Times finally admits it was right

Tim Cavanaugh | October 25, 2006

"In the early months of 1935," writes David Leonhardt in today's New York Times, "this newspaper ran a series of editorials warning about a grave threat to the American economy. The Social Security plan being pushed by Franklin D. Roosevelt was 'a bad bill,' the editorials said, that would become an enormous burden on American companies and might be unconstitutional to boot...

Many Congressional Republicans and business executives agreed, predicting that the bill's new payroll taxes would short-circuit the economy's recovery from the Great Depression. With all this criticism, the bill's fate seemed uncertain. On March 21, the editorial page of The New York Times approvingly quoted a news report saying that the bill's prospects were "diminishing daily."

The worries about Social Security may sound silly now, given that it did pass that summer and went on to become one of the most popular government programs in American history. But on the narrow charge that they were making—that Social Security would destroy jobs—the critics at The New York Times and on Capitol Hill were, in fact, correct.

Besides taking money out of the pockets of workers that otherwise might have been spent, the new payroll taxes raised the cost of employing workers, and when the cost of something goes up, demand for it usually goes down. The Social Security Act of 1935, as the historian Edward Berkowitz has noted, laid the groundwork for the "Roosevelt recession" of 1937 and 1938.

Regular readers of the Kan-Do Keynesian's "Economix" column will have guessed already that this stunning admission is just a setup for an argument that "job-killing programs" are good for the economy. Social Security, Medicare, and workplace safety rules, Leonhardt argues, have all elevated standards of living at the cost of only rounding-error-level dips in productivity. So make room for minimum wage hikes, which are on the ballots in Arizona, Colorado, Missouri, Montana, Ohio and Nevada:

[Arguments against the min-wage hike initiatives] seem to be falling flat with voters. A recent poll in Colorado shows 69 percent supporting the measure there, and only 26 percent opposed. In the other five states, the initiatives have similarly big leads...

I think there are two main reasons for the enormous popularity of the proposals. By now, many people probably understand that the dire predictions about higher minimum wages don't come true. In the 10 years since Congress raised the minimum wage, crime didn't become an epic problem, as [Colorado Sen. Hank] Brown forecast. Instead, it has fallen sharply.

In fact, modest rises in the minimum wage don't even appear to kill many jobs. The recent state increases have created a series of natural experiments for researchers to study, and they have generally found that modest changes have only minor effects on employment levels. Some have found no net effect. Higher wages may end up lifting employee morale and reducing turnover, making business more productive and mitigating some of the higher labor costs...

The second big cause of the proposals' popularity stems in all likelihood from the rise of income inequality. The American economy has done so well at creating jobs in recent decades that almost anybody who wants work can find it. The problem is that too many jobs still don't pay a decent living.

There is another argument against the minimum wage, of course: Nobody's forcing you to offer or take any job at any price. If you and another party agree on a price, why is that the government's business? And what powers of perpetual motion does the law have that it can make "income inequality" disappear by fiat?

That having been said, it's worth giving a think to Leonhardt's main point: that the apocalyptic predictions about minimum wages, Social Security, and a host of other expense-creating government mandates have failed to come true, leaving the human race (disappointingly) still alive. Ominously, you could make the same point about almost any regulation on the books.

Courtesy of reader "M," who calls the column, "Pork: The other Social Security."

Comments

|10.25.06 @ 11:04AM|#

almost anybody who wants work can find it.

Come to Michigan and say that, asshole.

|10.25.06 @ 11:15AM|#

A) He did say "almost anyone".

B) If you can't find a job there, get the hell out of the People's Republic of Michigan.

|10.25.06 @ 11:26AM|#

The Times? Treason! Treason! Arrest them all!! OK, I'll go back and read the article now.

|10.25.06 @ 11:27AM|#

If the minimum wage is never corrected for inflation, it's sort of pointless to have one.

Of course, if you think there shouldn't be one at all, you won't be bothered by that.

|10.25.06 @ 11:30AM|#

"almost anybody who wants work can find it."

Come to Michigan and say that, asshole.

Almost anybody can leave Michigan!

|10.25.06 @ 11:30AM|#

I propose that we teach creationism in our schools. It won't increase the crime rate. It will put very few people out of work (maybe only some evolutionists). It will only have a marginal impact on our economy since very few jobs are connected to evolution. Creationism will increase morale in this country since people will become more religious, which will actually increase productivity. Who couldn't love creationism?

|10.25.06 @ 11:30AM|#

FDR's central planning: disaster for the sake of "doing something".

