Chocolate and Gold Coins

Saturday, November 11, 2006

Tax Cuts, Minimum Wage Hikes, and Perpetual Money Machines

The Democrats have come to power and straight away they are going to make a priority of raising the national minimum wage (which has not be raised in many many years). I was wondering why this would be a priority. Usually labor unions support minimum wage hikes because it is the ultimate in collective bargaining (we all stand together and insist on higher wages) plus it prevents firms from switching to cheaper labor. But labor union membership and power have waned in the US and they have very little political strength – so why would politicians care?

Then it occurred to me that the minimum wage to the Democrats is what the tax cut is to Republicans: they are both the financial equivalent of a sort of perpetual motion machine (you could call it a perpetual money machine if you like). The idea is simple: politicians love to give free money to people. But where does one get free money? It is never free- is it? Well it might seem free if you manage to get it without raising taxes or reducing spending. Both a tax cut and a minimum wage hike seem to fit the bill.

For the moment, let us ignore any pro and con arguments for either tax-cuts or minimum wage hikes. Politicians will not be persuaded or dissuaded by any such logic. All they care is: “Will it help me get elected?” And perpetual money machines do work for politicians: there will always be five to ten percent of the electorate that will believe anything – and five to ten percent will swing any election. So politicians would be fools not to try to get the votes of these silly people.

But here is the major problem: politicians creating “perpetual money machines” are politicians not doing their primary job. They should be doing the hard work of both finding legitimate public goods that are worthwhile taxing the common man to pay for and/or finding illegitimate public spending that should be axed from the budget. But this requires courage: some people will be harmed and they will be angry. You cut farm subsidies and the farmers won’t vote for you. You fund a new project and your opponent will call you a “tax and spend liberal”.

Politicians looking to make something worthwhile out of thin air by some alchemy will inevitably succeed in creating nothing out of something instead. I wish more people would send them the message: “Stop this foolishness and get back to work!”

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