Tuesday, July 6, 2010

Signpost 11 -- Minimum Wage . . . Yee Hah!

I have been slammed with a variety of things over the past month and have neglected  my blog.  My apologies!  So now we are down to just two more Signposts to Slavery. Today's post will cover Signpost 11 -- 

11. Wage and price controls, especially in a non-wartime situation. 

Let me start by being completely up front with you -- I am no economics expert.  But I do have a basic understanding of the concepts of supply and demand.  Also, it is abundantly clear to me that many who profess to be true experts in this arena and hold positions of authority seem to know even less than I do!  So I will try my hand at touching on the in's and out's of wage and price controls.

First off, let me state that I don't think in our world, filled with imperfect, less-than-altruistic individuals, that there is any economic system without its faults.  In a capitalist society, someone always finds a way to make a whole lot more money than everyone else (and so long as they aren't doing anything illegal, what's wrong with that?!).  Someone is always in need either due to illness, incapacitation, lack of opportunity, lack of motivation, or some combination thereof.  Wages and prices are determined by supply and demand. Certain freedoms are valued, even if it means that some in the society will not fare as well as others. 

In a socialist society, the state assumes the responsibility of meeting many of the needs of the people.  No-one is homeless, for instance.  Nobody goes without basic health care.  In many instances, jobs are created by the government.  Wages and prices can be fixed by the state.  Certain freedoms are sacrificed in order for the government to provide services and in some cases sustenance to the people.

Of course, America today is some mixture between capitalist and socialist.  Most wages and prices are still determined by the market, but by no means are 100% of wages and prices left alone by the government.  We  have our minimum wage.  More recently, President Obama has placed caps on how much CEO's of corporations receiving bailout money are allowed to make.

Doesn't that sound good?  Power to the people, right?  Blast those filthy rich CEO's anyways!

But I have to wonder -- wouldn't it just have been easier (and far less costly to the American populace) to just forego the corporate bailouts altogether?  The market would have determined which CEO's were worth millions and which should receive pay cut, based on which businesses had products and services still in enough demand during a recession.

As for the minimum wage, it was instituted in 1938 at 25 cents per hour.  Those who argue for a minimum wage say that there are no negative effects of raising the minimum wage (these are probably the same people who see no negative effect from pumping trillions of freshly printed dollars into the economy to prop up failing corporations and banks.)

Those not in favor of a mandated minimum wage argue that it causes inflation, leads to fewer jobs for those with few skills, causes a greater rates of outsourcing of jobs oversees where wages are cheaper, and feeds the market for illegals to work for dirt-cheap wages under the table.

As I stated at the beginning of this article, I am no expert in the field of economics.  But I have enough brains to know that if companies have a limited number of jobs with a limited amount of money to pay to employees, any law mandating a minimum wage will affect how many people they can hire and could certainly cause them to look for ways to hire people oversees or illegally for less.

I can't say for sure if the minimum wage leads to inflation, but it certainly seems possible!

Why would our government be "for" a minimum wage, and vote to increase it from time to time?  Certainly some in government have good intentions -- they don't want the poorest of Americans to suffer so much.  But isn't it interesting that an increase in the minimum wage is a nice handy way to levy a tax increase by stealth as an increase in the minimum wage increases all wages, and therefore increases government tax revenues?!

As far as price controls go, except in a few exceptional cases primarily during wartime, they disrupt the normal levels of supply and demand naturally determined by the market, and lead to shortages, rationing, long lines, as well as inflation.

To quote an expert (emphasis added):

"The reason most economists are skeptical about price controls is that they distort the allocation of resources. To paraphrase a remark by Milton Friedman, economists may not know much, but they do know how to produce a shortage or surplus. Price ceilings, which prevent prices from exceeding a certain maximum, cause shortages. Price floors, which prohibit prices below a certain minimum, cause surpluses, at least for a time. Suppose that the supply and demand for wheat flour are balanced at the current price, and that the government then fixes a lower maximum price. The supply of flour will decrease, but the demand for it will increase. The result will be excess demand and empty shelves. Although some consumers will be lucky enough to purchase flour at the lower price, others will be forced to do without." (1)

Richard Nixon's failed price controls in 1971 led to run-away inflation, and further gas price controls later in the 70's led to gas shortages and even more inflation.

A type of price control taking place today is the subsidization of corn production in the U.S.  For some reason, our government feels it important to pay farmers to grow corn.  Corn is sold for less than it costs to produce, making it a cheap commodity that is being used to produce high-fructose corn syrup, feed for animals (fattening them up faster and causing all kinds of problems in the process), and is being exported all over the world taking out farmers in Mexico and other nations because they can't compete with America's super-cheap corn.

The U.S. government also heavily subsidizes the meat and dairy industry.  Perhaps that is why it is cheaper to buy a Big Mac and Coke (sweetened with high-fructose corn syrup, of course) than a salad.

So here we have it -- put the government in charge of wage and price controls, and what you get is bailed-out CEO's with a capped income higher than their income would be if the market had been left to deal with them, and more low-skill jobs going to hire Samrat's in India or Pablo's from Mexico but illegally living in Colorado, than Billy-Joe-Bob's in Arkansas because foreign or illegal labor is cheaper.  And it's cheaper to buy a bag of Dorito's and soda than food that is actually really food

11. Wage and price controls, especially in a non-wartime situation -- CHECK

(1) http://www.econlib.org/library/Enc/PriceControls.html


  1. Brilliant! Thanks so much for posting this series Julie!

    Here's a little more from Milton Friedman on minimum wage laws: http://www.youtube.com/watch?v=ca8Z__o52sk