One of the other things that happened in 1776 was the publication of a book, An Inquiry into the Nature and Causes of the Wealth of Nations, by the Scottish moral philosopher Adam Smith who became the father of modern economics. Since then we’ve had a proliferation of people known as economists. Originally they sought to better understand the Smith’s “invisible hand” as it relates to such things as free markets, supply and demand and market pricing. There are still economists working to enlarge on what he brought forth, but there are others who call themselves economists but actually believe that governments rather than the market should set prices. Logically the name economists can’t cover opposites. The market people got there first so they should have the name. Maybe those that believe the opposite should be called faux economists. Is there an easy way to tell the difference between real and faux economists? We submit the argument over raising the minimum wage is a great place to separate real from faux.
Smith would say that prices are best set by the market. Wages (or salary) properly understood are the price of labor. Some seem to argue wages are for humans and prices are for other things. Since draft animals replaced human labor, interchangeable things have to be logically treated the same. John Henry sadly found this to be true with machines. Markets should set the price of labor.
However, leading lights across the political spectrum from Mitt Romney to Paul Krugman taking their cue from the faux school, argue that we should substitute their or similar thinkers judgement for the market to set a base price of labor. Romney states that he’s for raising the minimum wage “Because frankly, our party is all about more jobs and better pay.” We have no idea of what his economic basis for this is. Even the CBO says it would raise some people’s wages while costing others their jobs. Pandering may be politics but it isn’t economics.
You would think the Nobel prize winner Krugman would do better. “Minimum wage workers are almost all in the United States employed in non-tradable industries — the production can’t move to China,” Krugman adds “They’re employed in areas where — yeah, you can mechanize some but not very much actually.” This powerful economic analysis from a man whose understanding of markets was on display in his analysis of gasoline prices he expressed on March 15, 2012 “The irony here is that these claims come just as events are confirming what everyone who did the math already knew, namely, that U.S. energy policy has very little effect either on oil prices or on overall U.S. employment. For the truth is that we’re already having a hydrocarbon boom, with U.S. oil and gas production rising and U.S. fuel imports dropping. If there were any truth to drill-here-drill-now, this boom should have yielded substantially lower gasoline prices and lots of new jobs. Predictably, however, it has done neither.” But this was before our production hit critical mass. Krugman seems to have forgotten that prices in the market are set at the margin meaning that the last barrels of oil added, in this case our shale, sets the price. A real economist might’ve projected supply growth vs. potential demand and seen a point where the former would overwhelm the latter. Gasoline prices are down sharply with no bottom in sight. Texas, the top energy state, accounts for about half of all U.S. job creation in the recovery. North Dakota, the number two oil producer, begs for workers. What would the price of Gas be now if we hadn’t listened to Paul and drilled more offshore and onshore public areas? How much sooner would oil prices have fallen? How many more people would have jobs? You diss Smith at your peril.
So how might Krugman be wrong again about the minimum wage? Let’s just imagine a fast food restaurant that employs 15 people averaging $10 an hour. To replace 5 of those workers with a mechanized digital kitchen now might take 4 to 5 years to recoup the investment with labor savings. Not very compelling. But do as many are demanding and raise the minimum wage to $15 and the payout shrinks to 3 years. The new system would be good for at least ten years.
That means 7 years of near pure profit. Bye Bye 5 employees. And those jobs will never come back. Paul would probably look at the statistics after a year and say there was little employment change. Again he would not realize it takes time to reach critical mass. Such an inviting target would insure that those jobs would be lost at some point and the higher the cost of labor the sooner it would be reached. The faux school often looks at things in a very short time frame as Krugman did with gas prices, rather than realizing the certainty that a 50% change in labor costs would bring about a response in the not too distant future. Just maybe not tomorrow. Actually there is talk about totally robotic fast food restaurants as fun showplaces. The other 10 might get wage boost in the very short term, but looking for a job a little later on.
Further, we have never heard a logical argument from the faux economists why one minimum wage level is better than another in its effect on total employment. Why is $15 better than $10? If the price of labor has little or no effect on employment in the fast food industry, why not $25. The Soviet Union thought they could set the prices of everything and we all know how that turned out. The idea that we can’t export the jobs doesn’t hold up either. We couldn’t export our agricultural jobs either. They’re tied to our farm land. Yet in 1870 70-80% of our population was employed in agriculture. In 2008 it was 2%. Does anybody that has a low skill job really thinks they can’t be replaced by technology or out sourced? If they do they should have a roundtable discussion with among others a self service gas pump, an ATM and a fast food soda dispenser or take a plane to Asia to visit their former jobs.
The sad part of this focus on the minimum wage as something that could actually help American workers is that it distracts us from real solutions. The fact that a national minimum wage hike is offered as a primary part of the President’s economic plan shows a paucity of ideas and thought. We can do better than this bromide.
Worse we eliminate starter jobs for the young people that need them most. Minorities and other poor kids that didn’t get the education they deserved, would be denied that first rung on the ladder to a better life. We would actually be better served if employers would train these people for little or nothing if it would lead to real jobs. This is the opposite direction the the faux model would lead us. Do we really want to hurt the chances of these young people to do the bidding of labor unions?
One thing is certain, when Krugman or Romney look in the mirror they don’t see Adam Smith.