Unintended Lesson

by Russ Roberts on April 4, 2008

in Politics

Last night, Hillary Clinton was on the Tonight Show and she gave a phenomenal example of the power of economics. Unfortunately, she did not appear to understand the example. At the 3:23 mark of this video, she tells a story (HT: Jim Colburn):

I was in Indianapolis the other day and I was shaking hands after I spoke. And there was this young boy about eleven years old and he’s trying to tell me something—you know the crowd was yelling—so I leaned over and he said, "You know, my mom makes minimum wage and even though it went up, her hours were cut. So we’re not making any more money. Can you help her?" You know,  when somebody says something like that to you, it really does kind of energize me.  I think, yeah, I can, I’m going to really try to help you, because this is wrong. And everywhere I go I hear stories like that about veterans who don’t get health care, about people, who are, you know,  losing their jobs, and I think we can do so much better. So for me it’s just get up every day and  fight on because this country’s worth fighting for.

She then launched into a litany of economic disaster ("we’re borrowing money from the Chinese to pay for oil from the Saudis") and finished up talking about the "deteriorating middle class."

I don’t believe the story. What eleven year-old boy whispers into the ear of a big shot the details of his mother’s wage/hours mix? And I like how she had to lean over–no one–not even Bill Richardson or Sinbad–can contradict her.

But let’s give Hillary the benefit of the doubt. Suppose the story really did happen. She clearly thinks the story is emblematic of something important that needs to get fixed. What is it? Just when you help someone by passing a minimum wage, greedy employers ruin everything by lowering the hours. Well, we need to "fight" and fix that, too.

I wish Jay Leno had pointed out that the cut in hours was the result of passing the minimum wage–that it was as inevitable as gravity. I wish he’d said that the story showed how the minimum wage is a false promise of prosperity. I wish he’d pointed out that fighting isn’t enough, caring isn’t enough, that prosperity can’t be legislated any more than self-interest can be made illegal. I wish Jay Leno had said that when you find yourself in a hole, the first thing to do is to stop digging.

And if that little boy really exists, I’d like to tell him that a Senator fighting for you is a losing proposition. You have to fight for yourself. If your Mom wants more money, she needs to go back to school or work a second job. And as for you, stay in school. It’s the best way to avoid earning the minimum wage.

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Marcus April 4, 2008 at 3:06 pm

I agree the specific story was probably made up. Yet, she's probably heard many stories during her campaign so perhaps we grant her a bit of artistic license in presentation.

Evaluating just the mother's situation in isolation it would seem that minimum wage has made her better off. She may not make more money but she now has more hours to do something else.

It's possible she may not be able to use those hours working as there are fewer worker hours available but she can perhaps spend more time with her son.

Just a thought.

Russ Roberts April 4, 2008 at 3:14 pm

Marcus,

Excellent point. Money does not equal happiness.

liberty April 4, 2008 at 3:17 pm

Bravo! Well said.

Couple quick things:

1. She probably doesn't even need to go back to school or work a second job; there are plenty of decent above-min-wage jobs for unskilled moms. If she exists, she just needs to look for a local Wal-Mart or go for some interviews one day at whatever shops exist near her. Most people are on minimum wage for just 6 months or a year before either getting a raise/promotion or finding something better.

2. I like your point about stopping digging. For the most part the problem with politicians (with democratic politics in an unconstrained government) is that they have no incentive to stop digging. In fact, their incentive is to pull out the bigger shovel, and the bigger shovel and then the back hoe.

This is because the more regulation, confusing tax code with credits and exceptions built in, price controls and subsidies that they have control over, the more control they have and the more votes they can win, and in the worst case scenario, the more bribery and corruption they can feed off of.

In any case, whether it is for this reason, or due to sheer, well intentioned naivety, politicians will always keep digging, until stopped by the public or the constitution. Sadly, the public believes the politician is going to help them (either because they don't understand economics or because they personally will benefit, though the economy will suffer).

Hence, we usually get more government, more digging, more regulation, more planning. Every once in a while we can stop it, as we did when we overturned some of the NRA's extensive planning of the 1930s and 40s as unconstitutional. But that is rare.

liberty April 4, 2008 at 3:21 pm

Marcus does make a good point!

