How bad will climate change be? Not very.
No, this isn’t a denialist screed. Human greenhouse emissions will warm the planet, raise the seas and derange the weather, and the resulting heat, flood and drought will be cataclysmic.
Cataclysmic—but not apocalyptic. While the climate upheaval will be large, the consequences for human well-being will be small. Looked at in the broader context of economic development, climate change will barely slow our progress in the effort to raise living standards.
To see why, consider a 2016 Newsweek headline that announced “Climate change could cause half a million deaths in 2050 due to reduced food availability.” The story described a Lancet study, “Global and regional health effects of future food production under climate change,”  that made dire forecasts: by 2050 the effects of climate change on agriculture will shrink the amount of food people eat, especially fruits and vegetables, enough to cause 529,000 deaths each year from malnutrition and related diseases. The report added grim specifics to the familiar picture of a world made hot, hungry, and barren by the coming greenhouse apocalypse.
But buried beneath the gloomy headlines was a curious detail: the study also predicts that in 2050 the world will be better fed than ever before. The “reduced food availability” is only relative to a 2050 baseline when food will be more abundant than now thanks to advances in agricultural productivity that will dwarf the effects of climate change. Those advances on their own will raise per-capita food availability to 3,107 kilocalories per day; climate change could shave that to 3,008 kilocalories, but that’s still substantially higher than the benchmarked 2010 level of 2,817 kilocalories—and for a much larger global population. Per-capita fruit and vegetable consumption, the study estimated, will rise by 6.1 percent and meat consumption by 5.4 percent. The poorest countries will benefit most, with food availability rising 14 percent in Africa and Southeast Asia. Even after subtracting the 529,000 lives theoretically lost to climate change, the study estimates that improved diets will save a net 1,348,000 lives per year in 2050.
When I was in college, we had four exchange students from Mainland China. A couple of them were majoring in physics, and we’d have occasional conversations in the physics lounge. One day, one of the students asked me what my monthly ration of potatoes was. He just couldn’t believe they weren’t rationed.
If he’d asked me that question a few years later, my response would have been to state my monthly income, and divide it by the per-pound price of potatoes. And then part two of my answer would have been to introduce the opportunity cost of buying only potatoes.
Planning Is Counterproductive
The Chinese students in that 1999 economics class began their MBA studies much like the essay writer who explained, “I had trouble conceiving of an economic or social order that is not deliberately made for a specific purpose.” “Government planning,” it seemed to him, was needed “to bring order and coordination to otherwise chaotic economic conditions.”
Reading Hayek’s, “The Use of Knowledge in Society” convinced him otherwise. He wrote, “Central planning ignores its impossible knowledge requirements. It demanded that all the fragments of knowledge existing in different minds be brought together in one mind, a feat requiring that single mind process knowledge far in excess of what anyone could ever comprehend.”
The student realized, quoting Hayek from his book Law, Legislation and Liberty, Vol. 2, there is no need to agree on aims: “The Great Society arose through the discovery that men can live together in peace and mutually benefiting each other without agreeing on the particular aims which they severally pursue.”
…except for all the others that have been tried.
Among Arnold’s themes that I especially like is this one: “Markets fail. Use markets.” The idea is the vital one that the case for markets does not depend on markets being perfect—or to use economists’ terms, the case for markets doesn’t collapse simply because of the existence of some “market failures.”
First, the concept “market failure” is notoriously slippery. The absence, say, of more light-rail transportation in Little Rock might plausibly be seen by Jones as evidence of market failure but also might plausibly be seen by Smith as evidence of the prohibitively high cost of expanding such transportation in Little Rock. Social and economic reality being what it is, there are simply no tests available to settle this question with the sort of certainty that is often achieved by tests of physical matter.
Importantly, Jones’s assessment might be correct. Perhaps investors and entrepreneurs really are underestimating the demand for—or overestimating the costs of building and operating—more light-rail lines in Little Rock. Arnold wisely advises friends of free markets to recognize and to publicly concede that markets can and do fail, even though such failure might never be provable in the way that the earth’s elliptical rotation around the sun is provable.
