The Minimum Wage is Bad at Everything

There are a handful of commonplace and widely accepted political policies that I fundamentally disagree with – ideas whose legitimacy I once took for granted but which I now question and reject the more I learn about them. Perhaps none is more far-reaching in its scope and implications, more cloaked in mumbo jumbo and fallacies, and yet more espoused by my peers and the population at large that the minimum wage. Conventional wisdom says that supporting minimum wage should be a no brainer for all but sociopaths and rich fat cats. Here, I’ll attempt to explain why I think the minimum wage fails to pass muster in virtually every respect.

Background

Minimum wage laws began appearing in several states across the USA in the early parts of the 20th century before being enacted nationwide in 1933. The national minimum wage was challenged in the Supreme Court and overturned as unconstitutional, then revived in 1938 and later upheld by the Supreme Court on the grounds that the commerce clause of the 10th amendment grants the federal government authority to regulate wages. The minimum wage has increased over time and since 2009 has sat at $7.25/hour nationally or slightly higher in some states and cities. Recently, calls to increase the minimum wage to $15 or more have picked up steam and become law in a handful of cities and states. Most democrats and those on the left have pushed for higher minimum wages, led by figures like Bernie Sanders, Elizabeth Warren, and Robert Reich with concern for egalitarianism and poverty. Most republicans and those on right have pushed for the status quo or only modest increases, citing jobs and unemployment as a main concern. Calls to abolish the minimum wage entirely are rare.

Without further ado, I present to you the three main ways in which the minimum wage fails.

1) Not actually effective at fighting poverty and promoting egalitarianism

That’s right, the main reason why many on the left support a minimum wage is deeply flawed. Emperor Bernie Sanders has no clothes.

The minimum wage is just as much a restriction on workers as it is on employers. “Employers must pay workers at least $X/hour” is logically equivalent to stating “only people capable of earning at least $X/hour are allowed to work.”The true minimum wage, in fact, is always zero. Employment is not a guarantee, and millions in the USA remain out of work.

The minimum wage declares the least productive ranks of society unfit for employment. Those are the very parts of the population most at risk of poverty and most in need of help. Instead, the minimum wage ties their hands. Sure, certain people who are far from rich may come out ahead in the short run as they enjoy the same level of employment with higher wages. But this is hardly remarkable or unique. As an analogy, setting a minimum price of $10 for a sub might help Potbelly and Quiznos while putting Subway into bankruptcy. Does a fair or egalitarian society convert have-littles into have-nots so it can marginally benefit a few have-somes?

At the same time, the minimum wage eliminates opportunities for career growth. Nobody disputes the value of job experience when it comes to commanding higher pay and more job opportunities in the future. To illustrate this point, many candidates who push for a higher minimum wage simultaneously hire eager unpaid interns. Workers who earn a low wage accrue experience and knowledge just the same as ones who earn nothing – so why outlaw the former and allow (or even engage in) the latter? I don’t have a good answer, but I do know that it only serves to hinder upward economic mobility.

With this in mind, it might not come as much of a surprise that the early minimum wage movement was rooted partly in eugenics, racism, and nativism. Consider this quote by Frank Taussig in the bestselling 1911 textbook “Principles of Economics:”

We have not reached the stage where we can proceed to chloroform them once and for all; but at least they can be segregated, shut up in refuges and asylums, and prevented from propagating their kind.…

What are the possibilities of employing at the prescribed wages all the healthy able-bodied who apply? The persons affected by such legislation would be those in the lowest economic and social group. The wages at which they can find employment depend on the prices at which their product will sell in the market; or in the technical language of modern economics, on the marginal utility of their services. All those whose additional product would so depress prices that the minimum could no longer be paid by employers would have to go without employment. It might be practicable to prevent employers from paying any one less than the minimum; though the power of law must be very strong indeed, and very rigidly exercised, in order to prevent the making of bargains which are welcome to both bargainers.

