Minimum Wage Plus; D. Bandow

Potomac Principles Minimum Wage Plus by Doug Bandow W hat could be more appropriate in Washington than a bipartisan con gressional majority pushing to increase the minimum wage? Legislators always move with alacrity when they are giving away other people's money. But while the public might be tempted to celebrate an increase as a victory for work ing people, it will help only those who remain employed. Decades of research demonstrate that fixingwages destroys jobs; the only question is how many. Nearly two dozen studies during the 1970s and 1980s reached a rough consensus that a ten per cent rise in the minimum cuts teen employ ment by one to three percent. The Minimum Wage Study Commission, created in 1977 by a Democratic Congress and staffed by President Jimmy Carter, concluded that a ten percent increase in the minimum re duces employment opportunities by be tween .5 and 2.5 percent. Indeed, the non partisan General Accounting Office stated that it "found virtually total agreement that employment is lower than it would have been if no minimum wage existed." In 1988 the Congressional Budget Officewarned, in a report which some opponents attempted to suppress, that a proposed hike to $5.05would destroy between 250,000and 500,000jobs.

Moreover, the Progressive Policy InstiDoug Bandow is a senior fellow at the Cato Institute and a nationally syndicated columnist. He is the author and editor of several books, including The Politics of Envy: Statism as The ology (Transaction). tute issued its first policy paper on the minimum wage, concluding that "certainly, employers will hire fewer minimumwage workers when they have to pay more for them." The Employment Policies Institute (EPI) has published a dozen or more studies documenting the ways in which a minimum wage hike would hinder job creation, reduce the number of hours worked by those who stay employed, and encourage companies to substitute better-educated, middleclass employees for disadvantaged, lower-skilled workers seeking to escape poverty. Even the few economists who favor the proposed increase don't dispute that it will throw some people out of work. They just say the number will be small.

This should come as no surprise. Unfor tunately, however good the politicians' in tentions, government fiat cannot erase eco nomic reality. People who earn little do so for reasons other than employer greed: lack of education, skills, and experience. Indeed, many minimumwage workers are young people just entering the labor force. Unfortunately, setting a legal minimum does not address the reasons people receive low salaries. It simply tells employers not to hire anyone who can't produce that amount. The result is higher unemployment, con centrated among the most disadvantaged, particularly urban teens. Noone who un derstands economics disputes this central point: arbitrarily raising the minimum above a worker's productivity level means the person won't be hired. 564 The Foundation for Economic Education Irvington-on-Hudson, New York 10533 Tel. (914) 591-7230 Fax (914) 591-8910 E-mail: freeman@westnet.com August 1996 Is Inflation Dead?

M ainstream economists are telling us that "there's little or no dan ger of inflation." The rates of inflation have come down significantly in recent years and can be expected to remain benign in the future. In the developed countries, average price inflation in 1995 was about 2.5 percent. In most less devel oped countries, it moderated to 8 percent. In Latin America, the Middle East, and Eastern Europe, it continued at above average rates, some even at triple-digit rates. When compared with the 1970s and 80s the rates of inflation in developed coun tries, no matter how you may define it, have indeed come down. The monetary authorities that shape national monetary policies may have learned from their earli er blunders or may have been replaced by more prudent managers. The governors of the Federal Reserve System who issue and manage the U.S. dollar and preside over the international dollar standard may have finally learned by experience that inflation has undesirable economic, social, and political consequences.

Some credit for the American learning process must be given to the governors of two other central banks: the German Bundesbank and the Bank of Japan. They consistently inflated their currencies at lesser rates and kept them harder than the U.S. dollar, which forced the Federal Reserve to follow suit. Refusal to follow could trigger an international flight from the dollar, which would have calamitous consequences the world over. The dollar crises of 1978 and 1979 were early warning signals of things to come if the Fed did not mend its easy-money ways and keep in better step with its hard-money competi tors. Despite the visible improvements in central bank behavior in recent years, it is certainly premature to say inflation is down for the count. The monetary system that bred past inflations remains unchanged; the monetary thought that guided the monetary authorities is still popular, especially with government offi cials. It grants legislators and regulators the monopolistic right to manage the peo ple's money and manipulate it to suit their political ends.

