How the Minimum Wage Benefits Corporations at the Expense of Workers

By J.D. Seagraves, on October 1st, 2008

If there is a silver lining to the dark clouds on Wall Street, it’s that people are finally waking up to the realization that something is fundamentally wrong with the U.S. economy. Unfortunately, most citizens accept long-refuted economic myths and, thus, incorrectly prescribe more government to cure a problem caused by too much government. Students of the Austrian school of economics know that government intervention into the economy—regulation—almost always has the opposite of its intended effect. A good case study for this is the minimum wage.

The federal minimum wage was $5.15 per hour from September 1, 1997 to July 24, 2007. Thanks to the money-supply expansion of the Federal Reserve, the purchasing power of that $5.15 dwindled to $3.99 over the ten-year period, meaning that minimum-wage workers received a 23% pay-cut in real terms, even as their nominal wages remained the same.

The Minimum Wage in Action Encourages Inaction

Obviously, a person earning $5.15 an hour for the standard 40 hours per week—$206 before taxes—could not afford to support a family. This was one of the arguments for raising the minimum wage to $6.55 (it will go up to $7.25 by 2014). But are all wage earners supposed to be able to raise families on their income?

Consider the single person, fresh out of high school, who has no interest in college. In fact, he has no interest in leaving his parental abode, where Mom does the laundry and Dad pays the cable bill. He wants as much money as he can get for his labor, of course, but he has no need to support a family. And since he’s a bit of a slacker and not all that bright, he doesn’t have the skills to merit $6.55 (plus payroll taxes, workers’ compensation, unemployment insurance, etc.) in hourly pay. In order to find employment, he’ll have to stumble upon someone willing to pay him more than he’s worth.

Maybe our slacker could add $5 per hour of marginal utility as the third worker at a donut shop—marginal utility tends to decrease as the number of employees increases. The slacker would be happy to work ten or 12 hours a week at this rate, which would allow him to buy a new video game every Tuesday. But the donut-shopkeeper cannot afford to pay him $6.55, which would result in a loss of $1.55 an hour for every hour the slacker worked, so as a result, the slacker continues to mooch off Mom and Dad, never getting a chance to build up the work experience that could lead to better jobs in the future—and a new outlook on life.

Free Market vs. Government: How Wages Are Set

Employees are generally paid based on the amount of profit their work contributes to their employer’s bottom line. After all, in a competitive job market, employers are incentivized to pay as much as they can afford to in order to attract the best workers. Government regulation, however, leads to diminished competition between employers and more competition between employees. Regulation, including the minimum wage, is what pushes wages down.

For example, imagine the government set the minimum wage at $25 per hour. Some people in the $20-$24 range would get a pay boost, but people earning much less than $25 would undoubtedly be let go. After all, if they were really adding more than $25 of hourly utility to their employer, they’d be making more than $8, $10, or even $15 an hour.

In this scenario, unemployment would be very high, and thus jobs would be extraordinarily scarce. Thus, instead of employers competing for employees, job-seekers would be fighting one another for jobs. This would push wages down, not up, and healthcare and other fringe benefits would unquestionably be cut.

The $25 scenario might be seen as a little extreme, but the principle holds: when you mandate a minimum wage, workers whose labor contributes significantly less than that wage to the company’s well-being will be fired, and the scarcity of the remaining jobs will lead to greater competition among employees, not employers. And far from hurting only “slackers,” minimum-wage laws hurt the most vulnerable members of society.

How the Minimum Wage Promotes Crime

Consider this: when people are priced out of the job market, what do they do? They can turn to a life of government dependency on welfare, or perhaps, in an effort to preserve their dignity, they can turn to crime. Yes, crime can be honorable in the interventionist state. After all, anyone who works for less than the minimum wage is by definition a criminal, as is their employer. But too many people, who would otherwise be productive workers in the “overground” economy, do turn to lives of actual violent crime when they have nowhere else to turn.