To reject Arnold’s advice is inadvertently to strengthen the hand of those who insist that instances of market failure are sufficient justification for government intervention. It is (at least to appear) to concede that if and when markets should fail, government should intervene to correct the failure.
But in reality markets aren’t perfect. They’re just not. Markets do sometimes fail because of (bear with me as I parade before you a band of fancy economics terms) “asymmetric information,” “moral hazard,” “time inconsistency,” “free-rider problems,” “opportunism,” “strategic behavior,” “empty cores,” “lumpiness,” “transaction costs,” “bounded rationality,” and other features of reality that prevent markets from performing ideally.
These sources of market imperfections are themselves a second reason to take seriously Arnold’s advice to use markets even though markets sometimes fail. Too many people—including economists—remain stubbornly unaware that even the proven existence of a “market failure” is only a necessary condition to justify government intervention; market failure is not a sufficient condition.
Voters and government officials don’t become more godlike simply by acting in the domain of politics. So voters and government officials are at least as likely as are investors, consumers, and other private-market participants to be poorly informed, to let their emotions block their rational faculties, and to suffer each of the other decision-making quirks that can lead to market failure.
But this fact suggests only that political outcomes are likely to be as imperfect as market outcomes. It does not suggest that political outcomes are likely to be worse than market outcomes. So why the strong advice to “use markets”?
The answer is that market institutions are better than political institutions at minimizing the frequency, intensity, and ill consequences of uninformed, emotion-ridden, and otherwise fallible decision-making.
The competition among businesses for consumers’ dollars, being never-ending, is more continuous than is the intermittent competition among politicians for citizens’ votes.
Yet another feature of government that causes its outcomes to be less desirable than those of the market is “lumpiness.” When Congress and the president agree on an annual appropriation for the U.S. military, every American is party to that specific annual appropriation. I—a dove—don’t get to have a lower appropriation than does my neighbor the war hawk. Government’s provision of national defense comes in a largely indivisible lump.
Not so in markets. If I prefer wine to beer, I get to have more wine than beer while my neighbor with opposite preferences gets to have more beer than wine. And all the while the teetotaling couple down the block chooses—and receives—a third, alcohol-free bundle of consumption goods.
Arnold Kling endorses free markets not because they are foolproof or flawless. They aren’t. Arnold supports them because the alternative is generally much worse: an especially flawed institution that fosters unusual amounts of foolishness.
When the Congressional Budget Office released its updated budget forecast, everyone focused on the deficit number. But buried in the report was the CBO’s tacit admission that it vastly overestimated the cost of the Trump tax cuts, because it didn’t account for the strong economic growth they would generate.
Among the many details in the report, the one reporters focused on was the CBO’s forecast that the federal deficit would top $1 trillion in 2020, two years earlier than the CBO had previously said.
And, naturally, most news accounts blamed the tax cuts. “U.S. budget deficit to balloon on Republican tax cuts” is how Reuters put it in a headline.
But there’s more to the story that the media overlooked.
First, the CBO revised its economic forecast sharply upward this year and next.
Last June, the CBO said GDP growth for 2018 would be just 2%. Now it figures growth will be 3.3% — a significant upward revision. It also boosted its forecast for 2019 from a meager 1.5% to a respectable 2.4%.
“Underlying economic conditions have improved in some unexpected ways since June,” the CBO says. Unexpected to the CBO, perhaps, but not to those of us who understood that Trump’s tax cuts and deregulatory efforts would boosts growth.
In any case, the CBO now expects GDP to be $6.1 trillion bigger by 2027 than it did before the tax cuts.
The CBO report also makes clear that this faster-growing economy will offset most of the costs of the Trump tax cuts.
In a table buried in the appendix of the CBO report, it shows that, before accounting for economic growth, the tax cuts Trump signed into law late last year would cut federal revenues by $1.69 trillion from 2018-2027.
