Note: this post was previously entitled “Thoughts on the Upcoming 2014 State of the Union Address.” I’ve changed it to a more generic title since I consider the issues discussed below still to be pertinent to current events.
Anyone who follows politics knows that President Obama will be giving his annual State of the Union Address tonight (Tuesday, January 28th). After hearing through the social media grapevine what the President might talk about, and after doing a little research myself, I thought I would jot down a few preliminary thoughts about what President Obama is most likely going to emphasize in tonight’s speech.
I am concerned about a couple things. First, the diagnosis of America’s problems and social ills. Before offering solutions to any problem no matter what it might be, one must first have an accurate diagnosis. But too often in politics this is of little concern; usually political gain over competition or allegiance with special interests groups are the true motives to “solutions” and “programs.” Second, I’m concerned about the actual policies, solutions, and procedures the President or any political body might take. Employing a destructive policy even though you have good intentions is insufficient; likewise, pursuing a destructive political path through fiat rule is also unwise (and illegal). Third, my general goal is to encourage economic competence and literacy among the American population in general. I once was, and I find many Americans to be, ignorant of basic economic conditions, causes, effects, and possible solutions. We need to move beyond good intentions and compassionate feelings to economic intelligence about what can and what should be done – and what most definitely should not be done. All this being said, here are some of the issues that will probably be addressed and how one might respond to them.
Posturing for the 2014 Midterm Elections
This should come as no surprise. Congressional midterm elections will be happening in November and control of the House and Senate will be up for grabs. This is a crucial issue. If the Democrats can gain control of the House and retain the Senate, President Obama will have a clear path toward introducing and passing any legislation he wants in his last two years in office – regardless of its benefit or detriment to the economy and society at large. Since I oppose many of the President’s policies as being harmful, non-solutions to misdiagnoses, I am in favor of Republicans retaining the House or if possible taking the Senate. I am not a Republican; I simply oppose the President’s (and Democrats’) legislative agenda (for the most part; immigration reform would be the exception). The important point for the State of the Union is that the President may be presenting the issues he does in order to influence these elections in his favor, instead of actually addressing the real state of our Union and possible legislative improvements.
There are rumors that this topic will be pushed front and center over the next couple years and especially form the bedrock of the Democratic Party for the 2016 presidential elections. The problem as it is usually presented is that a small percentage of the very rich (1-5%) in our nation own the vast majority of wealth while the rest of us suffer. This is unfair. The bottom 95% deserve better and the government must intervene with tax and other welfare redistribution policies to right this injustice. Here’s why this is a false narrative. First, current economies are not zero-sum, meaning, there isn’t a fixed amount of wealth to be divvied up. Am I being paid less at my administrative assistant job because Bill Gates is worth billions? No. Would I be paid more currently if either his personal salary or the wealth of Microsoft had been capped? No, of course not. I believe that I (and millions of others) have benefited greatly by Gate’s work in personal computers and software development. Had the government capped his wealth, or forcefully redistributed it to others, than it is very likely we wouldn’t have the computer and word processing products that we enjoy today. Wealth is created – and destroyed. Due to this, some people (or corporations) can become very wealthy without harming a single person. Of course this isn’t always the case (some people do become rich through fraud and extortion), but the point is that raw income or wealth statistics tell you nothing about how people came by their wealth or what they are doing with it.
The bare fact that there is a staggering difference between what the 1% make and what the bottom 10% make does not in itself tell you that something wrong or unjust is happening. There are many people that come by their wealth in an honest manner and they should not be penalized simply because they have more than others. Second, Census Bureau statistics on inequality are misleading because it only accounts for pre-tax and pre-welfare transfer income (see the CEE article below). When marginal tax rates, the Earned Income Tax Credit, and the plethora of government poverty programs are factored in, the inequality differences decrease (and there are good reasons why many of these programs don’t actually work well; see this study). Yet those who are pushing for more policies to address inequality often use the pre-distribution income numbers to paint the worst picture possible. Third, income inequality is not nearly as important as income mobility. The majority of people who start in the lowest income bracket move out of that bracket into the middle or higher income brackets over the course of their lives. Conversely, many people who are at one time in the highest income brackets will fall down to lower income brackets. The important thing we should care about is opportunity for better work, education, skills, etc. that increase income mobility, not a static one-time shot of who is making what at t-time. Fourth, it is simply untrue that the rich are getting richer and the poor are getting poorer. The rich are getting richer and so are the poorer. While I think there is a biblical mandate on responsible and generous stewardship for those who are given more, this should be a voluntary matter not forced redistribution by the government. The talk about income inequality is simply uninformed, overblown, riddled with myths, and an excuse to infuse class warfare, solidify envy, and jump-start more government redistribution programs.
- Distribution of Income: The Concise Encyclopedia of Economics
- The Inequality Delusion
- The Mismeasure of Inequality
- Overstating the Costs of Inequality
- What’s Wrong With Inequality?
