Demagogue at Work. Part 1: Economic moonshine from a pol who wants your vote

News Item: New York Governor Andrew Cuomo, following the lead of other populist politicians, demands that fast food restaurants dramatically raise wages. Cuomo also complains that McDonalds made $4.67 billion in profits last year while New York State spent a fortune on welfare costs for low-wage workers. He calls for the McDonalds hamburger chain and others to increase pay from $8.75 an hour to $15 an hour. Said Cuomo at a rally of fast-food workers, many of whom receive the state minimum wage of $8.75 an hour, “It is a gross, gross injustice, and it has to end now.”

Well, why stop at $15 an hour?

Indeed, why not have the government mandate $20 or $30 or $40 an hour? New York is a very expensive place to live.

And while Cuomo proposes to reconstruct the economy, could the governor also do something about the freelance income I receive? I’d like to make more, much more. And, by the way, why doesn’t the governor sign a decree saying that people who write and work on blogs must be paid big bucks?

That’s a law that I and my partner, Liam Judge, would love. Sure, why not have the government fix all wages and prices based on what our pols, not the impersonal forces of the market, think is just? And I’m sure pols would never let political forces influence their choice (haha!) of who gets what in their envisioned command economy controlled by pols. Of course most career politicians have never run a business. They usually have no idea how economies prosper.

Returning to Earth

O.K., time to come back from Never-Never Land and ask: Why not have the government raise wages by fiat, log rolling and legislative hi-jinks?

Because government tinkering with the economy—interrupting the free interaction of buyers and sellers who make billions of decisions each day based on decentralized information that changes from day to day and sometimes even from minute to minute—is a form of central planning. That is a policy that has failed time and again. Central planning is the government saying, thorough pols, countless commissions and bureaucrats, that it knows better than the market.

And what is the market?

It is you and me along with tens of millions of other buyers and sellers. We make billions of decisions each day on everything from how much we can afford to pay someone to how much we can pay for a product or service.

In a free economy—an economy not run by the government—these decisions are by their nature decentralized. They take place through an entire society in millions of places. So no government can effectively decide what is a “just” or reasonable price. A good price for me or you can change from day to day and minute depending on myriad factors.

A free market translates how we make these choices better than any central planning board or any pol who wants to impress others with his or her ability to run businesses through regulation and taxation. That’s even though it is not the politician’s capital that is at risk (For example, most of McDonalds are the franchisees, not the corporate leaders in Illinois. The franchisees start a business with their life savings and also take loans).

Both the franchisees and the corporation they work with are trying to anticipate the changing tastes of consumers. That can be quite difficult. Most of us are finicky. The choices of different human beings are unique. And each human being, over the course of his or her lifetime, often changes his or her tastes in what to buy or pay others. Indeed, when I was a kid, I went out of my way to eat McDonalds burgers. Today, I wouldn’t touch them.

Satisfying the greatest number of consumers is a lesson that can only be learned and re-learned every day. The best way of succeeding is through the free exchange of individuals who aren’t told what they can pay to hire someone. It is also most effectively through a free marketplace, provided someone neither uses fraud or coercion.

Economic Illiteracy

But now, with this latest threat of government intervention, we are moving, little by little, toward a backdoor system of central planning. This means we are forgetting the lessons that many people and nations have painfully learned while others never learned them or forgot.

That’s because we have centuries of economic history that provide ample evidence of what happens when governments try to engage in some form of central planning; when they try to fix prices and wages. And an example of the latter is what happened in the administration of President Nixon in the early 1970s. In an attempt to expand the economy and stop rising costs, it imposed wage and price controls.

President Nixon then famously announced that now he was “a Keynesian” in economics.” (Keynesianism is a kind of economic thinking most politicians love because it often sanctions massive government spending as a way of rejuvenating the economy). The result of Nixon’s wage and price controls was stagflation. That meant better than some 20 percent interest rates and high unemployment, which hurt the people at the bottom the most.

Governor Cuomo, I would expect, does have a basic grounding in economics. However, he is a pol first, last and always. And he likely wants to run for president someday. And, it is a painful fact, that economic populism often generates more votes than economic commonsense.

There are far more people who work at fast food restaurants than those who have often risked their life savings starting a franchise restaurant. But the latter is typically a dicey kind of business, one usually built on thin profit margins; sometimes no profits. And this kind of business owner usually faces lots of competition so must be free to change products, prices and wages quickly without constantly asking the approvals of a ruling class. But politics is about raw power—votes—not economic commonsense.

The Wisdom of the Ages

Here is commonsense, as explained by economists and friends of freedom Ludwig von Mises and F.A. Hayek. In the 1920s they predicted the economic disasters of the Soviet Union.

They, and few others, over generations warned that no government, no matter how wise, can know what are the right prices at any given time. A private economy is too complex to be micro-managed. Governments that tried would end up blundering.

Lenin discovered that in the first years of Soviet Revolution when he tried to communize an economy. He ended up having to backtrack on some of his Communist economic ideas, reluctantly allowing some private property for a few years with the New Economic Policy (NEP). The NEP was later ended by Stalin. Mises, Hayek and others warned the Soviets would stumble from one disaster to another.

They were right.

The Soviet Union, a country with central planning in which wages and prices were generally fixed, was a classic example of government planning that never works. There were perennial housing shortages. It could take years to get a phone. However, let us concede that government wage and price fixing can be great politics in the short term. It often creates a kind of Potemkin Village effect in which the economy seems to be doing better in the short term, then later tanks.

How often, for example, did we hear about the supposed successes of Communism in the Soviet Union in the 1960s and 70s.Popular economists such as John Kenneth Galbraith and Nobel Prize winner Paul Samuelson were whopping it for the Soviets right up until the Soviet economy imploded in the early 1990s.

Yet the Soviet Union had some of the richest land on the planet, yet it couldn’t feed itself. The Soviet Union also tried to fix prices.

Cuomo and his supporters are making the same mistake as all others who think that they can distort market outcomes and get what they believe are “just” outcomes. They are, in effect saying, that they know better than the impersonal forces of the marketplace. They say, at this point, a fair, just wage is $15 an hour. Sounds good if you’re a worker starting out and making minimum wage. However, it might not be so good for your boss, who will be able to afford fewer workers.

Indeed, how just it is to the franchise owner, who would have to raise the price of a BigMac by a large amount and drive away many price-sensitive customers? The governor apparently doesn’t care about that. He comes from a political family and has never had to meet a payroll or figure out how to persuade people to buy a product.

In our next installment of Demagogue at Work, let us consider the plight of the embattled small businessman in New York. Please visit us again at GregoryBresiger.com

About The Author

Gregory Bresiger

Gregory Bresiger is an independent business journalist from Queens, New York. His Personal Finance articles have appeared in publications such as The New York Post & Financial Advisor Magazine. He is the author of the eBooks “Personal Finance For People Who Hate Personal Finance” and “MoneySense”.