During the course of Bill Clinton's presidency, I have had frequent occasion to criticize his policies -- not because I usually disagree with his objectives but rather because his proposed policies are so often destructive and self-defeating. But, in spite of my sharp disagreement with Mr. Clinton on matters of policy, never have I questioned this President's deep capacity for human feeling nor his compassion for others, especially for the least fortunate among us. Neither have I ever doubted Bill Clinton's intellect.
So, I am forever grappling with a puzzle where the President is concerned: How can a man who is so smart, so feeling and so compassionate, how is it that he continues to come up with such destructive policies -- policies that actually threaten to harm the very people he aims to help? I can find only two explanations, and I am convinced that the President's proposal to raise the minimum wage from its current level of $4.25 per hour to $5.15 per hour -- by 21 percent -- is the product of both of these explanations.
First, it is pretty clear that some of the ideas put forth by this Administration are never intended to become law. They are politically motivated to score points with special interest constituencies, such as labor unions, and to embarrass the Administration's political opponents.
The political motivation behind Clinton's minimum wage proposal is crystal clear. Why didn't the President propose this idea to the Congress last year when Democrats controlled both Houses of Congress and presumably could have passed it into law? Why did the President say of the minimum wage during the last Congress that it is "the wrong way to raise the incomes of low-wage earners?"
Why does the very think tank (The Progressive Policies Institute) founded by the "New Democrat" group which Bill Clinton chaired before becoming President (The Democratic Leadership Council), why does this group oppose an increase in the minimum wage? Because the PPI understands that the vast majority of minimum-wage workers are in families with incomes well above the poverty line. Because the PPI knows that raising the minimum wage is self-defeating and hurts the very people it is intended to help -- and the President knows it too, or at least he knew it up until the November election.
Now, I never underestimate the power of bad economic advice, especially when wrong-headed advice appeals to the heart and coincidently reinforces an urgent political need which is what we have going on in the case of the minimum wage. What I fear is that Secretary Reich and his friends who circulate in and out of the Labor Department from academia may have actually convinced the President that their scheme to raise the minimum wage will work.
And this brings me to the second reason this Administration continues to come up with such ill-advised ideas. President Clinton gets incredibly bad economic advice from individuals who have a superficial and incomplete understanding of the way markets work. This is not surprising from an Administration that is populated by so many people who never have held a real private sector job nor had to meet a payroll.
For example, last year during the national health care debate, Americans were stunned to hear their President lecture Herman Cain, the owner of Godfather's Pizza who is one of our witnesses today, not to worry about the Clinton health insurance mandate on employers because Godfathers could just increase the price of its pizzas to offset the cost of the mandate. Evidently, President Clinton's economic advisers believe that entrepreneurs can make as much money as they want just by raising prices high enough. Obviously, too many of the people advising the President do not have a firm grasp on the law of supply and demand.
This same lack of understanding is exhibited with regard to government taxation. This Administration appears to believe that government can raise as much revenue as it desires just by increasing tax rates high enough. In 1993, the Clinton Administration hit Americans with an enormous retroactive tax increase and steeply higher marginal tax rates. Even with a tax increase that was largely retroactive, there is already solid evidence that the Clinton tax increases of 1993 are generating less than half the expected revenue increase. Next year, after everyone has had a chance to fully adjust their behavior, one can expect virtually all of the anticipated revenue increase to evaporate.
Now, the President and his Labor Secretary want to apply the same kind of "quack-economics" to the minimum wage. Mr. Reich has actually said that raising the minimum wage increases employment. As we will see during the course of this hearing, there is virtually unanimous agreement among economists that raising the minimum wage kills jobs and raises unemployment. Economists can agree on little else, but on this tenet, they are in full agreement. This principle is demonstrated in the above figure titled Unanimous View of Economists. The minimum wage is measured along the vertical axis and the rate of unemployment is measured along the horizontal axis. As the bold line clearly shows, increasing the minimum wage drives up unemployment.
Mr. Reich and his academic friends would have us believe just the opposite. Under Mr. Reich's unconventional theory, raising the minimum wage actually leads to more jobs and lower unemployment. (See the figure below titled The Reich Curve.) Why then don't we just raise the minimum wage to $300 or $400 an hour and pay everyone lawyers' wages?
We are about to hear two very different interpretations of how the minimum wage affects the economy and individual workers. The unconventional interpretation held by the President and Secretary Reich asserts that raising the minimum wage increases the welfare of poor citizens, has little adverse impact on unemployment and may actually lead to more job creation and business starts.
Mr. Reich will cite 12 studies, the "Questionable Dozen," as evidence of this unconventional view. Four of these studies are simply variations on a theme by the same three individuals, one of whom was formerly Mr. Reich's Chief Economist at the Labor Department and one who is Reich's current Chief Economist at Labor. One of the studies is an internal Labor Department report. Two of the papers are unpublished and have not even been subject to peer review. Two of the twelve studies were of foreign countries in much different economic circumstances. And, one was not even a study but simply a "Comment."
The other interpretation, the conventional one which is held by virtually all serious economists, states that raising the minimum wage destroys jobs and hurts most the very people it was intended to help -- the young, poor and unskilled. This mainstream economic finding is based on more than 25 years of solid empirical research conducted by hundreds of economists from all political persuasions across the breadth of this country.
Which interpretation are we to believe? Let's start with a few facts from the studies on minimum wages.
In 1981, the Congressionally-mandated Minimum Wage Study Commission concluded that a ten percent increase in the minimum wage reduces teenage employment by one to three percent. The President proposes raising the minimum wage by a little more than twenty-one percent. Based upon the findings of the Commission, we can anticipate that between 130,000 and 400,000 jobs will be lost if Clinton has his way.
Fifty-seven percent of those that benefited from the last minimum wage increase were from families with household income greater than $45,000. As Secretary Reich said in 1993, "After all, most minimum wage workers are not poor." (See the below figure)
From 1981 to 1990, the minimum wage did not rise and teenage unemployment fell from twenty-five percent to fifteen percent. Since the minimum wage increase in 1990 the teenage unemployment rate has risen to more than twenty percent. (See the Figure 4)
In conclusion, compassionate politicians and well-meaning government programs like the minimum wage cannot repeal the law of supply and demand any more effectively than they can repeal the law of gravity. In fact, Majority Leader Dick Armey says without hesitation that it is the Minimum Wage Law that ought to be repealed!
Click here to see Figure 1.
Click here to see Figure 2.
Click here to see Figure 3.
Click here to see Figure 4.
Click here to see Figure 5.
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