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What Bernie Sanders Got Wrong About Raising The Minimum Wage
What Bernie Sanders Got Wrong About Raising The Minimum Wage
Nov 19, 2015 @ 08:00 AM 5,866 views
Jeffrey Dorfman ,
Contributor
The three remaining candidates for the Democrat Party had a long discussion about the minimum wage and what it should be raised to during their last debate. Former Maryland governor Martin O’Malley and Vermont senator Bernie Sanders supported raising the minimum wage nationwide to $15 per hour. Former Secretary of State Hillary Clinton played the role of the (relative) grown-up in the room by supporting a raise in the federal minimum wage to “only” $12 per hour. What all three Democrats showed is that they either don’t understand economics or simply cannot speak the truth to the people they need as supporters and voters.
Sanders made clear the more liberal stance on the minimum wage: “You have no disposable income when you make 10, 12 bucks an hour. When we put money into the hands of working people, they’re going to go out and buy goods, they’re going to buy services and they’re going to create jobs in doing that.” This is the first mistake that liberals make—believing that money in the hands of poor people is better for the economy than the same money in the hands of rich people.
People can do three things with their money: Spend it, save it, or use it to pay taxes
People can do three things with their money: Spend it, save it, or use it to pay taxes. Tax money is co-mingled, so everybody’s tax dollars do equal good (or bad) for the economy. Spending has either an equal impact no matter who does it, or may even be more beneficial when done by the rich. Because the rich spend more money on services, the money tends to stay local; in contrast, the poor buy more products, many of which are imported, meaning that their spending may have a smaller effect on the economy (creating jobs overseas instead of at home). That leaves saving.
Liberals and the Keynesian economists who the liberals listen to seem to believe that consumer spending is wonderful for the economy, leading to the vaunted multiplier effect in which spending creates more spending which creates more spending, and so on. Meanwhile, they act as if our savings magically disappear from the economy, perhaps believing that we all keep our savings under our mattress or buried in the backyard.
Money in the bank does not just sit still
In reality, people either invest their savings in a business, thus creating jobs by hiring people, or buy equipment from other businesses, or put their money in the bank. Money in the bank does not just sit still. Banks lend most of it out to somebody who spends it. In fact, saved money tends to have a larger effect on the economy in the long run because some of it goes to buy capital equipment (factories, machinery and the like). When we buy clothes, the economy gets a boost once. When we build a factory, the economy benefits now and for years to come.
Hopefully, this simple explanation helps put to rest the misconception that spending money is good for the economy while saving is bad. Spending and saving either are equally good for the economy, or savings actually does more to help enrich us in the long-run. That means that the redistributive effect of increasing the minimum wage will not provide an economic boost; if anything it will hurt over time by increasing consumption’s share of the economy.
As evident by the strong support for raising the minimum wage by all three remaining Democrat candidates for president, liberals are almost unanimous in believing that raising the minimum wage would be good for poor people. That idea may make them feel good about themselves, but it is complete misconception about what would actually happen if you raise the minimum wage.
Four different realities intrude on the fantasy that Democrats have of taking money from supposedly rich business owners and redistributing it to economically-struggling workers: who actually benefits, where the money comes from, the job losses that would result, and the government stepping in to offset any economic gains of the working poor.
Who actually benefits?
First, many of the people who benefit from an increase in the minimum wage are not what you would think of as the working poor. In fact, 63% of workers earning below $9.50 per hour are the second or third worker in their families and 43% of these workers live in households that make over $50,000 per year. The Congressional Budget Office further estimates that families with incomes between one and three times the poverty level (roughly $25,000 to $75,000) will get over twice the benefits that families under the poverty level with capture.
Who pays the price?
Second, nowhere near all the money comes from evil rich business owners. Rather, those business owners will do their best to pass on their increased labor costs to their customers through higher prices. How much of the money is passed on through higher prices will vary by business depending on the elasticities of supply and demand (how much costs go up as quantity changes and how price sensitive their customers are). In most cases, supply is more elastic so customers will end up paying more of the increased cost than the business owners.
Plus, one must remember that many of those customers are, in fact, the very workers the increased minimum wage was supposed to be helping. Many minimum wage workers work in the food service, hospitality and retail industries. Poorer households spend much of their money at the type of restaurants and retail stores that employ many of those minimum wage or lower wage workers. Thus, these workers will essentially be paying for much of their own raises through higher prices at the stores they frequent.