But it goes on to say that higher rate of GDP growth will produce $1.1 trillion in new revenues. In other words, 65% of the tax cuts are paid for by extra economic growth.
That faster growth will also reduce federal entitlement spending keyed to the economy — unemployment insurance, food stamps, welfare and the like — by $150 billion, the CBO says.
If you subtract that from the cost of the tax cuts, the net cost drops to $440 billion.
This is what we and other backers of the tax cuts had insisted all along. Not that tax cuts would entirely pay for themselves. But that the economic growth they generate would offset much of the costs.
Looks like we were right.
Spending Is the Real Culprit
That still leaves the problem of the deficit. By 2022, federal deficits will top 5% of GDP, something that happened only once between World War II and President Obama’s spending spree.
What’s more, national debt is on track to top 91% of GDP by 2025 and reach 96.2% by 2028.
Despite what Democrats and the media insist, the culprit here isn’t tax cuts. It is out-of-control spending, which will be nearly $1 trillion higher over the next decade thanks to recent spending deals.
Even with Trump’s tax cuts in place, federal revenues climb every year as a share of GDP, going from 16.6% this year to 17.5% by 2025. (The post-World War II average for revenues is 17.2% of GDP.)
Unfortunately, spending is on track to climb even faster — going from 20.6% of GDP this year to 23.6% by 2028. (The highest spending ever got under Obama was 24.4% of GDP, and the post-War average is 19.3%.)
This is little short of a disgrace, and shows that Republicans love spending taxpayer money as much as Democrats.
In fact, some GOP senators don’t even want Trump to use his rescission authority to strip some of the worst spending items out of the bipartisan $1.3 trillion spending monstrosity.
Someone needs to remind these alleged fiscal conservatives that if they can’t get control of spending today, it’s a virtual guarantee they’ll end up agreeing to a “deficit cutting” tax hike tomorrow.
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One of the things people like to fret about is that with automation, artificial intelligence, and so on, there will be a shortage of jobs. In fact I’ve been seeing essays worrying about such a shortage for three decades now, and I’m sure there were plenty before then.
Don Boudreaux has a contrary view:
Strictly speaking, there will always be jobs to do as long as humans have unfulfilled desires and demands.
If you imagine a future where no one has to work, it’s because it’s a future where everyone’s needs are met. If all your needs are met, whether it’s by Autofac, the Krell machine, or an army of robot slaves, do you really care if you have a job?
By the way, “all your needs” would have to include the human need for meaning in life. “All” means “all”.
Net Neutrality has been disposed of, and somehow everyone seems to have survived.
Part of the problem is that “net neutrality” doesn’t seem to have a solid definition. It’s merely a term everyone thinks means something nice and desirable.
In thinking about it, it seems to me that we had “net neutrality” in the form of every bit being equal back before Earthlink started offering “all you can eat internet” — all the internet access you wanted for a fixed monthly price. In other words, if we were serious about treating every bit equally, ISPs would charge for every megabyte transmitted between any two points.
I have a feeling that’s not what the net neutrality advocates have in mind.
The Heartland Institute looks at Burger King’s take on Net Neutrality:
The problem with the video – from the perspective of BK and its media cheerleaders – is it is supposed to tell us why massive government regulations under the banner of Net Neutrality are so vital.
What the video actually, accidentally does – is demonstrate (yet again) how dumb and unnecessary Net Neutrality regulations actually are.
The video begins with man-on-the-street interviews – where no one included has any idea what Net Neutrality is. They shouldn’t feel bad – because after watching BK’s video…they still won’t know what Net Neutrality is.
The video then shows a computer screen and typing. Which claims BK will now explain what Net Neutrality is using their famed BK burger – The Whopper. By showing just how awful a world without “Whopper Neutrality” is.
The video’s theoretical BK store – sells three different speeds of “Whopper Pass.” You can pay $4.99, $12.99 or $25.99 for your burger – with the higher prices ensuring you increasingly fast delivery.
