First, as a disclaimer, I wrote a blog article about this two years ago here.

I have voted dem in 3 presidential elections, and this year I cannot fathom the idea of voting for a Democrat who supports $15 per hour for minimum wage.  Why?  Because it is artificially propping up a wage which the market does not bear.  You can say that now about minimum wage, but at $7.25 per hour is one thing – to more than double it to $15 per hour makes zero sense financially.

The crux of the problem is the middle class is disappearing.  You have more and more people in the workforce who either have:

  1. no college
  2. little to no college
  3. trade school education with little to no jobs available in the trade
  4. college degree that is useless

These circumstances have left millions of people now relying on minimum wage as their only source of income.

I would posit that the CORRECT solution here is to bring back more jobs into this country that are middle class.   This is one of the main reasons I’m supporting Trump this year.  Yes, he’s wacky.  Yes, at times he does not act presidential.  However, he seems to clearly understand the problem and seems to be the only candidate capable of remotely delivering any kind of practical solution.

On the left, they are championing the raise of the minimum wage to $15 per hour, which is a crutch – it’s not supported with any sound arguments.  Below, I plan on tearing apart this argument, piece by piece, to clearly demonstrate what it means.  To those people who are struggling to make ends meet, a Bernie Sanders coming in and promising $15 per hour to double their wages seems like a beam is shining down from heaven to help them in a time of need.  I also understand that if they vote for Bernie, they are effectively voting for the policies that can make their lives better…today.  However, will they even have that job in 6 months?  This is the face of $15 per hour minimum wage employees…

McDonald_TouchScreen_1.jpg

A minimum wage in economics terms is called a price floor.  It is an artificial limit put on something to protect an element of a class.  For example, you may have price floors on something like wheat.  For argument’s sake, if the free market determines wheat is $10 per bushel, perhaps big business gets involved to produce billions of bushels at $10 per bushel to make lots of money.  The problem is, when there is a LOT of wheat on the open market, it becomes flooded and those that charge less than $10 for their wheat will sell their wheat while those who keep it at $10 will have left over inventory.  Suddenly, you have to drop your prices to sell your leftovers at $8 per bushel.  Here’s the problem – the cost to make that bushel might cost a small farmer $5 per bushel to produce with land, equipment, and personnel.  Big business comes in with their giant combines and fancy derivative loans from big bankers and can produce that wheat for $1 per bushel.  So what happens then is a price war – big business can therefore charge $4 per bushel and put every small farmer out of business to then take their land….and it puts small farmers out of business.

Here’s what it looks like when you’re in class…

PriceFloor

These same concepts are thus applied with many industries, including federal minimum wage.  For example, if you have a job open at Burger King (my employer in high school) and you have 50 people apply for it, you might then say to yourself – why would I pay $7.25 per hour when 20 of those people would do it for $6 per hour.   And of those 20, 5 would work for $5 per hour.  So the free market might actually find that a Burger King worker SHOULD make $5 per hour, not $7.25.

That is the free market concept – and we apply the federal minimum wages to protect those workers from being underbid by a less privileged class who can work for less and still make ends meet.  Meanwhile, the market is now flooded with people to work those minimum wage jobs because middle wage jobs have been outsourced over the years.

China and some other countries have had a long practice of devaluing their currency.  The dollar is stronger against the currency – artificially.  There are entire articles on this you can research, but the net effect of this is that Chinese goods are so cheap to produce, that you cannot compete against them in the open market.  For example, if there is a clothing company in New York city – you have city minimum wages, federal minimum wages, costs of electricity, high rent.  It might cost you $30 to produce a sweater you sell for $90.  In China, their wages are so low because their cost of living is less, relative to ours.  So the labor to produce the EXACT SAME SWEATER might be $3, which they can then turn around and sell for $30.  This, my friends, is how Walmart lowers prices all the time.  Anyone they deal with essentially has to have their products made overseas.  We cannot sell our $90 sweater there, because when people are making $.80 per hour, it would take them 3 weeks to save up for one.  However, they can sell their sweaters here.

Employee Wages:

The immediate effect of a worker working 40 hours per week is that his wages would go from $290 per week to $600 per week.  At first, Bernie Sanders is the next Jesus.  These people are now celebrating Bernie Sanders day.