But, of course, it doesn't end right there: forcing the firms to all pay a higher wage may do more than only make them cut her hours. There may also be fewer jobs for her to find now when she goes job hunting for something better (she was unhappy before the increase in the minimum wage, so she must still not have enough money, though she does have more time). etc.

mpkomara April 4, 2008 at 3:22 pm

I think Jay Leno should make the minimum wage and work shorter hours.

Caliban Darklock April 4, 2008 at 3:27 pm

This is why our public schools suck.

When I was nine, I needed to earn more spending money, and the kids in my neighborhood mowed lawns in a pretty cutthroat competition. I looked at this situation, and constructed a strategy: because other kids charged one price for lawns regardless of size, they avoided the larger corner lots. So I tripled the going price and went ONLY to corner lots, where the homeowners were invariably enthusiastic about not having to mow their large lawns. This allowed me to make more money with less work.

Now, even if we assume that I was much, much smarter than the average nine year old… I don't find it hard to believe that an eleven year old child attending a political event (an atypical childhood behavior, usually indicative of greater wisdom) would have similar powers of reasoning.

But the adult world in general seems to think anyone under the age of 16 (and the average person under the age of 30) is an idiot, and therefore invests neither the time to listen nor the effort to instruct. As long as this attitude persists, children will be the only people who really know or care that public elementary schools are an absolute atrocity.

If they weren't, that eleven year old would not only be a credible source of such an observation – he would also be able to tell at once that Clinton's analysis was moronic.

mark seery April 4, 2008 at 4:16 pm

I am curious how the company that made the mother's hours shorter made up for the lost hours of labour? Invested in technology, shortened the hours of business? Other?

FreedomLover April 4, 2008 at 4:37 pm

Caliban:

I've never seen too many knowledgeable 16yo on politics. It's taken as a given that you need a few more years of seasoning to get what's going on.

CRC April 4, 2008 at 4:37 pm

HRC: "we're borrowing money from the Chinese to pay for oil from the Saudis"

I didn't realize that Hillary was a xenophobe too!

FreedomLover April 4, 2008 at 4:40 pm

mark:

Who knows, anecdotal stories are usually like that, devoid of real details. Always designed to pull a weak-minded person's heartstrings.

REW April 4, 2008 at 4:45 pm

Mark Seery,
If the story is in fact true, the business likely lost the hour of productivity. The cost of a unit of labor increased, so the number of units purchased went down. There were no magical resources resulting from an a hike in the minimum wage that allowed for technological investment or other increases in productivity. The business simply lowered production. As this situation repeated countless times throughout the economy, economic growth slowed.

Sam Grove April 4, 2008 at 4:48 pm

Possibly the employer was sympathetic to the woman's plight, but was unable to accommodate a larger paycheck. Perhaps fewer hours was the raise he could afford.

Wonder what the job was?

spencer April 4, 2008 at 5:06 pm

So the Mom is making the same money and working fewer hours.

How does this make her worse off?

It looks like her welfare has improved to me.

Methinks April 4, 2008 at 5:08 pm

This is the same Hillary Clinton who wants to create a cabinet-level "poverty czar" position? Presumably a person in such a position would have no incentive to "cure" poverty as that would cause him to be unemployed. Good thing then that relative poverty (which is what we have in the USA) is incurable by definition. That Hillary sure has a firm grip on incentives.

BAP April 4, 2008 at 5:36 pm

I have to say that along with most of you I seriously doubt whether or not this is true. I imagine a working group in the Clinton campaign whose job it is to come up with these little stories to be used at opportune times.
It bewilders me to think that politicians like HRC actually believe that increasing the minimum wage helps those lower paid workers. The results that I see almost immediately are higher prices in businesses that employ minimum wage employees.
I suppose the only other option is that they simply dont care if it helps them or not but just so long as the individuals think the politician is helping them, caring about them and their lot in life.
If this person were real, Clinton just got a first hand lesson on the effects of raising the minimum wage, that in the end, no one is better off.
What I cannot believe is that Clinton did not include what the little boy told her about his mother's health insurance. As a result of his mother's hours being cut back, his mom was no longer eligible for employer provided health coverage. Since it was only available to employees working more than 35 hours per week and the little boy's mother's hours were cut back below that, not only was she working less (not enjoying the minimum wage hike provided by the government) she now has lost her health insurance for herself and her little boy. Oh yeah, the little boy told Clinton that both he and his mother have medical problems that now must go untreated because her employer is no longer providing them with health insurance. The little boy went on to explain that the health insurance they had was inadequate at any rate, the copays were too high and the monthly premiums that were withheld from his mother's paycheck had increased by 1000% over the last couple of years. I guess Clinton is saving the rest of the story for a later time.

