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October 9, 2006

What Keeps Bad Economic Ideas Alive?

It’s hard to write a weekly column and not repeat yourself. Just as it is hard to put forth ideas that don’t build off – if not actually steal – what others have already written or said. But when public policy debates on matters affecting the economy and our economic well-being echo the same arguments and points made in years past, it’s hard to not reciprocate in kind.

Originality aside, addressing these individual issues is important. For if we truly believe, as some people state, that gasoline prices are manipulated by the Republican party, or that raising the minimum wage that businesses must pay to legally employ workers will help eradicate poverty, or that southwestern Indiana can achieve economic parity with the rest of the state without the transportation access afforded by a new Interstate 69, then we’re steering public policy in an economically destructive direction.

Of course, in a political season, it is difficult to know what people – and our elected leaders -- truly believe. The self-serving needs of some politicians to run to the front of every parade, no matter how misdirected, lend credence to some simplistic notions that are, at best, irrelevant, and at worst, wildly at odds with the workings of the economy that provides our wealth.

The minimum wage issue, very much alive in campaigns across the country, is a case in point. It’s been debated – and implemented, in one form or another – for more than half a century, and over that interval arguments voiced pro and con have changed little. Yet as judged by their actions – not their rhetoric -- even the minimum wage’s advocates acknowledge its destructive impact on job opportunities for the lowest paid workers. For if mandated minimum wages are the path out of poverty for the neediest Americans, why not raise the floor to $20 or even $30 per hour?

One could argue that the minimum wage’s undesirable effects have been, if you will, minimized, since upward adjustments in the dollar minimum have tended to lag overall wage inflation. Thus each year typically relaxes the constraints posed by the minimum wage on employers as market wages rise and the statutory minimum remains fixed. This is not true for certain states and cities, where the minimum wage can be much higher than the federal level of $5.25, and where the law may index that threshold to rise with inflation.

But even if in most parts of the country the minimum wage’s impact on labor markets is currently small, its impact on how we frame and understand the issues of poverty and low earnings is enormous. Because in continuously debating, and sometimes even passing, legislation on wage rates paid by businesses, we give credence to the notion that our elected politicians can legislate economic outcomes. And the experience of other countries, not to mention our own experience at different times in our history, has amply demonstrated the foolishness – if not outright danger -- of pursuing that idea.

If only the buck stopped there. But examples of foolish economic notions supported by public rhetoric, if not legislation, are depressingly common. It is no wonder that so many of us apparently feel that gasoline prices are set in smoke filled rooms, since every time prices spike upwards, dozens of price gouging investigations are opened with great fanfare. How those investigations turn out is usually less well publicized. And we have all signed on, apparently, to the idea that cost savings in Medicare and Medicaid can be found by simply cutting payments to doctors, even as the number of primary care physicians accepting those patients plummets.

But perhaps most depressing of all is the thought that we economists who work for universities have only ourselves to blame. In a nation where more than one in every four adults has a college degree, and a good fraction of those have taken at least one course in economics, our ignorance of the forces setting prices and wages in the economy all around us is appalling.

Link to this commentary: https://commentaries.cberdata.org/197/what-keeps-bad-economic-ideas-alive

Tags: income and wages


About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. He served previously as Director of the Bureau of Business Research (now the Center for Business and Economic Research) at Ball State University, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

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