Thursday, July 24, 2014

Minimum wage: Socialism or Communism?

I've said that I'll try not to be didactic, that I'll describe and not prescribe, that I'll listen first and preach second.  However, when it comes to minimum wage, I am going to ignore my own advice.  Minimum wage is a bad idea.  It needs to be repealed.  Minimum wage is just like communism, only on a smaller scale.

In the US we take it for granted that communism is bad.  It is ineffective and harmful.  This is practically universally accepted.  Given all the marketplace clusterfucks we have experienced, many Americans are starting to lose faith in the effectiveness of capitalism, but most still adamantly reject communism.

Americans are losing faith in capitalism, but still reject communism.

Socialism is very different from communism.  Socialism is about public welfare, shared accountability, and social contracts.  Communism, on the other hand, can be described as enforced equality.  Socialism, ideally, is democratic.  The public enacts and reviews programs and policies designed to serve the public good.  Communism, on the other hand, tends to be run by an oligarchichal, self-contained political movement.  Whereas socialism elicits the contributions of a diverse groups of people, communism appears to be lead by a small set of revered leaders.  I may not be the best person to ask about socialism, but I can at least recognize many ways in which it is different from communism.

Socialists like to claim minimum wage as their own.  They could not be more wrong.  Minimum wage is fundamentally different from things like public transit, need based welfare, social security, public health care, and state funded education.

There are two big differences between minimum wage and actual socialist programs.

Social programs are elective.
Minimum wage is not.

1) Social programs are elective for recipients.  You choose to collect social security, medicaid, or welfare.  You choose to ride state subsidized public transit or receive a state subsidized education.  If it is inconvenient or unnecessary, you don't have to participate.  This gives you both personal choice and can save taxpayer money.

Minimum wage is not elective.  If you are retired and working because you want to be active, you are still forced to take minimum wage.  If you want to work a second job parttime as a hobby, you are still forced to take minimum wage.  In both these cases, the primary benefit of working is doing the work itself.  Getting paid is only a secondary benefit.  You don't need the money, in fact, you would probably sacrifice some of the money you earn for more flexibility and more options.  With minimum wage you are limited in your options.

Voluntarily working for less money doesn't take jobs away from people, on the contrary, giving without asking for much in return helps everyone to have more and be more prosperous.  It's just as beneficial as electing not to recieve other forms of public welfare.

I'm not saying you should forgoe all benefits to try to save taxpayer money.  If you need it, accepting benefits is better than trying to save a few dimes.  The economic premise of welfare is that helping people out can be less expensive than waiting until their problems create costly expenses for everyone.  The moral premise of welfare is that we have a duty to assist one another when we are a position to do so, so long as we respect their own personal accountability and agency.

Social programs are about shared accountability. Minimum wage is not.
2) Social progams are about the state or public taking accountability.  The state pays for education, it subsidizes public transit.  It funds welfare and runs the social security program.  In a lot of these cases, it does make sense for the state to take some accountability.  We can work together to fix problems instead of leaving every man to his own means.  We shouldn't forget that we are using compulsorily collected taxpayer money, but for certain problems, drafting the help of the public is an appropriate solution.  In this context I use the word draft to highlight that it is compulsory.  For all the good that social programs might do, we should never forget that their funding is compulsory.  Social programs should be limited to activities where it is appropriate to elicit compulsory contributions.  But this test doesn't even apply to minimum wage because it is not actually a government expenditure.  The goverment doesn't directly pay a dime of the the related costs.

The government doesn't pay a dime towards minimum wage costs.
With minimum wage, the state is not taking accountability.  Instead, it defers accountability, by not paying any money itself, and it creates an extra burden on workers and employers.

Proponents of minimum wage tend to argue that employers have all the economic power, and thus need to be held in check.  I tend to agree with this assesment.  They will sometimes go so far as to clump all employers together into one group of people and label them as powerful and negligent.

But what does minimum wage do to hold employers in check?  There are a lot of laws that hold employers in check.  There are safety requirements and overtime requirements.  There are child labor laws and discrimination laws.  There are scores of industry specific regulations.

These rules are both important and effective.  Labor laws are important for protecting workers and holding employers accountable.  However, all these laws have certain side effects.  The biggest effect is that it takes a lot of work for employers to comply with all these rules and regulations.  Each rule by itself may be easy to comply with, but once you combine them all, it becomes a lengthy checklist.   There is a lot of risk and responsibility involved in being an employer.  Employees may not be aware of all the challenges and rules that are involved in giving them their monthly paycheck.

Labor laws are important for protecting workers and holding employers accountable.  However, there are potential side effects.

Without labor regulations, the distinction between employer and consumer is almost arbitrary.  When you buy something, the company you are buying from is like your employee.  You are hiring them to provide you a service, specifically, deliver a product.  What is it that fundamentally distinguishes an employer from a consumer?

Labor laws play a big role in helping to define the distinction between employer and consumer.  Employers have more obligations to their employees than consumers have to the business they patronize.  Employer and employee have an ongoing contractual relationship that involves expectations and obligations.

Labor laws create barriers to entry for new businesses.  Ironically, this makes companies more valuable, and more powerful.  When it comes to most labor laws, this extra value is earned.  Complying with labor regulations and having a positive relationship with the public and the community is what these companies have to do to earn the extra value they get from these barriers to entry.

