A Stitch in Haste

From the Wall Street Journal (subscription site -- sorry):

[Santa Fe, New Mexico] last year earned the dubious distinction of passing perhaps the most stringent "living wage" ordinance in the country. It demands that businesses pay a minimum of $8.50 an hour, increasing to $10.50 by 2008. (The federal minimum wage is $5.15.) Unlike "living wage" rules in about 100 other cities, Santa Fe's goes beyond public contracts and applies to any private business with more than 25 employees.
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The laws of economics suggest that the consequences will not be what this law's proponents expect. Companies with 30 or 35 employees will lay off staff to get below 25. Others will let go of their least-skilled workers and demand more from those who remain. More than a few will leave town, or refuse to expand. The Santa Fe Chamber of Commerce says it's already heard of eight businesses canceling plans to move to, or expand in, the city.

I was an economics T.A. at Cornell for four years. Nothing ever stirred more "there is no Santa Claus?" looks of despair among the budding young Ivy League liberals than a simple supply-demand graph showing how the minimum wage (i.e., a price floor) creates a surplus (i.e., unemployment). Somehow, though, most of them manage to suppress those traumatic memories as they grow older.

More on the stupidity of the minimum wage here.

UPDATE: My timing was bad today, for just after posting I encountered this drivel from Slate:

Ordinarily, when we decide to transfer income to some group or another—whether it be the working poor, the unemployed, the victims of a flood, or the stockholders of American Airlines—we pay for the transfer out of general tax revenue. That has two advantages: It spreads the burden across all taxpayers, and it makes politicians accountable for their actions. It's easy to look up exactly how much the government gave American, and it's easy to look up exactly which senators voted for it.

By contrast, the minimum wage places the entire burden on one small group: the employers of low-wage workers and, to some extent, their customers. Suppose you're a small entrepreneur with, say, 10 full-time minimum-wage workers. Then a 50 cent increase in the minimum wage is going to cost you about $10,000 a year. That's no different from a $10,000 tax increase. But the politicians who imposed the burden get to claim they never raised anybody's taxes.

Translation: There are "good" ways to be a socialist, and "bad" ways to be a socialist.

Pathetic...

The rising price of gasoline and other fuels, both before and after the New Orleans disaster, have prompted some governments, at various levels, to attempt to intervene in the petroleum markets. Hawaii is implementing price ceilings on wholesale gasoline, the federal government is tapping into the Strategic Petroleum Reserve, several hack state politicians are calling for suspending gasoline taxes.

Mexico City has its own ongoing anti-market policies for gasoline. The motivation is not a gasoline shortage, but rather a glut — the geography of the city (i.e., an elevated valley) results in a limited air flow into and out of the city. As a result, vehicle emissions tend to accumulate to uncomfortable and even hazardous levels. You see far more people walking around wearing respiratory masks here than in New York City.

To cut vehicle use, Mexico City implemented mandatory gasoline rationing analogous to the old "odd-even" program in the U.S. during the energy crisis of the 1970s. Mexico City's program is called "Hoya No Circular" or "No Driving Today" --

[T]he city enforces a ban on each vehicle during the week based on the final digit of its license plate. ... Monday: No driving if final digit is five or six. Tuesday: No driving if final digit is seven or eight. [Etc.]

Theoretically, this should have reduced vehicle emissions by one-seventh, right?

Wrong. Vehicle emissions have actually increased under Hoya No Circular:

Instead of using public transport, the city's moneyed classes simply bought second or third vehicles, often cheaper used autos with higher emissions. Since the program was introduced, the number of private vehicles in circulation has soared an estimated 40 percent.

Why do I suspect that no economistas, especially no economistas libre marcado, were consulted when the Hoya No Circular program was crafted?

For Discussion: Assume that the air quality problem in Mexico City is so bad (trust me, it is), that it qualifies as a bona fide "Tragedy of the Commons." How should the government deal with problem? Higher gasoline taxes? More mass transit? Prohibiting ownership of multiple vehicles? Government-subsidized health care for respitory ailments? What are the assorted effects, and side effects, of the various possible solutions?