Sam Grove April 4, 2008 at 5:47 pm

It bewilders me to think that politicians like HRC actually believe that increasing the minimum wage helps those lower paid workers.

She doesn't have to believe that. She only has to believe it will aid her campaign.

SheetWise April 4, 2008 at 5:48 pm

REW –
If the story is in fact true, the business likely lost the hour of productivity. The cost of a unit of labor increased, so the number of units purchased went down. There were no magical resources resulting from a hike in the minimum wage that allowed for technological investment or other increases in productivity. The business simply lowered production. As this situation repeated countless times throughout the economy, economic growth slowed.

A hike in the minimum wage will always create "magical" resources. The current wage of $5.85 translates to a little over $1,000 a month for a full time employee. That $1,000 a month expense could be used to lease a little over $40,000 of equipment (7.5%, 0 residual, 48 months). My guess is that buying a robot to flip hamburgers would cost over $40k today, since a lot of people are still employed to flip hamburgers. Raise the wage to $9 an hour, and we could now lease about $65k in equipment. I might take on that project …

It's all about alternatives, and a hike in the minimum wage will introduce all sorts of new "magical" alternatives.

spencer April 4, 2008 at 6:20 pm

This is just like you claim tha seat belt laws lead to an increase in accidents.

You just make up consequences that are not supported by the data and expect to be taken seriously.

mnm April 4, 2008 at 6:40 pm

She doesn't have to believe that. She only has to believe it will aid her campaign.

Posted by: Sam Grove

Well said Sam.

muirgeo April 4, 2008 at 9:21 pm

"You have to fight for yourself. If your Mom wants more money, she needs to go back to school or work a second job. And as for you, stay in school. It's the best way to avoid earning the minimum wage." Russel Roberts

Russel,

Would you advice be the same to a chi,d in North Korea or even Mexico. Policy matter's from everything I can see.

I just read an amazing thing in The Economist.

"In a recent study Martin Barnes of BCA Research, a Canadian economic-research firm, traces the rise of the American financial-services industry's share of total corporate profits, from 10% in the early 1980s to 40% at its peak last year (see chart 1). Its share of stockmarket value grew from 6% to 19%. These proportions look all the more striking—even unsustainable—when you note that financial services account for only 15% of corporate America's gross value added and a mere 5% of private-sector jobs."

It just seems like clear evidence of the productivity pie being munched by those with little actual added value while working people are not being rewarded proportionately.

muirgeo April 4, 2008 at 9:24 pm

Again, more evidence that this boy was talking to the right candidate. Policy matters.

Sam Grove April 4, 2008 at 9:31 pm

It just seems like clear evidence of the productivity pie being munched by those with little actual added value while working people are not being rewarded proportionately.

So that is how wages are to be determined? By some proportional equation?
Are doctors getting an appropriate proportion?

Sam Grove April 4, 2008 at 9:36 pm

I'm wondering if financial services are increasing due to Sarbanes-Oxley.

liberty April 4, 2008 at 9:44 pm

It just seems like clear evidence of the productivity pie being munched by those with little actual added value while working people are not being rewarded proportionately.