However, when it comes to minimum wage, employers need to pay competitive fair rates anyway in order to run a successful business.  You won't be able to run a successfully business long term without paying your employees competitive rates.  We do need social action including social programs to make sure that employers aren't in a position to exploit and abuse desperate helpless workers.  These social programs should start with information, education, and transportation.  People who are informed, educated and mobile are difficult to exploit.

All labor laws and regulations give an advantage to successful compliant business.  In most cases this advantage is earned by compliance to the applicable laws.  When it comes to minimum wage however, employers tend to pass on or avoid the burden of compliance.  They do this by automating more processes, using infrastructure to improve productivity, using more machines, outsourcing labor and hiring fewer workers.

How much you are worth depends on what job you are doing.  I don't like saying that people are worth $5 or $10 an hour.  The value of people is much more than the immediate monetary return of the work that they do.  However, there are certain jobs that people can perform that are only worth $5/hour.  Should we forbid them from accepting these jobs even if they want to?

Minimum wage makes it harder to be an employer, harder to be an employee and harder to be a consumer.

Employer burdens:
  1. Ensure its workers can meet the productivity level demanded by minimum wage.
  2. Ensure the business is successful enough to supply a continuous income stream to all workers.
  3. Do both of the above while paying taxes and complying with all regulations.

Worker burdens:
  1. Ensure they can meet the basic productivity level demanded by minimum wage.
  2. Ensure they are reliable enough to continuously provide the minimum wage value to employers.
  3. Sacrifice other job priorities such as flexibility or opportunity, in order to meet the minimum wage.
Consumers burdens:

   1.  Travel farther.
   2.  Pay more money.
   3.  Have fewer product and service options.

So what is minimum wage if it's not a social program?

There is a clear distinction between regulation, programs, and policy.  Regulation is rules that are enforced to help manage the marketplace.  Programs are expenditures of the government designed to provide some type of service.  Policy is a prescribed pattern of behavior by an institution.  While regulation and programs fall under a broad definition of public policy, policy can also more specifically refer to the patterns of behaviors established by institutions designed to create uniformity and consistency in achieving that institution's intended purpose.

With these definitions established, let's take a look at which apply to minimum wage.

Minimum wage is not funded, sponsored, or administered.
Minimum wage is enforced. 

Technically, all this means is that minimum wage is a form of regulation.  But good regulation should be about compensating for market externalities.  Our actions can indirectly hurt other people.  It makes sense, economically and politically, to communicate that potential for indirect harm through rules designed to punish annoying and unhelpful behaviors.  But minimum wage is not about disincentivizing harmful behavior or managing public resources.  Instead, minimum wage tries to enforce equality.  Minimum wage is essentially a form of central planning.  These differences, in my opinion, mean that minimum wage is communism not socialism.  And the great lesson that we learned from the history of communism is that enforcing equality doesn't work.

Looking at history, I tend to feel that minimum wage was an unfortunate compromise that both sides of the political spectrum could accept, but neither really wanted it.  It became popular because it was an effective compromise, not because it was an effective policy.  Unfortunately, I feel that the state of the marketplace has changed an imperfect compromise into a policy that is directly harmful.

Minimum wage has been accepted because it is an effective compromise.  It is not an effective policy.  Neither side of the political spectrum is getting what it really wants.

I hope to address this in a future article.  I will discuss some of the marketplace conditions that I feel make minimum wage a very harmful policy in our current economy.  This list includes asset inflation, infrastructure vs productivity tradeoffs, wealth inequality, and the increase of free and low cost information and services.  We will talk about why the effects of minimum wage on the job market are hard to measure.  (Hint: people are adept at adapting to changes in the job market).  We will talk about how the effects may still be very harmful, even if they are hard to measure using traditional metrics.  Overall, minimum wage considers only one half of the marketplace picture.  Minimum wage is about providing a reasonable cost of living, but tends to ignore the need to be competitive, especially for individuals who don't own the extra infrastructure required to achieve high productivity.  The unfortuntate part is, that minimum wage could potentially raise cost of living, both directly through labor costs and indirectly by disincentivizing the market from providing services that cater low income individuals.

Minimum wage considers cost of living, but ignores the need to be competitive.

One of the more plausible potential real world effects of the minimum wage policy is that it shifts a sizeable portion of the workforce away from serving the basic needs of the poor and middle class, who have less purchasing power.  Instead, a greater portion of the marketplace focuses either on providing luxuries to the higher classes or they provide services that are easier to mass market but at the same time are less essential on an individual basis.  This can in turn further reduce the purchasing power of the middle class and poor leading to a cyclical, self-reinforcing effect.

Minimum wage [might] reduce the percentage of the workforce that serves the basic needs of the poor and middle class.  These workers instead provide luxuries to rich or trivialities to the mass market.

Mimium wage tends to counteract the few advantages that the poor and middle class have in the marketplace.  These advantages include things like proximity, relatibility, friendship, empathy, cooperation, and personal trust.  Minimum wage can lead people to prioritize price tag above other important marketplace factors.

Minimum wage leads people to prioritize price tag above other concerns.

This will all be discussed in greater depth in a future article.