The customers are incensed. Oops – and there you have it: The first reason why this video is dumb. And why Net Neutrality regulations are dumb and unnecessary.
That reason is: The customers are incensed. Internet Service Providers (ISPs) – are in the customer service business. If they don’t service their customers – they will very soon be out of business.
ISPs strive mightily to deliver an incredibly fast, ever-increasing speed. Which is how and why we have gone in just two decades from the sloth of 14K dial-up – to massively-fast 1GB of speed…and up.
Which is why no one – save for the most radically ridiculous of multiple-HD-movie-downloading-at-once or incessant-gaming freaks – runs into any speed impediments to anything they wish to do online.
Oh: And any ISP stupid enough to slow down anyone as an extortion effort – would run afoul of several existing consumer-protection laws. And be swiftly dealt with by the Federal Trade Commission (FTC).
Thus there is zero need for any Federal Communications Commission (FCC) regulations – such as the massive ones imposed in 2015 by the Barack Obama Administration. Which were in December rightly, reasonably undone by the Donald Trump Administration.
All of this and more is why – in the two-plus decades without the FCC having any say in any of this – nothing like what BK depicts in its ridiculous video….ever actually happened.
Another reason the BK video is stupid: ISPs do charge more for even more bandwidth – because everyone on the planet charges more for more of anything.
Ask BK why they charge more for a Double Whopper than they do for a Whopper Jr. Where’s their Whopper Neutrality?
In fact, BK violates these Neutrality principles all over the place – beyond just their tiered-prices for tiered-burgers. They engage in all sorts of non-neutral exclusionary practices.
BK won’t sell you a McDonald’s Big Mac or a Wendy’s Single, Double or Triple. Where’s the Neutrality?
BK won’t sell you a Pepsi or an RC Cola – because they have an exclusive contract with Coca-Cola. Where’s the Neutrality?
And to further flesh out the utter stupidity of the one-size-fits-all model of bandwidth speed – where “all bits are treated equal”:
“What’s a truer depiction of Burger King under Title II utility regulation? A Burger King menu with only one product at one price – an expensive all-you-can-eat meal. For those ordering 10 triple-Whoppers and onion rings, with extra large milkshakes, it might be a good deal.
“For those seeking one salad or one chicken sandwich, and in a hurry, the high-priced all-you-can-eat plan would be a terrible idea. The all-you-can-eat subsidy would attract all the gluttons in town and discourage the customer seeking a quick snack.
“Gluttons would clog the line with their huge orders, and others would have to wait. The supplier of niche content – the small salad in this case – would suffer, too.
“The ad thus had the congestion problem exactly backwards. Diverse products at varied price points encourage economical consumption and incentivize investments in faster, more capacious networks.
“Everybody wins – Internet user, network provider, and content creator. Yes, in the future there will be some forms of priority service for real-time applications – think telemedicine and virtual reality – but the higher prices for these services will help pay for more capacity overall.
“Consumers across the diverse ecosystem of digital services will benefit.”
A grandma who only emails her kids and grandkids – should not be force-fed way-too-much-bandwidth for way-too-much-money – to subsidize the Web gluttons.
The late, great Robert Conquest wrote more than a dozen books about the Soviet Union – so he eminently understood Net-Neutrality-esque collectivism. He created his Three Rules of Politics – the first of which is:
“Everyone is conservative about what he knows best.”
Burger King knows the burger business. And in their burger business – they don’t want any part of Neutrality.
Burger King knows nothing about the Internet bandwidth business. So they ignorantly clamor for the Neutrality they would never, ever impose – or have the government impose – on themselves.
At first glance, the core insights of economics seem mundane. As something’s cost rises, consumers buy less of it. Producing more clothing requires transferring more resources to textile factories and, hence, away from other uses. When Jen buys a pear from Al for a dollar, she does so because she values the pear more than whatever she otherwise would have purchased with that dollar — and Al values what he will buy with that dollar more than he values the pear.
