Monday, January 29, 2007

Common Sense Economics

"Economics is extremely useful as a form of employment for economists." ~ John Kenneth Galbraith

OK. I am an economics moron, I admit. But I believe common sense is all that's necessary to determine whether raising the minimum raise in this country is a bad idea.

I know there have been many books published explaining the pro's and con's of minimum wage increases, and they have been written by economists with all kinds of college degrees and experiences in business and money management.

For me, trying to read and comprehend all those books and articles gives me a headache.

Interestingly enough, there seem to be as many economists against the minimum wage increases as there are for them.

It's all a matter of perspective, I suppose.



I am not an economist, and my math may be flawed, but here is some raw figures I have been working with to try to explain why I believe minimum wage causes inflation, and consequently, unemployment:

Working with round figures, let's say a small businessman makes and sells widgets at a cost of $1.00 a piece. At a 2.5% markup, the widgets sell for $1.02.5 a piece.

Consider that his 10 employees make a minimum wage of $5.00 an hour.

The manufacturer has to sell 10,000 widgets to make a measly $500.00 a week to meet his overhead expenses and feed his family, etc.

Now, suppose the government comes along and forces him to raise his employees salaries by $1.00 an hour. That's $400.00 a week more than he has been paying them. That leaves him with $100.00 a week to pay his overhead and feed his family.

That is if he doesn't raise the price on his widgets, of course. So, what will our fictitious manufacturer have to do to keep his family from starving?

Well, he has some choices:

1. He can sell about double the number of widgets than he did previously, but that is unlikely. If he could sell that many more he would have already been doing so.

2. He can raise the prices on his widgets, which could possibly cause some of his previous widget customers, (if not all) to look elsewhere for their widgets, or possibly just make them unaffordable to his lower wage customers, you know, the ones that have just had their wages raised so they can afford more.

If he loses customers, he will then have to raise the prices again to compensate for the loss in income, therefore making his widgets even more unaffordable than before.

3. He can lay off 1 worker and drop another employee to part time to lower his labor costs. That way he can avoid raising his prices but he will suffer a loss of production.

80% of his employees now make $40.00 a week more than they did, but one of them is now making nothing, and one of them is only making $120.00 a week.

Now more than 10% of his workforce has lost income!

Well, it looks like raising the minimum wage causes our widget manufacturer to raise prices and/or lay off employees!

That's inflation and higher unemployment.

Now multiply that scenario as many times as the number of small businesses there are in America and presto! We have inflation and unemployment problems!

I may not be an economist but I have common sense, and apparently the Democrats in the legislature don't. Or maybe they do but just don't care that minimum wage increases will hurt small business, and, consequently, the very people they claim they are helping.

The poor and middle class.

26 comments:

D.Daddio Al-Ozarka said...

"Now multiply that scenario as many times as the number of small businesses there are in America and presto! We have inflation and unemployment problems!"

It's Bush's fault!

Francis Lynn said...

I get my widgets from China - coolie labor over there makes them cheaper than US widgets.

Dan Trabue said...

The classic race to the bottom! Whichever location is willing to pay their workers the least and do the most damage to the environment and pay least attention to human rights, these are the locations that "win" the widget factories.

and Capitalism collapsing upon itself...

Mark said...

Dan, this is not an environmental issue. Suppose the making of widgets doesn't require polluting anything?

And whose human rights are you concerned with? I hope you include American humans. Do human Americans deserve the right to work for a wage? Is that the kind of human rights to which you refer?

Minimum wage increases, as I point out, take the rights to life, liberty, and the pursuit of happiness of average Americans away from them.

Anonymous said...

Across the board you have made your point Mark, but there is always the other side of the coin. How about the megga billion dollar businesses (Mcdonalds/Walmart etc.) who exploit the minimum wage for the sake of HUGH profits? In fairness to small business owners they need to come up with a plan where the widget size owner would receive a tax break and trust me they pay the same tax scale as the megga guys.

Mark said...

Anon, that is true. I am considering making a follow up post to this one dealing with mega-millionaires and the minimum wage increase and what it means to them.

Does anyone have any thoughts on that?

D.Daddio Al-Ozarka said...

Well...they should be able to offset their losses when they get to quit paying for their employees' health insurance!

BB-Idaho said...

