— by Polydamas
On February 17, 2013, Paul Krugman wrote an opinion piece in the New York Times titled “Raise That Wage” (http://nyti.ms/Xf5cPF). In his opinion piece, Krugman demonstrated without doubt that his 2008 Nobel Prize in economics was just as well deserved as President Barack Hussein Obama’s 2009 Nobel Peace Prize (“for his extraordinary efforts to strengthen international diplomacy and cooperation between peoples”) and Al Gore’s 2007 Nobel Peace Prize (which he shared with the Intergovernmental Panel on Climate Change “for their efforts to build up and disseminate greater knowledge about man-made climate change, and to lay the foundations for the measures that are needed to counteract such change”). Awarding a Nobel Peace Prize to America’s first African-American President who had not yet accomplished anything in his presidency other than get elected made as much sense as awarding the Nobel Peace Prize to the former Vice-President for selling the snake oil known as global warming. Sandwiched between the 2007 and 2009 Prize winners, Krugman’s own Prize exemplifies as much wishful thinking and as little substance as theirs.
In his opinion piece, Krugman attempts to make the case for raising the minimum wage from $7.25 to $9.00 per hour to effect a rise in the incomes of “hard-working but low-paid Americans”. He argues as follows: 1) increasing the minimum wage would not require the federal government to put out any money, 2) worker productivity has doubled but, for about four decades, the minimum wage has fallen behind inflation so “isn’t it time for a raise?”, 3) modest increases in the minimum wage do not necessarily result in greater unemployment, and 4) everyone except Republican men support an increase in the minimum wage. Each of these stated reasons displays an ignorance of economics that would be embarrassing to a college freshman much less a Nobel Prize laureate.
Let us suppose that the minimum wage is, indeed, increased from $7.25 to $9.00 per hour, which is almost 25%. Let us imagine that Joe is a minimum wage worker who earns his wage by washing dishes at a restaurant like TGI Friday. A 25% increase in the minimum wage will cause Joe’s employer to increase its meal prices by at least 25% in order to pay Joe and his fellow workers. It has been shown by the Reserve Bank of Chicago that “restaurant prices unambiguously rise after minimum wage increases are enacted” especially the prices of restaurants that pay minimum wage. (http://bit.ly/YFcR6X).
Now, Krugman might argue that the customers of TGI Friday can afford to pay 25% for their food and that a $15 meal became only an $18.75 meal, no big deal. Well, to an economist like Krugman, a $3.75 increase may not seem like much, especially when he won 10 million Swedish Kronor for his Nobel Prize in economics, which at about 6.3 Swedish Kronor to the dollar (at 2013 exchange rate) is approximately $1.6 million. However, the impact on Joe will be considerable when he needs to buy something for himself and for his family.
Joe will have to pay at least 25% more for his own groceries because minimum wage workers like him work in the agricultural sector. Because the work of other minimum wage workers is one of the components of everything that Joe consumes, from food to clothing to rent to gasoline, Joe does not enjoy this 25% raise because everyone got a 25% raise regardless of individual merit or performance.
A ripple effect then results in the economy as a whole because everything is interconnected. An increase in the cost of groceries and basic living expenses will cause other employees to request higher wages. The elderly, disabled, welfare recipients, and people on fixed income cannot simply ask for and receive higher wages. They will be forced to live on less. The non-working poor are hurt by an increase in the minimum wage because everything they need is more expensive.
An increase in the minimum wage is a liberal “feel good” panacea that does not truly improve the lives of the working poor that it claims to help. It only results in an erosion in the value of money, meaning inflation. Joe now pays $1.25 for the identical product that used to cost $1.00. At best, he gained nothing, except having to carry more dollar bills in his wallet to pay for more expensive products and services. At worst, his employer may decide that three of Joe’s co-workers can do his job in addition to their own and Joe will be joining the ranks of the unemployed. With government-mandated benefits, withholdings, health insurance, and the like, the cost of Joe to his employer is much more than $9 per hour, which that employer may decide not to bear.
Now, going back to Krugman’s four reasons for raising the minimum wage. Krugman says that an increase in the minimum wage does not cost the federal government any more money. Wrong. The federal government will eventually have to increase social security, disability, and welfare payments to keep up with inflation. The federal government contracts with private businesses and will have to pay more for goods and services.
Krugman claims that the American worker’s productivity has doubled while wages have fallen behind inflation. However, productivity on its own does not mean anything. Manufacturing two tractors in the time that it used to take to manufacture one tractor is great if the company manages to sell two tractors where it previously sold one tractor. Yet, if the tractor is purchased from China or India because the tractor is cheaper to produce in other parts of the world, productivity means little. As for wages not keeping up with inflation, this is true because of shortsighted government policies like the minimum wage which, as shown above, only serve to increase inflation.
Krugman claims that increases in the minimum wage do not necessarily cause higher unemployment. This may be true — or not — but increases in the minimum wage definitely cause inflation. As a result of inflation, the working poor whom he claims to want to support through higher wages only end up with less buying power. The non-working poor also end up being impoverished by inflation.
Krugman claims that everyone except for Republican men supports an increase in the minimum wage, which is why it is a good political decision as well as a good economic decision. That raising the minimum wage is a bad economic decision is very obvious after considering the resulting inflation. If we believe Krugman that everyone except for Republican men supports an increase in the minimum wage, that misplaced support may just be a reflection of the Republican men’s greater understanding of real world economics and that bad decisions have serious adverse consequences.
As an economist who has studied classical economics, Krugman knows that both the seen and the unseen consequences of economic decisions must be carefully evaluated together. The eminent classical economist and essayist Frederic Bastiat wrote the famous Parable of the Broken Window to explain this important principle (http://bit.ly/GQWUO). In this parable, the glass window of a store is broken. This unexpected breakage forces the store owner to hire a glass repairer to replace the window. To the people who are unversed in economics, the breaking of the glass would appear to be a positive event in that the glass repairer will now receive more money than before, which will then be spent on more goods and services and everything will result in an net economic benefit. For this reason, economically unsophisticated people may be misled to believe that Hurricane Katrina in New Orleans, Hurricane Sandy in New York and New Jersey, and other calamities are a great benefit to the economy because they can only see the builders and contractors who profit from the reconstruction. What they do not see are the less obvious consequences, namely the people and businesses which did not receive the money that they would have otherwise received because of the forced reconstruction. They do not take into consideration that the store owner was forced to repair the window using money that would have been used to buy another product or service as opposed to re-buying the same store window. The money spent to rebuild New Orleans and New York could have been lent to new businesses, like the next Apple or Google, with products and services that could have benefited the overall economy much more than rebuilding what had been destroyed.
Since Krugman does not present for consideration in his opinion piece the full picture, including the unseen — but no less real — adverse consequences to the economy from the increase in the minimum wage, which intelligent decision makers would require to make a well-reasoned decision, one can only conclude that he seeks to benefit from the economic ignorance of his readers and followers. Subscribing to his notions will result in greater inflation and poverty, for which he will seek to blame private businesses, and advocate for an even greater involvement by the federal government. To socialists like Krugman, more government is always the correct solution to any problem even if more government was the root cause of the original problem.