Poor people in the inner city are most susceptible to these deleterious effects of the minimum wage. Employers want work experience, which is impossible to get if you never have a first job. And you can’t get a first job when your marginal utility is less than the minimum wage. In the old days, people could agree to work for initially low wages to get their feet in the door, but this is illegal now. And even worse yet, inner-city entrepreneurs, who could better their impoverished communities by providing jobs, are stifled by the minimum wage and other regulatory red tape.

Who is the Minimum Wage Good For?

One common critique of raising the minimum wage—that it causes inflation—is 100% false. Only expansion of the money supply can cause inflation, and raising wages does not produce more money—only the Federal Reserve can do that. However, this inaccurate criticism is actually worthy of consideration because, if the minimum wage did cause inflation, it would actually be less destructive than it is. For if it simply caused prices to rise throughout the economy, then employers would be more easily able to afford the higher wages. The truth is, it doesn’t, and they can’t.

So the minimum wage is clearly bad for workers and entrepreneurs and good for the government, which expands its sphere of influence as more citizens turn to welfare and criminality. But left-liberals should also note that, by tightening the labor market, the minimum wage benefits large corporations, too. After all, why do you think Wal-Mart supported the most recent minimum-wage hike?



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Congress’ Bailout Plan: Will It Be Enough to Bridge Political, Cultural Divides?

By Evelyn Black, on October 1st, 2008

When I was a kid (I’m 55 now), I looked forward to holiday dinners because that was when my parents and my grandparents held their traditional “Was FDR a scoundrel or a savior?” debate. My grandparents, who worked for public utilities and, thus, survived the Great Depression with conservative opinions intact, argued for FDR the scoundrel. My father, who worked for a public utility company on the blue collar side and was a union steward, argued for FDR the savior.

The FDR argument was a traditional debate in our household even though the issue itself was a historical one, and though I already knew what every single participant was going to say, I looked forward to it because it was so exciting to see people I loved all vehemently disagreeing without really hurting each other. That’s the democracy I saw as a kid and the one that I miss today; a democracy that encouraged informed debate and tolerated strongly divergent views.

Watching the wrangling in Washington over the current banking crisis reminded me of that debate. The holidays are approaching, lots of Americans are scraping for turkey money, and, in an effort to maintain calm, the press is trying hard to replace the “D” word (Depression! Run for your lives!) with the more awkward but also more calming phrase “possible severe recession.” Once again we are witnessing an autumnal debate about the role of government in business and financial markets. Once again we are witnessing the spectacle of a televised tag team match between Emergency Socialism and Unfettered Capitalism.

Was FDR a scoundrel or a hero?

I don’t know. I do know that our current economic situation is similar in some ways to the one our grandparents (or in many cases, great-grandparents) survived. The stock market collapse that kicked off the Great Depression in 1929 came at the end of a bubble that included high-rolling, unfettered speculation and wildly indulgent personal lifestyles. The Dust Bowl disaster of the 1930s is parallel in some ways to our current climate change and energy crisis, with the displacement and disenfranchisement of huge numbers of people due to Katrina and now Hurricane Ike, and the promise that these kinds of monster storms will most likely become the norm, not the exception.

Like working Americans during the Great Depression, working Americans today are witnessing a rapid increase in costs concurrent with wage stagnation. Unemployment, while nowhere near Depression era levels of 25%, is rising rapidly and will rise even more rapidly should the current credit crunch continue. Just as in the aftermath of the stock market crash of 1929, we have a Hoover-like presidential candidate and an FDR-like candidate, acting out their respective roles in the holiday FDR debate on the national stage.

But there are real differences between our current situation and the one FDR seized by the horns in the ’30s.

The first difference is that American industry was still strong in the 1930s, and gearing this industrial base up for WWII arguably helped FDR turn the country around. Now, not only is U.S. infrastructure shot, our industrial base is gone, too, shipped overseas by multinational corporations in the wake of NAFTA for better profit margins.

