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When it comes to economic policy, liberals suffer from two major weaknesses.
One, they believe that all that matters with respect to policy are good intentions. As long as liberals mean well, they think that the policies they implement, especially with respect to the poor, are justified.
Two, they have a woeful lack of understanding of economic principles, which inevitably leads them to think that they can change the natural laws of economics through the simple act of enacting legislation.
Arguably, the people who have paid the highest price for these two liberal weaknesses are the poor, the class of people around whom liberal domestic policy has claimed to primarily revolve since at least the time of Franklin Roosevelts New Deal.
It would be difficult to find a better example of all this than minimum-wage laws. These are laws by which liberals claim to help the poor by requiring employers to pay their employees a minimum hourly rate set by the government. The notion is that this helps the poor by preventing employers from paying less than a subsistence wage. In the absence of a minimum-wage law, the liberals say, employers would be paying workers so little that the poor would be starving in the streets.
The truth, however, is that no matter how well intended liberals might be, a minimum-wage law actually serves as a monumental attack on the poor. It is a classic example of how a lack of understanding about economic principles leads liberals into harming the very people they claim to want to help.
Lets examine some fundamental economic principles to show how the poor those at the bottom of the economic ladders are damaged by minimum-wage laws.
In every exchange, both sides give up something they value less for something they value more. Its a natural principle on which trade is based.
Lets assume that I have 10 apples and you have 10 oranges and that I give you 7 apples and you give me 3 oranges. Someone might say that thats an unequal exchange because I gave up more than you did. Not so. I gave up something I valued less 7 apples for something I valued more 3 oranges. But you did the same you gave up something you valued less 3 oranges for something you valued more 7 apples.
Both of us have benefited from the exchange. We have both given up something we value less for something we value more. We have improved our respective standard of living through the simple act of exchange.
Employment and subjective value
This principle applies not only in the trading of goods, but also in the trading of labor services. When an employer and employee enter into a labor agreement, each of them is giving up something he values less for something he values more.
The employer gives up a certain amount of money in exchange for the labor services of the employee. He values the money less than he values the work that the employee is performing.
By the same token, the employee gives up his time and labor in exchange for the money he receives from the employer. The employee places a higher value on the money than he does on the time and labor hes devoting to the employer.
There is an important economic principle involved here: Value is entirely subjective. It lies in the eyes of the beholder. The value that I place on a particular item is likely to be different from the value that you place on it. Thus, I might well be willing to pay a higher price for certain things than you would, and the same applies to you.
This principle of subjective value applies to employers when theyre hiring employees. When contemplating whether to hire a certain worker, employers subjectively determine the applicants value. By the same token, the subjective determination of the worker will determine whether he takes the job.
Whether a person is hired or not will ultimately turn on the subjective determinations of both employer and worker. An employer might think to himself, That person is worth $5 an hour to me. The worker might think to himself, Im worth $6 an hour. If neither side budges, then no trade will take place. That means that the worker will not be employed at that business and must seek other employment where the employer says, That worker is worth $6 an hour to me. And the first employer has to continue looking for someone who will work for $5 an hour. There will be a meeting of the minds when each side gives up something he values less for something he values more, enabling an employment contract to come into existence.
This is an area in which liberals go astray. They simply do not understand the concept of subjective value. They think that everything and everybody has some sort of objectively determined value, one that can be legislatively imposed.
Lets consider an example. Suppose an 18-year-old man is looking for a job. He comes from a very poor family, dresses very badly, and speaks poor English. He has no work experience.
Everywhere he goes looking for a job, he is met with the same answer: No. No matter how many businesses he visits, he simply cannot get a job.
Finally, he walks into a business and says, Im willing to work for a dollar an hour. Ill do whatever you want me to. For his part, the employer finds that offer extremely attractive. He has menial tasks to be performed and it is worth it to him to pay $1 an hour to get them done.
Thus, both sides the employer and the worker have arrived at a meeting of the minds. Each is willing to give up something he values less for something he values more. Their decisions are based on their subjective valuation of the elements being exchanged labor and money.
Will the deal go through? Not today. The reason? The federal minimum-wage law, which requires employers to pay workers at a minimal rate of $7.25 per hour.
The reasoning employed by liberals goes like this: Nobody can survive earning a dollar an hour. To sustain ones life, liberals say, requires a minimal rate of $7.25 an hour. Therefore, liberals enact a law that requires employers to pay their workers that minimal rate. In the process, liberals portray themselves as great heroes for the poor.
But theres obviously a problem here, one involving subjective value. In our example, that 18-year-old is unable to find any employer willing to pay him $7.25. All theyre willing to pay him is $1 an hour, a rate that he is willing to accept but is precluded from doing so because of the minimum-wage law.
What happens to that 18-year-old? As a result of the minimum-wage law, he goes unemployed, permanently. He simply cannot get a job at the federally established minimum because employers do not place that value on his labor.
That leaves the worker with the following choices: die by starvation, live on charity, engage in criminal conduct, or go on government welfare.
Keep in mind that when a minimum-wage law is enacted, the government does not require employers to hire people at that rate. Instead, what the government does is to require people who are hired to be paid at that minimal rate.
The obvious question arises with respect to subjective value: What happens to people whose labor is valued by employers at less than the governmentally established minimum?
The answer is as obvious as the question, but unfortunately its one that liberals simply fail to consider. Those people are laid off and, even worse, permanently locked out of the labor market, assuming that valuations remain the same.