Pretty straightforward. But what economists do with such “obvious” observations is often mind-blowing.
An important counterintuitive insight was vividly conveyed long ago by my late colleague Gordon Tullock. Asked in the 1960s what government should do to maximize reduction in traffic fatalities, he replied, “Mandate that the steering column of each car be mounted with a steel dagger pointed directly at each driver’s heart.” Initially, that sounds crazy. Yet when you think about it, you realize such daggers would cause drivers to dramatically increase the care they exercise behind the wheel.
Instead of really wanting government to mandate mounted daggers, Gordon was warning government against going too far in mandating safety features such as airbags, seat belts and collapsible steering columns. Just as mandated daggers would lead to more-careful driving, mandated safety features lead to less -careful driving. Safety features truly might reduce highway deaths, but keep in mind the possibility that mandated safety features might have surprising opposite effects.
David Friedman explains another counterintuitive insight: “Economists are often accused of believing that everything — health, happiness, life itself — can be measured in money. What we actually believe is even odder. We believe that everything can be measured in anything.”
What Friedman means is that each of us routinely makes trade-offs among things that seemingly can’t be compared. Consider your enjoyment from going to a concert. Getting there conveniently requires driving. Yet by doing that instead of staying home, you raise your chance of being killed in an auto accident. If you nevertheless drive there, you conclude that the added enjoyment you expect from the concert is worth more than the added safety you’d experience by staying home. That is, you compare the experience of a concert to the risks of driving. Obviously, if the risk of being killed while driving there were high enough, you’d decide to stay home.
Another example: You buy a jacket, telling friends it “cost” you $100. But your statement is inaccurate. When you gave, say, five $20 bills to the clerk, what you really gave up wasn’t five pieces of paper engraved with Andrew Jackson’s portrait. What you really gave up is whatever you otherwise would have bought with those five pieces of paper.
Suppose that, had you not bought the jacket, you would have bought a meal at a nice restaurant for you and a friend. In this case, you compared a jacket to that restaurant meal.
We humans constantly compare apples to oranges — and choose sensibly between them.
The labor force participation and employment rates of young adults in the United States have declined sharply in recent years, especially among teenagers. The overall decline in the rate of labor force participation since the Great Recession has received a great deal of attention from researchers and policymakers, who focus in large part on trying to gauge whether this decline is permanent and what it implies about how tight the labor market is. However, the decline in labor force participation of young adults has been going on for much longer and does not coincide with swings in economic activity.
David Neumark and Cortnie Shupe consider three possible explanations for the decline in teen employment in the United States since 2000, with a particular focus on those age 16–17: (1) a rising minimum wage that could reduce employment opportunities for teens and potentially also increase the value of investing in schooling; (2) rising returns to schooling; and (3) increasing competition from immigrants. The higher minimum wage is the predominant factor explaining changes in the behavior of teens age 16–17 since 2000. Additionally, no evidence was found to suggest that higher minimum wages for teens leads to higher future earnings; if anything, the evidence points to the opposite effect.
- Prior literature shows that teen employment has declined much more than the employment rates of those age 20–24 since 2000. These changes were larger for teens age 16–17 than for those age 18–19. The percentage of teens not in the labor force who reported wanting a job fell by almost half between 1994 and 2009, from 24 percent to 13.2 percent.
- The decline in the number of teenagers in the workforce was owing to increases in teens being exclusively in school, rather than combining school and work.
- In new results presented in this paper, the authors find that higher minimum wages are associated with a lower share of teens age 16–17 both in school and employed, and a higher share in school and not employed.
- There is some evidence that changes in the return to schooling and an increase in the share of immigrants employed in the workforce may have contributed to the observed changes in employment and enrollment of teens age 16–17, although these effects are considerably smaller than the estimated minimum wage effects.
