Demagoguery and the Minimum Wage

[This post was originally published by American Thinker magazine on April 2, 2016.]

On Monday (Mar. 28) California Governor Jerry Brown announced that he would sign a bill to raise the state’s minimum wage to $15/hr.  The increase from the current minimum of $10/hr. would be fully completed by 2022.  Last year, New York passed legislation raising the minimum wage for fast food workers to $15/hr.  At the local level, the city of Seattle has mandated a minimum wage of $15/hr. to be fully phased in by 2021.  In the presidential campaign, Hillary Clinton and Bernie Sanders have proposed raising the federal minimum wage from $7.25 to $12/hr. and to $15/hr. respectively.

Particularly among politicians of the left, raising the minimum wage has long been a staple as a campaign talking point.  Mrs. Clinton and Senator Sanders claim, for example, that raising the wage floor is necessary to help people to move into the middle class.  The argument rests on the idea that if incomes are too low for some people to reach the middle class, a law mandating higher incomes is justified.  Certainly, the argument has strong emotional appeal.  Regrettably, it is also subject to significant demagoguery.

As economists have taught for generations, price controls (wages are prices) never achieve their intended ends.  Simply put, there are irrefutable laws of economics that cannot be repealed by political action.  Demagoguery and emotional appeal may produce short-term political advantage, but ultimately claims based on unsound economics must disappoint those who put faith into those claims.  Minimum wage laws are an exemplar of political action that cannot live up to its claims.

A fundamental law of economics is the law of demand, which states that as the price of something rises, the quantity purchased decreases in a given time period, and vice versa.   The law rests on the fact that, in the real world, resources are scarce, and thus the process of satisfying human wants requires making choices among alternative uses of those scarce resources.  Relative prices determined in free markets facilitate this process by permitting persons to make spending decisions according to the incremental value they obtain per extra dollar spent on a good or service.  The lower the price, the higher is that ratio.  The higher the price, the less is the ratio.  Hence, if the price of something goes up – thus reducing the value per dollar spent – less will be purchased as substitutes become a better bargain.

Artificially controlling specific prices distorts this process and creates inefficiency in resource allocation, as relative prices no longer fully reflect market forces.  Wages are prices.  Hence, if wages for unskilled labor are artificially set above the market wage by means of legislation, less unskilled labor will necessarily be purchased per period of time.  Moreover, the structure of wages throughout labor markets – skilled as well as unskilled – will be distorted, and economic efficiency will be compromised.  These outcomes are givens, and economists have known about them for a long time.

Why then do minimum wage laws persist?  Are not the harmful effects sufficient for voters to reject politicians who push these laws?  The answer, I believe, is that, although the harmful effects are real, they are generally not immediately visible, while the superficial, demagogic appeal of minimum wages is easy to articulate.  For example, both Mrs. Clinton and Senator Sanders claim that raising the minimum wage will help to elevate people – particularly unskilled workers — into the middle class. Senator Sanders further claims that raising the minimum wage will have a desirable redistributive effect that will lessen income inequality.

Neither of these contentions, however, lives up to its full billing.  As for elevating lower income people permanently into the middle class, minimum wage laws are highly inefficient because they focus on symptoms and ignore causes.  In this regard, vast amounts of evidence indicate that rising incomes are best achieved by education, stable families, and cultural factors such as personal discipline and a strong work ethic.  Entry level jobs – even at low wages – help to foster the personal characteristics, especially among young people new to the workforce, necessary to succeed in a work environment and eventually advance into higher paying positions with greater responsibility.  Minimum wage laws that price these persons out of the labor market remove the opportunity to develop these traits.  In addition, in few households is the primary income earner a minimum wage worker. Hence, even for households where jobs are retained, raising the minimum wage will have little impact on household income.  A far better emphasis for public policy directed toward building the middle class would be on augmenting incentives for skills acquisition and maintaining stable families.

Raising the minimum wage is a similarly inefficient means to address income inequality. This is not controversial among economists.  Any income redistribution that raising the minimum wage achieves is likely temporary, as employers adjust to the higher wage rate over time by substituting to other inputs such as labor-saving technology.  In addition, the higher wage rate only raises the income of those who continue to keep their jobs.  For workers who, at the margin, lose their jobs, income falls to zero.  And, finally, the redistribution comes at the expense of distorting relative prices, which can be considerable depending on the size of the wage hike.  There are far better ways to achieve income redistribution (assuming that’s the goal) such as simple cash payouts or a negative income tax.  Either of these measures ensures that the incomes of the entire targeted group increase, and both mitigate against compromising efficiency because of price distortion.

