American Elephants

Who cares if Romney wants to index? A generation of young people may. by American Elephant
February 4, 2012, 7:30 am
Filed under: Capitalism, Economy, Election 2012, Liberalism, News, Politics | Tags: , ,

We’re excited to present the following guest-post, contributed by reader & twitter friend, Erik Newton (follow him on twitter at @Newtonslawpc), a smart young conservative who makes lots of sense. Give him a read, we’re sure you’ll think so too.

A firestorm erupted this week in conservative circles when Republican presidential frontrunner Mitt Romney (R-MA) reaffirmed his longstanding commitment to automatic indexing to inflation of increases in the federal minimum wage. Romney held this position at least as far back as his campaign for governor of Massachusetts in 2002. To many Romney supporters, this is their candidate again sticking to his guns, showing his “constancy,” and refusing to flip-flop. It is the second such major issue on which he’s refused to nuance his views to come in line with those of many conservatives in the GOP base. The first is Romneycare, from which Romney also refuses to distance himself even in the heat of the 2012 campaign.

In 2007, Romney said he supported indexing the minimum wage because he likes the “idea of getting the political debate out and [likes] the idea of not having the huge jumps as we do now.” Most practical politicos probably didn’t think much ado about this explanation, but it has fed some critics. The first part of Romney’s defense, that indexing “get[s] the political debate out,” seems to detractors like Romney is again trying to back what is of immediate political advantage to him. He’s backing an “anti-growth” policy, as Club for Growth’s Chris Chocola calls it, so he doesn’t have to defend free markets when it comes to wage prices, so goes the criticism of Romney.

But to understand what is behind the criticism of Romney’s minimum wage position as a policy matter, one has to take a closer look at the minimum wage and the state of the law. To take the second area first, Romney’s own explanation for his indexing support relied, in part, on avoiding “the huge jumps” we’ve had in the federal minimum wage recently. From an economic standpoint, Romney does have a fair amount of support for this argument—large shifts in the wage price floor create dramatic distortions in the wage market. Smaller, incremental shifts create smaller distortions. But Romney’s leading opponent in the 2012 GOP presidential contest, Newt Gingrich, uses the former’s own argument against him. He points out periods of hyperinflation (14% in 1980; 15% in 1947-48), and says indexing “would be a very dangerous idea,” for exactly the reason Romney supports it. In an inflationary period, the minimum wage would jump dramatically through indexing, something Romney professes the desire to avoid.

There is no avoiding that several states have adopted a minimum wage that is indexed to inflation. Some of these measures were passed through the legislature, such as Florida, whereas others were passed by voter initiative, such as Washington. All told, there are six states with annual minimum wage increases indexed to inflation: Florida, Washington, Arizona, Montana, Ohio, and Missouri—quite a mix of the red, purple, and blue. Since these laws were adopted, the nation hasn’t faced the level of inflation, as referenced by Gingrich, which would put to the test the reasonableness of these automatic hikes. While certainly not a majority of states, or even an “evolving trend,” these state policies show Romney is not alone among politicians (not even among Republicans, at least in private), who would love to avoid taking minimum wage votes.

So, what’s the big deal with the minimum wage? As Rush Limbaugh said on his radio program, “Why not $10. Yeah, okay. Well, why not $15? Now we’re talking!” This may sound a little bombastic, but the late Sen. Edward Kennedy of Massachusetts was long an advocate for a “living wage.” Kennedy’s idea was to guarantee each citizen an amount earned that will cover their basic costs of living, which is only a small change in policy and no change in logic from current law. But the point Limbaugh highlights is a concern with both a “living wage” and an ever-increasing “minimum wage”: the higher the wage floor, the more low-skilled and younger workers will be out of work. These laborers are priced out of the market for work, because they can’t charge as much for their labor and employers aren’t allowed to pay less.

Without a wage price floor (a minimum wage), small and other business are more likely to hire unskilled and younger workers. To be clear, depending on the job, some companies are still able to hire such workers even at a pretty high minimum wage. There is no denying that McDonald’s hired 50,000 such workers last year. But all this says is that for McDonald’s, with its success and profit margins, it is willing to hire X number of people even at the current $7.25 federal wage price floor. It says nothing, for example, about how many young and low-skilled laborers McDonald’s would hire at, say, a wage rate of $4.25. Additionally, President Obama has complained about the rise of automation, including ATMs. Left unexamined is how the government’s distortion of the wage market drives companies towards what might otherwise be a prohibitive level of investment required for automation. This is particularly true of a company like McDonald’s, which spends hundreds of millions each year inventing or implementing such devices as the computerized fountain drink dispenser—a job previously done by a young worker. Of course, a fact lost on the President is that most of this trend in automation is nothing more than the march of economic history (no more jobs filling drinks; now you have to know how to fix the drink filler). But it is important to point out that wage market distortions, such as the minimum wage, also drive companies toward these types of investments today by making the investments presently more cost-effective.

The reality is that most minimum wage jobs (indeed, the vast majority) are held by young and unskilled workers. Those are the people hurt most by a minimum wage and its effects. Those effects mean less jobs (remember full service gas stations and window washers? (Yes, I know NJ and OR still have them by state fiat!)) and higher unemployment. The unemployment rate among 16-17 year-olds is 28.1 percent and 18-19 year-olds is 22.4 percent. Among young African-Americans the unemployment rate is over 38 percent—a national disgrace of epic proportions. Having a job gives a person dignity and one’s first or early jobs train them in productivity and open doors for future promotion and social mobility. It is also an exercise individual liberty. If a young person, whose fundamental right is to their own labor, chooses to agree with a business to work at a certain rate, why should the government say otherwise? One needs to learn to trade their services, exercise their rights, and make these important decisions. But the minimum wage and its effects hinder these very important hallmarks of a successful society.

By Erik Newton (Twitter: @newtonslawpc)


3 Comments so far
Leave a comment

People have been manipulated into believing or it’s the entitlement mentality that minimum wage is suppose to be a living wage, you hear that up here in N. California all the time. You did a nice job articulating the reasoning behind the minimum wage.I was a dish washer for the Spokane Club worked every Friday & Saturday night till 2 am through high school. I always had money and my Mom loved it because it kept me out of trouble, that’s what it’s all about.


Comment by hey_sherm

“Those effects mean less jobs … .” Should be fewer jobs, or less employment.


Comment by Subsidy Eye

Good Eye, Subsidy! Less versus fewer, and the anatomy of describing a mass versus a counting noun. This should read: “Those effects mean FEWER jobs…” or, as Subsidy Eye says, “…less employment…” I stand corrected. It’s a great lesson for anyone reviewing this. If the noun can be counted, generally speaking, it is modified with “fewer.” If it is a so-called “mass noun,” like “employment,” which can’t be counted (as the Obama administration proves every month), then it is modified by “less.” Excellence in style.


Comment by Erik Newton

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