A second difference is a loss of skills in the general populace. While my grandmother loved to regale me with stories about how she walked six miles for a 20 pound sack of government-issued potatoes once a week and fed her family of six on that and not much else, today’s consumer would be hard pressed to know what to do with a potato if there wasn’t a Wendy’s nearby. While we can relearn these skills (and many are doing just that: agricultural markets are “ripe for picking,” so to speak, and purchase of vegetable seed skyrocketed this year), in the short term, we have lost a lot of self-reliance and capability as individuals.

But maybe the most striking difference between that time and this one is the lack of a unifying political vision. My parents and grandparents argued about FDR at the Thanksgiving dinner table in part because FDR, scoundrel or hero, was able to bring everyone together for the common good, at least for awhile. Today, we have political machines that are still feeding the culture war in America, drawing a line between red and blue and even underhandedly pitching to white – something we all hoped we were past but clearly are not.

Who has the 21st century New Deal for America?

Hank Paulson doesn’t. But between the stock market’s meltdown after the House rejected Paulson’s bailout plan on Monday and tonight’s Senate vote on their version of a financial rescue package, we are finally hurting bad enough to come together to fix the mess wrought by 25 years of free market capitalism. Even then, freeing up U.S. credit markets will not in and of itself stop the free-fall in home values and home sales. It will do nothing to bring back the tax bases of our major cities. It will not encourage energy independence or investment in U.S. industry and infrastructure, and it will not address the problem of declining wages and rising costs.

Finally, helping Wall Street get its credit markets back on track will not bring together a populace split down the middle over issues of religion and personal lifestyle. It will not stop the feckless political pandering that has brought us to this sorry state.

I think we do need a New Deal, a vision of where America wants to go and who America wants to be on the world stage. Until that emerges, we will be seen only in terms of what we once were, and our suffering will continue. Debt cannot be a nation’s only commodity if that nation intends to prosper.

The parallels to our time and the time of the Great Depression are there alright.

But we haven’t seen anything, yet.



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Health Insurance Companies Take Advantage of Doctors, Part II

By J.C., on October 1st, 2008

I’ve posted previously on how tough insurance companies can make it for doctors to collect their payments. Those of you in the profession know what I am talking about and are probably familiar with the acronym “EOB.” The EOB is the “Explanation of Benefits” that insurance companies provide to their patients and physicians.

If you are a patient, you probably only look to the bottom line or the far right which shows how much you owe the provider that the insurance company does not cover. You probably clearly overlook the fact that the amount paid by the insurance company is much less than what is billed by the doctor. When a physician provider receives the EOB, it looks a little different from the patient’s: there is usually an explanation of why the claim was not paid fully and/or why the claim was denied.

Unfortunately, the insurance companies have expertise in being as opaque and confusing as possible – the language in these explanations involves a mixture of legalese and what many of us would call “B.S.” It is the kind of language that confuses doctors and office staff and usually is only understood by the billing specialist at the insurance company. Additionally, it is a canned response by the insurance company computer system. Essentially, their computers flag certain errors or omissions and then send the generic computer response that is meant to deter the physician from resubmission or chasing the collection.

In a weak effort to provide some evidence behind my strong opinions, I found this article dated in August 2008 from the North County Gazette in New York. This is in reference to a health insurance company being fined $600,000 for failure to provide EOBs or adequate explanation of EOB denials to patients with their coverage. Interestingly, I could not find an example of a health insurance company being fined for providing inadequate EOBs to providers.

As I mentioned previously, the problem lies in the fact that the provider is good at his profession: providing medical care. He is not trained in how to maximize medical billing and how to chase down insurance companies to make sure they pay what they owe. It is a sad state of affairs and is actually a major reason why many new providers are opting to join a large managed care organization such as Kaiser Permanente, where they do not have to worry about scheduling, billing, EOBs, and human resources.



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