- The study found no positive relationship between higher minimum wages for teens and higher future earnings. The evidence, if anything, says that teens exposed to higher minimum wages since 2000 had acquired fewer skills in adulthood. Thus, it is more likely that the principal effect of higher minimum wages since 2000, in terms of human capital, was to reduce employment opportunities that could enhance labor market experience.
NO ONE LIKES to admit having been wrong. It’s especially tough for members of the pundit class, whose job amounts to telling people what to think. So when National Review’s critic-at-large Kyle Smith last week published a piece with the headline “We Were Wrong About Stop-and-Frisk,” people noticed.
Smith and National Review are conservative. Like many conservatives, they had predicted that if New York Mayor Bill de Blasio fulfilled his campaign pledge to end stop-and-frisk — the police practice of stopping, questioning, and patting down people for weapons merely because they seemed suspicious — crime in the city would go up. But that’s not what happened.
In the four years since de Blasio became mayor, conceded Smith, major crime has declined “to the lowest rates since New York City began keeping extensive records on crime in the early 1960s.” The left-wing mayor turned out to be right about stop-and-frisk. The right-wing journal said so, and in so doing, displayed more loyalty to truth than to theory.
Following facts where they lead is a principle easier to state than to live up to, particularly when the facts upend our preconceptions. Some public-policy debates are endless because they are rooted in disagreement over fundamental principles — the question of capital punishment, for example. But other disputes ought to be resolvable, at some point, by facts on the ground. Advocates of an aggressive stop-and-frisk policy were certain the only alternative was higher crime rates. They were mistaken. The honest response is to acknowledge it, and end the debate.
Another controversy that should be laid to rest is the impact of minimum-wage laws.
When government raises the lowest hourly wage at which a worker may lawfully be employed, does it help those at the foot of the economic ladder? The issue has been fought over for decades. Yet reality repeatedly renders the same verdict: Artificially hiking minimum wages makes it harder to employ unskilled workers. Raising the cost of labor invariably prices some marginal laborers out of the job market. Advocates of higher minimums may wish to ensure a “living wage” for the working poor. Yet the result is that fewer poor people get work.
Two years ago, Seattle’s hourly minimum wage jumped to $13, the second hike in less than a year. Before the legislation was enacted, there had been the usual arguments pro and con. But the impact of Seattle’s law is now a matter of facts, not theory. And those facts confirm what opponents of the increase had foretold: Minimum-wage hikes hurt the poor.
In a major research paper last summer, economists commissioned by the city of Seattle reported that the hike to $13 an hour caused a decline in the employment of low-wage workers. For those who remained employed, it caused a sharp cutback in hours. When the gain from higher hourly wages was set against the loss of jobs and hours, the bottom line was stark: “The minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016.”
Another 2017 study, by Harvard Business School scholars, analyzed the effect of minimum wage hikes on San Francisco-area restaurants. The upshot: Every $1 increase in the mandatory minimum wage led to a 14 percent increase in the likelihood that a median-rated restaurant would go out of business. Decades of empirical research, dating back to the first federal minimum-wage law, have reached similar conclusions.
In 18 states this month, minimum wages are going up. Will those changes make unskilled workers more employable? Will the hours they work be increased? As in Seattle and the Bay Area, these questions will have answers. Soon enough, fresh data will shed even more light on the question of what happens to unskilled laborers when their labor is made more costly. Perhaps that will be the moment when someone more loyal to truth than to theory will publish an essay bowing to reality and conceding, at long last: “We Were Wrong About the Minimum Wage.”
From Henry Hazlitt’s Economics in One Lesson, we learn that “the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence: The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” Let us begin with a simple illustration: the 18 minimum wage hikes that will take place next Monday on January 1.