There is a strange tendency to assume that wages should increase exactly proportionately to an increase in productivity. But this assumption misses the fact that workers alone are not creating that productivity- they need capital, entrepreneurs and – yes – capitalists:

Present-day labor-union doctrine … [defines] "increase in productivity of labor," and they pretend that it by rights belongs entirely to the workers…

… Between the United States and Asia the difference in productivity computed according to the methods of the union doctrine is enormous… The superiority of the American plant is entirely caused by the superiority of its equipment and the prudence of its entrepreneurial conduct …

On the eve of the "Industrial Revolution," conditions in the West did not differ much from what they are today in the East. The radical change of conditions that bestowed on the masses of the West the present average standard of living (a high standard indeed when compared with precapitalistic or with Soviet conditions) was the effect of capital accumulation by saving and the wise investment of it by farsighted entrepreneurship. No technological improvement would have been possible if the additional capital goods required for the practical utilization of new inventions had not previously been made available by saving.

While the workers in their capacity as workers did not, and do not, contribute to the improvement of the apparatus of production, they are … both in their capacity as workers and in their capacity as consumers, the foremost beneficiaries of the ensuing betterment of conditions.

Who said that? More here.

mnm April 4, 2008 at 9:54 pm

muirgeo, what's a productivity pie?
If my productivity happens to be higher than my neighbor have I made him less productive?

Methinks April 4, 2008 at 10:22 pm

Sam,

In light of your proven culinary skills, I think you are just the person to invent a recipe for "Productivity Pie". When you do, please send some to mnm and me as he would enjoy it and I'm sick to death of the shit on a brick that passes for "pie" on Wall Street.

Have fun at the muirpid circus. G'night.

Justin Bowen April 4, 2008 at 10:42 pm

Given the current political climate, what are the odds that a HRC administration could push a new NRA through Congress and have it hold up in court?

Jay April 4, 2008 at 11:41 pm

"It just seems like clear evidence of the productivity pie being munched by those with little actual added value while working people are not being rewarded proportionately."

Muir(duck/donkey): I'm going to ask you again and again until you answer. Do you deny Y(k,l) = k^a * l^b???

Also what do you think the relationship of Dk/DY(k,l) for China and the U.S. is? And also the relationship between Dl/DY(k,l) for China and the U.S.?

M. Hodak April 5, 2008 at 12:22 am

Jay,

Would you respond to an unsolicited note from some "Russian hottie" looking for a chance to come to the U.S.? No? Because you know it's a con, and that any communication is just gibberish designed to get you to send her money for a "plane ticket."

For "muirgeo" the plane ticket is attention from earnest debaters. It would be called "feeding the trolls" if muirgeo were an actual person. I'm convinced it's a clever, frighteningly subtle experiment in argumentation.

muirgeo April 5, 2008 at 1:07 am

Yeah Hodak,

I reference something form The Economist and another article based on a book by a Princeton economist and that makes me a troll? Don't pretend you're interested in earnest debate.. you're scared shitless of it.

muirgeo April 5, 2008 at 1:13 am

mnm,

Don't play games talking about productivity pies. Look at the article from the Economist. Tell me the proper interpretation of Wall Street's corporate profits going up from 10% in 1980 to 40% at present.

That's an incredible fact that earnest debaters should be able to discuss. I want to hear from all the experts and insiders here what that means. Please be earnest.

muirgeo April 5, 2008 at 1:19 am

Jay,

Ciò non nego. Non so che che è.

SheetWise April 5, 2008 at 1:44 am

"[M]uirgeo, what's a productivity pie?
If my productivity happens to be higher than my neighbor have I made him less productive?"

Zero-sum fallacy.

It's a great and powerfull fallacy — should be used for the greater good in a broader understanding of rational ignorance.

Gil April 5, 2008 at 2:37 am

So? The conclusion? Leave market forces alone to sort themselves out. No? Profits and wealth can't be legislated?

So why do Libertarians argue for 'force&fraud'? Who is the noble higher power who makes 'f&f' legislation and enforces it without expanding their power to become an all-powerful government? The Mercantilists opened up the land and resources of the New World using 'force&fraud'. The great productivity and wealth generation of the immigrants far exceeded what the natives were doing therefore the initial 'force&fraud' returned great dividends.

FreedomLover April 5, 2008 at 4:46 am

Ah Muirdiot. Won't you ever understand that life is not equal? We are not born that way?

