we continue down the road that drives up the cost of doing business?

TrapEconomicsIf raising the minimum wage could do what its supporters suggest it can do, I’d support it wholeheartedly. A conservative wants every man to flourish to his fullest potentiality. Let every flower bloom.  Even if on-balance its effects were more good than bad, I’d happily support it. Rather than helping the lowest wage workers get ahead, spiking the minimum wage to $9 will derail their success and cost many of them their jobs. That may seem counterintuitive, but it’s not upside-down. If all it took to make everyone worth $9 an hour was as easy as making a law saying so, why not raise it to nineteen, or nine hundred?

A wage is a price; the price of a worker’s labor. If a worker does not produce enough value to justify the wage, that worker won’t have the job long. A job that produces, say, $12 worth of sellable pancakes may enable an employer to pay an employee $10 to do it. But when the government passes a law saying that no man may be paid less than $15, everyone producing less than $15 worth of goods will lose their job. All those who might be worth $10 are effectively prevented from working and the economy loses whatever wealth they might have produced, not to mention; no more pancakes.  —Unless, of course, the employer raises the price of his pancakes to reflect the increase in the price of labor. But raising the price of pancakes will cause fewer people to dine out for pancakes and the marginal restaurants will simply go out of business, costing not only all the restaurant’s pancake flippers their jobs, but the managers, waitresses, busboys will be out of work also.

SupertrampBack in ’79 when $3 was worth more than $9 is today, Milton and Rose Friedman wrote, “It has always been a mystery to us why a young person is better off unemployed from a job that would pay $2.90 an hour than employed at a job that does pay $2 an hour.” Their book Free to Choose is one of many books which explain most succinctly why minimum wage laws hurt the very people they intend to help. “The key to understanding the situation is the most elementary principle of economics: the law of demand–the higher the price of anything, the less of it people will be willing to buy. Make labor of any kind more expensive and the number of jobs of that kind will be fewer. Make carpenters more expensive, and fewer houses than otherwise will be built, and those houses that are built will tend to use materials and methods requiring less carpentry.”

The price of labor is always a reflection of production. If the price of the labor to  produce pancakes goes up, so must the price of the pancakes. If consumers are willing to pay the increased price for the pancakes, it may seem like nobody would be hurt except the people who paid more for pancakes. It is easy to see the increase cost to pancake eaters.  But what is unseen and easily overlooked is that because of price increased price of pancakes, the pancake eaters will have less to spend on other things. And so the butcher the brewer and the baker’s business suffers.

And here’s the rub, if pancake restaurants could charge more for pancakes, they already would be! This one of the magical benefits of the price system. We already have at this moment, exactly what we want in the exact quantities we want, delivered to us exactly when we want it for the lowest price possible. Please, don’t misunderstand this all-important point. I am not suggesting that we have an abundance of everything and it is all free. If we, as a people, with the amount of wealth we currently have, wanted something different than what we are currently offered, the market would give it to us. It is the magic of the price system combined with free enterprise that most efficiently connects capital and labor to provide for human wants. If people are willing to pay more for a good or service, some profit-seeking capitalist will try to find a way to provide it to the market for an even lower price. This way we have more of the things we want and need and we also have lots of people working to produce them for lower prices.

Let’s look at it this way, if we prized home delivery of all the crap we buy at Walmart more than the money we saved by putting on our pajamas and actually driving down there to get it, the chain store would turn their greeters, stock boys, and check-out girls into delivery people. The market today reflects precisely what we want at precisely the price we’re willing to spend. The demand for the stuff is greater than the demand for the delivery of it. So you can go get it cheaply, but nobody’s making any money in the grocery list delivery business.

Many people will payPatient higher prices for pancakes but many will not, therefore there will be fewer pancake restaurants and higher prices. Poor people are the least able to afford rising prices. Therefore raising the minimum wage not only puts more poor people out of work, it raises the prices of goods they are already having difficulty affording! Yet the supporters of the proposal call us heartless for opposing it.

This distilled essay is not the place to discuss inflation, consumer price index, credit bubbles bursting, or the attempt to reach full employment with currency manipulation, but the case can be made that it is the height of hypocrisy and the greatest of illusions to claim the high ground for supporting the minimum wage hike when you’re also pulling the rug out from under the value of the currency. If the government really wanted us to earn more in real dollars, why not simply stop the printing presses over at the Federal Reserve and let our dollars swell in value?  Instead the printing presses are on full and  we are QEing to infinity and beyond! If your dollars are worth more, your wages don’t have to be as high to get by. Plus, even graduates of America’s public school system are smart enough to recognize that not all places in America have the same costs of living, so it is preposterous to suggest a one-size-fits-all minimum wage when in some places a dollar stretches much farther than in others.