Businesses:

Something like 90% of small businesses fail within the first 5 years.  If you have a small company who has, say 4 employees working minimum wage full time, your payroll just went from about $1200 per week to $2400 per week.  However, your sales did not increase.  That means $1200 now must appear from thin air to pay these employees.  This will mean one of three things:

  1. Business has to accept less profit.  This means owners who were barely getting by after putting their life savings into their business may have to close their business.  This means all 4 employees lose their jobs, or somehow the owner is going to lose his shirt after investing his life into his company.
  2. Business will have to raise prices to make up for that $1200.  This means a cheeseburger that cost $8 in a restaurant may now have to cost $12 or more.  Costs of goods they sell have to go up on all products.
  3. Business will have to cut jobs or hours.  If you now have $1200 less in your bank, you may have to let go of 2 of those 4 employees in order to make ends meet.  This can somehow mean double the work from the remaining two employees, and causing 50% layoff.  Or, those 4 employees now make $2400 in a month but they work 160 hours.  They may have to cut hours to 20 from 40 in order to make that $1200 back.

Landlords:

More companies will begin to fail due to option 1 above.  More commercial properties are vacant, and rents have to thus go down.  The property owners spent millions of dollars of their hard earned money to invest in these properties based off of rent projections.  Now, more properties are vacant and causing significantly less revenues to come in – meaning they have to lose money, cut staffs, and reduce new development almost overnight.  No new construction will be needed for a long, long time due to the abundance of supply.

Customers:

If the cost of all goods, everywhere starts to go up 25-50% in some cases, but you are someone who makes $40,000 per year and not one of the people to make more money with a federal wage increase – effectively your buying power has just decreased significantly.  Where you maybe had budgeted $100 to go out to eat twice a month, perhaps you can now only go out once a month.  Perhaps you had a clothing allowance of $100 per month, but all of the retail stores have had to jack their prices due to the minimum wage laws, and where you used to buy 4 articles of clothing, you can now only buy 2 or 3.

Net effect:

  1. For some people in our society that make minimum wage, they will see short term relief and good times.
  2. Soon, companies will have to lay off people and many companies will close.   This now reduces jobs for the people in item 1 above, adding more people to an unemployment line.
  3. Owners of property companies will be folding, construction on new facilities would stop overnight.  This could bankrupt high end real estate firms costing thousands of jobs and making wealth disappear almost instantly to be re-distributed to the 50% or so of minimum wage workers that still exist.
  4. Less people will be working at places, meaning longer lines everywhere, loss of production, stress, and the introduction of more kiosks and self service operations, costing even more minimum wage jobs.
  5. With more and more people unemployed, it will then seem you will need at least an associates degree to even be considered for any minimum wage jobs, effectively turning all high school only graduates into welfare recipients.
  6. Welfare costs start to skyrocket, which then results in higher taxes for the rich.
  7. The middle class, who would make $40k-$100k or so have significantly less spending power due to the higher costs and thus would almost instantly slow down the economy.  Less goods/services are now being purchased.  This then has an effect of reducing the needs to employ blue collar factory workers, truck drivers, construction workers who used to make more than minimum wage  – but now these people are also vying for minimum wage jobs because blue collar jobs disappeared with a slower economy.
  8. The top 5% of earners gradually see their tax rates hit 50…then 60…then 70% until it is realized that it is unsustainable to have 1 person’s taxes pay for the well being of 10 people at the bottom of the percentile.  Minimum wage of $15 is repealed.  Bernie Sanders then goes down as the worst president in history.
  9. It will have a chilling effect of reducing the middle class even more, by now having a larger class of people on welfare and minimum wage of 30k per year…and increasing the number of people who are essentially sucking the teet of more affluent people and government – through no fault of their own other than promises which were not well thought out.

Something else to consider.  How would Bernie Sanders get a $15 per hour wage through a republican-controlled house and senate?  Executive order?  Begin supreme court battles..

How could it work?

In some areas like NYC, San Francisco, and even Seattle (thanks cuz!), rents at places are really high and people who work in those cities cannot afford to live there.  In NYC, some places are rent controlled (read: price ceilings artificially put in place to keep costs low) but overall, it’s hard to find affordable housing – so people must commute long distances to therefore work their minimum wage jobs in the city.  However, the rent for an owner of a place like McDonald’s in Manhattan has one advantage – he can charge $12 for a cheeseburger and there are no other choices- and because of the high wages of the inhabitants – the market COULD withstand minimum wage hikes.  However, it would seem more practical to have minimum wage increases gradually with inflation…like 2% per year rather than double the wages.