Paleologo April 5, 2008 at 8:51 am

I don't usually post. But since Muirgeo asked for earnest debate, here are my two cents:

i) The relationship between percentage of jobs and "gross value" is irrelevant (and measuring "gross value" is very, very tricky). Similarly, there is a very weak relationship between corporate profits and market capitalization, and a fundamental misunderstanding at the base of the reasoning. The former is a flow measurement, the latter a stock measurement.

The statement that the "productivity pie is being munched by those with little actual added value" is puzzling. That more productive workers/sectors should be compensated more? The agricultural sector has seen spectacular productivity growth, but I don't see, or argue for, a proportional increase in wages. I think that the "pie" analogy is truly misguided. Financial-sector employees (or CEOs, or your favorite foe) do not earn more by taking money away from minimum-wage workers, the reason being that the "pie" is not an independent and constant quantity.

ii) Bartel's book is not out, but the chart reported in Dani Rodrick's blog is not very meaningful out of context. Correlation does not imply causation. Other remarks I have are that 14 observations are not sufficient, and that lag effects in political economy decisions matter greatly. And just to make a pointed observation: Bartel is not an economist. He is in PoliSci, and writes for a PoliSci audience. It makes a big difference in methods and objectives.

muirgeo April 5, 2008 at 9:51 am

We are not born that way?

Posted by: FreedomLover

No we are not. And your world will have more idiots like Paris Hilton living off inherited wealth while human brilliance born into poverty never sees a chance to add to society. What you are unknowingly pushing for is a return to pre-revolutionary conditions.

muirgeo April 5, 2008 at 10:07 am

The statement that the "productivity pie is being munched by those with little actual added value" is puzzling.

Posted by: Paleologo

When lenders drain every penny from people via loan shark financing, pushing credit cards, increased stock trading fees, miscellaneous bank fees, pushing for bankruptcy reform that favors lenders over borrowers, advanced paycheck loans with massive interest charges, home equity loans…..ect I just noticed my Citibank auto pay mortgage for my condo went up $10 a month over 9 months ago. They changed the late fee date and sure enough I received notification in very small writing on my bill 9 months ago.

So there are some ways they take bites out of the pie. The big way is through asset valuation. Making all sorts of financial products based on subprime lending that artificially increases the value of assets then the guys on top walk away with plenty left in their pockets while many homeowners are left without a home.

The point is the financial sector was not 30% more productive then they were 30 years ago but leading up to the bubble crash many in the industry had already walked away with a lot of cash they didn't earn.

Gamut April 5, 2008 at 10:14 am

Earth to Muirgenius:

I think that that 40% margin might have already been revised downward — into negative territory if I'm not mistaken. Man, it just SUCKS when markets correct themselves. We need benevolent bureaucrats to help put a stop to that.

Gamut April 5, 2008 at 10:16 am

Oh, no, wait! Wasn't it the opposite argument you were trying to make? I'm confused, please explain.

mnm April 5, 2008 at 10:47 am

Don't play games talking about productivity pies.

Posted by: muirgeo

Who's the one playing? My point muirgeo is that your presumptions about the way the economy works, indeed about the way the world works, are seriously flawed.

You were the one that suggested that productivity is somehow fixed and that the financial services industry seized an unfair portion of it.

Sir, your ability to ignore the things that you have said astounds me.

Marcus April 5, 2008 at 10:58 am

muirgeo, you paint a bleak picture yet it's not the whole story.

For example, credit cards don't just raise 'gotchya fees'. They payback cash or points. The majority of credit card users payoff their statement every single month. The use of a credit card allows me to earn interest in a high-yield savings account while I accumulate my expenses cost free on my credit card. Not only is it cost free (to me), they pay me back cash for doing so. Plus, they automatically deduct my monthly balance from my high-yield savings account every month requiring no effort on my part. All of this saves me several hundred dollars per year.

As to your Citibank issue, I recently refinanced my house to get the sweet interest rates. My first payment was this week. I hee-hawed around last month and didn't get the autopay setup but I didn't consider it a big deal as I figured I'd just login and pay online and setup the autopay to start next month. When I logged in earlier this week to make the payment I noticed they charged a $10 fee to process it. So I called them up and said I wasn't going to pay the fee. They said, "OK," and waived it.