Behind all of this nonsense, naturally, are people whose politics are to subsidize their voters at the expense of others. And since nobody likes tax hikes, it’s easier to squeeze more money out of them by ‘bracket creep’ which happens when people are making more money but their money is worth less. The higher tax rates ‘creep’ down onto them simply because the dollar is slipping, not because they are really earning more.

BernankeThe way to raise wages is by raising production. The more ‘value’ a worker can produce each hour, the more profits there will be for the worker to share in.  If the pancake producer could increase his output from $12 worth of pancakes an hour to $20 worth of pancakes, his employer may be able to pay him $18. But to repeat, if the minimum wage is raised to $15 and he’s not producing more than $15 worth of pancakes, he just loses his job.

Another key consequence that comes from raising the nation’s minimum wage is that it ships jobs out of the country. When the minimum wage is increased here it becomes more lucrative for businesses to find cheaper employees somewhere else. Now, it’s true that you cannot ship the local pancake flipper to Mexico, so he’ll still just remain unemployed or export himself to wherever the jobs are, but those who are earning minimum wage working in the local pancake batter factory might want to worry about where his next meal might come from. Low skill jobs that can be are exported quickly.  When it became possible to employ unskilled labor in Mexico for $5 to do the work that an autoworker in Detroit was being paid $25 to do, the exodus was on. The only way to keep those autoworkers in Detroit is by making them so much more productive (through innovation, automation and more efficient management, etcetera) that they become worth more than $25.  In other words, they have to be worth what five Mexican workers are worth.  I’ve seen how hard most poor Mexicans work, this will not be an easy feat for the worker in Detroit.

OReillyHowever, let’s return to a couple points mentioned earlier, most people earning minimum wage are not working in factories that could easily be moved to a country with cheaper labor costs, they are in the jobs like fast food and lawn service. We’re not going to drive to Mexico when we make a run for the border for some quick tacos, so the demand for cheap fast food may remain high even after the wage hike. But it still means we have less money to spend on other things and this means other sectors will suffer from a lowered demand. Therefore the person who works in a marginal company which has nothing to do with fast food loses his job when the last straw breaks his company’s back because more of the economy’s money was spent on higher prices at Taco Bell.  Remember, we can only create wealth through production. We will continue to create wealth in the future, but the amount of wealth we currently have can only buy so much in the present. Progressives can often be heard complaining that a growing percentage of jobs are now low-paying, but they don’t stop to ask why the higher-paying jobs seem to be drying up and blowing away.

Now, let’s consider for a moment; who are the people earning the minimum wage? Our youngest people and poor immigrants–unskilled workers. The Heritage Foundation crunched the Bureau of Labor Statistic’s numbers and discovered that only about 5% of all hourly workers (not counting salaried and self employed workers) were earning only the prevailing minimum wage which is well below the 13% that were earning it back in 1979. They reported that in 2011, “most minimum-wage workers are 25 or younger, and 69 percent work part time.”

Most people eventually acquire some valuable skills in their adult lives and very few people stay in jobs that pay only the minimum wage.  If they’re not working because they cannot increase their productivity to the level of the minimum wage, what will they do?  Some will find jobs under the table in the black market. If they are immigrants, they may migrate somewhere else (which explains one of the key reasons why immigration to the United States has been near net zero since Obama took office; there are few available jobs to be had at any price!), or if they are our kids, they’ll probably move back in with us while they’re learning how to be worth more than the minimum wage.

Now let’s quickly examine the relation of minimum wage hikes to the cost of welfare, unemployment relief and other programs for the poor. If you’re an American citizen and you don’t have a job there are a myriad of programs to provide for your basic needs. Let’s assume that the minimum wage is $15 dollars or $600 for a forty hour work week and you had one of those jobs. Let’s also assume that if you lost your job, the amount of government relief you could receive would add up to $550. If this were the case, wouldn’t you spend each of those forty hours at work wondering why you’re busting your hump in one of the worst jobs only to earn $50 more than you could by not having to work at all? The enticing disincentive to work is a necessary part of the duality of wages and welfare in a society that has government in the poverty relief business. It zaps the dignity and initiative right out of the recipient of the hand out.  It encourages a hopeless dependency mentality. Long before America’s Great Society spoiled much of the culture in our inner cities and in the hollers of Appalachia, generations of angry British youth have been growing into immaturity and poverty in their parents’ flats with no jobs and no incentives to much more than a little of the old in and out of criminal mischief or even “a bit of the old ultraviolence.”  But that’s a lesson for another day, oh my brothers.

plokoAnother facet of this mountainous subject that I’d like to mention is the effect that raising the minimum wage has on other the attitudes and wages of other workers. What does this effect have to do with the price of rice in China? In his textbook on economics, Russell Kirk explained the dilemma:

“In communist China, a severe problem for years after the Chinese communist revolution was the difficulty of finding competent people to manage factories. For the manager of a Chinese factory has greater responsibility and strain than anybody else in the factory, but until recent years he was paid no better than any other worker. So no competent person sought the manager’s post. As Edmund Burke said in the eighteenth century, “Ordinary integrity requires the ordinary rewards of integrity.” 

