Watching Washington squabble over the rightful size of the US federal government during the last year has required patience and understanding. From the sidelines, it’s hard not to be discouraged. The government shutdown in October last year makes Hunter S. Thompson’s wicked take on US political culture in Fear and Loathing on The Campaign Trail ’72 look positively fantastic.
As 2013 came to a close the pressing question was therefore whether this was a brief flirtation with danger or a sign of things to come. And sadly it has been a first-up victory for the cynics among us, with the elusive bipartisan bridge remaining firmly out of sight. Indeed, January in Washington D.C. has proved a cold affair in more ways than one, with the familiar frustration of political deadlock further driving an icy wedge between those in Blue and Red.
In an attempt to revive a stuttering and stalling second term, President Obama, in his recent State of the Union Address, announced his intention of increasing the minimum wage for federal contracts from $7.25 to $10.10 an hour. The Republican reaction so far has been coloured by contempt, signalling the resumption of normal practice. But why exactly is lifting the price floor of the minimum wage so contentious? Surely, it’s a simple way of alleviating income inequality, a demonstrated burden to economic growth and sustainability?
According to the dominant school of thought on the issue, however, an increase in the minimum wage has the potential to paradoxically harm those earning low wages. With increased costs of production following the rise, firms will naturally be more reluctant to take on low-skilled employees as the return from their investment lessens. As a result, those earning the minimum wage may be squeezed out of the market in favour of more highly skilled individuals. Furthermore, the increased cost associated with the rise, in certain contexts, can inhibit economic growth.
Such rationale has been of obvious interest to those who shudder at Obama’s plans. Doug Bandow of The Cato Institute, a libertarian think-tank, has been most forceful in this respect. For Bandow, the traditional economic argument against an increase, while obviously a huge source of contention, is not so much the root of the problem. Rather, it’s the fact that politicians perversely masquerade as ‘philanthropists while forcing other people to pay higher salaries’ that really irks him.
John Boehner’s enthusiasm for an increase is similarly dire, a fact not lost on viewers during President Obama’s address. In a telling comment, Boehner makes it clear that he believes an increase will ultimately be ineffectual: ‘I think the question, Mr President, is how many people will this executive action actually help? I suspect the answer is somewhere close to zero… When you raise the cost of something you get less of it.’ And to a certain extent this is true: the broader economic impact of such a policy would be marginal. Furthermore, as we have seen in recent months, states are increasingly willing to increase the minimum wage above the federal level without government involvement.
And for the all the bluster and economic reasoning against a rise in the minimum wage, something seems amiss. The missing element to the debate, oddly, it seems, is in part derived from Mr Bandow’s comments; namely, that the minimum wage holds symbolic and moral value.
Republican calls for the trimming of social services may indeed hold merit, especially considering current debt levels. Moreover, the scrapping of unnecessary regulation under the premises that it ‘purports to be the cure from which it is the disease’ is an appealing line of argument. But in arguing for social benefits to be cut on the grounds that these programs erode the incentive to work, Republicans need to similarly ensure that those who do work are guaranteed a wage worth having. An income that allows a basic standard of living should be a right of all who show the initiative, capacity and dedication to hold down a job. Unfortunately this has not been the case in the US for some time as the minimum wage has failed to keep up with inflation. In real terms, over the period 1967-2010, the minimum wage has decreased by 20%.
The proposed plans to better align the costs of living with the working wage may only serve 200,000 at best. It’s hardly the stuff that will shake up the economy. However, the implications behind the sentiment are profound. America lauds itself on its entrepreneurial and pioneering spirit, and rightfully so: stories abound of Fortune 500 executives paying their way through college in unglamorous fashion. Yet the $60,000 student budget required to attend Stanford in 2013-14 may prove more dream than reality for even the most dedicated of aspirants if $7.25 an hour is all they’re worth.
Regardless of the impact, Mr Obama will no doubt succeed in raising the minimum wage. Republican arguments to the contrary are tenuous at best as executive mandate is all that is required. However, unilateral force by the president will not be enough to push through keystone policies later on in the year. For that reason, the debate over the minimum wage has turned icy already.