As consequences are bearing out, history's judgements of presidents are changing rather dramatically (rightfully so): FDR is going down, Woodrow Warmonger Wilson is going down, and Clinton is going up.

|10.25.06 @ 11:31AM|#

Lord Duppy,

What's the unemployment rate in Michigan now, like 7 or 8 percent?

|10.25.06 @ 11:33AM|#

I welcome our new Creationist overlords

|10.25.06 @ 11:35AM|#

Duppy does have something of a point. Employees have the same flexibility to choose employers that employers have to choose wages only if you assume that the costs of relocation and retraining are zero.

|10.25.06 @ 11:37AM|#

In fact, modest rises in the minimum wage don't even appear to kill many jobs.

Yes. That would be the definition of 'modest'. If everyone makes more than the minimum wage, raising it won't put anyone out of work.

|10.25.06 @ 11:39AM|#

On the other hand, raising the minimum wage hasn't reduced the proportion of people below the poverty line. . .

|10.25.06 @ 11:40AM|#

Also, it's important to note that most employees work for metastatic corporations like WalMart, not for small businesses, and that someone applying for a greeter job has zero negotiating power with Metastatic Inc. The big boys have all the market power here.

|10.25.06 @ 11:50AM|#

Nobody's forcing you to offer or take any job at any price. If you and another party agree on a price, why is that the government's business?

This sounds like a great reason to strengthen and grow union labor. I wonder if reasonable minimum wages help reduce the desire or need to unionize?

|10.25.06 @ 11:58AM|#

Also, it's important to note that most employees work for metastatic corporations like WalMart, not for small businesses, and that someone applying for a greeter job has zero negotiating power with Metastatic Inc. The big boys have all the market power here.


The reason "most employees" have no negotiating powert isn't because they're dealing with Metastatic corporations as opposed to small businesses, it's because they have no value to bargain with. Anyone, aside from the mute and/or blind, can be a greeter. You can't negotiate if you don't have anything to offer.

|10.25.06 @ 11:59AM|#

The problem is that there is no accounting for what never existed. Yes, the world did not come to an end because of these programs and yes we are all now a hell of a lot richer than we used to be. But that all happened in spite of not because of these programs. We will never know how much better things could have been had these policies never been enacted. The U.S. economy is kind of like Jessee Owens with head cold. Yeah, Jessee Owens on a bad day is still pretty incredible and probably wins a couple of gold medals, but healthy he wins four. The U.S. ecomony certainly won its share of medals in the last 70 years, but it could have done more absent some really bad economic policies.

|10.25.06 @ 12:00PM|#

These laws have effects at the margins. What are the effects and who are the people at the margins who are getting screwed, and what effects does the minimum wage have on their life courses?

|10.25.06 @ 12:14PM|#

Social Security would destroy jobs

crime didn't become an epic problem, as [Colorado Sen. Hank] Brown forecast

Ultimately these are straw men. The principled argument against Social Security and minimum wage was never that the world was going to end. In aggregate Americans are too educated, too productive and too motivated to let that happen. The argument against the programs is spiritual and financial. It is spiritual in the sense that the welfare state continues to sap and impurify our right to self-determination. John beat me to this point while I was writing this, but it is a financial argument because what proponents of Social Security and minimum wage cannot show is how much wealth is destroyed by both of these policies. Sure, we have survived just swimmingly but how much better off would we be without them? I can't speak for anyone else here, but I would be tremendously better off, and the Constitution was ratified to protect the fruits of my labor, not empower the federal government to deprive me of it.

As been amply demonstrated in the other Social Security thread, any of us cogent enough to be contributing who are in our 40's and younger have already put more in to the program than we will get out, and that is with no guarantees for the future benefits (and no mention of Medicare). As much as Joe may wish it was, Social Security is not welfare; if I don't put anything in I am not eligible to get anything out. The program is an individual old age, survivors and disability program existing at the whim of agents of the federal government, with no option to opt out. That is everything that is wrong with it.

|10.25.06 @ 12:17PM|#

I conduct a little mental exercise about every 5 years or so.

How many minutes do you have to work at McDonalds at minimum wage to buy lunch at McDonalds?

Given the same meal -- 2 regular hamburgers, 1 small fry, 1 child's size drink (that was the "normal" size way back when) -- the time required to earn the price of lunch has stayed very constant at about 45 to 50 minutes(ignoring state, federal, and sales taxes).

Regardless of what the minimum wage is posted at, the market will balance out the cost of labor to produce the things that are in the price range of the people who earn the minimum wage.

Franklin Harris|10.25.06 @ 12:33PM|#

Actor Jeff Daniels assures me that Michigan is Paradise and I should open a business there.

Jennifer|10.25.06 @ 12:54PM|#

Duppy, that commment you quoted is, in context, a lot less callous than you're pretending: "almost anybody who wants work can find it. The problem is that too many jobs still don't pay a decent living."

Exactly. Almost anybody can find themselves a minimum-wage job; problem is that in many places working full-time at minimum wage won't even pay the rent on a one-room apartment, to say nothing of all the other monthly expenses people must pay in order to survive.

|10.25.06 @ 12:58PM|#

"Higher wages may end up lifting employee morale and reducing turnover, making business more productive and mitigating some of the higher labor costs..."

