Lowering the Cost of Living is Better than Raising the Minimum Wage

Editor’s Note:  This post by Michael Shedlock explains quite well why significantly increasing the minimum wage is a terrible idea. If the union’s new “Fight for Fifteen” (dollars per hour) campaign were successful, it would increase unemployment, and unleash a round of price inflation that would in-turn require government entitlement payments to increase. This is not news to anyone with common sense. But Shedlock makes two additional points worth emphasizing. First, he notes that lowering the cost of living is more useful than raising wages, a point that cannot be made enough, because that is the win-win solution that opponents of government austerity fail to recognize. In addition to raising the standard of living for everyone, regardless of how much or how little they make, lower prices free capital to reduce debt and invest in innovation. “Better-faster-cheaper” is more than the mantra of the Silicon Valley’s tech geniuses, it is a perennial and core factor in the advance of civilization. Second, Shedlock identifies the anti-competitive forces who benefit from statist overreach, of which imposing excessively high minimum wages is just one aspect. He writes: “We do not need higher wages, we need lower prices. With productivity advancements we would have just that, absent of course the socialist fools, the progressives, the war mongers, and the central bankers.”

Michael Tanner at the Cato Institute notes Welfare Pays Better than Work in 33 states.

The federal government funds 126 separate programs targeted towards low-income people, 72 of which provide either cash or in-kind benefits to individuals. (The rest fund community-wide programs for low-income neighborhoods, with no direct benefits to individuals.) State and local governments operate more welfare programs.Of course, no individual or family gets benefits from all 72 programs, but many do get aid from a number of them at any point in time.

In the Empire State, a family receiving Temporary Assistance for Needy Families, Medicaid, food stamps, WIC, public housing, utility assistance and free commodities (like milk and cheese) would have a package of benefits worth $38,004, the seventh-highest in the nation.

Welfare is slightly more generous in Connecticut, where benefits are worth $38,761; a person leaving welfare for work would have to earn $21.33 per hour to be better off. And in New Jersey, a worker would have to make $20.89 to beat welfare.

Nationwide, our study found that the wage-equivalent value of benefits for a mother and two children ranged from a high of $60,590 in Hawaii to a low of $11,150 in Idaho. In 33 states and the District of Columbia, welfare pays more than an $8-an-hour job. In 12 states and DC, the welfare package is more generous than a $15-an-hour job.

People Aren’t That Stupid

While it’s beneficial to have a job, assuming there is hope of advancement, for those with no special skills there is little to no hope of advancement.

Moreover, wages are taxed, welfare benefits are not. And what about day-care costs for single mothers? What about transportation costs? What about the value of extra leisure time?

Add it all up and it makes perfect sense for many to remain on welfare for as long as they can.

Minimum Wage Fallacy

Given welfare benefits exceed minimum wage, it should not be surprising to find socialists arguing for higher minimum wages. And they are.

In Seattle, a Campaign Seeks to Push Minimum Wage to $15.

How successful would that be?

Not very.

The higher the minimum wage, the more incentive businesses have to get rid of employees and use hardware and software robots. And with the Fed suppressing interest rates, companies can borrow with miniscule interest rates and do just that.

Should minimum wages rise, the recipient workers would benefit, but at the expense of millions of others who would lose a job or not get one.

Then when prices rose in response, the socialists would ask for increased welfare benefits to keep up with the rising cost of living!

More Minimum Wage Nonsense

The socialists are out in force. Heidi Moore on the Guardian writes How low can you get: the minimum wage scam.

 Wonder why benefit spending is rising? Simple: corporations get away with crappy wages, so government has to make up the rest.

The grim irony of minimum-wage America is that many who work in the fast-food industry need food stamps to get by.

You’d think the exceptionally low minimum-wage – $7.25 an hour – would be the shame of a country like the United States that prides itself on its economic leadership. Half of minimum-wage jobs are held by adults over 25 years old, and asking adults to live on $7.25, or $14,500 a year, doesn’t leave them with enough to rent an apartment, commute to work, raise a child and participate in society in any meaningful way.

No Heidi, the sad state of affairs is that socialist fools have no idea what is going on. As Michael Tanner at the Cato Institute points out, it does not pay to work. So people don’t.

Don’t blame low wages, blame high prices.

The Fed, the ECB, the Bank of England, and the central bank in China are all printing money hand over fist hoping to spur job growth. Instead, they fueled another stock market bubble, a bond market bubble, and revived the property bubble.

Congress enacted hundreds of affordable housing programs. The one and only thing those programs did was create a housing bubble.

When prices crashed, government and the Fed stepped in with attempts to reblow the housing bubble (proving of course no one really wanted affordable housing in the first place). Rather, the Fed wanted a stock-market party and Congress wanted a vote-buying party).

Is Low Minimum Wage the Problem?

Perceived low wages are a symptom of the problem, not the problem.

The problem is socialist fools, progressives, and war mongers sloshing other peoples’ money around. For that, place the blame where it precisely belongs: on central bankers, on fractional reserve lending, and on government bureaucrats who interfere in the free market.

We do not need higher wages, we need lower prices. With productivity advancements we would have just that, absent of course the socialist fools, the progressives, the war mongers, and the central bankers.

About the Author:  Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education. Every Thursday he does a podcast on HoweStreet and on an ad hoc basis he contributes to many other websites, including UnionWatch.