Reich Is Repeatedly Wrong

by Don Boudreaux on May 9, 2015

in Economics, Myths and Fallacies, Seen and Unseen, Wal-Mart, Work

Here’s a letter to Robert Reich – who, it is especially interesting, and perhaps even scary, to recall here was once U.S. Secretary of Labor.  Note that the Reich video mentioned in the letter below is different from the one addressed in yesterday’s posts (here, and here):

Mr. Reich:

In one of your recent videos endorsing a 100-plus percent (!) hike in the national minimum wage, you repeat the popular-in-Progressive-circles assertion that (quoting you) “we subsidize low wage employers” through government welfare programs such as food stamps, Medicaid, and housing assistance.

Basic economic reasoning reveals your argument to be backwards.  Welfare payments of the sort that you mention make work a relatively less attractive option for welfare recipients and, thus, reduce the labor supply.  One consequence is that wages paid by employers to their low-skilled workers are raised (and not, contrary to your mistaken suggestion, lowered).  Thus, far from being subsidized by most government welfare programs, Wal-Mart, McDonald’s, and other employers of many low-wage workers are harmed by them.

Don’t believe me?  Here’s Arindrajit Dube, one of the most prominent economists today who favors raising the minimum wage: “[M]eans tested public assistance programs are not tied to work, and we should not expect them to lower wages.  Let’s take food stamps, which are available to eligible families whether or not a family member works or not.  Indeed, when people are not working, they are more likely to be eligible for food stamps since their family incomes will be lower.  Therefore, SNAP is likely to raise, and not lower a worker’s reservation wages – the fallback position if she loses her job.  This will tend to contract labor supply (or improve a worker’s bargaining position), putting an upward pressure on the wage.”

Your failure to grasp even the most fundamental of economic principles makes your arguments for a higher minimum wage especially dubious.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

In stark contrast to traditional and more common forms of government welfare payments – such as those mentioned by Reich – the supply of labor is increased by the Earned Income Tax Credit.  It is, however, revealing of Reich’s depth of economic understanding that he doesn’t mention the EITC and, instead, singles out for mention Food Stamps, Medicaid, and housing assistance – welfare programs each of which, in a society where even the poorest person lives well above subsistence, decreases the supply of labor.

(HT to Tim Worstall for the pointer to the Dube post.  See also this EconLog post by my colleague Bryan Caplan, as well this 2004 Cafe Hayek post by me.)

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