These arguments are so patronizing. They are always pulled out to support regulations on businesses. We are going to apply this ham-handed regulation on all businesses, and even though you work every day to optimize your business' returns, and I don't know a single thing about your business, I think my ham-handed new regulation will end up making your business better! Just have faith in my all-knowing & all-wise meddling in your business, which I have never seen or worked for.

|10.25.06 @ 1:00PM|#

I have never been able to understand why the minimum wage is supposed to be a "Living Wage". Do high school kids not need a job? If they have one should it be able to provide them with a living?

|10.25.06 @ 1:15PM|#

...and that someone applying for a greeter job has zero negotiating power with Metastatic Inc. The big boys have all the market power here.

If they have zero negotiating power, why do the Metastatic companies already pay MORE than the minimum wage for unskilled labor?

|10.25.06 @ 1:45PM|#

I don't know if it's still true, because I haven't been in the industry for a few years, but it used to be that if you needed a job that paid more than minimum wage, you became a salesperson, and generally a telemarketer. I could make well over $10 an hour over 6-7 years ago doing that job.

Also, you can get an apartment and have a roomate to share expenses with. It's how a lot of people get by.

So no, I won't be voting for the minimum wage increase here in AZ.

|10.25.06 @ 1:46PM|#

Almost anybody can find themselves a minimum-wage job; problem is that in many places working full-time at minimum wage won't even pay the rent on a one-room apartment, to say nothing of all the other monthly expenses people must pay in order to survive.

Then its a good thing that practically no one who works for minimum wage has to pay all these monthly expenses out of that one paycheck.

|10.25.06 @ 2:12PM|#

If everyone makes more than the minimum wage, raising it won't put anyone out of work.

Good point. I recall reading somewhere the other day that only about 2% of the workforce is working at the minimum wage. So I expect this will mostly have the effect of allowing the proponents to pat themselves on the back, while doing virtually nothing for anyone else. Which, when you think about it, is probably the best possible outcome.

|10.25.06 @ 2:23PM|#

Pig Mannix has a point, it would seem from BLS statistics [1], that only around 1.5% of workers actually make the minimum wage.

http://www.bls.gov/cps/minwage2005.htm

|10.25.06 @ 2:38PM|#

Also, it's important to note that most employees work for metastatic corporations like WalMart, not for small businesses

I find it amusing how the same people who steadfastly support minimum wage laws (since escalated to "living wage") are also so hateful of mega businesses like Wal-Mart.

Minimum wage and living wage laws practically ensure that the Wal-Marts of the world gain more market share.

The Main Street USA nostalgians always forget the legislative make-up of the country at the time those close-knit communities were constructed. Main Street USA now only thrives in upper middle class and higher socioeconomic communities, areas with enough extra disposable income to support higher wages. I suppose one could argue that it also survives in poor immigrant communities, but that requires turning a blind eye to the violations of the regulations in those establishments. Stop by the kitchen of the local Ma & Pa burrito stand and see how much of the kitchen help gets paid in cash. Or ask your teenage kid if Patel at the local Quizno's offered them a job paid in cash.

uncle sam|10.25.06 @ 2:46PM|#

As luck would have it, SS was accompanied by increasing industrialization and productivity, eclipsing its negative effects.

Jennifer|10.25.06 @ 2:52PM|#

Then its a good thing that practically no one who works for minimum wage has to pay all these monthly expenses out of that one paycheck.

What are the exact numbers, RC?

|10.25.06 @ 3:17PM|#

What are the exact numbers, RC?

The first hit I got on my search is a 1999 HHS paper.

The most interesting numbers along the lines being discussed are that only 17% of workers earning within a dollar of the minimum wage at that time work 35 hours per week or more and that only 16% of workers earning within a dollar of the minimum wage at that time come from households below the poverty line.

|10.25.06 @ 3:19PM|#

SS was accompanied by increasing industrialization and productivity, eclipsing its negative effects.

Only because the rest of the world was destroying its own industry with war and communism. Now that the rest of the world is slowly coming out of its malaise, Soc Sec is fuuucked.

|10.25.06 @ 3:59PM|#

With each tax/regulation/restriction/program, the same argument is heard: "The negative effects will be minimal."

The cumulative effects are not, however. Excuse the cliche, but it IS like 'being nibbled to death by ducks.'

|10.25.06 @ 5:39PM|#

"Stop by the kitchen of the local Ma and Pa burrito stand and see how much of the kitchen help gets paid in cash."

Or sneak a peek at your gardner paying his help, or the paint contractor paying his guys, or the house cleaning people paying their helpers, and on and on....

For poor people, Cash is King.

|10.25.06 @ 6:12PM|#

Some guest on the Colbert Report a while back said that stay at home moms were discriminated against because, since they weren't paid, they were deprived of Social Security benefits.

