You Can’t Defy Economic Gravity

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I always get a bit of a chuckle when I see people who have tried to break the basic laws of economic realize it isn’t working, but then expect government to do something to somehow make it work. It is the equivalent to trying to defy the laws of gravity, being surprised when you fall down, then thinking that the government could somehow make it work. It usually goes like this:

  1. The system is unfair. We need to change things.
  2. Things are changed and the old system is thrown out, totally ignoring the reasons for the old system and why it worked.
  3. The new system does not work because it violates the laws of economics.
  4. People say the government should do something to keep the new system going, but make it work.

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The last step, expecting the government to make the unfixable work, is particularly comical, given that the government does everything relatively poorly. Some things you really need the government to do since they really can’t be done in the private sector, but they are not done well. Anyone who has ever been in the military will tell you about all of the waste, senseless rules and actions, and inability to change the systems that everyone knows are wrong but no one seems to be able to do anything about. Look at any road project and you’ll see it take forever and have huge overruns and waste. Really, is there anything that the government does that is high quality, reasonable cost, and done anywhere near on time? It is also necessary to take a one-size-fits-all approach that is rarely ideal for anyone. You don’t want the government trying to solve the problems in your life.

Still, people persist in following this pattern rather than looking for solutions that follow economic principles and do work. Today we’ll look at a few of these attempts to defy economic gravity. We’ll also look at why the former system worked and alternative systems that would work.

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Everyone working

Up until about the 1960’s in the US and many other countries, the standard was to have a committed/joined couple work together as one unit. One person would work at a job and then the other would take care of the kids and the home and do all of the errands needed to maintain a household. (The working person would also provide support in doing things for the household at night and on weekends.) This meant that one person could concentrate of meeting the needs of the company and doing what was needed to earn more money while the other person had the time to do what was needed at home. In particular, this meant that there was always a parent around to be there to nudge the kids in the right direction and keep them from making bad decisions.

This system worked very well economically because:

1. The working person could concentrate on being a good employee or running a business, had the ability to stay after or travel as needed for the job, and was able to work continuously until retirement, avoiding long breaks where job skills are lost and where the company would need to find someone else to fill the role.

2. The parent/homemaking person was there to take care of the kids (which is a full-time role when the children are young); help to maintain the home; meet repairmen, delivery men, and others who come during the day; and have the time to run all of the errands that can only be done during the day. This role was particularly important since no one will take care of your kids, home, and personal affairs as well as you will, so it is virtually impossible to replace by hiring it out. Plus, the person could multi-task by doing laundry, cooking, and other chores while watching the kids, making them very efficient.

This system had the flaws that:

  1. It was sexist in assuming that the woman would always be the one taking care of the home and the children and the man would always be the person working. Not only is this not fair because people are cast into roles by gender without the freedom to choose, but it also makes the mistake of assuming that women are always better homemakers and men always better workers.
  2. Sometimes the man would decide that his role was only working outside of the home, so that when he got home he was free to loaf about. This meant that the homemaker was working 24/7 while the man was only working eight to ten hours per day five or six days per week. There was also often the perception that performing the job was more important than the work of the homemaker, which is almost always not the case.

Starting in the 1960’s this system was replaced by a new one. In the new system, everyone works and no one is a primary homemaker. Now there are two paychecks instead of one (although both paychecks are smaller since there are more workers.) The idea is that everyone can work and then childcare and homemaking chores could be hired out or done after work.

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This defies economic gravity since people are trying to replace the homemaker with a second income where the value of the homemaker is far more than the second income. In particular, the value of having someone there to raise the child while also being able to do other things at the same time useful to the family is discounted. People expect that they’ll be able to pay for childcare and still make a lot of extra money from the second job, but quickly discover that it costs an enormous amount of money to pay someone to provide the full-time care for a child.

This makes sense since that person needs to pay for things like food and their home, too, so they need to charge enough for their time to cover their expenses since they are watching your children instead of watching their own or taking care of their home. The only way to make the economics work is for them to charge enough to cover things or for them to take on more children to watch. The reality is, either paying for childcare costs more than the additional income provided by the second worker or the child suffers because they are cared for by someone caring for a lot of other kids, so he gets little personal attention.

So, the economic law being violated is:

The value provided by a full-time parent has a vested interest in the child, plus is able to perform additional tasks while taking care of the children. The value of this service is often far more than the salary that can be gained from a second person working. In addition, the value added is tax-free while income from work is taxed and additional costs.

So, when people discover that they can’t get someone to deliver something of great value for a small price so that they can make more working then they pay out in childcare and for other, household expenses, they demand that the government fix the problem by requiring employers provide childcare or the government provide money for childcare directly. They don’t realize that the money for both of these things would need to come from those working sicne the government produces nothing. If businesses provided childcare, they would need to cut salaries and/or raise prices to pay the cost of hiring people, so families would end up right where they were. If the government were to provide money for childcare, they would need to raise taxes, probably skewed towards those with higher incomes so there would be less incentive for people to work their way into higher paying jobs, plus the government would waste a great deal of the money as they always do.

