The Obnoxious Fallacy of Mandated Prosperity

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Obama's overtime end-run is the latest example of the fallacy of attempting to mandate prosperity. This labor rule mimics so many other administration initiatives that seek to unilaterally impose its will on circumstances not suiting their vision. However, the economy is a tough adversary. So the basic problem remains: Although government may redistribute wealth, government cannot create it.

Last week, the Obama administration announced a rule doubling (from $23,660 to $47,476) the salary range within which employees must be paid time-and-a-half overtime. Like recent high-profile minimum wage hikes in several large cities and the "living wage" movement in general, Obama's action is just the latest effort to "mandate prosperity."

Theoretically, such an effort fits neatly with the administration's mindset. Seeing the free market as an inherently negative force on equitable outcomes, its tendencies must be corrected. Seeing government as the ultimate force for good, it is the natural means for righting the free market's perceived inequities.

Practically, it is also understandable that Obama would act on such thinking now. With just months left in office, it is clear that after seven-plus subpar years, America's economy is not going to rebound on his watch.

During his presidency, real annual GDP growth has averaged just 1.4% - less than half its average from 1946-2008 - and 2016's first quarter economic growth was just 0.5%. Americans' income growth has been stagnant. Obama's only real positive point is a low unemployment rate, but even this is only due to Americans' decades-low participation rate in the labor force.

In short, if Obama is going to aim to give America prosperity, he is going to have to try to mandate it. However, while his effort is being ballyhooed as a blow against income inequality, the problem remains: It won't work.

The proposal effectively serves as a tax on labor for those affected. As with all taxes, it raises the cost of the item taxed - the end result being a reduction in the amount of the item demanded. Just because the commodity in question is labor, and it is directly attached to the employee, will not alter that outcome.

The Obama fallacy is that somehow there is excess money in the affected businesses that can be simply shifted to cover his mandated higher labor costs. But businesses and markets do not work that way - profits must be continually regenerated in dynamic competition; they do not lie automatically available.

Without reducing these now higher costs of operation, businesses will be uncompetitive and consumers will shift to lower cost alternatives. Businesses' most logical approach will be to hold labor as close to its previous cost as possible. None of the possible approaches offers a long-term benefit to those intended to be helped by the new rule.

Salary workers can be converted to hourly status, with wage rates set to match their old salary and work levels - thereby meeting a business' particular requirements and still adhering to the new rule. Or new (and likely part-time) workers could be added to avoid paying overtime rates once an employee's weekly 40 hours are reached. Finally over the long-term, new labor-reducing investments - uneconomical before, but now made cost-effective - will be utilized.

The best result affected employees can hope to see is a short-term benefit, until businesses alter their operations to meet the new requirements. The long-term affect invariably will be reduced use of the higher cost labor.

Employees' compensation only rises one way over the long-run: Increased productivity. The new rule does nothing to advance this.

Obama's economic record argues America is in more than just a prolonged slow recovery. At the same time it has experienced growth less than half that of the preceding post-war period, our economy has never had more prosperity mandates. Yet had they worked, there would have been no need for Obama's latest one.

Neither the attempt to mandate prosperity nor the low growth trap is just an American phenomenon. Slowing growth and increasing prosperity mandates appear highly correlated globally. Their problem is that they follow wealth accrual, they do not lead to it.

The illusion is that wealth offers the means to accomplish mandated prosperity's goal by offsetting the resulting increased cost. Just the opposite actually occurs. As these regulations push the marketplace further from its optimal operation, the private sector produces less wealth to offset its public sector-imposed costs. This shortfall only increases "prosperity mandaters" in their desire to catch up to the private sector outcome it envisioned. The result is a self-reinforcing spiral - only in the opposite direction intended.

It is increasingly clear that growth and wealth accrual do not proceed from mandates. Government can impose prosperity mandates, but cannot mandate the wealth creation needed to support them.

 

J.T. Young served in the Treasury Department and the Office of Management and Budget from 2001 to 2004, and as a congressional staff member from 1987 to 2000. 

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