Lessons on Minimum Wage Causality

Hilary Clinton was on Jay Leno, and she tells this story about a 11 years old boy in Indianapolis (See 3:23 here):

... he said, "You know, my mom makes minimum wage and even though it went up, her hours were cut. So we're not making any more money. Can you help her?" You know, when somebody says something like that to you, it really does kind of energize me. I think, yeah, I can, I'm going to really try to help you, because this is wrong.

Watching her response, the causality appears to be lost on Clinton. The minimum wage caused the reduction in hours. Just as importantly, there is nothing that can be done about it. If I hold my iPod out over the floor and open my hand it will fall to the ground, and there is nothing Clinton can do about that either. Congress cannot pass a law changing the Laws of Demand any more than they can the Laws of Gravity. On a smaller note, I am concerned that a child so young is looking to politicians to solve their problems, especially when these particular politicians have no power over the situation, regardless of what they tell people.

HT: Cafe Hayek

Irrationality and the Minimum Wage

I have found that the hardest point to get across to students is the many adverse consequences of price controls, primarily because of their attachment to the idea of the minimum wage. Bryan Caplan has the best rejoinder I have ever read for this criticism from students:

What happens when my outraged students reach the "Salary Requirements" line on job applications? They could ask for a million dollars a year, but they don't. When their future rides on it, students honor the economic truism that labor demand slopes down.

The rest of the book is excellent, but would have been worth the read for that statement alone. Raising the wage, ceteris paribus, lowers employment.

Zimbabwe, Price Controls, and Socialism

Zimbabwe has arrested 7,500 since the enactment of price ceilings on many necessities on the convoluted logic that this is will curb inflation. While there are many lessons in this story, there are three big demonstrations of economic principles at play here in the story.

1. The story demonstrates the shortages created by price ceilings (Qd>Qs).
   
   
2. The price ceilings fail because black markets replace the legal markets, so you never actually get a reduction in price anyway:
   
   The price cuts have left shelves bare of corn meal, meat, bread, eggs, milk and other basics that sell for at least five times the government price on a thriving black market. Local beer became the latest item to disappear Monday. Acute shortages of gasoline have crippled commuter transportation and prevented manufacturers delivering diminishing stocks to retailers.
   
   
3. This is a demonstration of how ultimately socialism must resort to totalitarianism, that the idea we can have social freedom without economic feedom is flawed (See here for Nobel Prize Economist Milton Friedman explanation of this).
   
   "Some are ... saying they will not supply goods and services but we say you will," Mugabe said, according to state television.
   
   

Gas Price Gouging Bill

Lawmakers in the House have introduced a bill creating a Federal Law against "price gouging" at the pump. According to the article, Rep Bart Stupak (D-MI) says he is concerned gas prices will again reach $3/gallon. This is essentially creates a price-ceiling for the retail gas market. What will happen with this?

Suppose there is some big shock: Iran gets enthralled in War, another bad hurricane in the Gulf Coast, another massive earthquake in Alaska, or whatever. Oil is traded on a global market, and one of these shocks would trigger a fast spike in oil prices. If this spike in prices is large enough, gas would need to be sold above $3/gallon for there to be any profit. Now, U.S. refineries and other U.S. gas retailers would be unwilling to purchase oil from world suppliers because it would be too expensive relative to what they could sell it for. Clearly, the result would be empty gas stations in the U.S.

Additionally, what would happen to the little bit of gas that did make it here? Even if it was sold at a retail price of $3/gallon, the individual who managed to get it would have a big incentive to turn around and sell it "black market" to somebody willing to pay a whole lot more. We'd be left with a gas shortage and paying very high prices for gas on a black market.

Remember, "high" prices does not equal price gouging.