OK, economics confuses me too! Let's say the widget owner's employees PRODUCTIVITY went up, as
it has consistently in the US. But wages in real terms went down,
like it has in the US. Will widget owner lower costs? Give raises? Give himself a bonus?
Pay more taxes? Increase his profit
margin? Merge with MegaWidget?
If the minimum wage goes into effect will the widget plant outsource to Indonesia? Will people boycott foreign-made widgets? *sigh* it's just too
confusing!!

Jason H. Bowden said...

mark--

Your common sense is exactly on the money. The traditional, classical approach can easily explain why stagflation occurred in the 1970s. Keynesians, with their nice Phillips curve that excludes simultaneous high unemployment and high inflation, can only explain stagflation with great difficulty. The complexity of their model should count against it. In other fields, it would. Think how the complexity of the Ptolemaic model of the solar system, with its baroque system of epicycles and deferents, eventually proved inferior to the Copernican model, which explained more with less.

RoxieAmerica said...

Well, in many cases, businesses are paying more than minimum wage for unskilled labor because they need to do so to get any people to show up for work. I think that is what they call free enterprise.

You forgot one option in your busienss --

They close the factory and export all jobs to an Islamic nation, where we help fund terrorism and we become more dependent and enslaved on them for our needs...

Ordering my burka... got to be ready for these things...

Marie's Two Cents said...

I am really confused on this issue.

Say the minimum wage that is being proposed is raising to 7.00, I can see if it was to raise to 7.00 an hour (All at once) that would knock the crap out of alot of businesses and they would deffinately have to close.

But if it's small at first, like say 50 cents an hour for the first year, and 50 cents every year after that until it reaches 7.00, coupled with a tax relief package, would that not offset in the long run any damage that might be done to a small business?

Then again I have to agree with Roxie, I dont know any business in Oklahoma for instance that even pay minimum wage! They ALL pay at least 2.00 + an hour over minimum as it is!

Unless I guess we are talking about McDonalds which I have no idea what they pay, but next time I feel like clogging my arteries and go there, I intend to ask them.

By the way, I LOVE what you have done to your blog :-)

rusty shakelford said...

The bill did not get through the Senate, since it did not have a tax break for small business(thank you Republicans). I have worked for a few large retail chains while in high school/college but never for minimum wage. The small business types who employ a lot of high school kids and retirees are the ones that will feel the brunt of the new law. Of course it is important to note the bill will raise the minimum wage over the next few years, not all at once.

One good argument for the raised minimum wage is mostly only kids who still live with there parents make minimum wage. 100% of their income is disposable, they will feed more money into our economy allowing more people to make more crap for kids to buy. Iwidgets for example

rusty shakelford said...

Dan for fifty years people have saying what you wrote and for fifty years they have been wrong. Perhaps you should read the book "Surviving the Great Depression of 1990" by Ravi Batra. It was published in 1989. The two of you share many opinions.

Jim said...

Yes, Mark. One thing you forgot to factor in is that happier employees might well be more productive and produce more widgets for the same or even lower cost.

I also present the following data from after the last increase to the federal minimum wage:

"Second, following the most recent increase legislated in 1996, the low-wage labor market performed better than it had in decades. The fact that the employment and earnings opportunities of low-wage workers grew so quickly following that increase continues to pose a daunting challenge to those who still maintain that minimum wage increases hurt their intended beneficiaries." [emphasis added]

"• Between 1998 and 2001, the number of small business establishments grew twice as quickly in states with higher minimum wages (3.1% vs. 1.6%).
• Employment grew 1.5% more quickly in high minimum wage states.
• Annual and average payroll growth was also faster in higher minimum wage states."

Marshall Art said...

I really love Jason, but when he talks economics, I need a bong. Can't afford to fill it though. Need the dough for widgets.

And didn't we just talk about this?

Mark said...

Perhaps Jim should stop reading the experts and start using common sense. As I've stated, there are probably just as many economists who believe raising the minimum wage is a good thing as there are economists who believe just the opposite.

Sometimes a reasonable person has to ignore the so-called experts and rely on their own common sense and experience.

It's like when so-called experts try to tell me welfare works because all their facts and figures prove it when I have personally been on welfare and know from first hand experience that it doesn't.

What is more reliable?

From an old movie or television program (I don't remember the source, onky the quote): "Who ya gonna believe, Alice? Me or your lyin' eyes?"

Dan Trabue said...

Could it be possible, Mark, that welfare didn't work for you?

I personally know other folk who have been on welfare and it kept them off the streets until they had time to pull themselves together and get over their issues at least enough to move on to become productive tax-paying citizens (most often minimum wage tax-paying citizens, but still...).