Source: Moon Handbooks' Mexico City.

The fare for Mexico City's subway system, the Metro, is two pesos, or roughly $0.20.

Of course the cost, as opposed to the fare, is far more than two pesos per rider. The government makes up the difference via large subsidies.

Compare this situation with the New York City subway system (fare $2.00), which is subsidized to a far lesser extent. Also compare the relative usefulness of the two systems.

By serving a substantial portion of the city, the New York City subway makes owning a car unnecessary to almost all New Yorkers, and few in fact own cars. The Mexico City Metro, by contrast, serves only a small part of the city's geography, hence cars are still necessary for most residents.

How does this relate to the air pollution problem of my previous post?

At first glance, it might seem that a heavily subsidized subway system would help Mexico City's air quality problem by keeping people off the roads. But consider: if the government reduced the subsidy and redeployed that funding to expanding the Metro, so more people could actually use it, then perhaps that would actually get more people into mass transit, despite a higher fare.

In entrepreneurial capitalism, demand creates it own supply. In central planning, demand creates its own government subsidies.

In Mexico City, you can literally choke on the difference.

The problem with real-world economics is that reality is simply too complex and too dynamic to fit into nice little freshman-classroom, single-chalkboard equations. Everything impacts everything else, everything generates unintended consequences, cause and effect become lost in the haze of secondary and tertiary factors.

Or not:

According to BLS data on unemployment rates by age, it looks like almost all of the .50% increase in May unemployment to 5.5% from 5% in April was due to increases in the jobless rates for young workers in the 16-24 year age group, especially the 16-19 year group. For workers 25 years and over, the jobless rate has remained pretty stable at around 4%[.]
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Although it apparently hasn't received much media attention, perhaps there is a link between the rising unemployment rate for teenagers and the pending 12% increase in the minimum wage next month. Since we have evidence that consumers respond to higher gas prices by driving less, wouldn't it also be the case that employers of unskilled workers would respond to 12% increases in wages for unskilled workers by hiring fewer unskilled workers?

The laws of economics are not subject to repeal by any legislature, any more than are the laws of physics. In the aggregate and over a sufficiently long time horizon, an employer is simply not going to pay a worker more than she is worth to him. If the government makes it impossible for that employer to pay what that employee is worth (e.g., because of minimum wage laws or mandatory benefits), then the employer will simply not hire the employee. Government-imposed price floors create surpluses. All else is willful obliviousness.


(Larger version here.)
It's quite simple really: Anyone who loves the minimum wage hates young unskilled workers, and has no claim whatsoever — whether in the name of "progressivism" or "enlightened public policy" or "maximizing social welfare" or any other insolent bromide — to the moral high ground.

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The disingenuous liberal response to this development, nicely illustrated here, is that the rise is teenage unemployment is explained more, if not entirely, by "general economic conditions" (i.e., recession) and not by the recent increase in the minimum wage (or the chilling effect of the next increase on July 24 or the next one in 2009). But, since we are not in recession, that simply cannot be right. Go figure. (How also does one explain via "the business cycle" the fact that all the increase in unemployment is with young — i.e., unskilled — workers?)

And even if we were in recession — so what? That only makes matters worse. The fact remains that creating an artificial hurdle of productivity increases the likelihood of losing your job because you can no longer meet that hurdle. Even more so in a weak economy!

To be paid the minimum wage, you must first earn the minimum wage. If you don't, then your employer must either let you go or go bankrupt himself. A weak economy makes earning that minimum wage, let alone a drastically higher one, all the more difficult.

For example: A restaurant that, due to recession (or rising gas prices or whatever) sees business decline is far more likely to let a server or busboy go the higher the minimum wage is, all else equal. Not all the servers and busboys, to be sure — but maybe one or two. Now aggregate that "maybe one or two" over the entire young-and-unskilled service economy. And don't forget multiplier effects.

The road to hell is paved with economic illiteracy (and partisan politics) masquerading as "good intentions."

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Via Market Power. More thoughts at Hit & Run.