In the end we’d have worse childcare and be paying a lot more for it. Wealthy families would pay for private childcare as they do now with school. Middleclass families would be forced to use poor childcare because they would not be able to pay for both the public provided childcare and pay again for private care. Only the very wealthy would be able to afford to have someone stay home since everyone would be paying for the public childcare through either taxes or increased prices for goods.

The solution is to return to single-worker families, but now have the person best suited and who desires to be the homemaker take that role rather than assignment by gender. People who want to work should find someone who wants to be a homemaker to marry. Likewise, people who want to be a homemaker should find someone who is ambitions at work. This would allow the huge, tax-free value provided by someone who can be a fulltime parent and homemaker to be realized again. By reducing the number of people working, salaries would also increase since there would be less supply and more demand for workers.

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Minimum wage

Another place where people try to defy economic gravity is with minimum wage laws. Originally mostly young people would take low pay, minimal skill, entry-level jobs as first jobs to get experience or make a little spending money while they were still being supported by parents and then work their way out of them before they were supporting themselves. Before having a family, individuals would have already worked their way out of those jobs and established an income that could support themselves and others. They did this by moving up in the field, using the skills in part that they got in the minimum wage jobs to attain better jobs with more responsibility and salary.

More recently there has been a push to increase minimum wages so that those still working them later in life could support a family. The idea is that a mother of three should be able to support her family while still working in an entry-level job. The reasoning, well, she needs the money.

I agree that she probably needs the money, but that doesn’t mean that you can just lift the minimum wage and have enough for her to raise her children. Again, this is trying to defy economic gravity because it is not possible for these jobs to pay enough to support a family. The person working these jobs is just not providing something of enough value to be paid as much needed to support a family.

Just think of all of the things she would need to buy and the labor required to produce those things. She would need food to be grown, picked, and brought to market. She would need people to make cloth from crops or animal fur, then sew those clothes. She would need people to dig up coal or oil or nuclear fuel and run a power plant to provide electricity. She would need people to produce all of the materials for her car, make the car, then pump and refine oil to put in the tank. Finally, she would need someone to build her a place to live. Is she putting in anywhere near that amount of effort just showing up and working an eight-hour shift at a register?

Realize that in a free enterprise system, as long as there are plenty of places to work, there is an auction system in place for workers that will set the wages as high as is possible for each worker. (Conversely, as long as there are enough workers competing for jobs, it will set the wage as low as reasonable for the job. The system finds the ideal wage.) While it is certainly true that there are people who start in minimum wage jobs who grow in ability to provide services worth a higher wage, those people quickly move up into a higher wage position. This is because there are lots of other places to work and as soon as one of those locations has a better job if the person is qualified, she can move over into that job. Anyone who doesn’t move up either is unable to provide more valuable service or isn’t trying to move up the ladder.

The free enterprise system where businesses are competing against each other for customers means the companies are also paying as much as they can for the entry level jobs. To pay more, they would need to 1) cut wages of higher-paid positions, 2. cut the cost elsewhere, 3. charge customers more, or 4. decrease their profits. If they cut the wages for employees working at higher levels, they’d lose their mid-level employees to other companies that paid better. They might be able to cut costs elsewhere to raise entry-level salaries, but most of the time this has already been done to reduce their prices and there is little that can be cut without sacrificing quality. (Cutting service is normally the best option to reduce costs since salaries make up most of the costs, but this means firing the minimum-wage employees. So, the employees who are left may get paid more, but some lose their jobs and all of their wage.) If the company tries to charge customers more, this may cause them to go to their competitors, making them lose income, so they’d need to cut workers or close down. The minimum wage employees may also be customers, so they see their salaries increase but then they need to pay more for things they buy, so they really don’t get any more per hour. Finally, decreasing profits to below those of competitors would chase away investors since that would decrease their returns, giving the business less capital to improve operations and grow, eventually leading to failure of the business. Profits are also usually fairly small compared to costs, so there really isn’t much to cut before the business becomes unprofitable and closes.

So, if you force businesses to increase their starting salaries with a minimum wage hike that is above what they are paying their employees anyway, it results in a combination of laid-off workers, higher prices, and failed businesses. In general those who keep their jobs may do a little better, but a lot of employees lose their jobs. Changes are the ones who are still at entry -level jobs after several years will be the first ones cut. So, you’re not helping anyone. It is better to encourage people to learn new skills, be a valuable employee, and make their way up to higher-paying jobs before they start a family. That actually works.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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