Tuesday, 20 September 2016

The Economist Doesn't Do A Very Good Job With This One

From the days when I used to read it every week (long before the days of the online option) The Economist has always come across as wishing to be economically slightly right of centre and socially slightly left of centre. My impression these days from sporadic reading is that in terms of its economics it is drifting implacably to the left, probably to appeal to a younger readership.

It is still friendly to free trade, but in my view not trenchant enough in its repudiation of bad leftist policies. A good example is this article, which despite being two years old, grabbed my attention this morning when it was shared on The Economist's Facebook page and generated lots of attention in the comments section.

It's not just that the article sits on the fence too much regarding the minimum wage, it's more that by only focusing on how the policy affects statistical employment levels in terms of having only a moderate effect on job losses, it fails to consider the most important statistical group - the people that cannot get a foot on the rung of the employment ladder in the first place (and that's to say nothing of the other negative effects such as unfairly loading the burden onto employers of low-skilled workers and causing price inflations that hit those same people hardest).

An article that makes itself so oblivious to the entirety of the net cost on society is rather like an article on assisted suicide that makes no mention of the pain and suffering of the people that wish to end their life. The minimum wage is basically a tax on people who do the most for low earners - a tax passed on to low-earning consumers, which ought to tell you almost everything you need to know about it (and let's not forget that it has a very dark history with sinister eugenicists who knew exactly what kind of effect it would have on struggling factions of society, as I wrote about in this article for the Adam Smith Institute) .

The minimum wage legislation occurs because the UK government wants low-skilled workers to receive more in wages than the market value of their labour - but it rather reminds us of an old political maxim: don't judge a policy by its intentions.

The desire to ensure low earners have enough to make ends meet is a noble one - but it can, and should be achieved by supplementary benefits, which basically amount to a tax funded by taxpayers as a whole, rather than the minimum wage, which is a tax on people who employ low-skilled workers, where the cost is largely borne by consumers of firms that employ lots of low-skilled workers.

It should be obvious, but as I explained in this blog, if you want to help low-earners it seems bizarre and unnaturally wrong to expect the vast majority of the cost to fall on the sub-section of society already doling the most for low-skilled workers and for consumers who buy the goods and services provided by low-skilled workers.

Like the ill-conceived tariffs I mentioned in a recent blog post, the minimum wage benefits are tangible and easy to endorse, whereas the costs are spread out widely across the population (particularly for people whose labour value falls below the government's mandated price floor and remain unable to sell their labour). Like the tariffs, politicians like minimum wage legislations because they conceal the subtlety of the tax*.

While we're on the subject, have a look at this graph, which measures government spending as a proportion of GDP.

In the past few decades government spending has hovered around the 40% mark of the entire GDP, which constitutes a massive proportion of total spending. Plus if you add on all the hidden taxes in the form of regulations, price controls, tariffs, etc - plus government borrowing, which is basically deferred taxation (which this graph does not factor in), it's probably over 60% of GDP.

That is to say, if the government taxes Jack 20p in every £1 earned and gives some of it to Jill, that transaction is recorded as a tax. If however, the government forces Jack to pay Jill more than her market value, or consume at a price above the market value, those transactions between state and citizen won't be recorded as a tax

Just as the tariffs prevent you from buying cheaper alternative goods and services from more competitive foreigners, the minimum wage prevents you from buying cheaper alternative goods and services domestically. Not only do both these regulations generate many deadweight losses on the economy, they are deadweight losses for which the majority of our citizens continually lobby the government.

Alas, I'm sorry to say - almost all our society is controlled and governed around left wing constructs (progressive taxation, price controls, state-provided health, education, defence, a quasi-governmental central bank that controls interest rates, and it's impossible to undertake any mutually beneficial transaction with another agent without incurring numerous instances of State-regulation or state-enforced taxation on earnings that have already been taxed - usually both).

* To give you an additional point to consider regarding the absurdity of this price floor; suppose our new chancellor Philip Hammond was injected with a potion that made him believe all old banger cars in circulation have suddenly increased in value. 

From now on, irrespective of whether your car is falling to bits, rusty, leaking, worn out or on its last legs, under this new potion’s influence the Chancellor now believes that no car is worth less than £1500. On the basis of this, he creates a minimum car sale law that prohibits anyone from selling a car for under £1500.

Who do you think this will hurt most? You've got it, the people trying to sell inexpensive cars. Philip Hammond's law won't make those cheap cars any more valuable to buyers than they already are - which means the law will simply prohibit a lot of people from being able to buy and sell cheap cars. The same reasoning can be applied to minimum wage laws.