Relying upon common sense is a great thing, truly. But relying upon anectdotal evidence alone - especially when we're talking policy - is not that wise.

D.Daddio Al-Ozarka said...

"anectdotal evidence" = "I personally know other folk who have been on welfare and it kept them off the streets until they had time to pull themselves together and get over their issues at least enough to move on to become productive tax-paying citizens (most often minimum wage tax-paying citizens, but still...).
"

Mike's America said...

I see your pacificist appeaser in chief also spouts Pravda talking points regarding the environment and capitalism

Hmmm..... I wonder what the connection is?

Mark said...

Dan, actually welfare did what it was designed to do with me and my family. It gave us a hand up when we were struggling. Not a hand out. But what I was referring to were my ex neighbors, lifelong welfare receipients who never even tried to get up and out of the system. They are the failures of the welfare system. They are the reason I say welfare doesn't work.

People I knew personally, the welfare cheats like my neigbor, Scott, who worked full time jobs and got paid under the table and then reported to the welfare department that he couldn't get work because of a "bad back", or my neighbor Yolanda, who never did a lick of work in her life, whose own mother raised her on welfare, who sat in her front yard all day and complained that the government wasn't doing enough to help her. Meanwhile her son's were gang banging and selling crack on the corner to make sure her new Cadillac was running properly, and had the appropriate gold rims and other thug accessories.

And on and on and on.

Go on, Dan, tell me anectoctal evidence doesn't reveal the facts as well as some college professor book writer who never had to experience living in the welfare state. Tell me they know better.

Geeez, the more you argue the less credibility you have.

Dan Trabue said...

Anectdotal evidence provides a snap shot of what you saw around you. That doesn't make it the whole picture.

As you said, it worked for you as it should have.

No one - least of all social workers in the field - denies that there are problems. What we need to know is, how many people like you is it helping and how many people like Scott is it hurting? And what are the cost/benefits analyses?

And we don't get that anectdotally.

Always - I say ALWAYS - beware the expert opinion. Whether the experts are telling you the best way to fight a war or to end crime or to help the poor.

But ignoring the expert opinion just because it's an expert opinion is no more foolish than listening to it simply because it's the expert opinion.

Jason H. Bowden said...

dan--

Skill is usually desirable when trying to understand various phenomena. Those who lack expertise, such as journalists, actors, and politicians, are the ones we need to worry about.

With economics, if one is unconfortable with jargon and mathematics, then look at the big picture. Think about the results predicted by various ideas, and observe how they square with reality. Human history has provided an excellent laboratory for how economic ideas play out.

For example, consider Japan after the Meiji restoration. Before it was a primitive, feudal society composed of diamyos and serfs. They adopted British and North American forms of laissez-faire capitalism, and within decades they were powerful enough to defeat Russia in a major war in 1905.

Now, consider India after independence. Exposed to centuries of English customs, it was well positioned to be an economic powerhouse. But instead, they decided to avoid "extremes" and choose a mixed economy with a lot of central planning. The economy stagnated for decades and people starved. In the early 1990s, Indians stood up to their unions, opened their markets to foreign "predators," sold off many state enterprises, and deregulated many business. Instead of disaster, India's economy now is growing at a whopping 8.5% a year, and their unemployment -- 7.8% -- is lower than the left's utopias in France and Germany. Granted, many regions of India have a few decades to go before they catch up to the west, but it isn't about where you are, but where you are going.

Anyway, one can tell that the results in both countries are the complete opposite of what would be predicted by modern liberals. India should have been a worker's paradise after WWII, since they avoided the extremes of communism and capitalism, while Japan, which embraced Western-style capitalism from the start, should have grown into a cesspool of poverty. Moreover, an increasingly laissez-faire India should be becoming increasingly poor, but the opposite is the case.

The proof is, as Jim noted, in the pudding.

Marshall Art said...

You da man, Jason!

The WordSmith from Nantucket said...

Why does it even matter? Only about 2% of the work force is ever on minimum wage; and after 3-6 months, how many of these minimum wage earners remain at the minimum wage rate?

Erudite Redneck said...

"Go on, Dan, tell me anectoctal evidence doesn't reveal the facts as well as some college professor book writer who never had to experience living in the welfare state. Tell me they know better."

Oh, let me.

Anectoctal evidence doesn't reveal the facts as well as some college professor book writer who never had to experience living in the welfare state. They know better.

Erudite Redneck said...

Re, "This is not an environmental issue."

Everything is an environmental issue. Everything. Our house is on fire.