Thursday, February 21, 2013

President Obama and the Minimum Wage

Economic policy is not made only by economists.  It is made by a lot of people, many who lack economic knowledge and credentials.  Politicians often make economic policy, and despite their immense resources to get the best economic advice, they often make bad economic policy.  The rest of us make economic policy everyday as we buy and save, and when we buy, what we buy, and when we save, how we save.

For background, there are two basic types of governmental economic policy, namely fiscal and monetary.  Fiscal deals with the size of government, the size of the deficit, tax policy, transfer payments, and all sorts of minutia that deal with governmental programs and purchases that are usually wrapped up in governmental budgets.  Monetary policy deals with interest rates, bank reserves, governmental bonds and assets, and similar things. 

Our politicians deal with fiscal policy, and the Federal Reserve deals with monetary policy.  The Chairman, Presidents and the Governors of the Federal Reserve are supposed to be knowledgeable in economics.  The politicians? …. Not so much. 

One of the areas where our chief politician wants us to support him in revising economic policy is on the subject of minimum wage.  President Obama gave the State of the Union address, and in it he wanted the Congress to adopt policies that would lower unemployment and bring more manufacturing to the United States.  And then the President asked the Congress to raise the minimum wage.  

The problem is that in real life there are policy trade-offs and if we want to raise the minimum wage, we will have to compromise our goals of decreasing unemployment and expanding manufacturing.  Mike Konczal explained the relationshipwell.  When the minimum wage goes up, the costs of production goes up as well, which the entrepreneur will want to control by lowering overall employment.  So, unemployment will go up, not down, and manufacturing will not expand, at least not at the pace the President wants.  This is the equivalent in physics of, where, if I jump up, I expect to stay up without coming down.

Raising the minimum wage would have some negative effects on our economy that I do not think we want to experience.  It would encourage an increase in offshore manufacturing, and the President spent a lot of time in the State of the Union asking for policies that would repatriate manufacturing jobs to our shores.  It would hamper effects to decrease youth unemployment, notably black youth unemployment that is pegged at 37%.    It would also hamper efforts to increase hiring among recent college graduates who need more internships and entry-level job opportunities.

The President wants an intelligent jobs debate, but to suggest that trade-offs are not in the mix and that we can have all things economic is misleading.  

In all fairness, there is a blog entry in this series criticizing those on the right who advocate privatizing Social Security without adding to the nation’s debt.  Efforts to misrepresent economic thinking exist on both the left and the right.  Except in this case, it is the President of the United States who is supposed to educate us all and lift the quality of the debate by sticking to real economic possibilities.