Wintery Knight

…integrating Christian faith and knowledge in the public square

Wal-Mart cancels plans to build three stores after D.C. leftists raise minimum wage 50%

From Fox Business, a story that shows how completely clueless left-wing politicians are about economics.

Excerpt:

Wal-Mart Stores (WMT) no longer plans to build three stores in the nation’s capitol, after the city’s council voted to force large retailers to pay starting wages that are 50% higher than the minimum wage there.

The world’s largest retailer also said it will consider its options related to three other Washington, D.C., stores that are still under construction.

The bill, called the Large Retailer Accountability Act of 2013, was approved by an 8-to-5 vote, even though Walmart had warned that the company would leave the district.

“Nothing has changed from our perspective: we will not pursue Skyland, Capitol Gateway, and New York Avenue and will start to review the financial and legal implications on the three stores already under construction,” Walmart spokesman Steven Restivo said, referring to the locations of the planned stores.

“This was a difficult decision for us—and unfortunate news for most D.C. residents—but the Council has forced our hand.”

The district’s new law requires retailers with sales of more than $1 billion and with stores of at least 75,000 square feet to pay their workers starting salaries of at least $12.50 an hour, compared to the minimum wage of $8.25.

Unionized businesses are exempt from the measure. Large stores that already have a presence in D.C., including Target (TGT) and Macy’s (M), have four years to comply.

Now for most of my readers who understand economics, what happened here is going to be pretty obvious. But sometimes people get specialized in other areas and neglect the study of economics. The danger then is that they will be moved to support policies that appeal to their hearts. But it’s very important to understand that policies that sound good, like raising wages, often have unexpected negative results.

Here is George Mason University economics professor Walter Williams to explain the problem with increasing the minimum wage, starting with the basics of economics.

Excerpt:

Are people responsive to changes in price? For example, if the price of cars rose by 25 percent, would people purchase as many cars? Supposing housing prices rose by 25 percent, what would happen to sales? Those are big-ticket items, but what about smaller-priced items? If a supermarket raised its prices by 25 percent, would people purchase as much? It’s not rocket science to conclude that when prices rise, people adjust their behavior by purchasing less.

It’s almost childish to do so, but I’m going to ask questions about 25 percent price changes in the other way. What responses would people have if the price of cars or housing fell by 25 percent? What would happen to supermarket sales if prices fell by 25 percent? Again, it doesn’t require deep thinking to guess that people would purchase more.

This behavior in economics is known as the first fundamental law of demand. It holds that the higher the price of something the less people will take and that the lower the price the more people will take. There are no known exceptions to the law of demand. Any economist who could prove a real-world exception would probably be a candidate for the Nobel Memorial Prize in Economic Sciences and other honors.

[...]University of California, Irvine economist David Neumark has examined more than 100 major academic studies on the minimum wage. [...]About 85 percent of the studies “find a negative employment effect on low-skilled workers.” A 1976 American Economic Association survey found that 90 percent of its members agreed that increasing the minimum wage raises unemployment among young and unskilled workers. A 1990 survey found that 80 percent of economists agreed with the statement that increases in the minimum wage cause unemployment among the youth and low-skilled. If you’re looking for a consensus in most fields of study, examine the introductory and intermediate college textbooks in the field. Economics textbooks that mention the minimum wage say that it increases unemployment for the least skilled worker.

When considering what economic policies to adopt, it is not enough to do what feels good. Liberals and conservatives agree that it is good to help the poor. Liberals think that higher minimum wage rates help the poor, and conservatives think that lower minimum wage rates help the poor. This is not a topic that is up for debate, though, because economists across the idological spectrum agree on this one – and for the reasons outlined above and illustrated in the Wal-Mart case.

Take a look at this post from moderate Harvard University economist Greg Mankiw.

He writes:

I believe it is better to introduce students to economics with topics about which there is more of a professional consensus. In chapter two of the book, I include a table of propositions to which most economists subscribe, based on various polls of the profession. Here is the list, together with the percentage of economists who agree:

    1. A ceiling on rents reduces the quantity and quality of housing available. (93%)
    2. Tariffs and import quotas usually reduce general economic welfare. (93%)
    3. Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)
    4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)
    5. The United States should not restrict employers from outsourcing work to foreign countries. (90%)
    6. The United States should eliminate agricultural subsidies. (85%)
    7. Local and state governments should eliminate subsidies to professional sports franchises. (85%)
    8. If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85%)
    9. The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85%)
    10. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%)
    11. A large federal budget deficit has an adverse effect on the economy. (83%)
    12. A minimum wage increases unemployment among young and unskilled workers. (79%)
    13. The government should restructure the welfare system along the lines of a “negative income tax.” (79%)
    14. Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78%)

When you raise the price of anything – including labor – fewer people will buy it. Wal-Mart will still spend the money on new stores and new employees, just not in Washington, D.C. – not with those laws. Notice that number one on his list is the case of rent control, where government good-intentioners try to hold the price of rent down. What happens next? Well, it the price goes down then everyone wants to buy more of whatever just went on sale. But the people providing what just went on sale stop making it because they can’t make a profit. The unexpected consequence is that there is a housing shortage. The quantity of housing decreases, and the quality of housing decreases. The quality decreases because demand is so high that property owners no longer have to maintain the properties, since demand has skyrocketed. Economics is something that everyone should study, so that we don’t just have good intentions, but also have good results.

 

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