One of these days, the economy will get back up on its feet. But will the recovery resemble a V, with a sharp upward thrust, or a flat U shape, keeping us in the doldrums interminably?
It depends upon public policy to a great degree. If the government keeps unemployment insurance payments higher than available wages, the prognostication is not very positive. Few people will rush back to work, even when it is safe to do so. If our politicians continue to demand that entrepreneurs who accept government largesse adhere to a minimum wage of $15 per hour, again the economic future does not look too bright. Let us consider, then, the case against this type of interference with the free enterprise system.
Demand curves slope in a downward direction. This means that the higher the price charged for something, the less of it will be purchased, other things equal. And the lower the terms of trade, again ceteris paribus, the more that will be bought and sold.
Progressives are absolutely clear on this matter when it comes to protecting the planet against carbon footprints, cleaning up the air, ridding the economy of plastics and Styrofoam, promoting electronic cars, reducing the use of tobacco products, and a whole host of other such initiatives.
For example, a recent New York Times article was titled “Raise gas prices for the climate.” In it, support was offered for a plan by several governors in the northeast, particularly Republican Charlie Baker of Massachusetts, to tax gasoline to the tune of “perhaps 8 or 9 cents a gallon.” Why? So as to reduce the usage of this fuel. This is based on the insight, wait for it, that the higher its price the less of it will be purchased. Similarly, when plastic straws, shopping bags, plates, are not banned outright, left wing environmentalists want to raise the prices of these items, in order to discourage their usages. This can be done by taxing them, not subsidizing them. If Mayor Mike Bloomberg of New York City couldn’t outright ban sweet drinks of greater than16 ounces, he would have called for increasing, not decreasing, their prices
Again, the law of downward sloping demand is in operation, and widely appreciated for the work it does.
Similarly, when liberal intellectuals want to encourage the use of something or other, they call for a lowering of the costs imposed upon buyers. Examples include electric cars, wind, water, solar and thermal power, and vegetables.
This is not a column on environmentalism. I make no comment on the wisdom or otherwise of these goals. I claim, only, that the means employed, raising prices for unfavored goods and lowering them for favored ones, is compatible with what economists know about these matters. Did they employ the very opposite means to these ends, these environmental activists would have been proposing policies contradictory to their own espoused goals.
Rather, this is an op ed on economic schizophrenia.
The point is, these writers take the exact opposite viewpoint when it comes to the minimum wage law. They so clearly and correctly appreciate that the demand curve slopes in a downward direction when environmental issues are on the table, but forget all about the elemental fact that high prices reduce consumption when it comes to employing unskilled labor. Then, all of their splendid economic sense flies out the window. In psychology, this is sometimes characterized as “compartmentalization” or an “ideé fixe.”
To wit, we know for sure that liberals do not relish an increase in unemployment for vulnerable low skilled workers who are disproportionately black and brown. Yet, there is not a single solitary Democratic politician who does not favor an almost doubling of the national minimum wage law from its present $7.25 to $15 per hour. Bernie is most vociferous about this, but several others such as Bloomberg and Buttigieg, who have business backgrounds and really ought to know better, are also supporters.
But the demand curve for labor, too, is downward sloping. The higher it is pegged, the fewer the number of workers who will be hired. A simple mental experiment ought to clarify this matter. Suppose the level were raised not to $15 per hour, but to an hourly $150 or $1,500. Does anyone really think, in their heart of hearts, that this would actually help any employee? Why oh why do not Bernie and all these others not favor such a stratospheric raise? After all, according to their “logic”, the higher the wage is pegged, the better off will be the economic welfare of the poor and unskilled. Common sense alone indicates this would be a total and utter disaster. Firms paying anything like the latter wage would soon go broke and not be able to hire anyone. If this is not a reduction ad absurdum, then nothing is.
Those with a superficial knowledge of economics will object at the point on the ground of monopsony. This is why, they will aver, a minimum wage level of $15 per hour would be reasonable, but not one of $150 or $1,500. But monopsony implies that there are only one or at most a very few firms that can hire workers.
Hershey, Pennsylvania is the poster boy for the monopsonistic argument. In this town, virtually everyone works for that one firm. But if this chocolate company reduces wages below productivity levels, apart from the coronavirus which has played havoc with labor mobility, employees can move to another town. As well, other firms can move in to take advantage of low-paid workers, by bidding them away from the Hershey company.
Yet, in the U.S. there are an estimated 5.6 million business firms, all bidding for labor. The monopsony objection is dead from the neck up.