- Income Mobility, Not Income Gaps
- Income Inequality from an Economic Perspective (Part One)
- Income Inequality from a Biblical Perspective (Part Two)
- Why President Obama is Wrong on Inequality
- Stunning New Study Dismantles Obama’s “1% vs. 99%” Inequality Argument
Higher Minimum Wage
In last year’s State of the Union speech President Obama called for raising the minimum wage to $9.00/hour. This year it is likely he will call for a $10.00/hour or more minimum wage. Last year the President couched it in terms of an “honest day’s work with honest wages” – that not only is this fair for families who are struggling, but it will make our country stronger. The problem is that the President (and those who agree with him) are defying over 60 years of economic research and consensus that shows quite plainly that the minimum wage hurts younger workers and the poor. The minimum wage sounds like a great idea; it seems to be a reasonable requirement for companies to pay their employees so that they can pay their bills and get by in life; it seems to be a policy of compassion and empathy. But this is only convincing for those who do not understand the economics behind the minimum wage or the consequences of this law. The minimum wage, in short, is a price control on labor. What is a price control? A price control sets minimum (floor) or maximum (ceiling) prices that individuals or companies can buy or sell goods or services for. These external restrictions are always set by governments upon the market and are almost always arbitrary – meaning, they are influenced by external factors instead of being regulated by markets signals and behavior. Price controls have a terrible history of destruction in this country and around the world. Why is this? The market determines the price of a good or services through both internal and external factors. The internal factors include the cost that it requires to make and deliver that good or service so that you and I can buy it. External factors includes supply and demand, and how much that good or service is wanted or valued (subjective value). Highly valued goods or services that are in high demand raise the price of that thing because more must be produced from the scare resources that already exist; lower demand decreases the price as companies that stock such goods seek to sell them.
For labor, people are paid based on their productivity, the relative value of the job they are doing (it would be grossly unfair to pay a fast-food worker the same as a lawyer), their education, skills, experience, and competing prices for comparable labor in the same industry. The minimum wage is a floor price control that unnaturally jacks up the price of labor and skews the market determination of labor payment that all those previous factors help to determine. Think about this: if the government were to impose a raise in ticket prices on movie theaters, do you think this would affect sales and the quantity of people attending movie theaters? Sure. When prices increase, people buy less of a good or service. The same holds true for labor and the minimum wage. With minimum wage laws in place companies who would buy more low-paying labor buy less of it; this means that many individuals who would be working for $7.25/hour are now unemployed. And making $0/hour is a lot worse than making a low per hour wage as determined by the market. I’m not saying that the minimum wage doesn’t help those individuals who remain employed; it’s just that on net average, more people are let go and harmed than helped. I could go on about how the minimum wage is unfair because it overpays jobs that are less valuable and places unnecessary burdens on employers; how it increases unemployment and deprives young unskilled workers from gaining the skills and experience they need while they are still dependents; about how it rarely actually helps those it proposes to help (the poor, unskilled, young workers); and how the vast majority of people who make the minimum wage are actually second or third income earners in a family. The minimum wage is a foolish and destructive economic program that should be tossed out, and the President displays his ignorance, political loyalty, and appeal to the people when he continues to call for raising it. If you are interested to learn more, check out the resources below.
- The Myth of the Zero Sum Game
- Minimum Wages: The Concise Encyclopedia of Economics
- Price Controls: The Concise Encyclopedia of Economics
- Where Do Prices Come From?
- Minimum Wage, Maximum Nonsense
- The Debate Over Minimum Wage Hike Is Obscured By Myths
- Most of the Benefits of a Minimum Wage Increase Would Not Go to Poor Households
- Minimum Wage and Unemployment
- The Hiddent Costs of a Minimum Wage
- The Minimum Wage, Discrimination, and Inequality
- Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research
Executive Control and Orders
The President has had a favorite argument for justifying his fiat executive rule that has marked his presidency thus far: Congress is inept, unproductive, and too divided; thus President Obama must step in, issue executive orders and tinker with existing legislation in order to provide a unified way forward through our national distresses. The problems with this approach are many: simply put, the President has also been a lightning rod of division, blame-shifting, and out-right deception; he has not been a true leader nor has he united our country. In addition, his role and power as President is constitutionally restricted – restrictions and limitations that he has continuously ignored and flagrantly flouted. This is an impeachable offense. (For an analysis of Presidential Executive Orders, what they are and are-not, see my article below.) Many of the President’s executive orders are illegal, as is his changing of legislation after it has been passed and signed into law by him. A recent example of this was the changes he made to Obamacare (ACA) regarding the employer mandate (delaying it a year) and pressuring insurance companies to reinstate insurance policies they had cancelled due to ACA requirements. None of this is permissible, yet the President has gotten away with it so far; look for him to justify such actions and expand them further by blaming Congress and painting himself as a sure leader to guide us to better days.
