Cameron Schaeffer: Wage-hike cure could do more damage to recovering economy

February 12, 2014 

Dr. Cameron S. Schaeffer of Lexington is a pediatric urologist.

The excitable doctor orders every test and every procedure for every symptom, believing a slight cough is evidence of impending death. His patients suffer for it.

The calm doctor trusts the mysterious wisdom of the human body, its salty interior betraying an ancient education that began as single cells drifting in a warm sea.

Eschewing interventions, and with faith in the body's capacity for self-healing, he spends time talking to his patients, gets them to laugh, and carries them to that higher emotional plane where self-healing best occurs.

Like the body, economic systems are living organisms — intricate, complex and unknowable. They are beyond the wisdom of a single man or a group of economists, like those who run the Federal Reserve.

The fatal conceit of excitable economists is to view every sick economy as something that can be diagnosed and cured through endless poking, prodding and experimentation. In the end, the treatment is usually worse than the disease.

Economies follow the laws of nature, and recessions are like illnesses. History shows that most recessions are relatively brief. If left alone, a sick economy will eventually purge its distortions and heal itself. Like the Great Depression, the Great Recession is lingering like a bad cold through bad economic policy.

The economy is too complex to manage centrally, and many economic distortions can be traced to bad federal policies. Many economists argue that the genesis of the recent housing crash and the subsequent recession was the Community Reinvestment Act of 1977. It was certainly laudable to try to expand low income home ownership, but forcing banks to loan cheap money to people with bad credit was, in retrospect, a cruel and predictable mistake.

The billions of individual transactions within the economy, like the billions of chemical and cellular interactions within a living organism, cannot be anticipated and controlled without creating new distortions. Cutting interest rates to zero may encourage some business borrowing to stimulate job growth, and it always rescues bankrupt banks. But it also causes stock market and commodity bubbles, exported inflation and civil unrest, currency wars, plunging returns for savers, and explosive government spending.

The Nobel Prize used to have meaning, back when peace meant peace. Now it has an agenda. Some Nobel laureates in economics are smart and excitable, yet they lack common sense. An academic often has brilliant insights, but perhaps he must also start a business and meet a payroll to win a Nobel Prize in economics. Just saying.

When you tax something, you get less of it. Anything taxed excessively disappears. When the cost of one of his inputs goes up, the businessman uses less of it. If the cost of his labor goes up, he hires fewer people and has less capital to invest in his business. ATMs replaced some bank tellers because they are cheaper for mundane transactions. If the minimum wage is raised, expect more ordering kiosks and fewer people at fast-food counters.

Every policy has hidden, unintended consequences. If it never existed, it cannot be polled or measured. Advocates for a higher minimum wage frequently cite polls that suggest it will have no negative effect on jobs. But the person not polled was the young dreamer with a great idea who sketched out his idea, did the math, and said "screw it." Fortunately, there remain a few undaunted entrepreneurs.

We need a new bumper sticker that says: "My economist can beat up your economist."

Economist Thomas Sowell points out that Switzerland and Singapore have no minimum-wage laws, vanishingly low unemployment rates and the highest standards of living in the world. Economist Walter Williams points out that black and white youth unemployment was similar and negligible before the first federal minimum-wage law was passed in the 1930s. The new federal minimum wage diktat will put additional funding pressure on federal programs and it will create no new net wealth.

There will always be a bottom 10 percent; it is not a static group of people, and most people work their way out of it. Understanding those facts does not require a Nobel Prize in economics.

Lexington Herald-Leader is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere in the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Commenting FAQs | Terms of Service