Demagogue at Work, Part II: New Yorkers May Soon Be Saddled with Higher Prices and Costs as Decreed by the State Government

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 McDonald’s 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 McDonald’s 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.”

Governor Cuomo is confused. The “gross injustice” is something else. It is raising the biggest cost of most small businesses—wages and salaries—by some 70 percent. Let us consider its consequences.

Imagine you are responsible for a household budget and your biggest cost just went up by some 70 percent.

Imagine you are trying to pay for a son or daughter’s college education and the price tag just went up 70 percent.

Imagine if you are trying to figure out if you and your spouse can afford to retire and the retirement bill just went up some 70 percent.

High Costs Can Choke Anyone

Then you would be facing the same problems that many small businesses do in New York. They already pay some of the highest costs in the United States owing to taxes and regulatory costs. However, in effect, these businesses are being told by the government that they are greedy and cheat workers so the government will raise their costs by 70 percent. I’ve been told by many business people that, if labor costs skyrocket through higher minimum wages, they will hire less or maybe not at all.

Who is hurt by that? The people just starting out. The ones who are looking for the first rung on the employment ladder.

For those who rail about income inequality and low wages, raising wages by fiat sounds great. The government—not the impersonal forces of the marketplace, not buyers and sellers—will decide what workers in small businesses earn. There’s a problem: Many, if not most, small business owners, can’t afford it. They often work on thin profit margins. They must offer products at the lowest possible prices to survive.

Their biggest costs, salaries and wages, will skyrocket if Governor Cuomo and others—other cities and towns across the nation have or are contemplating the same–do the same.

How Would It Affect Me?

Once again, let us personalize their thinking and consider what would happen if applied in other parts of the economy: You pay $1,000 on your mortgage. Now it goes up to $1,700 because the government says so.

You have to meet a payroll of $2,000 each week and now it will going to $3,400.

You pay $200 a week for food. Now it goes to $340.

What would you say? You’d be upset, correct?

Indeed, you’d say that someone just destroyed your budget and now dramatic changes would have to happen. Don’t worry none of those things is happening in the short term. That’s because it is much easier for pols to rip business people or a corporate entity like McDonald’s, which is perceived as overflowing with money.

But the Golden Arches have been anything golden for years. McDonald’s is a business that has been losing market share to more nimble rivals. It is a company with declining profits.

That’s something that Governor Cuomo, complaining about their profits, doesn’t seem to understand. But the governor does understand raw political numbers: The McDonald’s and their franchisees represent far fewer voters than the average worker, who is often upset because his or her wages have been effectively dropping—figuring in inflation—-for years.

Gregory Bresiger’s Low Wages

I certainly understand that. Twice in my life I have made minimum wages. Once in high school and college. And another time in my 20s and early 30s when I worked as a reporter for small market newspapers and radio stations, where a vigorous effort, in effect, meant you were making about the minimum wage or maybe less. However, by getting and holding low-paying jobs in my adolescence and 20s I learned skills that were vital to my advancement.

In my last full-time job—I have been a totally free lance worker since early 2013—as a reporter/editor I didn’t make minimum wage. For years before I had made a nice salary. But then my company, a small financial publishing firm, stopped giving raises and contributing to the 401(k) program because it was losing money after the crash of 2008.

There’s lots of bad things I can say about my former employer, but it is difficult to criticize a person or an institution that can’t pay raises when it is losing money. (I was actually happy to stay employed through the terrible recession that followed the crash). And any company that is losing money will have difficulty avoiding higher prices, even though they could alienate many customers over the long run.

But maybe the average worker who supports Governor Cuomo, and who likes to eat in a fast food restaurant because of low prices, might think twice when the business will have to raise prices. He or she might also start to notice fewer new restaurants coming into an area because costs are too high. That will likely lead to less competition as costs spook prospective business owners in places where the government is controlling prices.

So what is to be done? How can the problem of low wages be reversed without wrecking small businesses?

A Free and Prosperous Commonwealth

In sports, often the team that wins is the one that minimizes mistakes (Think of the last Superbowl. That’s when Seattle threw away a championship by a gross mistake in the last minute of the game).

Prosperity comes from increasing skills and more productivity as well as a government smart enough not to interfere. A productive, growing business has money to invest in better tools. Better tools mean workers can produce more. That generates healthy profits. That can lead to raises and better profits because the employer can afford them. Workers who practice a trade—even at a low salary at the beginning of a career—can move on to the better jobs and a better life. Once a person has skills, they are never lost.

These good things must naturally occur. The government can not simply decree prosperity and better skills. That’s even though high-tax New York spends tons of money on public education, but has some of the worse schools around. An economy’s success comes through the advancement of workers with increasing skills and an increasing number of entrepreneurs who are willing to risk capital.

Why would anyone risk money when he or she can forego the risk and spend more on themselves?

They do it because they think there’s a chance—possibly a very good chance depending on the circumstances—that they will make a profit.

What about the worker?

Ultimately one of the reasons why people work is they hope that they can make a good living and possibly do better each year because they are steadily employed. Acquire enough skills and experience in a field and one can ultimately do much better.

How many dishwashers in restaurants have gone on to become waiters? How many waiters have gone on to become managers? How many managers have gone on to start restaurants?

Millions of stories like those are how a country achieves prosperity. It won’t be achieved by politicians giving fiery speeches and advocating the taking of wealth from one group and giving it to another.

That’s the road to economic disaster.

The other road is the one to economic betterment. Don’t rail at the best fishermen. Teach others how to fish.

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”.