Streetwise Professor

December 5, 2013

Obama Believes Demand Curves Slope Up, or Economic Perpetual Motion Machines

Filed under: Economics,Politics — The Professor @ 1:23 pm

In his latest, desperate attempt to change the subject from Obombacare, BHO is following in the slipstream of another economic ignoramus, the Pope, and pushing for an increase in the minimum wage.  He evidently believes demand curves slope up, because he claims, via Twitter, that a 40 percent rise in the minimum wage will increase employment by 140K and increase GDP by $32.6 billion.  Not $32 billion.  Not $33 billion.  $32.6 billion.  That’s right, a forced rise in the wages of some individuals will somehow magically result in a rise in employment overall, and an increase in economic activity.

Just how that would work is a mystery.  My guess is that they are multiplying the rise in wages to those currently paid less than the new minimum wage of $10.10 times the number of hours worked (assuming no decline in that figure-which is bogus) times some magical Keynesian multiplier times some jobs/GDP ratio to get the 140K jobs and the $32.6 billion GDP increases.  The multiplier step would come from (presumably) the higher earnings translating into higher spending which raises the income of others who spend more and on and on.

But as Steve Landsburg rightly points out, when criticizing someone who should know better, even overlooking the highly unlikely assumption that the higher wage does not reduce employment, the higher income of those earning the higher minimum wage is a transfer from those who pay it.  So even if you believe in magical Keynesian multipliers, there’s nothing to multiply.  The income of some goes up, the income of others goes down by the same amount, so even if the consumption of some goes up the consumption of others goes down by approximately the same amount.  Meaning the Keynesian spiral (if you believe in such things) never gets started.

In other words, if this sounds like an economic perpetual motion machine, you’re right.

But maybe it would make sense if explained by an articulate spokesman.  You know, like this:

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  1. And right on time, Applebee’s announce that they are putting iPads on every table, so that you can order and pay without waiting for a waiter,

    Comment by jon livesey — December 5, 2013 @ 2:31 pm

  2. @jon. Yes. I saw that. Minimum wage + Obamacare will lead to a lot of substitution of capital for unskilled labor. Yet more perverse consequences. Hurting those in whose name these laws are advocated and passed. Won’t it be grand when we have youth unemployment rates like Spain?

    The ProfessorComment by The Professor — December 5, 2013 @ 4:08 pm

  3. What can a young person do to optimise their position in these circumstances, would you say? They already face the problem of not yet having much in the way of skills or experience. Jobs they can do, with their skills and experience, seem to me to be getting offered down noticeably fast right now.

    Comment by Green as Grass — December 6, 2013 @ 4:32 am

  4. I don’t know if you’re right about this. The person who works in the fast food industry can’t expect to be earning a living wage but as fast food proliferates and competition from recession-desperate yuppies with food trucks and storefront cafes increases, what can they do? It seems axiomatic that if owners have to pay more, they can’t stay in business. Except, who is there to keep buying stuff when people don’t have enough money? I know that I eat out far, far less since the recession, even at cheaper places like McDonald’s.

    I wonder what you think of this German author — sorry, it’s a PDF that you’ll have to click on:

    “Pay policy
    The mandatory national minimum wage is coming to Germany. Wolfgang Mulke looks at implementation in other countries and Ulrike Herrmann explains why capitalism needs decent wages to thrive.”

    The article (I subscribe to the hard copy of this paper so I read it there) basically explains that wages have to increase or there is a bubble that leads to recessions. I don’t know. I’m curious what you think.

    Comment by Catherine Fitzpatrick — December 6, 2013 @ 9:22 pm

  5. Trust me on this one, Catherine: I’m right. Government can dictate a “living wage.” They can dictate the wage, but they can’t dictate that businesses hire anyone at that wage. Re desperate yuppies: the fact that there are large numbers of young relatively educated people out of work means that the impact of a higher minimum wage will be even greater on those with the lowest skill. A business given a choice between hiring an unskilled person at $10.10 and one who has gone to college, or had some college, will choose the latter every time. Re “keep buying stuff when people don’t have enough money”: that’s the issue of the transfer aspect of the minimum wage, exactly. The money that those hired at the higher minimum wage get comes out of someone else’s pockets. The former have more, but the latter have less. To a first approximation, the effect is a wash. You can’t magically rejuvenate the economy by robbing Peter to pay Paul.

    Re capitalism “needing” decent wages. There is certainly a correlation here between a healthy economy and high wages. But the direction of causation doesn’t go from high wages to a healthy economy: it goes from a robust economy to high wages. You can’t just decree high wages, and magically get a healthy economy if the underlying fundamentals aren’t there. Indeed, since one of the causes of a moribund economy is often a meddling government that intervenes in markets-and especially labor markets-advocating further intervention in the form of a higher minimum wage totally reverses cause and effect.

    Germany is in fact a very interesting case in point. Extensive regulation of the labor market in German caused serious unemployment and low-wage growth problems there in the 1990s and early-2000s. Germany was called the Sick Man of Europe As much as I loath Schoeder for his pimping (or is it whoring? or both?) for Putin, he did his Nixon to China imitation and deregulated substantially the German labor market in 2003-2005. The result was a substantial reduction in unemployment and a strong German economy. Germany went from being Europe’s sick man to being accused of living large while the rest of Europe-notably the southern Europe which is to this day saddled with highly regulated labor markets-collapsed.

    I am deeply sympathetic to the plight of low income, low-skill individuals. It would be nice if we could ease their plight by a law, or decree. We can’t. What we should definitely not do is fall for nostrums like the minimum wage, which rather than being a cure, are a symptom of some of the real problems that they face.

    The ProfessorComment by The Professor — December 7, 2013 @ 11:15 am

  6. Professor,

    You claim “you can’t magically rejuvenate the economy by robbing Peter to pay Paul.” How do you know this? Doesn’t it depend on how Peter and Paul behave after the transfer? If Peter loses the liquid assets that were sitting idle on his balance sheet, while Paul increases his spending in response, there is every reason to believe that the increased spending from Paul will not be offset by a decrease in spending from Peter.

    It would be one thing to claim you don’t believe this will work, but you insist it can’t work. In a healthy economy, crowding out is expected, but not with so much slack in the economy.

    Comment by Ben — December 31, 2013 @ 1:16 pm

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