2) Fewer jobs, yes, but also a less prosperous and productive society

It’s not just that the minimum wage can swell the ranks of the unemployed, it makes society poorer as a whole. The real wealth of any given society is entirely a product of the goods and services it produces (whether they are counted in GDP or not, perhaps a topic for another blog post some time). In the examples above, people who work less or not at all due to minimum wage restrictions represent real losses in wealth and production. People who get paid more to do the same job, however, don’t magically become more productive.

The repercussions are not always as visible or easily measured as the unemployment rate, but they make an impact through higher prices and fewer consumables to go around. And yet again, the meaningful consequences fall largely on those near or below the poverty level. A well off person’ wallet might barely notice the difference between a $10 or a $5 footlong sub, but it’s a different story for someone barely making ends meet.

3) My employment, my choice

This is an angle that’s rarely considered but personally I find it quite important. Many on the left understand and value the right to privacy and making choices for oneself, at least on certain issues. The signature issue where this applies, of course, is abortion. People in favor of abortion rights are not called “pro-abortion” but rather “pro-choice.” Perhaps people who favor abolishing the minimum wage should be called “pro-choice” as well.

If we want to call ourselves a free country, we should put some consideration towards giving people the right to make their own choices. For government to interfere in the private contracts or arrangements between consenting adults (employer and employee in this case), it should have a good reason to do so. Protecting third parties from harm, for instance, is a worthwhile concern. “I don’t think that’s enough money” is not. In this instance, I struggle to see where there’s any harm in allowing people to freely negotiate their terms of employment.

Ultimately, enforcement of the minimum wage falls on the use of force and imprisonment to punish and subdue violators. Call me old fashioned, but I think the use of such tools can only be justified in cases of clear harm and wrongdoing, and not as a way of imposing economic doctrine on ones neighbors.

Final Thoughts

Before I conclude, let me answer some possible reservations or retorts one might have about the arguments I laid out above.

  • “Employers need workers and will just pay the higher wages.” Intuition and data both disagree – and as far as data goes it’s hard to measure the number of jobs that have simply never existed due to the minimum wage. If you’ve ever wanted something but decided not to buy it because it was too expensive, you know how this goes. As the price of labor increases, employers will find ways to reduce the amount of labor they consume. As a prospective business owner one day myself, I can imagine roles that are a steal at $9/hour but not worth it at $15/hour. In the long term it’s simply unsustainable to pay employees more than they create in value.
  • “Putting more money in the hands of the working class is good for the economy because they spend it.” Even if we accept the premise that money in the hands of the working class is good for the economy, it’s not clear that the minimum wage actually accomplishes that and it may even be counterproductive. If the goal is to get more money to the working class, there are simpler and more direct ways to achieve that such as tax cuts or even a basic income guarantee.
  • “Countries in Europe have high minimum wages and are doing fine.” These sorts of correlational observations without accounting for the multitude of other factors in play are notoriously unreliable. Even then, this is not as true as one might assume. Many of Europe’s most prosperous countries actually have no minimum wage, such as Switzerland, Denmark, and even Sweden.
  • “Well, maybe the minimum wage is flawed but it’s still better than nothing as far as poverty is concerned.” Again, it’s not clear that the minimum wage helps the poor at all and it may even be counterproductive. And again, there are more direct and much more effective ways of combating poverty.

The minimum wage is a shining example of how no amount of good intentions or wishful thinking can make a bad policy into a good one and how conventional wisdom can be dead wrong. It exacerbates dire poverty, it makes us collectively poorer, and it needlessly infringes on our liberty and self-agency. I hope you’ll agree, and maybe bring up some of these points the next time a minimum wage increase is served up as a solution to poverty and inequality.

1Technically speaking, this is only truly equivalent if people are required to demonstrate their capability of earning $X/hour by finding a job that pays at least that, but you get my point.

The US Debt is Enormous and You Shouldn’t Care

Did you know that the US National Debt is almost $17 trillion and growing at a rate of hundreds of billions of dollars a year? Or wait, maybe the debt is at $70 trillion. Or is it $86.8 trillion?

