Sunday, May 4, 2014

Scrooge McDuck and Company

Seattle is moving forward with a plan to raise the local minimum wage to $15 an hour via a graduated plan that will roll out over the next several years. (By the way, before you chalk this up to "Socialism," understand that the one actual Socialist on the Seattle city council doesn't think that the plan moves quickly enough.) One of the benefits of this plan that I've heard on a few occasions, goes something like this:

[T]his will likely increase demand, by putting more money in the pockets of people who spend in the regular economy. This increased spending may lead inevitably to more hiring, as businesses look to capture more of the increased demand. I don't think a negative outcome is an inevitability, but I think what is likely is that places like McDonalds [sic] and Subway will just raise their prices a little (I'm willing to pay a little more for a McDouble if the person who makes it can afford to live a decent life). It would be foolish of businesses to layoff a bunch of people, and lose a share of the demand. I.E. businesses hire based on demand, not on the minimum wage.
Milkshakes are wonderful, but any politician will tell you, to REALLY bring all the boys (and girls, for that matter) to the yard, what you have to do is offer a free lunch. While I understand the sentiment expressed above, it works under the assumption that the extra money that goes into the pockets of minimum wage workers has two characteristics: 1) That were it not for newly-flush minimum-wage workers, it wouldn't be spent into "the regular economy" and 2) That the minimum wage worker who is now making about 160% of their old salary will still be living hand-to-mouth and won't be able to either place the new money into savings or pay down old debts. And so, to "the regular economy," raising the minimum wage effectively adds new money, created out of thin air.

To be sure, the assumptions that I've pointed out are not entirely implausible. The money that goes to workers under Seattle's new minimum wage may, in fact, come from funds that were simply sitting around somewhere doing nothing, rather than being transferred from one possible expenditure to another. It could be that most of the costs will be borne by people who have been hoarding money they will never otherwise have a use for, and that converting some of that excess wealth into income will boost the velocity of money in the local economy. And it's entirely possible that someone who needs to spend their entire paycheck to get by at $9.32 an hour (Washington's current minimum wage) while they will find their situation eased at bit at $15 an hour, will still be in a position spending their entire paycheck to get by every pay period. It's possible that people trying to make ends meet as independent adults on the current minimum wage are so deep in a hole that even a 60% increase in wages merely slows their rate of descent. But they strike me as unlikely, especially in combination.

In a republic, you don't normally get the best answer to a thorny question. You normally get the first answer that appears (correctly or not) to have no or minimal costs for the majority of those motivated to vote. The idea that raising the minimum wage will have a magical Keynesian multiplier effect through boosting aggregate demand fits the bill. There are plenty of people who feel that wealthy Americans have been amassing large stockpiles of case in vaults, and that the primary effect of raising the minimum wage will be to force them to pay some of that money out to the working poor in salaries. But, as the saying goes, wealthy people didn't get that way by giving away money when they didn't have to. So even if the economics somehow supported the idea that a boost to the minimum wage could be a free lunch, human nature dictates that there will be a bill for it anyway.

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