- The Threat of Executive Orders | Faithful Politics | brcrenshaw.com
- Michael McConnell: Obama Suspends the Law
- Yes, Delaying Obamacare’s Employer Mandate Is Illegal
- The Rule of Law?
- The Use and Abuse of Executive Orders and Other Presidential Directives
President Obama wants to make immigration reform legislation a mark of his presidency. I have no problem with this. The immigration system in this country has not worked very well for decades. America has historically been a strong immigrant welcoming country and immigrants do little to no harm to our economy. The biggest problems are two: first, what to do with the illegal immigrants who are already here; and second, how to maintain appropriate border control and entrance regulations into our country for the future. Regarding the first, I am in favor of there being some kind of path to citizenship. I do not think illegal immigrants currently in the country should simply be conferred with legal status with the swipe of a pen; instead, there should be some guide to assimilation, probably including but not limited to: learning English, getting a worker’s visa, etc. Regarding the second issue, many immigration reforms have made changes to entrance rules or the status of immigrants already here with the promise that border security would be increased or made more efficient. Unfortunately, this has not happened and our border is currently quite porous. I am in favor of doing something in the immediate future to increase border security in conjunction with helping current illegal immigrants gain citizenship. Much could be said about the economics of immigration, but the short of it is that immigrants only help our country, not hurt it (although there is ongoing debate about this). They do not steal jobs nor do they overly burden the welfare programs.
- Immigration: The Concise Encyclopedia of Economics
- Ten Economic Facts About Immigration
- An Economic Case for Immigration
- Remittances and the Latin American Dream
- The Economics of Immigration
The President has focused on job creation for a long while now. Remember the stimulus plan (American Recovery and Reinvestment Act) back in 2009 that pumped almost $800 billion into the economy in hopes of jump-starting employment again? Right, few people remember it because it didn’t work. Or how about Cash for Clunkers? The President promised multiple times that the unemployment rate would fall, but such predictions did not come true. In fact, unemployment rates hovered between 9-10% for over two years (2009-2011) and the current unemployment rate is 6.7%. However, one problem with these numbers is that since February 2009 almost 10 million Americans have left the workforce; when factoring employment/unemployment rates, the Bureau of Labor Statistics doesn’t count those individuals who have dropped out of the workforce and stopped looking for work altogether. When this is considered (known as the U-6 rate), unemployment rates are closer to 13% or higher. Basically, calculating un/employment rates is very difficult, and there is a lot of room to fudge numbers and make things look better or worse than they really are.
However, beyond the numbers issue, I want to stress that the federal government is neither able nor suppose to create jobs. This is not the job of the President. Go ahead and read Article 2 of the Constitution; you won’t find a single word about the President’s responsibility to manufacture jobs for the American people (in fact, this isn’t Congress’s job either). However, in recent years Presidents have taken on this role and now the American public expects (and blames) the President for job loss or job creation. The real engine of job creation is the private sector as entrepreneurs start businesses and other businesses expand. Greater employment is only possible when businesses profit and are able to reinvest those profits in higher wages or benefits, venture capital, and hire more workers as they expand. Governments are simply unable to create jobs because their profits come mostly from taxation and the selling of stocks and bonds (and some services they charge for). Since this is liquidity that is taken from the market in order to pay government workers, it is less that businesses and individuals have to invest in economic growth. Governments rarely create wealth; instead they most often destroy it through waste and fraud. Unfortunately President Obama has been quite hostile to the private sector; since coming to office in 2008, he has imposed thousands of new regulations on businesses that make it harder for them to compete, be profitable, or for new businesses to start (e.g., Dodd-Frank and Obamacare). In addition, picking winners and losers during the 2008-2009 financial recession (bail-outs) and with the stimulus bill has infused a level of uncertainty in the market place. This is only compounded by President Obama’s tendency to change existing legislation whenever he feels like it as this disrupts the rule and implementation of the law.
- 9.5 Million People Have Left the Workforce Under Obama
- Chart of the Day: The Real Unemployment Rate?
- What is U-6 Unemployment?
- How the Market Creates Jobs and the Government Destroys Them
- Why Governments Can’t Create Jobs
- Red Tape Rising: Regulations in Obama’s First Term
- 2013: Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State
- “The War on Business” chapter four, pp. 151-184 of At the Brink: Will Obama Push Us Over The Edge?
My goal in this post has been to address some of the potential issues President Obama will speak on tonight in order to shed light on them and help people understand the economic and political realities that are behind them. We all need to take a vested interest in our country. This is not rabid or blind patriotism, nor is it hateful cynicism; instead, we should care deeply about our country and our people in order to promote human flourishing, justice and righteousness, and provide for those who are truly in need. My desire is that you will take an interest in these issues, read thoroughly and carefully, and come to a well-informed, articulate knowledge of the real state of our Union and the steps we need to take to improve it.