Take some responsibility for yourself and let other people take responsibility for themselves. 'We the people' don't need you to save us from ourselves.

muirgeo April 5, 2008 at 11:06 am

Gamut,

Yes it sucks when markets correct and the general public is left holding the bag. S&L debacle, the junk bond fiasco, the dotcom bubble..ect These fiascos made a small number of people very wealthy and hurt a huge number of innocent people.

And the market didn't correct it was bailed out AGAIN BY THE FEDS ACTIONS IN SAVING Bear Stearns. Not yelling shift key sticks but will leave as emphasis seems appropriate… computer seemingly becoming self aware.

muirgeo April 5, 2008 at 11:18 am

You were the one that suggested that productivity is somehow fixed and that the financial services industry seized an unfair portion of it.

Sir, your ability to ignore the things that you have said astounds me.
Posted by: mnm

I NEVER said that productivity was fixed. You guys love to set up that straw man so you can use your canned reply. Productivity has risen… although now I question that because it likely only appeared to rise because paper pushers simply inflated values to incredible degrees. But to what ever degree it did rise all the profit was "munched" by a small minority who had little to do the increased productivity.

The idea that wealth and value are well correlated is laughable to anyone paying attention.

"It is not within the scope of my purpose on this occasion to develop practical policies. I limit myself, therefore, to naming some instances of what I mean from amongst those problems about which I happen to have thought most.
Many of the greatest economic evils of our time are the fruits of risk, uncertainty, and ignorance. It is because particular individuals, fortunate in situation or in abilities, are able to take advantage of uncertainty and ignorance, and also because for the same reason big business is often a lottery, that great inequalities of wealth come about; and these same factors are also the cause of the unemployment of labour, or the disappointment of reasonable business expectations, and of the impairment of efficiency and production."

From a brilliant essay by John Maynard Keynes, THE END OF LAISSEZ-FAIRE. A good read for anyone trying to understand the alternative to the extreme economics of socialism and classic liberalism.

muirgeo April 5, 2008 at 11:28 am

Walking the ridges of the hills by my house I looked down to the valley and saw in huge sign covering almost all of a neighbors garage door.

AUCTION PENDING
CALL XXX_XXXX

Those now houseless neighbors must also feel stigmatized.
It felt very Orwellian. A sign of the times. I suspect I should get used to seeing these.

Marcus April 5, 2008 at 11:35 am

muirgeo, the more I read your posts the more I fortunate I feel that I'm not you. All you see is the negative side of everything. Is there no positive side to anything?

Randy April 5, 2008 at 11:50 am

Marcus,

There will be as soon as his team wins. Then everything will be just dandy no matter how bad it gets. You watch, poverty and inequality will magically vanish.

muirgeo April 5, 2008 at 12:53 pm

All you see is the negative side of everything. Is there no positive side to anything?
Posted by: Marcus

Marcus,

I'm an extremely positive person. But I am a realist and I have high standards for the future world I want to leave for my children.

Yesterday I had the moist incredible day I could have asked for snow-shoe hiking to a frozen wilderness lake with my dog Myra. Beautiful beautiful scenery. Untrammeled sparkling snow, marshmallow cream covered mountaintops, 500 year old trees, blustery winds, roaring waterfalls, meditating by a dabbling stream with sunbeams shooting through my eyelids and extreme stick fetching with Myra. Today me and her are just about to leave for another great journey to Mt Watson. I wish everyone could be as happy as I am now and still in the back of my mind will be those sad paper pushers and children born into poverty who I only wish could be as happy as me.

Randy April 5, 2008 at 2:23 pm

Muirgeo,

Mt. Watson Utah or Washington? I took up hiking a couple of years ago and try to do a 14er every summer. So far I've summited Pikes Peak, Yale and Elbert. I'm shooting for Quandary in May. So far, I haven't tried anything but the foothills in winter, which is great, but I would like to try a 14er in winter – a new challenge – got to stay motivated.

Sam Grove April 5, 2008 at 2:43 pm

And the market didn't correct it was bailed out AGAIN BY THE FEDS ACTIONS IN SAVING Bear Stearns.

Damn those progressives for getting government involved in the economy. This should not be.

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