As a result of 18 state laws mandating that minimum wage workers will get paid $0.35 (in Michigan) to $1 an hour (in Maine) more on January 1, a young teenage worker named Alex working full-time at a small neighborhood pizza restaurant in Maine would make $160 in additional income every month (ignoring taxes). Alex would spend that additional monthly income of $160 at local merchants on items like food, clothing, footwear, Uber rides, movies, computer games, and electronics items. The local merchants who receive that $160 from Alex’s additional spending now have additional income and profits every week, and they can spend some of that additional income and profits on goods and services. Alex’s additional monthly income, therefore, ripples through the local Maine economy with an amazing multiplier effect that almost magically increases spending and income throughout the local economy. The pro-minimum wage crowd points to these many positive income effects from Maine’s pending $11 an hour minimum wage and Alex’s additional income, and many might even suggest that a minimum wage far above $11 an hour would create even greater and more positive benefits for workers like Alex and the local merchants who would be the beneficiaries of an even higher minimum wage. For example, EPI suggests that a $15 an hour federal minimum wage would lift wages for 41 million American workers.
But let us take another and closer look at the situation. The minimum wage crowd is at least right in its first conclusion about Alex’s spending, which is just a small part of the much larger $5 billion in additional wages and spending EPI estimates for next year. The public policy of artificially raising wages through government fiat will mean more business and billions of dollars in greater sales revenues for local merchants around the country. The local merchants will be no more unhappy to learn of the magical spending from 18 minimum wage hikes in 2018 than an undertaker to learn of a death.
However, we haven’t yet considered the situation that will now face hundreds of thousands of merchants and small business owners next year, including Alex’s boss – Mrs. Alice Johnson who owns the small pizza restaurant in Bangor where Alex works. As a result of Alex’s good fortune to receive $160 in extra income every month (and nearly $2,000 during the entire year) as a result of government fiat, his boss and sole-proprietor Alice Johnson now has $160 less every month (and $1,920 for the year) because she has to pay Alex out of her own income or profits. The Johnson family now has to cut back on their household spending by $160 every month that they would have spent on food, clothing, Uber rides and electronics products at local merchants. Alex’s gain of $160 each month comes at the direct expense of the Johnson family, who are now worse off in the same amount that Alex is made better off. (And if Mrs. Johnson employs more minimum wage workers than just Alex, she and her family are worse off by $160 per month, and $1,920 per year, for each worker.) If we consider that Alex and the Johnson family are a part of the same local community in Bangor, the community’s income hasn’t changed – rather, there’s only been a transfer of income of $1,920 per year from the Johnson family to Alex; but no net gain in community income, wealth, jobs, or prosperity has been achieved.
For the entire state of Maine, the $80 million in higher wages that EPI’s estimates next year as a result of the $1 an hour increase in the state’s minimum wage have to come from somewhere or someone. And that “somewhere” or “someones” are the thousands of local merchants in Maine like Mrs. Johnson who will be made collectively worse off by $80 million in 2018.
The people in the pro-minimum wage crowd think narrowly of only two affected groups from minimum wage hikes: Alex, the minimum wage worker, and the merchants that gained his business from his artificial increase in income. The minimum wage advocates forget completely about the third parties involved, namely small business owners and their families like the Johnsons in Maine, and the local merchants that now lose their business because the labor costs for small businesses have been artificially increased by government fiat. Minimum wage advocates will easily see Alex’s increased income and spending because it is immediately visible to the eye and easy to calculate ($5 billion next year according to EPI, and $144 billion annually if the federal minimum wage is increased to $15 an hour). They fail to see the lost income and subsequent reduction in spending by the Johnson family that otherwise would have occurred – because it’s less visible and harder to calculate.
The minimum wage example above exposes an elementary fallacy about its alleged positive income effects. Anybody, one would think, would be able to avoid that fallacy after a few moments thought. Yet the minimum wage fallacy, under a hundred disguises, is the most persistent in the history of economics. It is more rampant now than at any time in the past. It is solemnly reaffirmed every day by great captains of industry, by labor union leaders, by editorial writers and newspaper columnists, by progressive politicians and progressive think-tanks, by learned statisticians using the most refined techniques, and even by professors of economics in our best universities who sign statements in support of the minimum wage. In their various ways, they all perpetuate the minimum wage fallacy.
