Voting Largess

It’s one of my favorite quotes and I always bring it to classes where economic policy will be discussed:

"A democracy cannot exist as a permanent form of government. It can exist only until the voters discover they can vote themselves largess out of the public treasury. From that moment on, the majority always votes for the candidate promising the most benefits from the public treasury, with the result that democracy always collapses over a loose fiscal policy, always to be followed by a dictatorship."

There is debate about who first said it. Some attribute it to Adam Tyler while others spell his name as Tytler. Still others suggest it might have been de Tocqueville. It matters less who said it then what truth it brings to mind. Consider the elemental truth of America today. Fully 40% of Americans, euphemistically referred to as “the working poor,” pay no federal income taxes. None! Then at the other end of the scale, the “obscenely rich” who get all those tax breaks, where we find that the top 15% of earners pay more than 40% of total federal tax revenue.

Now, this leads inevitably to the sordid conclusion that if one wants to get elected to public office it would be wise, if not just, to appeal to the biggest demographic slice. That would be the ones who pay no taxes rather than the ones who pay a lot. The appeal for the socialist policy of redistribution of wealth is tremendous. The slight tempering of a policy of total pandering comes from the fact that campaigns cost money and in order to finance them, one must also appeal at least a little bit to the folks that can contribute.

But, it gets worse. We’re in an election year and hence the temptation looms large to get on with the voting of largess from the treasury. Give the masses more bread and circuses if you want to get elected. This week, however, the largess being distributed isn’t from the treasury, but according to the House of Representatives comes from private industry. It’s that perennial favorite of the economically unenlightened, the magic and mirrors of the minimum wage. In booming stentorian tones, the Democrats mount the podium and appeal to the emotions of “living wages”, “family of four”, “poverty level” and justice. It makes you want to stand and salute before you turn and barf.

Yet, when I ask college classes to explain to me what should be the basis for establishing a minimum wage, I always get the emotional response that has been inculcated in their mushy minds. They banter about costs of living and housing and children and justice. But they don’t relate cost of labor to value produced. They don’t make a connection between ability to add productivity to an organization and then be appropriately compensated for your labor. Adam Smith is conspicuously absent from the equation.

The suggestion that government should not be involved in setting costs of any commodity boggles the American twenty-first century mind. The idea that a willing buyer and a willing seller can set an agreeable price is amazing. Certainly there was the oppression of the dirty birth of the Industrial Revolution. But that is long ago and the justification for government interference is long gone. Does no one notice that simple burger flipping requires little skill or training and hence there is an army of potential flippers waiting for recruitment? Conversely does no one note that brain surgeons get a huge amount of compensation because there aren’t many of them and when you really need one, a plumber or carpenter won’t substitute very well?

Well, this fall the House of Mis-Representatives seeks to get re-elected as they do every two years. The largess available from the public treasury is not adequate to buy the necessary votes, so they turn to business owners’ pockets and vote to increase the minimum wage to more than $7 an hour. Will this solve poverty? Will this allow support of a family of four? Do most minimum wage earners belong to a family of four? Well, no they don’t. Most minimum wage earners are young people on their first job. Most are unskilled but, hopefully, learning to prepare themselves for greater responsibility. If they are wise, most will refrain from creating a family of four until they can earn more than a minimum wage.

There is a lot of evidence that artificial imposition of a minimum wage will do more economic harm than good. Unskilled labor intensive businesses may fail if faced with a requirement for higher labor costs. Many businesses which continue may reduce staff to hold labor cost constant resulting in harder work conditions for those remaining. Almost all businesses will shortly reflect the increased labor costs in increased costs to consumers. The outcome of those increased prices will be inflation which will, in fairly short order render any economic gain of that minimum wage increase to be erased. So, inflation devalues dollars, workers get laid off, prices rise and businesses fail. That, of course, means lower governmental tax revenues. Taken to extremes, it ain’t a pretty picture.

The Founding Fathers are regularly credited with establishing the bi-cameral legislature’s upper house with its smaller number and longer term as a brake against the emotional impetuousness of the lower chamber. Let us steadfastly hope that in the coming weeks before the November election that economic reality and a bit of common sense prevail with regard to minimum wage legislation. If they truly want to do some good for working Americans, they might consider repealing any and all wage legislation. Give the free market with its inherent balances a chance to function and let the rewards of education, preparation and dedication stimulate young workers to succeed. It might be worth a try, particularly if failure to vote some largess from business pockets results in some fresh new faces in Congress at the same time.