The Minimum Wage and the Dangers of Government-by-Decree

By Kevin D. Williamson

Wednesday, April 20, 2016

Bernie Sanders doesn’t have to think too hard about the minimum wage. He lets other people do his thinking for him, which, in his case, probably isn’t the worst idea most of the time. There’s a movement afoot on the left for a $15/hour minimum wage, there is a reasonable chance of prevailing, and that’s all Senator Sanders really needs to know. His approach: Take what you can get now.

Hillary Clinton doesn’t have to think too hard about the minimum wage. She lets other people do her thinking for her, which, in her case, probably isn’t the worst idea most of the time. There’s a process under way in New York in which the minimum wage probably will be raised to $15/hour, with a moment’s pause around $12.50 to evaluate the effects of the change. New York supports this, and that’s all she really needs to know. Her approach: Take most of what you can get now, but make sure there’s a Plan B.

Donald Trump doesn’t have to think too hard about the minimum wage. Thinking isn’t really his thing, and he has dopey red trucker hats.

Can Ted Cruz think about the minimum wage?

Can anyone?

Senator Cruz is skeptical of the value of the federal minimum wage per se, a fact which has scandalized those in the business of being scandalized, such as MSNBC’s Steve Benen, who wondered that such a sentiment would be given voice by anyone other than “fringe figures.” Ordinarily, American progressives are inclined to admire Western European practice, but the Swiss federal minimum wage (there isn’t one) is an exception, along with Dutch school choice and Swedish free trade. Senator Cruz can make the ordinary case against raising the minimum wage as well as anyone else: The basic economics suggest that raising the price of labor will reduce demand for it, some Congressional Budget Office research suggests that job losses could be large (up to 1 million), Democrats are willy-nilly on the price target, having gone from $9 to $10.10 to $15, more guided by sloganeering than by economics, etc. Senator Cruz has read his economics.

So has Paul Krugman (he even won a prize for it), who offers a different take. A series of natural experiments in which some U.S. states raised their wages while others did not suggests that the negative effect of a higher minimum wage on employment may not be as severe as conventional economic models would predict. New Jersey’s fast-food franchises did not go all-robot when the state raised its minimum a bit above Pennsylvania’s next door. If the evidence of heavy employment costs isn’t there, why not raise that wage?

There are problems with Professor Krugman’s argument. One of them is inherent to the study of the economic effects of policy changes: We can only compare what was to what is, rather than to what would have been in a different policy environment. Because the latter comparison involves unknowable data, we cannot rely on simple measurement but must rely on theory and modeling, which aren’t always persuasive, and which are vulnerable to outcome-oriented study design.

But Professor Krugman isn’t entirely wrong. He argues that we may not see much in the way of employment effects because the increase is coming from such a low level. Maine’s $7.50/hour isn’t radically different from the $7.25 in New Hampshire. It is also possible — and this is what most interests Professor Krugman — that there are offsetting effects from higher wages, too — that firms offering higher pay attract a better class of employee or that higher wages improve current employees by making them happier, more loyal, more productive, etc. The usual point of comparison (it has become a cliché) is Costco against Walmart. Costco’s lowest hourly wage is about $12 (on its way to $13.50) whereas Walmart historically paid much less (it is in the process of raising its in-house minimum to $10/hour). The progressives ask: If Costco can do it, why can’t everyone else?

Because everyone else isn’t Costco. Every firm is different, and every market is different. On this question, Professor Krugman would do well to consult Professor Krugman: “Workers aren’t bushels of wheat. . . . They’re human beings, and the human relationships involved in hiring and firing are inevitably more complex than markets for mere commodities.”

That’s an interesting pickle: The challenge is complexity, and the answer is . . . a simple, crude, ham-fisted policy of maintaining one universal minimum wage, from Muleshoe, Texas, to the Upper West Side, enforced at gunpoint by federal agents. Strange that an argument rooted in economic complexity should be itself resolved into something so simple.

But simple is what politics does.

The thought probably never has crossed a mind such as Senator Sanders’s, but Professor Krugman the economist can distinguish causes and effects, even if Mr. Krugman the columnist cannot. Low wages are an effect. The underlying cause is that American workers do not provide labor that is highly valued under current economic conditions. Professor Krugman insists that this is not a reflection of skill, inasmuch as wages for college graduates have stagnated in real terms for 15 years. It does not occur to the gentleman from Princeton that this may reflect the markets literally – literally, Mr. Vice President — discounting the value of U.S. college degrees, a perfectly rational thing to do given the recent direction of college education. Caitlyn may have worked very hard for her women’s-studies degree from Butterscotch College, but that isn’t going to help her income very much if she messes up my tall flat white.

Properly understood, raising the minimum wage — and having a minimum wage at all — is camouflage, something to talk about and fight about while we’re not talking about and fighting about the more important underlying issue. Declaring that all American workers shall be paid at least $15 an hour is not the same as ensuring that all American workers produce $15 an hour worth of value, and, eventually, the disconnect between those two considerations must make itself felt. Even the nice guys at Costco, who like the good press their higher wages purchase for their company, cut the firm’s earnings estimates after deciding to increase its labor costs.

Krugman, Clinton, Sanders, et al. have a backward and primitive view of government. For them and for their fellow Hobbesians, the Middle Ages never really ended, and the role of the sovereign is to distribute benefices and issue decrees. Unhappy with your wages? Petition the prince to decree that they shall be otherwise, and dare any gimlet-eyed economist to point out that the imperial tailor is skimping on the ermine.

To consider the unspoken question — Why is it that some Americans’ labor is valued so little that we feel the need to threaten people with time in the penitentiary for valuing it honestly? — is to wade quite deeply into that human complexity that Professor Krugman mentions in passing. We might talk about the value of maintaining a holdover 19th century Prussian monopoly model of education. We might consider the wage effects of a costly, cumbrous, corrupt, and unpredictable regulatory regime. We might talk about trade policy, labor organizing, the ineffectiveness of U.S. public institutions compared with their counterparts in countries as different as Sweden and Singapore, the severity and complexity of U.S. business taxes, etc. Policies have consequences, and simply having the prince declare that those consequences shall not exist isn’t a solution. It’s an approach that works right up until the moment it doesn’t.

The ancient idea is that government is here to tell us what’s what, that it is a large and well-armed collection of Thou Shalt and Thou Shalt Nots that speaks with finality. But reality cannot be decreed away, and it is in reality that we must live and work, which is why governments are instituted among men in the first place. Properly understood, government is the great enabler, not the great prohibitor. But we are in a prohibitory mood, and one of the things we are most interested in prohibiting is real economic evaluation of the past 60 years’ worth of policy choices.

I don’t expect Senator Cruz to give a speech about that, exactly. But it might be worth it for the occasional Republican politician to ask the question in public: “Is Caitlyn’s paycheck too small simply because there isn’t a law requiring it to be larger, or is there something else in Caitlyn’s life — in our lives — that should be taken into consideration?” Mrs. Clinton will not think about that. Senator Sanders cannot think about that. Apeneck Sweeney is obsessed with the wily Oriental and the marauding bandito. Professor Krugman has demoted himself to politician. And what have they come up with? Price-rigging, underlying economic reality be damned.

Decree, decree, decree: E pur si muove.