Topic: International Economics and Development

The Minimum Wage: Immoral and Inefficient

Democratic politicians are desperate to make up for ObamaCare’s disastrous roll-out.  Thirteen states are increasing their minimums this year, and some Democrats believe raising the national minimum wage is a winning campaign issue for November.

There’s no doubt that raising the minimum wage would reduce employment and slow economic growth.  Worse, government wage-setting is immoral.  It is unfair and wrong for politicians to posture as philanthropists while forcing other people to pay higher salaries.

The first question is the minimum’s impact on employment and price levels.  The answer is clear:  the cost of higher wages will be borne in varying degrees by customers, workers, and investors.  As I wrote in the American Spectator:

as Nobel Laureate Milton Friedman observed, there ain’t no such thing as a free lunch.  Arbitrarily raising the cost of labor—there is no principled basis for choosing any particular government minimum—will increase prices, reduce investor returns, and cut employment levels.

Most vulnerable are workers with the least education, experience, and skills, who tend to be young and minorities.  Forcing up wages will not only reduce overall employment, but shift jobs toward higher-skilled workers who are more productive and thus warrant higher pay.  The minimum wage also encourages mechanization, since it makes economic sense for companies to invest more in machines to spend less on labor. 

In effect, the minimum wage is a tax on labor-intensive companies.  No surprise, then, as explained by Mark Wilson of Applied Economic Strategies in a Cato Institute Policy Analysis:  “The main finding of economic theory and empirical research over the past 70 years is that minimum wage increases tend to reduce employment.” 

The strangest claim may come from the Financial Times, which editorialized:  “a higher wage would stimulate the economy without adding a dime to federal spending.”  However, to the extent raising the minimum increases the total amount of wages, it does so by redistributing the money from other people, who end up with less to spend on consumption. 

No doubt, the employment impact of a small increase, especially if salary levels have been rising, would be modest, which explains recent economic studies demonstrating lesser job loss.  But the less significant the increase, the less meaningful any potential benefit.

In contrast, those who claim that raising today’s minimum would have no impact on employer behavior fail to demonstrate the courage of their convictions.  If government can hike wages without harm, why stop at $10 or $15 an hour?  Why not go to $1000 or $1500?  Then everyone in America could be rich at no cost to anyone!

Yet there is an even more fundamental issue.  The minimum wage is the modern perversion of compassion into coercion:  I believe there is a moral imperative for you to earn more, so I force someone else to pay more.  I feel moral while sticking someone else with the bill. 

However, if “we,” the citizens of America, believe people should earn more, then “we,” the citizens of America, not a few labor intensive businesses, should pay for those above-market wages.  Opposing the minimum wage is simple fairness.

While many advocates no doubt are true believers, for some fairness talk is pure twaddle.   John Cassidy wrote in the New Yorker:  “In the current political environment, there is little chance of pushing through another hike in income-support programs.  Raising the minimum wage pushes the burden onto corporations and consumers.” 

Washington should be systematically reducing, not increasing, the cost of doing business.  Yet the regulatory-happy Obama Administration has been imposing multiple burdens on commerce, starting with ObamaCare. 

The next time someone rises to support arbitrary government wage-setting, they should be asked what they are doing personally to help the economically disadvantaged.  Raiding the wallets of others does not count as compassion

Chinese Liberal Mao Yushi Turns 85

Mao Yushi accepts the 2012 Milton Friedman Prize for Advancing Liberty

All lovers of liberty and limited government should celebrate Mao Yushi’s 85th birthday on January 14.  He was a signatory to Charter 08 and the recipient of the 2012 Milton Friedman Prize for Advancing Liberty.  As chairman of the Unirule Institute of Economics in Beijing, Mao Yushi has been instrumental in spreading classical liberal ideas in China.  In 1998, he commissioned the first Chinese translation of F. A. Hayek’s classic text, The Constitution of Liberty.  Unirule (Tianze or “Universal Rule”) conveys the fundamental principle of liberty under the law. 

Mao was educated as a mechanical engineer but later became interested in economics and how China could make the transition from central planning to a market economy.  In 1957, he was purged from the Chinese Communist Party during the Anti-Rightest Campaign, and he lost his job as a railroad engineer.  Later, during the Cultural Revolution, he lost his property when Mao Zedong outlawed private ownership. 

After Deng Xiaoping’s opening to the outside world in 1978, Mao Yushi was invited to rejoin the CCP but refused.  Instead, he became a leading critic of the Party’s monopoly on power and an advocate of free markets and civil society. 

In a recent essay, “Returning Mao Zedong to Human Form,” he argued that Chairman Mao should be subject to open criticism and not be viewed as a god—and called for removing Mao’s picture from Tiananmen Square and from the Chinese currency. As Nobel Peace Prize winner Liu Xiaobo has said, Mao Yushi’s “bravery is worth our respect.”

At Unirule, Mao Yushi has attracted many younger scholars to discuss the institutions necessary for a market economy, particularly private property rights and a legal system that protects basic human rights.  He holds that the state should protect the people who should be free to choose—an idea that goes back to Lao Tzu. 

In addition to drawing from the work of Hayek, Mao Yushi and his colleagues at Unirule have developed the ideas of Nobel Laureate economists Douglass North and Ronald Coase, focusing on the “new institutional economics.”  Peaceful development requires nurturing the right institutions and, in Coase’s words, requires a “market for ideas,” not just for goods and services.

