Obama’s Minimum Wage Proposal Would Hurt The People He Wants to Help

If you’re explaining, you’re losing. It’s one of the most frustratingly true political axioms in Washington. Current political decisions aren’t necessarily based on whether something is actually good policy, but rather whether it sounds like good policy in the thirty seconds you’re generally allotted for a soundbite.

This fundamental truth is most dangerous in economic discussions, which often require policymakers and the public to look at complex, long-term impacts of decisions. As economist Henry Hazlitt wrote in his famous book, Economics in One Lesson,

“[There is a] persistent tendency of men to see only the immediate effects to a given policy, or its effects on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.”

Nowhere is this fallacy more present than the current discussion over the minimum wage. And the reason is simple: Raising the minimum wage makes for great politics. As Beth Reinhard writes in National Journal:

A prominent liberal think tank dubbed it a “political goldmine.” The New Republic called it “the issue that could take down Mitch McConnell.” The issue is raising the federal minimum wage, and President Obama’s sweeping speech on income inequality has thrust it to the center of his party’s platform in 2014.

Democrats increasingly view championing the pay of hourly workers as a can’t-lose issue that revs up their base of liberal, black, and Hispanic voters. Perhaps more important, it also resonates with the white, blue-collar workers who overwhelmingly side with Republicans.

Since minority participation tapers off in midterm elections, assailing Republican opposition to hiking the minimum wage could be a more potent Democratic wedge than immigration reform, particularly in red states with competitive Senate campaigns, such as West Virginia, Kentucky, Arkansas, North Carolina, and Louisiana.

Raising the minimum wage is intuitively pleasing. After all, who doesn’t like the idea of raising workers’ incomes, especially if the government doesn’t have to raise the deficit to do it! Unfortunately, it’s not that simple, for as Hazlitt warned, we need to look beyond the immediate effects (higher wages for certain workers) to long-run effects (dramatically higher unemployment).

Let’s tease that out a little further by looking at the potential effects in the industry most generally associated with minimum wage workers: fast food. Initially, fast food chains like Wendy’s or McDonalds would give their employees a raise in order to comply with the law. But eventually, and probably soon, paydays become panic-inducing. In order to re-achieve some level of profit margin the owners are forced to fiddle with one of the two levers at their command – the cost of labor and the price of goods.

On the labor side the owner is incentivized to maximize productivity in order to get his labor costs as close to where they previously were. That means automating tasks, demanding higher productivity from each worker, or looking at alternative business models, like self-serve restaurants. Are these good things? As Carolina Baum writes for Bloomberg, it depends on who you are:

“I feel bad for those who are relegated to a minimum-wage job. I feel worse for those who want a minimum wage job as a steppingstone to something better and would be denied that opportunity by the imposition of a higher wage floor. A higher wage is great for the workers who keep their jobs; it isn’t so great for those who wouldn’t get hired because McDonald’s Corp. starts asking its existing workforce to do a bit more.”

And lest you think we’re just picking and choosing arguments from like-minded economists, an exhaustive 2013 literature review of studies concluded that, “the evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind.”

On the price side, the fast food owner could also attempt to make up for the lost earnings by raising the prices of food. A typical fast food restaurant spends around 30 to 35 percent of its income on labor. So in order to achieve the $15.00 per hour minimum wage that advocates are calling for, a McDonalds would have to increase the price of its signature Big Mac by around $1.35. Would you pay $5.55 for a fast food hamburger? Some would, many wouldn’t. And that demand would find a new outlet – either by people cooking more burgers at home or eating at higher-priced restaurants where they could still get bang for the buck.

Unfortunately, President Obama is counting on Americans not taking the time to think through the long-term effects of a higher minimum wage. For as Steven Chapman writes in the Chicago Tribune, “If you offer people something that is too good to be true, you will always find takers. Ask Bernie Madoff. Or ask Barack Obama.”

Unlike Madoff, we can hope that President Obama is at least acting with a pure intention to help the poorest among us. But it sure is coming off as nothing more than an attempt to talk about something, anything, other than his failed Obamacare bill. And the potentially disastrous impacts of raising the minimum wage are too high a price to pay for a mere distraction.