I thought, yeah, because I'm constantly trying to pay people in cash, and they insist on leaving a paper trail so that they can pay their FICA taxes & get their social security.

|10.25.06 @ 6:24PM|#

So much wishful thinking. Sure, employment increases/stayed steady after the minimum wage was raised, but I JUST KNOW it would have increased even more without it. I just know it.

"As luck would have it, SS was accompanied by increasing industrialization and productivity, eclipsing its negative effects."

Wow! What are the chances?!?

"SS was accompanied by increasing industrialization and productivity, eclipsing its negative effects. Only because the rest of the world was destroying its own industry with war and communism."

DAMN we're a lucky country! You know what? George Bush is right. God really does favor America. I mean, how else could you explain the way things completely outside of our control just keep happening to save us from the negative effects of progressive economic policies?

Or maybe, just maybe, instead of remarkable set of coincidences masking effects...just bear with me here...maybe you're wrong.

|10.25.06 @ 6:41PM|#

I mean, how else could you explain the way things completely outside of our control just keep happening to save us from the negative effects of progressive economic policies?

joe, this is not rocket science. If one believes in the cardinal rule of microeconomics -- that a voluntary trade increases total wealth, or the trade would not have happened -- then anything the government does that inhibits using one's resources voluntarily does not increase wealth as much. The simple fact that the government takes a private actor's money and spends it in a way he she or it would not have spent it destroys wealth.

Yes, there are public goods concerns, and an argument could be made that some government spending does indeed increase wealth in ways markets can't. But actual public goods spending is a pittance compared to total federal spending.

Question back to you: How phenomenally improbable is it that the exact formulation of laws and rules created and maintained by the government actually comes close to maximizing total well being?

uncle sam|10.25.06 @ 7:40PM|#

Let us also note here that FDR did, in fact, preside over the longest depression in U.S. history and economic research does point to FDR's policies as a significant contributor (Smoot-hawley also contributed as well as the tight money policy of the FED).

|10.25.06 @ 8:33PM|#

Mike P,

Lawrence Summers, Robert Rubin, Robert Reich, and about half the practicing economists in the country - all of whom, I daresay, understand microeconomics even better than non-economists who self-describe as libertarians - disagree with you. What you've described is Econ 101. Most colleges also offer Econ 102, 201, 301, and so on, all the way up to graduate level. If the impact of minimum wages on employment and growth was as clear cut as the Econ 101 description you just provided suggests, this wouldn't be an open question anymore.

"How phenomenally improbable is it that the exact formulation of laws and rules created and maintained by the government actually comes close to maximizing total well being?"

1. Phenomenally improbable. We are mere mortals.

2. "Maximizing total well being" is a subjective concept that relies on values statements that vary from person to person.

uncle sam,

True enough. Much of what FDR attempted was ineffective and even counterproductive.

|10.25.06 @ 8:51PM|#

Lawrence Summers, Robert Rubin, Robert Reich, and about half the practicing economists in the country...

Sorry, old boy, but noone thinks of Robert (the III) Reich as an economist. Absolutely none of his degrees are in economics and he he has never held an academic position as a professor of economics.

And we know how the left feels about Lawrence Summers, after his faux pas a Hahvahd and all.

|10.26.06 @ 3:24AM|#

"Maximizing total well being" is a subjective concept that relies on values statements that vary from person to person.

Very true. Why, then, should government get to decide that having people who are worth $6.85 per hour employed while having people who are only worth $5.15 per hour disemployed is the only possible state of affairs? Is the state not stripping away the variability of the value positions of persons -- a variability that by its very nature is wealth creating -- and replacing it with a one-size-fits-all prescription: No one should earn less than it takes to keep a household? Even though fewer than a fifth of near-minimum wage earners work full time and fewer than a fifth live below the poverty line?

|10.26.06 @ 9:31AM|#

"Why, then, should government get to decide that having people who are worth $6.85 per hour employed while having people who are only worth $5.15 per hour disemployed is the only possible state of affairs?"

Primarily because there isn't very good evidence that that would actually happen. Most, if not all of the people you've decided are only worth $5.15 would actually be earning $6.85.

|10.26.06 @ 1:00PM|#

DAMN we're a lucky country! You know what? George Bush is right. God really does favor America. I mean, how else could you explain the way things completely outside of our control just keep happening to save us from the negative effects of progressive economic policies?

Countering fact with emotion doesn't say much about your debating skills.

"Completely outside of our control" is completely ignorant. Geez, there's books written about the US federal reserve BECOMING a major influence in international banking, the only major economy still on a real gold standard at the time! Hell, we're talking about a time when American industry was failing, albeit at a slower rate than European industry. You couldn't pick a time in American History with such a massive increase in US government involvment at home and abroad.