The minimum wage supporters see almost endless benefits despite the economic destruction that characterizes minimum wage laws. They see miracles of multiplying prosperity, increased income, and more jobs coming from minimum wage hikes, a form of economic magic enacted in state capitals, by city councils, and the federal government. But once we trace the long-term effects of such public policy on all groups in the economy, and analyze both what is seen and what is unseen, we should easily understand that the minimum wage cannot, and will not, have overall positive effects. At best it can only transfer income from one group (business owners like Mrs. Johnson above and/or their customers in the form of higher prices) to another group (low-skilled, limited-experienced workers), but with no net gain. It’s an ironclad law of economics that to stimulate one group with public policies like the minimum wage, protective tariffs, or farm subsidies, another group in the economy has to be equally “un-stimulated.” In the case of the 18 increases next week in state minimum wages, the EPI’s estimate of $5 billion in additional wages will stimulate low-skilled workers next year by the exact same amount that it will “un-stimulate” merchants, businesses, business owners and their families in those 18 states – by $5 billion.
When one considers all of the long-term effects on all groups that would result from minimum wage laws: the economic distortions, the misallocation of resources, the loss of employment opportunities for low-skilled workers and the lifetime consequences of not gaining work experience at an early age, and the businesses that close or are never opened, one can only come to one conclusion: the minimum wage law is a very bad and very cruel public policy that makes local communities and the entire economy overall much worse off, not better off.
MP: Groups like EPI that support increasing the minimum wage do a great job of addressing the benefits of higher wages to low-skilled workers, but then completely ignore the costs of those artificial wage increases. That is, they never answer the most important question of all, posed above: Where will the $5 billion in additional annual wages from the 18 minimum wage hikes next year come from?
For example, in a 60-page document released earlier this year by EPI’s senior economic analyst David Cooper, “Raising the minimum wage to $15 by 2024 would lift wages for 41 million American workers,” there is extensive coverage on every page of the estimated benefits of artificially higher wages ($144 billion annually) to various workers by demographics (age, gender, race/ethnicity, education, family status, children, geography, etc.) that would result from a $15 an hour federal minimum wage. But you won’t find a single sentence in the 60-pages of text that explains where the $144 billion will come from if the federal minimum wage is increased to $15 an hour!
There’s not a single mention in the EPI report of the word “business” except for a reference to a $15 minimum wage “spurring greater business activity and job growth.” There’s also not a single mention of what should be relevant terms like “higher prices,” “labor costs,” “profits,” “adjustments” or “reduced hours” that would give us some idea of the costs of a $15 an hour minimum wage, who pays those costs (businesses), and how those higher costs will offset the benefits. And that’s the essence of the “blessings of the minimum wage fallacy” that EPI has fallen prey to — a $15 minimum wage sounds like good public policy only when you count all of the blessings (benefits) to workers while ignoring the costs to businesses.
Bottom Line: We learned from Bastiat and Henry Hazlitt that broken windows and other forms of destruction can’t increase a community’s overall income, employment, and economic prosperity. Likewise, neither can the 18 minimum wage hikes scheduled to take place on Monday have overall, positive net economic benefits next year. Any public policy looks good when you look merely at the immediate effects, but not the longer effects; when you consider the consequences for just one group (workers in the case of the minimum wage) but for all groups (businesses), and only emphasize the benefits (to workers) while completely ignoring the costs (to employers). But that’s not sound economic logic or objective economic analysis on the part of groups like EPI; rather it’s pure partisan political advocacy for an economic fallacy that violates the ironclad law of economics described above. Or as Milton Friedman described it in 1966, support of the minimum wage is “monument to the power of superficial thinking.”
Update: As Not Sure points out in the comment section, there is an additional cost to employers when the minimum wage increases because of the 7.65% payroll tax imposed on employers for Social Security and Medicare. Therefore, the $5 billion in higher wages next year for minimum wage workers would actually cost their employers $5.3825 billion.