How could we help INSTEAD of passing $15 per hour minimum wage?

  1. Fixing our trade deficits.  By applying economic pressure on countries who artificially manipulate their currency, we can slow down and perhaps stop the jobs going overseas.
  2. Reducing the number of minimum wage workers.  By re-vamping our immigration policies, we can reduce the number of people coming into this country who might be competing for these positions or eventually going on welfare.
  3. By changing our education system with tweaks geared towards producing children and young adults with life skills:
    1. Reduce some classes like English lit, philosophy in high schools and replace with a life skills class by age.  Students learn how to build a resume, apply for colleges and student aid, balance a check book, apply for a car loan, interview for a job, understand basics of retirement savings, budgets, cooking at home, shopping, paying their bills, etc.  How many people graduate for high school armed with Elizabeth Barrett Browning but can’t write a check or open a savings account?
    2. Rate colleges/courses on feasibility and issue loans based off of that.  If a rich kid wants to take philosophy at Brown for $240k and mommy and daddy are paying, who cares.  But if you’re a broke kid with little scholarships, this loan should not be approved because it is high risk to never be paid back.  I wanted to be a lawyer once, and I was advised in the mid 90s that there will be too many lawyers and they’d be out of work – yes, it happened exactly like that.  No reason to give loans for programs where there are 10,000 graduates, but 1,000 jobs available.  For jobs like doctors, we don’t have enough of them, and there should be programs similar to the 1960s with teachers.  Why not ask for 2-4 years of civil service in return for college/med school costs?  The person can then be a military doctor or work for cheap in a clinic for 2-4 years until their “debt” is paid, similar to ROTC.  This would have an effect of every 5 years adjusting for what people we need, proving tons of scholarships to people who could not afford or could not borrow on their own.  We need IT talent in this country…why not use this?
  4. By running a more efficient government.  If we run a government that costs less, we can therefore reduce taxes for everyone and thus give people more money back in their paychecks – which would stimulate the economy.  READ: reduce taxes AFTER efficiencies are met and budgets are balanced.  This business of running deficits each year should be AGAINST THE LAW, with only EXTREME circumstances approved.
    1. What services SHOULD the government be in the business of?
    2. What regulations can be combined/eliminated to help the free market reduce their costs of goods to compete with the rest of the world?
    3. What regulations need to absolutely be in place to protect consumers/employees?
    4. What can government put into the free market for competition?  I’m looking at things like how FedEx/UPS complement the USPS and do things better in many cases.  What can we send to the private sector to get off of tax needs?
    5. Reduce corporate taxes by a lot.  As Trump mentioned, corporate inversion is happening a lot today.  For example, Burger King.  With many of our U.S. based companies being global companies now, why would it make sense to even be incorporated in the U.S. when you can go somewhere else and pay less taxes and return higher value for your shareholders?  Less taxes here will be more money companies can use to make their investors more money, hire more people, open up more plants – and KEEP U.S. based corporate jobs here.
  5. By increasing minimum wage based off of an inflation index, gradually.  When I was in HS 23 years ago working at Burger King, minimum wage was like $4.35 per hour.  Now it’s $7.25.  If inflation is an average of 3% per year, that would mean minimum wage should be $8.84 per hour.  It’s still raising the price floor – but at the same rate all other prices are increasing.  Without this, someone who makes $290 per week for the past 3 years has seen all prices go up – cable, medical, food, rent – but their income has remained the same…making them poorer now than 3 years ago.  I would not be opposed to a law which raises minimum wage like 2-3% per year.

 

Now, if you’ve read this far, you may think I have some sort of wacky ideas.  Well, in 2003 or so, in my economics classes, I predicted the housing bubble bursting.  I was a schmuck in an MBA class at a second-rate school and was able to see how the economic policies were going to cause problems.  Thing is, I’m sure many other people saw it too.  And we see what $15 per hour is going to do….

Take a look at a test answer circa 2003 or so.

 

 

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