Regrettably, demagoguery on the minimum wage is not limited to political candidates seeking electoral advantage. Minimum wage laws also receive strong support from organized labor under the guise of helping out all workers.  The California legislation, for example, was backed strongly by unions.  At first glance, such support would seem odd as union jobs, after all, are typically at hourly wages much higher than the minimum wage.  Even so, there are at least two reasons why unions can be counted on to advocate for higher minimum wages.  First, many union contracts contain clauses that structure union wages relative to the minimum wage.  That is, the union pay scale is set, in relative terms, to be some percentage above the lowest pay scale.  Hence, when minimum wages are hiked, the union pay scale is similarly adjusted upwards.  Second, even aside from contract terms, it is in the interest of skilled union workers to have the wage rates of unskilled workers continually increase.  The higher the wage of the unskilled worker, the less that worker competes for the same job as the more productive skilled worker.  In the end, despite contrary rhetoric, both of these factors work against greater employment of unskilled workers.  Once again, legislated wage floors produce perverse consequences for those intended to be helped.

To sum up, higher minimum wages cannot be justified in sound economics. Fundamental economic laws simply cannot be overridden by political action.  Unskilled labor in California, New York, and Seattle will, in the end, suffer the most from the economic demagoguery of their elected officials.  Moreover, if Mrs. Clinton or Senator Sanders succeeds in raising the federal minimum wage, the perverse consequences will be spread across the nation.  This result would be unfortunate because it need not be so.

Indeed, higher real wages for all workers (unskilled as well as skilled) and permanent rises in standards of living have been the historical norm in the U.S. The drivers of this experience have been ever-increasing labor productivity and an expanding economy in which competition for labor services remains intense.  The proven recipe to those ends is a vibrant and growing free-market private sector incentivized by low taxes and minimal regulation, and a culture that encourages skills enhancement and personal responsibility.  Demagoguery over the minimum wage is no substitute.

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Justice Antonin Scalia — RIP

I did not know Antonin Scalia, who passed away unexpectedly February 13 at the age of 79.  I did, however, have the opportunity to meet the Supreme Court justice from time to time at Federalist Society events in Washington, but only long enough to shake hands and exchange pleasantries.  More significantly for me in remembering Justice Scalia is the dramatic impact he had on the law.

Largely in the 1980s — and spurred in significant measure by then-Attorney General Edwin Meese — conservative and libertarian legal scholars began to formalize the study and key principles of the judicial philosophy known as “originalism”  Originalism holds that a judge should seek to interpret the Constitution solely on the basis of the meaning that its drafters (including the drafters of amendments) had at the time of the drafting.  Justice Scalia, who took his seat on the Court in 1986, was an originalist, and by dint of his appointment, was in a position to bring that judicial philosophy to bear on actual law.  He did so with great effect over the course of nearly 30 years on the Court.  Today, even those justices and lower court judges who do not subscribe to originalism must be prepared to account for it and be able to defend their constitutional law opinions in the face of it.

Importantly, originalism is not a single idea with firm boundaries.  Over the years, legal scholars have developed various strains of the philosophy.  Justice Scalia self-identified as a “textualist,” by which he meant that he looked principally, if not solely, at the text of the provision of the Constitution that he was interpreting.  In so doing, he looked to the meaning of the words as they were understood at the time that they were written  Although with considerable overlap, another strain of originalism has taken on currency today as well.  This strain holds that, to give proper meaning to the words of the Constitution, one must read them within the context of the natural law and natural rights principles found in the Declaration of Independence.  That is, the natural rights principles in the Declaration informed the Constitution’s drafters understanding of what they were writing, and thus must similarly inform subsequent judges who are interpreting the document.  Some believe that Justice Clarence Thomas represents this originalist perspective.

Significantly, Justice Scalia applied his textualist brand of originalism with equal vigor to statutory interpretation.  Here too he sought to examine only the words within the four corners of a statute to find its legal force.  He considered such things as “legislative intent” — derived, for example, from the record of congressional debate — to be extraneous material and therefore not to be consulted by judges.  One of the more celebrated recent examples of his application of textualism is his dissent last year in King v. Burwellthe case upholding the Internal Revenue Service’s interpretation of the word, “Exchange,” within the meaning of the Affordable Care and Patient Protection Act, i.e., “Obamacare.”  In that case, the Court’s majority, in an opinion written by Chief Justice John Roberts, found it proper to define “Exchange” on the basis of the spirit and intent of the statute.  In stark contrast, Justice Scalia read the words of the statute literally and, in uniquely Scalia-esque language, vigorously critiqued the majority’s departure from those words.  (If readers are interested in more detail, I have written on that case and Justice Scalia’s dissent here.)

Last Friday, along with thousands of others, I was honored to be able to pay my respects to the late justice as he lay in repose in the Great Hall of the Supreme Court building.  As I exited the building, a reporter asked me about my impressions.  The brief interview with me and his story about the day can be found here.

 

 

Economic Libertarians Will Have a Friend in Ted Cruz

[This post was originally published in American Thinker magazine on Feb. 11, 2016]

In considering the current crop of presidential candidates, economic libertarians and others who place a high value on property rights, the right to earn a living, and the right to open a business will find no better friend than Texas Senator Ted Cruz.  Cruz demonstrated his commitment to these values when he was a senior official at the Federal Trade Commission during George W. Bush’s Administration.  Significantly, his work at the FTC established a foundation on which the cause of economic liberty progresses still today.