Regardless, what’s important is that our country owes a zillion bajillion dollars and that growing number will lead to the federal government going bankrupt like the City of Detroit, the Chinese marching in with their US debt holdings and taking over, or worse! Even in the short term, you have people like Donald Trump stating that “When you have [debt] in the $21-$22 trillion [range], you are talking about a [credit] downgrade no matter how you cut it.” A credit downgrade! That means the US would have to pay even higher rates on the money it borrows, meaning the debt would increase even faster! And Donald Trump is really rich, so you know he’s smart and wouldn’t be making ludicrous claims with no basis in reality.

Mother of God...

Mother of God…

Are you terrified yet? Ready to demand that the government balance the budget or, better yet, pay off our debt entirely? Relax. I was once like you, worried that the US Government was overspending and undertaxing our way to financial collapse and putting an undue burden on future generations. I cringed at the thought of the US government paying nearly $3 trillion in interest – almost $10k per American – while I responsibly paid all my credit cards and debt payments in full each month. I got a warm, fuzzy feeling from politicians and journalists who talked of balancing the federal budget (that would probably include almost every politician these days). But I, like many others, bought into a critical misunderstanding of how taxation, spending, and public debt work with fiat currency like the US Dollar.

In reality, there is no coherent possibility for the US government to go bankrupt, experience a credit downgrade, or be coerced by foreign debt-holders due to excessive debt. These are all logically absurd outcomes that don’t even merit acknowledgment. In fact, just the notion of any government being in debt of the currency it issues is rather absurd as well.

Chuck E. Cheese’s and the Never-Ending Supply of Fiat Currency

Anyone familiar with the term “fiat currency” is aware that the US government has an infinite supply of dollars at all times. Every dollar in circulation today was created, and distributed, by the US government at one point or another. Note that I used the term “distributed” instead of “spent,” but those words are equivalent in this context since the distribution of dollars from the US government to other parties is the very definition of government spending. Once a dollar is in circulation, it can be used to pay taxes or exchanged for goods and services in the free market.

The US government’s capacity to produce dollars is quite similar to Chuck E. Cheese’s capacity to produce its tickets. It can create them and distribute tickets however it likes, and it also collects them at their arcade stores. But, the process of awarding tickets through its machines doesn’t depend on how many tickets are collected at their stores. Quite simply, Chuck E. Cheese’s can never run out of tickets or ever have a compelling need to acquire them.

All that's missing is "This note is legal tender for all debts, public and private."

All that’s missing is “This note is legal tender for all debts, public and private.”

Now, imagine a world where Chuck E. Cheese’s is duly elected to represent the people, and a new constitution is drafted giving them powers of taxation and declaring the ticket as the national currency. Let’s assume that, on day one of this new order, the government has not yet distributed any tickets. Although they still have infinity of them, as they always do, the people have none and are using a barter system (or maybe SOJs and Bitcoins) for trade.

It’s not really a government without any government spending, so President Cheese himself declares that they are hiring policemen, teachers, road builders, and miscellaneous paper pushers to be paid in tickets. To his dismay, he gets exactly zero applications. Nobody is trading tickets, nobody has a need for them, and in fact tickets don’t even burn well enough to heat one’s house. Likewise, nobody is willing to take a job that pays in tickets.

But President Cheese is a resourceful mouse and he figures out a solution. “All citizens will be required to pay a tax of 10 thousand tickets at the end of the year, and violators will be thrown in jail for tax evasion!” he decrees. Now that may not be the fairest way to allocate tax burdens to the population, but it does the job. People, now clamoring for tickets to avoid jail time, sign up to become government employees in droves. Those that don’t join the public sector instead trade their goods and services to government employees in exchange for tickets. Soon, everything from aardvark meat to zucchini bread can be bought and sold for tickets.

