I remember a prominent businessman at a Lafayette Chamber meeting noting that he wasn’t nearly so concerned about the level of taxes, as he was about the consistency and predictability of them. His explanation was that as long as taxes were reasonable and equitable, his company would make money. What hurt his bottom line were the sudden, unpredictable changes.
I doubt many people in attendance agreed with him; it’s certainly not the typical reaction to taxes. That doesn’t necessarily mean he was wrong. What I like about his approach, however, is that he was looking at the bigger picture. Rather than the pigeonholed, label-thinking approach that “All taxes are bad,” he considered taxes as any strategic businessman should, from a dispassionate, holistic view. They are simply part of the cost of doing business in a particular market.
To the point of this post, the real concern is the problems created by sudden change. Right now, a number of politicians – most notably Bernie Sanders – are talking about raising the minimum wage to $15. Before I criticize this proposal, I should point out that I have seen data which suggest that raising the minimum wage expands the economy. And counter to what many argue, after businesses adjusted to the change it actually made the wealthy wealthier.
But Bernie and others are suggesting a sudden, radical change. What happens if, by legal fiat, we suddenly double the minimum wage? Minimum wage workers serve as critical support in a large number of industries.
Businesses don’t have budgets in place to handle the sudden increase in costs. So the first thing that would happen, is that many of those workers would quickly be let go, and the businesses would contract. The second thing is that entry level positions for high school and college students would shrink dramatically. And finally, from all of those the economy would struggle to adjust, and for several years the markets and American competitiveness might decline. After readjusting, the economy would probably improve, but in the short run we might see harmful, unintended consequences.
There is also a reflection of this problem on the employee side that I don’t think anyone is considering. It is the rare person who receives a sudden, large boost in income who handles it responsibly. Time and again I have seen windfall hearis, huge lawsuit recipients, lottery winners and even new doctors and other professionals, get quick money and quickly land in financial trouble, sometimes in bankruptcy court. Just as industry prospers best with consistency and gradual, sustained growth, so do people.
In a interesting parallel situation, some candidates and elected officials have promised to immediately deport the estimated 11M undocumented aliens in the country. I think few Americans support illegal entry in to the US, and most of us think it is unfair that once here, those illegals get a jump in line over the legals. But the hard-line stance of immediately deporting them all would produce many of the same problems that raising the minimum wage would.
First of all, it is time Americans came clean. We are, all of us, complicit in the undocumented alien problem. So much of the construction and farming from which we all profit are dependent on illegal aliens, as are a lot of domestic housekeeping and gardening services. If we quickly remove 11M people from the workforce, the impacts will be very similar to suddenly increasing the minimum wage.
The loss of all of those workers would immediately increase wages, because few Americans are willing to do the backbreaking work, for the same pay, that undocumented aliens will do. And the Americans might not do it as well as the aliens; despite all of the ugly comments in the political arena today, I have heard people who work with illegal aliens say that most of them are rock-solid, conscientious workers. That only makes sense; many of them risked their lives to get here, and if they fail they have no safety net.
On top of the increase in salaries the loss of immigrants would create, business would have to instantly come up with benefits for replacement employees. So many industries would take a sudden hit from the loss of workers, loss of continuity, and dramatically increased salaries and other costs. It would drive some of them into bankruptcy. Either way, the net effects would ripple through the economy and hurt everyone. And ironically, retail increases would be small by the time the economy normalized.
Now add to that the sudden cost of expanding government to locate and deport 11M people. Once the job is complete, then we have another problem: those governmental agencies should lay off the added workers, which would create further disruptions. But of course, it is very rare that government ever lays off workers. So the added government employees become ongoing costs.
You can see that we need to approach the problem the way the businessman at the beginning of this post did: look at the bottom line.
As I noted, I am not opposed to raising the minimum wage, and I have great concerns – as do many Americans – about illegal aliens jumping the line ahead of people trying to enter legally. My points here, however, are not about the kind of change, but about the rate of change.
There are other possibilities. For instance, we could increase the minimum wage by what I call the quarter/quarter approach, by 25¢ every fiscal quarter, until we achieve some pre-defined level. And for reasons of future continuity, it might be worth considering legislation that would automatically adjust the minimum wage to rise – or decline – in further quarter-quarter increments, in response to the cost of living.
Similarly, if we decide to deport illegal aliens, we might pursue monthly and quarterly goals, and plan to complete the job in 10 years or even more. Such an approach would dodge many of the problems I listed, and allow industry and the economy to adjust to the changes in healthy ways.
Evolution, gradual, cautious change, can be helpful.
But revolution, quick, disruptive change, can be disastrous.
Revolution silhouette courtesy of Pixabay.
Paper currency graphic courtesy of the US Mint.