At the present, the central banks of the developed countries are aggressively expanding their credits because of the fear of recession. With unemployment running high, the Bundesbank recently cut its dis count rate to a record low of 2.5 percent, hoping to revive the dragging economy. This "bastion" of anti-inflationary credibil ity may be changing its course to go the way of all full-employment programs. The Bank of Japan, which is an important cred itor to the U.S. government, last year low ered its official discount rate to a record low-to one half of one percent. When compared with these" stalwarts" of hard money, the Federal Reserve System, which presently is charging 5 percent for its cred its, looks like a miser and tightwad. Actually, it has no ch9ice but to keep its rates high because the United States is a low-saving, high-consumption, heavily indebted country with a chronic current account deficit.

In developing countries, inflation is still an everyday experience. In Asia the rate remains relatively high at some 12 percent. Turkey is the worst, with an inflation rate over 75 percent. In the economies of the former Soviet Union the average rate is estimated at 150 percent, with that of Belarus at 700 percent, Ukraine at 300 per cent, Azerbaijan at 460 percent, and Tajikistan at 390 percent. These rates are well down from an average rate of more than 1,500 percent in 1994. Everywhere central banks are creating new credits and printing new money. The stock of money is growing faster than at any time in the 1990s. Moreover, the United States is experiencing an explosive growth of securitized debt, what most economists call" rising money velocity." Yet, the price inflation of goods and ser vices remains rather moderate. The ram pant growth of leveraged speculation and corporate acquisitions point at a different kind of inflation: that of existing capital assets. Instead of soaring prices of goods and services, we see the effects of easy money and credit in the financial markets.

Inflation is not dead but very much alive. It has moved from Main Street to Wall Street. Most developed countries are mired in economic stagnation or even recession. Japan continues to suffer the readjustment pains from its credit expansion binge of the 1980s. The European countries are chafing under crushing loads of welfarism and soaring rates of unemployment. The European monetary ease,led by the Bundesbank, is failing to stimulate eco nomic production but instead is fueling a great financial-asset inflation; European stock prices are hitting one record after the other. The United States, which is the only country not mired in stagnation, is leading the way in the asset inflation. Our age of inflation has deep roots in doctrines and theories that disparage eco nomic freedom and deny the freedom of contract. Faulty monetary thought paved the way for the age of monetary destruc tion by allowing governments the world over to create monopolistic banks of issue and make their money Illegal tender,"

which everyone is forced to accept no mat ter how depreciated it may be. To refuse to accept it is to forfeit income and wealth. The monopolistic money system then was made to serve the welfare state with its unquenchable thirst for deficit spending. It was in 1971, finally, that the U.S. govern ment opened the inflation flood gates by removing the last deterrent, the gold reserve requirement. Building on political force and managerial discretion, it created the paper dollar standard. Depend on it, the legislators and regula tors who gave us such a system will bring us more inflation in years to come. HansF. Sennholz NEW FROM FEE! Private Means, Public Ends: Voluntarism vs. Coercion edited by J. Wilson Mixon, Jr. "Private interactions create a virtual flowerfield. Not every flower is perfect, but the overall effect is breathtaking. Government meddling often entails poisoning the ground, then lamenting its inability to produce, and finally setting out a few very expensive potted plants."

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The essays in Private Means, Public Ends cover a diverse range of subjects, including education, charity, telecommunications, private. banking, the arts, trans portation, and private roads. Published by The Foundation for Economic Education Inc. 30 South Broadway, Irvington-on-Hudson, NY 10533 ISBN 1-57246-024-5 Paperback $14.95 Available in bookstores nationally, or call (800) 452-3518 Back-to-School Sale 8.95 6.95 8.95 6.95 6.95 5.95 14.95 12.95 14.95 (H) 12.95 14.95 9.95 Faustino Ballve Essentialsof Economics The best survey of principles and policies. Frederic Bastiat EconomicHarmonies An inspiring exposition of the natural harmony that results when people are free to pursue their individual interests. EconomicSophisms The book exposes the fallacies and absurdities of a host of harmful interventionist ideas. Bettina Bien Greaves Free Market Economics:A Basic Reader This anthology of selected readings is ideal for classroom use or personal study.