In China’s Future: Constructive Partner or Emerging Threat? (Cato Institute, 2000), Mao Yushi wrote, “”The major obstacle to developing market institutions in China is the special privilege rights that lie beyond, and conflict with, human rights.”  That obstacle is still present, and Mao is still fighting for the people’s rights.  His courage in advancing freedom and civil society in China—through his writings, Unirule, Fuping Development Institute, and, most recently, the Humanism Economics Society—deserves our admiration and respect.

Progressives in Space

According to the Wall Street Journal:

“If all goes according to plan, Hollywood icon Leonardo DiCaprio will blast into space aboard the maiden voyage of Richard Branson’s Virgin Galactic spaceship sometime this year, opening up a new era of civilian space travel….Mr. DiCaprio is on the board of trustees of the Natural Resources Defense Council and has decried overconsumption. ‘We are the number one leading consumers, the biggest producers of waste around the world,’ the actor said in 2008.”

Leo’s 6 minutes of weightlessness will cost him a cool $250,000 and while it is his money to burn, lecturing the rest of us about overconsumption and waste is, well, hypocrisy of galactic proportions.

Even the Establishment Media Is Now Admitting the French Economic Model Is Fatally Flawed

Some things in life are very dependable. Every year, for instance, the swallows return to Capistrano.

And you can also count on Dan Mitchell to wax poetic about the looming collapse of French statism.

Geesh, looking at that list, I guess I’m guilty of - in the words of Paul Krugman - being part of the “plot against France” by trying to discredit that nation’s economy.

Or maybe I’m just ahead of my time because we’re now seeing articles that almost sound like they could have been written by me appearing in establishment outlets such as Newsweek. Check out some amazing excerpts from an article by Janine di Giovanni, who lives in France and serves as the magazine’s Middle East Editor.

…what is happening today in France is being compared to the revocation of 1685. …the king closed churches and persecuted the Huguenots. As a result, nearly 700,000 of them fled France, seeking asylum in England, Sweden, Switzerland, South Africa and other countries. The Huguenots, nearly a million strong before 1685, were thought of as the worker bees of France. They left without money, but took with them their many and various skills. They left France with a noticeable brain drain.

It’s happening again, except this time the cause is fiscal persecution rather than religious persecution. French politicians have changed the national sport from soccer to taxation!

Since the arrival of Socialist President François Hollande in 2012, income tax and social security contributions in France have skyrocketed. The top tax rate is 75 percent, and a great many pay in excess of 70 percent. As a result, there has been a frantic bolt for the border by the very people who create economic growth – business leaders, innovators, creative thinkers, and top executives. They are all leaving France to develop their talents elsewhere.

It’s an exaggeration to say “they are all leaving,” but France is turning Atlas Shrugged from fiction to reality.

Boost Worker Pay - and Make the United States More Competitive - by Gutting the Corporate Income Tax

The business pages are reporting that Chrysler will be fully owned by Fiat after that Italian company buys up remaining shares.

I don’t know what this means about the long-term viability of Chrysler, but we can say with great confidence that the company will be better off now that the parent company is headquartered outside the United States.

This is because Chrysler presumably no longer will be obliged to pay an extra layer of tax to the IRS on any foreign-source income.

Italy, unlike the United States, has a territorial tax system. This means companies are taxed only on income earned in Italy but there’s no effort to impose tax on income earned - and already subject to tax - in other nations.

Under America’s worldwide tax regime, by contrast, U.S.-domiciled companies must pay all applicable foreign taxes when earning money outside the United States - and then also put that income on their tax returns to the IRS!

And since the United States imposes the highest corporate income tax in the developed world and also ranks a dismal 94 out of 100 on a broader measure of corporate tax competitiveness, this obviously is not good for jobs and growth.

No wonder many American companies are re-domiciling in other countries!

Maybe the time has come to scrap the entire corporate income tax. That’s certainly a logical policy to follow based on a new study entitled, “Simulating the Elimination of the U.S. Corporate Income Tax.”

Written by Hans Fehr, Sabine Jokisch, Ashwin Kambhampati, Laurence J. Kotlikoff, the paper looks at whether it makes sense to have a burdensome tax that doesn’t even generate much revenue.

The U.S. Corporate Income Tax…produces remarkably little revenue - only 1.8 percent of GDP in 2013, but entails major compliance and collection costs. The IRS regulations detailing corporate tax provisions are tome length and occupy small armies of accountants and lawyers. …many economists…have suggested that the tax may actually fall on workers, not capitalists.

Ending the Year on a Positive Note

Throughout the year, we are constantly bombarded by bad news. Stories about hunger, violence, oppression and illness flow from our television sets and radios, and fill the pages of our newspapers. And true enough, for far too many people, 2013 was not a good year. We must, however, distinguish between stories of individual unhappiness and disaster, and long term trends – which are, on the whole, positive. Over the last couple of weeks a number of stories pointed to these positive developments and I include them below:

NPR Morning Edition “Tired of Doom And Gloom? Here’s the Best Good News of 2013”

Cracked.com “5 Amazing Pieces of Good News Nobody is Reporting”

Washington Times “Most Things are Better Now”

TheAtlantic.com “Is the Pope Right About the World?”