Leading a team of senior FTC lawyers, Cruz used his considerable advocacy skills to fight relentlessly against state laws conferring privilege on politically and economically powerful interest groups.  Many of these laws do little more than protect entrenched incumbents from small entrepreneurs seeking to open a business and earn a living.  Cruz and his team vigorously opposed unjustified state government privilege in such diverse occupations as attorneys, funeral directors, opticians, and mortgage brokers.  The goal was always to open up markets to entry by anyone with the talent and desire to compete on a level playing field.

The legal theories that Cruz and his team developed from 2001 – 2003 continue to pay dividends.  For example, last year those theories helped secure economic rights for small entrepreneurs providing teeth whitening services in North Carolina shopping mall kiosks and similar venues.  These entrepreneurs entered this service market coincident with the growing popularity of teeth whitening in the mid-2000s.  Practicing dentists in the state also offer teeth whitening services, but generally at much higher prices than the small operators.  As a result, the new competitors began taking business away from the incumbent dentists.

In response to this emerging competition, the North Carolina State Board of Dental Examiners (NCSB), a North Carolina state-sanctioned agency controlled and elected by practicing dentists and charged with regulating the practice of dentistry, sent letters to the small operators threatening them with potential criminal liability for the unauthorized practice of dentistry.  The letters effectively closed down the new competitors.  Significantly, North Carolina law did not include teeth whitening in the statutory definition of dentistry, nor was there credible evidence that non-dentists offering whitening services created a significant health or safety hazard.

In 2010, the FTC filed an antitrust complaint against the NCSB charging it with unlawful collusion to exclude the non-dentists from the teeth whitening market.  After an administrative hearing, in 2011 the full Commission found the NCSB’s tactics to violate antitrust law.  Key to that finding was that the NCSB did not conform to proper procedures under North Carolina law and was largely motivated by a desire to protect incumbent dentists’ economic interests.  The FTC ordered the NCSB to stop sending the threatening letters, to send new letters to previous recipients admitting error and rescinding the earlier threats, and to notify prospective non-dentist teeth whiteners that they would not be violating the law.

Relying on a 1943 Supreme Court decision holding that state actions to suppress competition are immune from the federal antitrust laws under the constitutional principle of federalism, which provides for both state and national sovereignty, the NCSB went to federal court arguing that, as a state agency, it had sovereign immunity and therefore was not bound by the FTC’s findings.  Armed with the legal theories that Ted Cruz and his team developed, which were later memorialized in a formal Report, the FTC defended the constitutional legitimacy of its antitrust suit all the way to the Supreme Court.  In an opinion handed down just a year ago, the Court held that, although a creature of the state, the NCSB nonetheless was a non-sovereign body, being controlled by private parties and elected by market participants, and acted without significant state supervision. It therefore did not enjoy state action immunity from the federal antitrust laws.  The FTC’s prior finding of unlawful anticompetitive conduct thus stood, as well as its order enjoining the NCSB from prohibiting non-dentists from competing in the North Carolina teeth whitening market.  In other words, property rights, the right to earn a living, and the right to open a business prevailed.

Without Ted Cruz’s earlier efforts to develop the legal theories used by the FTC to defend the constitutionality of its antitrust suit, it is doubtful that these important values could have been protected in the face of politically powerful local interests.  What’s more, this important clarification of the law has led to increased scrutiny of state-sanctioned boards in other states, thus further securing economic liberty rights against the politically connected.

For example, just last month, relying on the FTC’s 2015 win, an antitrust action was filed against the Nevada State Board of Pharmacy, an administrative agency of the state.  The complaint contends that that the Board exceeded its authority in finding direct shipment of pet medicines unlawful.  The effect was to exclude the plaintiff, a direct shipper, from competing with incumbent pharmacists, allegedly because such competition would mean a loss of business for the incumbents.  Similarly, resting on the NCSB decision, a Texas telemedicine business brought an antitrust suit against the state’s medical board, alleging that the board promulgated a rule for the unlawful purpose of protecting state-licensed physicians against competition from telemedicine providers.  The rule prohibits doctors from treating people over the telephone.  The court issued a temporary injunction requiring the medical board to suspend the rule pending the outcome of the litigation.  In North Carolina, after the NCSB decision, LegalZoom settled a long-running dispute with the N.C. State Bar over whether its online provision of certain legal documents constitutes the unauthorized practice of law.  The settlement permits LegalZoom now to offer these documents, subject to certain conditions.  

What all these developments say is that Ted Cruz’s FTC legacy continues to have positive results in advancing the cause of economic liberty.  Much work, however, remains to be done, as government privilege persists at both the state and federal level.  Contrary to maintaining the status quo, a Cruz Administration will assuredly expand the fight for economic liberty by using all legitimate means to challenge such government privilege.  Based on Ted Cruz’s history, economic libertarians can be confident of that commitment and would do well to support the Texas Senator in his presidential quest.

[Full Disclosure:  Senator Cruz and I were colleagues at the FTC from mid-2001 to 2003.]