The Great Depression was largely constructed by politicians who inflicted devastating damage on the economy in a purported effort to end the downturn.  It is my thoughtful perspective that policy makers today are pursuing a course of action which is eerily similar.

This Friday, July 24th, the Government will take another step towards manufacturing the Next Great Depression.  The federal minimum wage, which was created during the last Depression, will arbitrarily increase from $6.55 to $7.25 an hour.  This action closely resembles efforts during the 1930s to artificially manipulate prices and increase wages. 

Several representative initiatives are included below:

• March 1931 – Davis-Bacon Act signed by Herber Hoover creating the first federal minimum wage law
• May 1933 – FDR created the Agricultural Adjustment Administration to lower output and raise prices in an effort to help farmers
• August 1933 – The National Labor Board was established to collectively bargain for organized labor in an effort to increase wages
• July 1935 – FDR signed The Wagner Act, establishing the National Labor Relations Board, which ensured the right to collective bargaining and paved the way for millions to join unions
• June 1938 – FDR signed the Fair Labor Standards Act (FLSA), instituting a federal minimum wage and maximum work hours

In 1933 President Roosevelt documented his economic philosophy for ending The Depression through the manipulation of wages, prices and competition. 

“If all employers in each competitive group agree to pay their workers the same wages... and require the same hours... then higher wages and shorter hours will hurt no employer.”

The absurdity of the President’s perspective was clearly demonstrated when these manipulations caused the economic downturn to worsen and linger.

The Current Unemployment Environment

Today the under- and unemployed find themselves in the worst economy for procuring gainful employment in at least a generation.

In June 2009 unemployment was:

• 9.5% overall
• 16.5% when all under employed and marginally attached workers are included
• 15.5% for Americans 25 and older with less than a high school education
• 14.7% among black Americans
• 37.9% among black Americans age 16 – 19

Average hours worked per week declined to 33.0 in June.

Raising the minimum wage will do nothing to assist this population.  To the contrary, it will increase the ranks of the unemployed and make it more difficult for people victimized by the depression to find a job.  In this manner, the minimum wage is an unethical redistribution of income amongst the downtrodden purported to benefit from the Government intervention.

The Impact of Increasing the Minimum Wage

Supporters believe that this command-economy directive produces net-positive benefits.  But, the minimum wage only makes sense when using incomplete and intellectually dishonest accounting.  There are certainly visible, direct benefits from this federal mandate, but there are also negative, indirect costs.

Visible, Direct Benefits:

• Minimum wage employees, who retain their jobs, will earn an additional $0.70 (10.7%) per hour of labor

Difficult to Quantify, Indirect Costs:

• Some number of current employees will lose their job as the marginal cost of unskilled labor artificially rises by 11%
• Unemployed people, willing to work at or for less than minimum wage, will be denied access to a job
• The number of hours per week worked by minimum wage employees may be reduced
• Some number of companies will go out of business
• Jobs that would have been created are not
• Businesses lose flexibility with which to respond to the economic downturn
• Artificially increased labor costs create inflationary pressures as some amount of incremental expense is passed on to consumers through higher prices (when possible)
• Higher consumer prices directly erode the benefit of an increased minimum wage to its recipients, and all other members of society are made worse off, including the poor, the unemployed and retirees
• None of these preceding indirect costs occur in a vacuum.  A lost job, a business failure or reduced hours impacts the rest of the economy in a dynamic way.  This interaction is especially prevalent in a consumer-based society like ours.  The higher the minimum wage, the deeper and longer the economic downturn.

The Reality of Too Much of a “Good” Thing?

If the minimum wage worked as professed, helped the working poor, produced net-positive economic benefits, did not increase unemployment and did not harm the economy then it would be fundamentally immoral to set it as low as $7.25.  If this artificial compensation dictum is the “free lunch” that its proponents describe, then why not raise the rate to $50 an hour or higher?

The answer is that such a dramatic increase would be an act of economic self-immolation.  Furthermore, the resulting damage would clearly illustrate the fraud of minimum wage.  Only small increases are adopted because the fall-out may be obfuscated by broader economic activity, while the visible benefits are hailed as a triumph of Government over the free markets. 

The fact is minimum wage is a politically manufactured deception perpetuated to convince the poor that the Government is on their side.  In reality, the policy is disastrously harmful to the poor.  The negative impact may be negligible or tolerable during good times, but this week’s wage increase will overtly damage our already weakened economy.

Dismal Reality

There are few worse initiatives that the Government could undertake in response to either a depression, or high and rising unemployment rates, than to artificially increase the costs associated with hiring employees; thus depriving the economy of vital flexibility with which to adapt to the downturn.

The minimum wage, like all price fixing initiatives, is a terrible idea which defies economic understanding and results in inefficient outcomes.  Raising the federal requirement during a depression is incompetent at best, and in my view approaches the threshold of economic treason or criminal negligence.

This Friday the Government will knowingly worsen our financial calamity, destroy jobs, increase unemployment and prolong the downturn, all in a professed effort to help the working poor who will in fact be most devastated.