For the sake of this example, suppose that 10 billion tickets are paid to government employees in the first year, while 9 billion tickets are collected in taxes. With 10 billion tickets going into economy, and 9 billion coming out, that leaves 1 billion tickets in circulation. It also means that the government spent a billion more tickets than it collected, although strangely there is still no government debt. At the end of the day, the government leveraged its power of taxation to take some of the workforce and put it towards providing roads, police, and teachers. The government can continue operating with this budget as long as it wants. The only direct impact of the deficit is that a billion tickets are put into circulation each year. Sounds all well and good, right?

Does the Deficit Matter at All?

Remember that government spending injects money into an economy, while government taxing takes it away. If you have too much of the former, but not a lot of the latter, the supply of money grows at a very fast pace. When it grows faster than the output of the economy, the currency in question experiences inflationary pressure. Inflation is not always a bad thing – it is effectively equivalent to a tax on those who hold money – but large or unpredictable amounts of it usually are undesirable.

Yet, sometimes inflationary pressure and putting money into an economy can actually result in a more productive and prosperous society. This is generally true during recessions, including the recent 2008 crash that we’re still recovering from. In a recession, businesses lose revenue and therefore lose money available to spend on wages. Cutting the price of products or services is easy – consumers love a good price reduction – but wages are another story. Wages are sticky, meaning that people don’t like accepting pay cuts, so instead businesses employ fewer people to reduce their wages paid. That leaves us with unemployment, and unemployment represents wasted production in an economy.

Reduced taxes would give businesses more money to spend on wages and individuals more money to buy what they want, decreasing unemployment and helping put an end to the recession. Alternatively, increased government spending could make use of the labor being wasted to unemployment and end the social ills that come with it, also leading to a faster recovery from recession. Either of these, of course, would result in a larger deficit.

Considering all this, cutting taxes and/or increasing spending until a recession is over and unemployment goes down to low levels seems to be a pretty obviously good idea. Yet our government doesn’t do it nearly as much as it should. Why not? Because, as I indicated in the beginning of this article, too many people are paralyzed over fear of national debt.

Instead of issuing new currency to cover deficits, the US government issues treasury bonds. Issuing these bonds is not necessary for government spending, it is merely a relic in constitutional procedure from when the US dollar was on the gold standard. The only practical difference between issuing currency and issuing treasury bonds is that bonds pay interest, effectively encouraging saving and putting upwards pressure on interest rates in the free market. This occasionally results in weird situations when the Federal Reserve decides it wants to lower interest rates, like the government buying treasury bonds from itself. It also means the government has an obligation to redeem those bonds for dollars when they mature, and this is what’s known as the national debt. The term “debt” is something of a misnomer and is not the same debt that people, businesses, and local governments are used to. To “pay off its debts,” the government must simply convert outstanding treasury bonds back to dollars.

The Phony Debt Crisis

Rather than handling fiscal policy in a way that maximizes the well-being and productivity of society, policymakers in Washington bullheadedly pursue disastrous policies in the name of debt reduction with little basis in reason or reality. The size of government is a legitimate question for society to debate, yet rather than compromise between cutting taxes and increasing spending during a recession, we often do the opposite. In the face of a rampant unemployment, Republicans ask for spending cuts while Democrats ask for tax increases.

Actually, our country CAN literally sustain deficit spending forever, as can any country with a sovereign currency.

And now, with the debt rapidly approaching a completely arbitrary debt ceiling, some congressmen are threatening to allow the US to default on its debt payments, despite the massive negative impacts that could have on the economy. That’s like the ocean defaulting on payment of water. Or Chuck E. Cheese’s defaulting on payment of its tickets.

And before you blame it all on the Republicans, keep in mind that it wasn’t long ago that our current President voted against a debt ceiling increase himself:

Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘‘the buck stops here.’’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.

I therefore intend to oppose the effort to increase America’s debt limit.

None of this is accurate, except perhaps the part about a failure of leadership. Our children need not be burdened by today’s deficits because the government doesn’t need anything from them to pay off its debts. What matters for our children is that they have the technology, education, and infrastructure to provide for their generations. Even if this quote were true, the right away to do something about it wouldn’t be to default on debt payments.

