When politics runs roughshod over economics, we have a problem. In the Feb. 12 State of the Union address, President Barack Obama announced his intention to raise the minimum wage. Anyone with a rudimentary understanding of microeconomics knows that minimum wage only works to deprive people of jobs that they otherwise would have had. This policy, in effect, hurts the citizens who need a job the most—and who also happen to be the people pushing the most for increased minimum wage. But that is only the beginning of many economic fallacies that run pervasive among the general population. People still cling to an archaic conception of protectionism or mercantilism. There is a belief that we must safeguard American jobs or restrict foreign competition so as not to out-compete our domestic industries. The very charge of offshoring when levied against a business is anathematic kryptonite. These ideas are well intentioned but, as is usual with well-intentioned things, lead to counterproductive policies. As Adam Smith said, “I have never known much good done by those who affected to trade for the public good.” Do-gooders do no good.
The minimum wage laws in this country work to disadvantage the most impoverished members of our society. From a theoretical standpoint, in any Econ 101 class in the nation, students learn that any market with a constraining price floor leads to a shortage of the good in question. Rhetorically, it may be nice and self-gratifying to proclaim that we are bringing financial salvation to the poor by raising the minimum wage. It’s such a pity that facts and reason get in the way of rah-rah political banter. The reality is that minimum wage laws increase unemployment, particularly among young and unskilled workers, who are largely the recipients of minimum wages. In his speech, Obama states, “A full-time worker making the minimum wage earns $14,500 a year. Even with the tax relief we’ve put in place, a family with two kids that earns the minimum wage still lives below the poverty line. That’s wrong.” Great job using an appeal to emotion, Obama. As noted by The Wall Street Journal, the fact is that “the average family income of a household with a minimum-wage worker is about $47,023—which is far above the poverty line of $23,550 for a family of four.” In other words, minimum-wage workers are generally a secondary or tertiary source of household income. Economic analyses show that the losses of the losers outweigh the gains of the winners in a market constrained by the minimum wage, generating a net loss of economic welfare. It’s great that a small portion of workers have their wages raised from $7.25 to $9.00; however, for the large number of workers on the margin, the ones with less than $9.00 of marginal revenue productivity, they now make $0. That is a far greater loss than the $1.75 gained by the few. What is truly amusing is that the people with the most to lose from this policy advocate for it with such blind fervor. But, I’ll save public choice theory for a future column.
Another pernicious and prevalent belief is that economic protectionism somehow serves our rational interests. The general public (and probably most Duke students) thinks that by enacting legislation restricting foreign competition, we’re doing ourselves a favor. We’re not. Foreign competition, whether it is in goods or services, prevents domestic monopolies and lowers prices for consumers. Many opponents of free trade argue that by protecting American businesses, we generate more American jobs. Those workers then pay back into the economy by consuming things. It is true that we generate more jobs, but at a disproportionate loss of consumer welfare. Furthermore, these opponents are misguided in believing that buying things equates to greater economic welfare. Economic welfare is predicated upon production, not consumption. That’s why we measure the might of a country by gross domestic product, not gross domestic consumption. If we are importing a good, it means that some other nation has a comparative advantage in production. Instead of restricting cheaper goods, we should encourage them so that the general consumer pays lower prices. The workers who are laid off by domestic businesses that lose out to cheaper, foreign competition should transfer to a line of work in which we have an advantage (i.e., producing airplanes). Likewise, businesses offshoring aspects of their production are simply trimming costs. These savings are then passed on to consumers in a competitive market. Speaking of competitive markets, the best way to prevent monopolies is to welcome foreign competition. In practice, almost every monopoly is a result of government legislation. Allow markets to be free, and they will be competitive and efficient. Free trade doesn’t make sure everyone is a winner, in fact there will assuredly be losers, but the average Joe is better off.
Public ignorance of economic reality translates to self-defeating policy through our democratic political process. The only real solution is better public economic education. Otherwise, we are eternally damned to shooting ourselves in the foot and enjoying it.
Jonathan Zhao is a Trinity freshman. His column runs every other Thursday.