That is, as long as employers place a subjective value on the labor of unemployed people that is lower than the governmentally established minimum, those people are going to be out of work. Employers will simply refuse to hire them.
To make the matter clearer, suppose that Congress enacted a minimum wage of $1,000 an hour. Wouldnt that be a great thing for workers? No, because its easy to see that lots of people would be laid off. The reason? Subjective value. All those workers whose labor is valued by employers at less than $1,000 an hour would be terminated.
Liberals will rail against this natural law of economics. Theyll exclaim, Every employer should place a high value on the work of employees. The value they place should at least equal the amount we set in our minimum-wage law.
But thats not how life works. Again, value is subjective, not objective. Employers have their own personal, subjective valuations. For their part, so do workers.
Thus, in an unhampered market economy that is, one unhampered by such governmental interventions as minimum-wage laws there will be no permanent unemployment because people will be able to find jobs at wage rates that are acceptable to them and to their employers, even if it is at rates that liberals consider too low.
Liberals say that it is abhorrent that that 18-year-old would have to work at a dollar an hour. They say that no one could survive at that rate. They say that its unconscionable that anyone should have to work at that less-than-subsistence wage rate.
But in their paternalistic approach to this situation, they block out of their minds some important things. Even though the young man is making only a dollar an hour, hes not only earning a bit of money hes also learning work skills and a work ethic. Hes learning the business hes working for. Hes building up his stock of knowledge, which will enable him to become more marketable down the road or perhaps even open his own business to compete against already-established businesses.
Unemployment and crime
But when a teenager willing to work is locked out of the labor market, thanks to the minimum-wage law, he doesnt acquire any of those things. As a result of the supposedly good intentions of the liberals, the minimum-wage law locks him out of the labor market and relegates him to a life of charity, illegal activity (e.g., theft or drug dealing), or welfare.
Liberals cry, But the boy could never survive on a dollar an hour. Nonsense! There are all sorts of things he could do to make do, especially knowing that the situation is likely to be temporary. He could live with family or with a large bunch of friends who are sharing expenses. He would do what was necessary to survive during the time he was improving his work skills.
With their minimum-wage laws, liberals never give that 18-year-old a chance. With their supposedly good intentions, they make him permanently unemployable.
Is there a real-life example of this phenomenon? Last October the New York Times published a news story about runaway teenagers in America (http://www.nytimes.com/2009/10/26/us/26runaway.html?_r=2), the number of which has soared because of family financial problems arising from the recession. Citing federal studies and experts, the article stated that 1.6 million juveniles become runaways annually.
According to the article, Legitimate employment was hard to find in the summer of 2009; the Labor Department said fewer than 30 percent of teenagers had jobs. The runaways supported themselves by selling drugs, panhandling, and prostitution.
Why werent the runaway teenagers choosing to work at legitimate jobs to support themselves?
The answer: minimum-wage laws. There are no jobs being offered at low wage rates to 14-year-old runaways with minimal education, rates that many of the runaways might well be willing to work at. All the available jobs are being offered at the minimum wage because thats what the law requires. And employers simply do not place that value on the work of runaway teenagers who lack an education and work experience.
(A related factor here is teen work permits, another ludicrous regulation that most states require.)
Suppose there was no minimum-wage law. Then there would be all sorts of jobs being offered on the market at hourly rates of $5, $4, $1. Runaway teenagers would have an array of available options open to them from which to choose.
But those options are never permitted to come into existence because of the governments minimum-wage law. It relegates runaway teenagers to surviving by working in such activities as drug dealing and prostitution.
Liberals say that in the absence of minimum-wage laws, employers would pay everyone below-subsistence wages.
But thats obviously ridiculous, for the labor market is filled with instances of employers paying their workers more than the minimum wage. How do liberals explain that?
In other words, if employers would pay everyone below-subsistence wages in the absence of a minimum-wage law, why would so many employers today be paying many of their workers more than the minimum? Wouldnt you think that they would be paying the minimum amount established by law and not a penny more?
The answer lies, again, in the concept of subjective value. The reason that employers pay some workers higher than the minimum wage is that they subjectively place a higher value on the labor of such workers. Thus, some employers are willing to trade, say, $20 an hour in exchange for the labor of their employees.
Why would employers do that? Why not pay less rather than more, even if you place a higher valuation on the labor of the workers? Because there are other businesses that are competing for the labor of those workers, which tends to send labor rates upward.
Thus, it is in the interests of workers to have as many businesses operating as possible. More businesses mean greater competition for workers.
Yet, because of minimum-wage laws and other such governmental interventions, many businesses cannot survive. For example, a company that is barely operating at the margin cannot afford to give its workers a governmentally established pay raise. With the increase in the minimum wage, such a business has no choice but to close down, thereby laying off its workers.
Add to that all the businesses that have to shut down as a result of other governmental interventions. Among the people who are hurt are the poor because there are fewer businesses competing for their services.
Liberals operate under the quaint notion that such natural laws as the law of supply and demand can be repealed by public officials. They cannot be.
Minimum-wage laws are just one example among many of a government intervention that hurts the poor. Other examples include price controls, welfare, protectionism, licensure, and subsidies.
Good intentions dont matter and a lack of understanding of economic principles is no excuse. What matters are the actual consequences of government policy. Those whom liberals claim to love the poor are the ones who suffer the most from liberal economic policies.
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