Yes, job losses will happen
Third, some of the working poor will not benefit because they will lose their jobs. Liberals can cling to their misconception that the minimum wage can be increased without job losses, but claiming it will not make it true. These same people believe that raising taxes on cigarettes, alcohol and carbon-based energy make people buy fewer of those products, yet somehow don’t think that increasing the price of lower-skilled workers will lead to employers hiring fewer of them. The reality is that if the minimum wage was raised to $15 per hour the job losses would number in the millions.
Before minimum wage advocates mention the studies that they think show you can raise the minimum wage without job losses, they should know two things. The central study continually cited as evidence that few, if any, jobs will be lost has been fairly comprehensively refuted. The authors (David Card and Alan Krueger) used fatally flawed data from phone surveys of fast food restaurants. Most likely, their questions were answered by workers who did not know the correct answers and just guessed (badly in many cases). Later reexamination using actual payroll records showed a completely different story. Further, the neutral Congressional Budget Office says that just raising the minimum wage to the neighborhood of $10 per hour will cause a loss of up to one million jobs. Going to $12 or $15 would greatly increase those numbers.
Government is the big winner from a minimum wage increase
Finally, the fourth misconception about increasing the minimum wage is that those benefits will all flow to workers. Instead, the government will actually take more of the raise than the workers. Between income taxes, payroll taxes and lost benefits, I estimate that the government can easily end up with 55% of any increase in the minimum wage, leaving the poor worker with only 45% of what was supposed to be a boost in their standard of living. When you add in the higher prices engendered by the increased labor costs, the workers lose another few percent to inflation.
Make the Earned Income Tax Credit more generous
Put all of these misconceptions together and increasing the minimum wage is a terrible policy if your goal is to help the working poor. It is badly targeted (many non-poor workers benefit), is partially paid for by other poor people, some of the people will be hurt, not helped, because they will lose their jobs, and the government actually gains more than the workers. A much better policy is to make the Earned Income Tax Credit more generous: It is well targeted, paid for with progressive income taxes, does not cause job losses, and the government does not seize any of the gains.
People acting on the goal of helping poor people have an admirable aim. However, they should support policies that would actually accomplish their goal, not ones that just make them feel good about themselves. While it is a pet cause of the left at the moment, increasing the minimum wage does little to help the poor. If that is our goal, let’s choose a better policy.
Also on Forbes:
What Bernie Sanders Got Wrong About Raising The Minimum Wage
Nov 19, 2015 @ 08:00 AM 5,866 views
Jeffrey Dorfman ,
Contributor
The three remaining candidates for the Democrat Party had a long discussion about the minimum wage and what it should be raised to during their last debate. Former Maryland governor Martin O’Malley and Vermont senator Bernie Sanders supported raising the minimum wage nationwide to $15 per hour. Former Secretary of State Hillary Clinton played the role of the (relative) grown-up in the room by supporting a raise in the federal minimum wage to “only” $12 per hour. What all three Democrats showed is that they either don’t understand economics or simply cannot speak the truth to the people they need as supporters and voters.
Sanders made clear the more liberal stance on the minimum wage: “You have no disposable income when you make 10, 12 bucks an hour. When we put money into the hands of working people, they’re going to go out and buy goods, they’re going to buy services and they’re going to create jobs in doing that.” This is the first mistake that liberals make—believing that money in the hands of poor people is better for the economy than the same money in the hands of rich people.
People can do three things with their money: Spend it, save it, or use it to pay taxes
People can do three things with their money: Spend it, save it, or use it to pay taxes. Tax money is co-mingled, so everybody’s tax dollars do equal good (or bad) for the economy. Spending has either an equal impact no matter who does it, or may even be more beneficial when done by the rich. Because the rich spend more money on services, the money tends to stay local; in contrast, the poor buy more products, many of which are imported, meaning that their spending may have a smaller effect on the economy (creating jobs overseas instead of at home). That leaves saving.
Liberals and the Keynesian economists who the liberals listen to seem to believe that consumer spending is wonderful for the economy, leading to the vaunted multiplier effect in which spending creates more spending which creates more spending, and so on. Meanwhile, they act as if our savings magically disappear from the economy, perhaps believing that we all keep our savings under our mattress or buried in the backyard.
Money in the bank does not just sit still
In reality, people either invest their savings in a business, thus creating jobs by hiring people, or buy equipment from other businesses, or put their money in the bank. Money in the bank does not just sit still. Banks lend most of it out to somebody who spends it. In fact, saved money tends to have a larger effect on the economy in the long run because some of it goes to buy capital equipment (factories, machinery and the like). When we buy clothes, the economy gets a boost once. When we build a factory, the economy benefits now and for years to come.
