Friday Interview: Countering Minimum-Wage Myths | Eastern North Carolina Now

    Publisher's note: The authors of this post are the Staff of the Carolina Journal, John Hood Publisher.

JLF's Cordato pans progressives' flawed thinking on pay mandates

    RALEIGH     Some progressives continue to push for an increase in the government-mandated minimum wage. They argue that employers ought to be forced to pay their workers a "living wage." Dr. Roy Cordato, John Locke Foundation vice president for research and resident scholar, finds flaws in their thinking. Cordato discussed the issue with Donna Martinez for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)

    Martinez: Flawed thinking. Why?

    Cordato: Well, there's lots of reasons why promoting the minimum wage represents flawed thinking. The one in particular that I emphasized in a recent article I wrote is based on Keynesian economics. The idea ...

    Martinez: And what is that?

    Cordato: It's economics that dominated the economics profession, macroeconomics, basically from the late 1940s through the 1970s, and has made a very big comeback during the Obama administration. It's the idea that what is good for the economy is spending, and that what you want to do is encourage spending, and that, consequently, saving is bad for the economy. So the argument that's being made with respect to the minimum wage is that an increase in the minimum wage will transfer money from those who don't spend such a large proportion of their money ...

    Martinez: Wealthier people.

    Cordato: Wealthier people, employers, to lower-paid workers who spend a large proportion of their paycheck. So you are getting more money spent by increasing the minimum wage because you're making this transfer. Well, it's flawed thinking. The idea that saving doesn't matter, for example, or that what a corporation or a business does with its money, with its profits — look, an increase in wages has to come out of profits.

    Well, what does a business do with its profits? It can retain some earnings. That means it's going to go into savings and therefore fund other people's investments. It can go out in dividends or to other people, or it can go into investing in more workers. All of those things have to come out of profits, and all of those things are at least equally as valuable to the economy as spending. It's a bad argument for that reason.

    Also, any future growth in the economy has to come out of current investment and saving. It has to. That's where all economic growth comes from. In fact, higher wages are a result of that future growth and, in fact, in a true market economy, will have to be the result of that investment. So it's an argument really based on very flawed economics. But it's also the argument that was made for [President] Obama's stimulus package, for example, and, in fact, [President] Bush's stimulus package a year before it.

    Martinez: In what way?

    Cordato: Basically they were trying to stimulate the economy by stimulating demand, by transferring money, through borrowing in this case, from investors who they borrowed the money from, and shove it into the economy by increasing demand. Of course, we've seen how that worked out.

    Martinez: For those of us who aren't economists, let me see if I understand this. It sounds as if their thinking is that they want to simply transfer money, that there is a finite pie of money, and they want to transfer it from more wealthy people or business owners, over to people of more modest incomes. But, Roy, that says to me that the pie, the total pie, remains the same. So how would that be better somehow for the economy?

    Cordato: The argument from a Keynesian perspective is that this extra spending — that if I transfer a dollar from a wealthier person to a poorer person, the wealthier person might spend 50 percent of that dollar, but the poorer person might spend 95 percent or even 100 percent of that dollar — it's going to be better for the economy because that entire dollar is going to get spent.

    So they would argue — and I'm doing their argument much more justice than it deserves — their argument is that that would therefore stimulate the economy and encourage economic growth. But, of course, that ignores everything that would happen with that dollar, even the 50 cents that gets saved, and maybe even especially the 50 cents that gets saved. Because that's what going to go toward future economic growth, more people ultimately getting hired, and higher wages in the future.

    Martinez: Roy, what seems to underpin a lot of the progressive argument for this kind of thing — the transfer — is the word "fairness."

    Cordato: Right.

    Martinez: Market economies are criticized routinely because they are not "fair."

    Cordato: Right.

    Martinez: Talk about the issue of market economics and fairness. Do the two go together, or are they just simply not — is it not possible to have fairness in a market economy?

    Cordato: Of course, it depends on what you mean by "fairness." And I would argue, coming from someone who believes that what is fair is that people have a right to keep what they earn, that they should be able to enjoy the fruits of their labor. ... That is actually in the North Carolina Constitution, that phrase — Article 1, Section 1 of the North Carolina Constitution. So if what you believe is that it's fair for people to keep as much of their income as possible, then we shift the entire conversation about fairness.

    That [progressive] notion of fairness is really, I would argue, a Marxian notion of fairness, an egalitarian notion of fairness. What is fair is that no one should have more than somebody else. Of course in a market economy, what people have is constantly being changed because it's an economy based on exchange, on trade. And it's also based on people getting for themselves to the extent that they satisfy the needs of others.

    It's a very outward-looking system because no one can get rich unless they've made someone else better off. And all the great people, all the really rich people, the Bill Gates of the world, how have they gotten all of their wealth? Well, they've gotten it by making other people better off. To me, that is a very sound notion of fairness, and I would put that notion of fairness up against the notion that the economy has to be — or that everyone in the economy has to have equal incomes, which is really the notion that drives that.

    Martinez: If we want to make sure that everyone has as much opportunity as possible, to pursue whatever they want to pursue, to do whatever they want to do, in terms of economics, what types of policies do we need to implement? What principles do we need to govern by?

    Cordato: We need to make sure that property rights are secure, that people can indeed keep as much of their income as possible. ... What a minimum wage does, for example, is it forces an exchange ratio, a price, in the marketplace that wouldn't occur otherwise.

    What you would have to do is allow people to freely make contracts based on their skills. That will, I think, bring about fairness to the extent possible. What we have seen is a situation where many policies that have been put forth actually exacerbate [un]fairness, actually no matter how you look at it.