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For years advocates of the mInImum wage-labor unions, whose skilled mem bers benefit from the wage floor; liberal politicians seeking to buy votes from poorer workers; and left-wingideologues, who pre fer social engineering to improving people's lives-simply ignored the facts. Confident that anyone who lost his job would blame something else, perhaps capitalism or Reaganomics, Congress steadily raised the minimum wage even as teen unemployment soared. But now, after disdaining academic in quiry their entire careers, minimumwage advocates have suddenly become interested in the facts. They finallyfound a report that fit their political preconceptions. Alas, the analysis of a 1992 New Jersey minimumwage hike, by Princeton's David Card and Alan Krueger (the latter later hired by the Department of Labor), was, accord ing to a detailed review by EPI, "based on ludicrously flawed data." EPI Executive Director Richard Berman explains that his organization studied the actual number of employees and found that "the payroll records do not match the Card-Krueger data. Only a handful come anywhere close."

Michigan State University economist David Neumark and William Wascher of the Fed eral Reserve Board figure the actual impact to have been a 2.7 percent decrease in employment for every ten percent mini mumwage hike. Indeed, minimum-wageadvocates should avail themselves of EPI's extensive body of work, conducted by a host of outside economists. For instance, in 1993 Bruce Fallick, from UCLA, and Janet Currie of MIT, concluded that teenagers whose earnings were raised by increasing the min imum were more likely to lose their jobs. The larger the gap, "the greater the proba bility that there will be a loss of employ ment." In the same year, Lowell Taylor of Car negie Mellon reported on California's most recent minimum-wagehike. His conclusion: everyone percent hike cut retail employ ment by .8 to .9 percent. Also released in 1993was a review of recent studies by David 565 Neumark. He reported that "the best esti mate of the range of effects is that a 10 percent increase in the minimum wage re duces employment of teenagers by 1 to 2 percent, with the effect generally closer to 2 percent."

A 1994 study by two University of South Carolina economists, John Addison and McKinley Blackburn, found that rais ing the minimum wage did nothing to lower poverty rates. In another EPI paper in early 1995,David MacPherson from Florida State University and WilliamEven of Miami Uni versity showed that for every dollar in minimumwage increases going to single parents, about $4.50 goes to single individ uals and $6.80 to children and others living in their parents' homes. Another 1995 study by David Neumark found that minimumwage increases lure additional higher skilled teens into the work force, supplanting disadvantaged kids. Those displaced, he warns, "are more likely to end [up] neither enrolled nor employed," a prescription for social disaster. Also last year, Kevin Lang of Boston University dis covered a similar phenomenon when study ing eating and drinking establishments. This is the real research record.

There's also the little matter of princi ple-of fundamental fairness to employers. Helping those in need should be a concern of every individual in society, not just firms that hire the most unskilled labor. Yet rais ing the minimum wage penalizes the very companies that are doing the most to assist the disadvantaged by providing them with jobs. However, if Congress really believes that it can repeal economic reality, it should consider the proposal by John McClaughry, head of Vermont's Ethan Allen Institute. Let workers sue the federal government if they lose their job, or fail to find a job, because of the increase. And take any awards out of the Labor Department's bud get and the officeaccounts of legislators who voted to raise the minimum. Of course, the right method to raise wages is to improve education and lower taxes. Today's educational monopoly is warehous566 THE FREEMAN • AUGUST 1996 ing rather than teaching inner-city kids; why not give their parents a choice in schools, increasing the likelihood that future workers will be prepared for higher-wage jobs? If federal officialsreally care about the earning power of minimumwage workers, why not ease the payroll tax burden, which falls most heavily on those who earn the least? UnTHEFREEMAN IDEASON LIBERTY DefiningJustice by Mark.Da Vee W hen a word is used in a certain context often enough, it can take on a whole new meaning. One such casualty of the English language is the word "justice." By planting it within the phrase "economic justice," we begin to equate justice with the equal distribution of wealth. Would economic equality through the transfer of wealth by the state be the realization of economic justice?