Hopefully, this simple explanation helps put to rest the misconception that spending money is good for the economy while saving is bad. Spending and saving either are equally good for the economy, or savings actually does more to help enrich us in the long-run. That means that the redistributive effect of increasing the minimum wage will not provide an economic boost; if anything it will hurt over time by increasing consumption’s share of the economy.
As evident by the strong support for raising the minimum wage by all three remaining Democrat candidates for president, liberals are almost unanimous in believing that raising the minimum wage would be good for poor people. That idea may make them feel good about themselves, but it is complete misconception about what would actually happen if you raise the minimum wage.
Four different realities intrude on the fantasy that Democrats have of taking money from supposedly rich business owners and redistributing it to economically-struggling workers: who actually benefits, where the money comes from, the job losses that would result, and the government stepping in to offset any economic gains of the working poor.
Who actually benefits?
First, many of the people who benefit from an increase in the minimum wage are not what you would think of as the working poor. In fact, 63% of workers earning below $9.50 per hour are the second or third worker in their families and 43% of these workers live in households that make over $50,000 per year. The Congressional Budget Office further estimates that families with incomes between one and three times the poverty level (roughly $25,000 to $75,000) will get over twice the benefits that families under the poverty level with capture.
Who pays the price?
Second, nowhere near all the money comes from evil rich business owners. Rather, those business owners will do their best to pass on their increased labor costs to their customers through higher prices. How much of the money is passed on through higher prices will vary by business depending on the elasticities of supply and demand (how much costs go up as quantity changes and how price sensitive their customers are). In most cases, supply is more elastic so customers will end up paying more of the increased cost than the business owners.
Plus, one must remember that many of those customers are, in fact, the very workers the increased minimum wage was supposed to be helping. Many minimum wage workers work in the food service, hospitality and retail industries. Poorer households spend much of their money at the type of restaurants and retail stores that employ many of those minimum wage or lower wage workers. Thus, these workers will essentially be paying for much of their own raises through higher prices at the stores they frequent.
Yes, job losses will happen
Third, some of the working poor will not benefit because they will lose their jobs. Liberals can cling to their misconception that the minimum wage can be increased without job losses, but claiming it will not make it true. These same people believe that raising taxes on cigarettes, alcohol and carbon-based energy make people buy fewer of those products, yet somehow don’t think that increasing the price of lower-skilled workers will lead to employers hiring fewer of them. The reality is that if the minimum wage was raised to $15 per hour the job losses would number in the millions.
Before minimum wage advocates mention the studies that they think show you can raise the minimum wage without job losses, they should know two things. The central study continually cited as evidence that few, if any, jobs will be lost has been fairly comprehensively refuted. The authors (David Card and Alan Krueger) used fatally flawed data from phone surveys of fast food restaurants. Most likely, their questions were answered by workers who did not know the correct answers and just guessed (badly in many cases). Later reexamination using actual payroll records showed a completely different story. Further, the neutral Congressional Budget Office says that just raising the minimum wage to the neighborhood of $10 per hour will cause a loss of up to one million jobs. Going to $12 or $15 would greatly increase those numbers.
Government is the big winner from a minimum wage increase
Finally, the fourth misconception about increasing the minimum wage is that those benefits will all flow to workers. Instead, the government will actually take more of the raise than the workers. Between income taxes, payroll taxes and lost benefits, I estimate that the government can easily end up with 55% of any increase in the minimum wage, leaving the poor worker with only 45% of what was supposed to be a boost in their standard of living. When you add in the higher prices engendered by the increased labor costs, the workers lose another few percent to inflation.
Make the Earned Income Tax Credit more generous
Put all of these misconceptions together and increasing the minimum wage is a terrible policy if your goal is to help the working poor. It is badly targeted (many non-poor workers benefit), is partially paid for by other poor people, some of the people will be hurt, not helped, because they will lose their jobs, and the government actually gains more than the workers. A much better policy is to make the Earned Income Tax Credit more generous: It is well targeted, paid for with progressive income taxes, does not cause job losses, and the government does not seize any of the gains.
People acting on the goal of helping poor people have an admirable aim. However, they should support policies that would actually accomplish their goal, not ones that just make them feel good about themselves. While it is a pet cause of the left at the moment, increasing the minimum wage does little to help the poor. If that is our goal, let’s choose a better policy.
Also on Forbes:
...increasing federal minimum wage to $15 will just drive more corporations across seas, especially with these supped up trade agreements that will be in place..you socialist/communist supporters fail to account for these issues when waving the palm palm for these unrealistic goals in this type of economy