Communist countries are becoming more capitalistic because they can see they stand to grow their prosperity, but Western capitalist countries are becoming more collectivist and are centralizing their economies because they cannot stand up to the growing underclass of people who rather vote themselves their income rather than work for it

When wages are artificially hiked by a minimum wage, there is less money to pay other workers what they are really worth. When the reward for being worth more is not reflected in higher wages, the incentive to acquire the skills that make ourselves more worthy is reduced, and we all end up like Wayne and Garth, not worthy, unemployed, unskilled and living in our parents’ basement. But if your president promises to pay you almost as much as you would earn by working, you might just say, “Party on!  Excellent!”

WaynesWorldBut before I clock out here today, let me discuss the practical politics of the issue.  We should persuasively explain the prior points with simplicity and charm when we have a reachable audience, but we should not delude ourselves into thinking that we are winning any popularity points by opposing raising the minimum wage for what is only a tiny fraction of workers. The GOP is already painted into a corner which makes them appear that like they do not care about poor people by the people who actually want there to be more poor people to help. The poorer the economy is, the more poor people there will be and that means more democrat voters to support.  If we are to wisely pick our battles, we should choose the battles that unleash growth and help us win the hearts and minds of those who don’t want to be poor or dependent of government but who earnestly want the best economic soil with the right economic conditions in which they can put down roots and actually accumulate real wealth. Wasting precious political capital by fighting over the minimum wage is a fool’s errand and a distraction. Instead  discuss incentives for economic growth and restoring a culture that rewards effort.

The books mentioned in this essay are available from The Imaginative Conservative Bookstore.

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4 replies to this post
  1. The theoretical economic arguments against minimum wage increases–indeed, against the minimum wage altogether–are compelling, but often appear to be masks for libertarian ideology. Given that, I’d like to have seen some empirical data in this post to support the theory. We’ve had a minimum wage in this country for decades, with occasional increases and adjustments; surely there have been studies documenting (a) the predicted loss of jobs for the least-skilled workers and (b) the predicted price increases resulting from higher labor costs being passed along to customers. I’d have also liked an acknowledgement that worker productivity has increased over the past three decades, as have corporate profits and the incomes of the top 2% of earners; but the wage of the average worker has not kept pace. Is it possible that sometimes productivity increases, in the absence of (say) pressure from organized labor, are almost wholly captured as profits, dividends, and CEO pay, and not shared with the workers? And if so, what if anything can or should be done about that?

  2. Jack,

    CEPR just released a meta-study (a summary of the various studies done since 2000) on the effects of raises in minimum wage on employment numbers. Turns out, if these studies are to be believed, the effect is negligible.

    From the executive summary:
    “The employment effect of the minimum wage is one of the most studied topics in all of economics. This report examines the most recent wave of this research – roughly since 2000 – to determine the best current estimates of the impact of increases in the minimum wage on the employment prospects of low-wage workers. The weight of that evidence points to little or no employment response to modest increases in the minimum wage.
    The report reviews evidence on eleven possible adjustments to minimum-wage increases that may help to explain why the measured employment effects are so consistently small. The strongest evidence suggests that the most important channels of adjustment are: reductions in labor turnover; improvements in organizational efficiency; reductions in wages of higher earners (“wage compression”); and small price increases.
    Given the relatively small cost to employers of modest increases in the minimum wage, these adjustment mechanisms appear to be more than sufficient to avoid employment losses, even for employers with a large share of low-wage workers.”
    Link: http://www.cepr.net/index.php/publications/reports/why-does-the-minimum-wage-have-no-discernible-effect-on-employment

    In response to this summary of thirteen years’ worth of studies, Bob Wenzel at the Economic Policy Journal writes: “The simple fact is that if you force people to pay more for something, they will buy less of it. There are no empirical studies that can refute this. It is pure logic. And no empirical studies are needed to prove the argument. They can’t. Anyone using empirical data to try and prove or disprove logic is a quack.”

    So there’s that.

  3. Justin: thanks for the helpful information. As for the quote from Bob Wenzel–it’s frightening indeed when empirical data and logic collide. My money is on empirical data, but Mr. Wenzel clearly has a different view–how dare reality not align itself with his ironclad logic! It would be unkind, I suppose, to point out to him how easily his last statement can be turned around to read “Anyone using logic to try and prove or disprove empirical data is a quack.”

  4. Tie it to the price of gold. Then it will simply be stable.

    And if a company can’t afford to pay the workers it needs, then it doesn’t have an adequate business plan. It isn’t ‘too big to fail’

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