Minimum Wage; Seen and Unseen; Foresight

A seemingly good thing to do at the time often turns out to be a bad thing to have done down the road. We can see the immediate beneficial effects of our decision. Cause and effect is direct and visible. But often there are unseen and harmful consequences, too.

The immediately unseen effects require foresight. If we decide to do something now, we must consider the foreseeable long range consequences accompanying that decision.

Minimum wage laws are an example of what's seen is often good and what's unseen is bad.

In "The Jobless Summer", the troubling current levels of youth unemployment (ages 16-19) are discussed. A large component of the youth employment problem results from the minimum wage having been raised from $5.15 in 2007 to $7.25 per hour in 2009. This "seen" political decision has negatively impacted the youth employment levels today, especially those of the poor and unskilled.

So what are some of our brilliant thought leaders considering now? Another increase in the minimum wage.

From 1950 until 2000, approximately 45% of teenagers between the ages of 16-19 worked, but during the past ten years youth employment has fallen to ~25%. While there are many reasons for today's situation, including the state of the economy, the more than 40% recent increase in the minimum wage has been a big contributor, too.

But there's an even more consequential economic issue to be considered.

The political decisions about our minimum wage laws will serve to illustrate what Frederic Bastiat in 1850 described in "That Which is Seen and That Which is Not Seen".

In brief, Bastiat reasoned that it's wrong to focus solely on the "seen" short term favorable impact of our decisions at the expense of the "unseen" long term consequences. Sadly, politicians consistently practice this short term "seen only" way of decision making.

The current headline debate taking place in Washington, along with many States and cities, is about whether to raise taxes, cut spending or both. In the short term, doing either or both will make the current economic situation more difficult. In the long term, we the people must choose to live within our means. That requires us to be serious about holding both ourselves and our politicians accountable each and every day.

When the economy is strong again, as it will be, we can create a budget surplus or "rainy day" fund, in addition to paying down the nation's debt. Thereafter when we face a future recession, which we inevitably will, we will avoid a future debt and deficit debacle. By having such a rainy day fund, we'll be able to use some of that cushion when the need arises. Of course, we have no such cushion today. Instead we now have a deep hole, which gets deeper each day.

That's precisely what Bastiat tried to tell us in 1850 when he compared bad and good economists, "Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, - at the risk of a small present evil."

There is an enormous consequence when we consider only the visible short term effects of our actions and neglect the long term. Bastiat puts it this way, "the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee." So while we experience the "seen" consequences of our decisions, we are well advised to make an effort to foresee the longer term effects as well. While we can never know for certain what will happen in the future, a little thought up front more often than not will enable us to see that future. Clearly.

Now let's return to the minimum wage laws and their impact.

The minimum wage "debate" has been going on for many years, even though there is no logical basis for any debate. If the price of something is raised, all other things being equal, the demand for that thing will decrease. The basic economic principle is simple; when prices go up, demand goes down, and vice versa. Along with everything else, the pricing rule applies to youth wages. The more the wages are increased, the lower will be the demand for labor. That's simply the market at work.

And the more we individually and as a country save when times are good, the more rainy day funds we'll have to spend when times turn bad. And vice versa.

Thanks. Bob.