Why can’t our policymakers simply set government spending at a level that allows it to provide the services that society desires from it, and then set taxes at a level that minimizes unemployment without letting inflation get out of hand? Why must our leaders posture, fear-monger, and repeat blatant falsehoods? Is that really too much to ask?

This kind of nonsense policy and rhetoric will continue as long as Americans continue to miscomprehend the nature of our debt and the effects that deficit spending has on an economy. Politicians will capitalize on fear and misunderstanding of our national debt to help their election chances, but don’t allow yourself to be fooled. I only hope that this article takes us a step in the right direction.

It’s all Monopoly Money Now

I used to play Diablo II, an action role-playing game that could be played online with other players. In the game, the players’ characters would slay monsters which occasionally dropped weapons, armor, and other items that could be used to make characters more powerful. The items they’d get from slaying monsters would be generated randomly by the game, and every now and then they’d get lucky and find exceptionally rare and powerful equipment. However, the valuable items found were not always useful to the character that found them, and an in-game barter system quickly arose.

Let’s say I found a rare crossbow, but my character had no need for a crossbow and instead could use a better helmet. I would look for another player who wanted a crossbow and was offering a helmet so we could make a mutually beneficial trade. However, this was not always a simple task. What if the player offering the helmet didn’t want a crossbow? What if the player who wants a crossbow doesn’t have a helmet to offer? What if someone does want a crossbow and offers a helmet, but my crossbow is much rarer and more powerful than his helmet, or vice versa? These issues complicate trading.

Currency and its characteristics

Currency can facilitate these types of trades. However, the Diablo II universe did not trade in dollars, euros, pounds, or pesos. There was an in-game currency called gold, but it was exceedingly common and there were restrictions on how much of it a character could carry or store which made it useless for trading rare items.

A useful form of currency should have the following characteristics:

  • Fungibility: One unit of the currency must be equivalent to any other units.
  • Portability: It must be easy to move and carry around significant amounts.
  • Divisibility: It must be able to be split into smaller quantities for precision when performing transactions.
  • Scarcity: It must be difficult to find or produce in large quantities.
  • Durability: It must not spoil or decay over time.
  • Acceptability: It must be recognizable, desirable, and demanded by a large portion of the population.

Over time, one item started being used as a de facto currency in the Diablo II world. The Stone of Jordan (SOJ) was a rare type of ring that was useful across all the different character classes and most character levels. It was small and therefore possible to carry and store large amounts of them at once. All SOJs were more or less equivalent to each other, and they never decayed. As such, it had all of the above characteristics except divisibility, and soon all rare items and valuable transactions were denominated in SOJs. A player could sell his rare crossbow for SOJs, and then use them to buy a rare helmet. Trade flourished and the players benefited.

Stone of Jordan

Suppose that one day a player in Diablo II announced that he had made his own rings. These rings were small and durable like SOJs, but they conferred no bonuses to the character that wore them and were therefore worthless on their own. Furthermore, the player that made these rings would have the ability to make more of them whenever he wanted at his own discretion. Imagine you were a Diablo II player and this player offered to trade you his rings in exchange for your rare equipment or SOJs. You would laugh him off and tell him to take his useless trinkets elsewhere, right?

SOJs in the Real World

Now, let’s go back to the real world. Currency has been a boon to trade and the prosperity of humanity. Gold and silver are the SOJs on planet Earth; they are fungible, portable, divisible, scarce, durable, and widely recognizable and desirable. They’ve been valuable across generations and across eras. However, they are not as convenient to use for currency as paper money. It’s much easier to give someone exactly $3.50 than it is to give someone the equivalent amount in gold or silver (which would involve a lot of dividing and weighing I imagine).

There is a workaround for this, however. Banks can accept deposits of gold and silver and issue bank notes that are redeemable for the gold and silver on deposit. These notes can come in varying denominations – grams, milligrams, etc… – which makes the underlying commodity even more portable and divisible. Notes from banks that are sufficiently reputable and reliable can be considered as good as the gold or silver they represent. There are shortcomings of such a system, namely the risk of fraud and bank failure, but that is a different topic altogether.

Gold, silver, and notes that represent them have been used as currencies in human history because they were the best forms of currency known to man at the time. Suppose that you lived in a society where these were the most widely used and accepted forms of currencies. And suppose that, as in my Diablo II example, a person started making his own currency and this time called it “monopoly bucks.” These offered the same convenience that bank notes did but had no intrinsic value of their own and were not redeemable for anything that did. This person could also make more monopoly bucks whenever he felt like it. If he came up to you and offered you his monopoly bucks in exchange for your gold, silver, or other objects of value, wouldn’t you laugh him off just as you would the Diablo II player peddling his trinkets?

Fiat money – “This is valuable because I said so”

If, however, a national government were the entity making the monopoly bucks instead of some arbitrary person or private party, what you wind up with is basically the fiat money system that is used all over the world today. What are fiat bills if not arbitrary, inherently useless artifacts that can be created in unlimited quantities by an issuing authority? They are not truly scarce – producing them is a matter of turning on the printing press. Perhaps more importantly, they don’t provide any functional advantages over other forms of paper currency.

500 billion dinar bill

That’s a lot of zeroes…

What makes US Dollars any different from the monopoly bucks in my previous hypothetical? Americans are, to a certain degree, compelled to use dollars by the government. Legal tender laws make it so that only debts in dollars are enforceable by the courts. Taxes are imposed in dollars, and Americans must pay capital gains tax on their nominal gains when they convert other currencies to dollars, even if those gains do nothing more than keep up with inflation.

Dollars can satisfy the demands of the US Government and, to that extent, they have a use that other fiat currencies don’t. Even in places outside of the US government’s jurisdiction, dollars are recognized as valuable because it’s understood that they are useful for people in the USA. However, the value of the dollar isn’t due to it being any more desirable or better suited for use as a currency than other types of paper money. Its value is artificial and propped up by the policies of the US government.

Bitcoin – The Cadillac of monopoly money

Bitcoin is a decentralized, virtual currency with a predictable and limited supply. Bitcoins are inherently worthless and they are not backed by anything of value, like fiat money. However, they have essentially all of the desirable characteristics of currency.

Bitcoins are extremely portable; carrying large amounts is no more difficult than carrying small amounts and bitcoins can be sent across the globe in seconds with virtually no transaction fee. They can easily be divided down to eight decimal places. They are scarce, with a fixed long term supply of roughly 21 million bitcoins and no possibility for any party to increase the bitcoin supply or to create counterfeits. Bitcoins never decay, and large amounts can be stored securely without needing to trust a bank.

When I tell people about bitcoin (which is often), I usually am faced with skepticism. Some of the first questions I generally get are:

“What are bitcoins backed by?”

“Who decides what they’re worth?”

“Who invented bitcoin and who makes new ones?”

The answers are simple: Nothing. Nobody decides but the free market. An anonymous software developer designed and released it, all the code is open-source and the process for making new bitcoins is entirely predictable and open to anyone with a computer.

Bitcoins combine the scarcity of gold and silver with divisibility and portability even greater than that of paper money; and that’s without needing to trust banks to honor their notes. Although bitcoins are inherently worthless, their scarcity and superlative usefulness as a currency makes them valuable to society and to whomever holds them. That is something that can’t really be said about fiat money.

Many still dismiss bitcoin as online funny money, yet those same people are generally blissfully unaware and accepting of the inherent worthlessness of the government fiat money that pervades their lives.

I don’t expect the US Government to start printing $500,000,000,000 bills any time soon, although that is an inevitability if we continue with our current monetary system. Nor do I expect it to revise its legal tender laws or accept alternate currencies to satisfy tax payments. But, if that were to happen, I wonder how long it would be before people realize their dollars are only truly good at hotels on Boardwalk and Park Place…