ECONOMIC AFFAIRS by Patrick J. ByrneNews Weekly
Minimum wage is the cornerstone of the family wage
, August 30, 2014
The United States minimum wage is not the cause of high unemployment among American blacks, nor are large amounts of government-to-government aid being siphoned off today by corrupt leaders in developing nations, as claimed by Hal G.P. Colebatch.
These claims were made in Dr Colebatch’s review in News Weekly (August 16, 2014) of Jason L. Riley’s book, Please Stop Helping Us: How Liberals Make It Harder for Blacks to Succeed (New York: Encounter Books, 2014).
Income concentration in the United States
Mr Riley is a member of the editorial board of the Wall Street Journal.
Dr Colebatch praises the radical economic libertarian policy of abolishing the basic wage, quoting Professor David L. Goetsch, who says of the book: “Riley shows that black unemployment was significantly lower before minimum wage laws were introduced 60 years ago.”
Dr Colebatch goes further, saying that Australians have failed to learn this lesson from the Americans about the damaging effect of the minimum wage, saying that “the folly of the minimum wage laws never appears to have sunk into our [Australian] law-makers’ thinking”.
First, neither Goetsch nor Colebatch has his history right. The U.S. minimum wage was introduced 76 years ago in 1938, not 60 years ago.
After its having been found unconstitutional in 1933 during the Great Depression, legislation establishing a minimum wage was reintroduced in 1938 at US$0.25 per hour (US$4.10 in 2012 dollar terms), and currently stands at a measly US$7.25 per hour (or about US$15,000 annually).
Needless to say, the huge social problems among blacks and whites living in poverty can be substantially attributed to the fact that people cannot live and raise a family on a US$15,000 wage.
Secondly, it is true that there is a high unemployment rate among black Americans. Consistently, it has been at twice the rate of white Americans for decades, and in 2013 was 13.4 per cent.
What Dr Colebatch ignores is that from the end of World War II until 1970, the unemployment among blacks was continually declining. It bottomed at around 7 per cent about 1970.
It then rose to a peak of 19.5 per cent in the mid-1980s, declined to about 9 per cent as the U.S. boomed in the 1990s, then rose sharply when the global financial crisis hit.
The period in which black unemployment declined until 1970 corresponded with the postwar era when the world’s major economies were governed by the 1944 Bretton Woods settlement. In this period exchange rates were regulated, U.S. manufacturing boomed and a rising tide of prosperity expanded job opportunities for both the black and white middle-class.
The period of rising black unemployment after 1970 followed in the wake of the U.S. under President Richard Nixon in 1971 unilaterally terminating convertibility of the U.S. dollar to gold, and the Organisation of the Petroleum Exporting Countries (OPEC) in October 1973 quadrupling the price of oil.
These twin shocks ushered in a prolonged period of global stagflation — that is, a combination of economic stagnation and job losses coupled with rising inflation.
Then, in the 1980s, the U.S. under President Ronald Reagan pursued a radical agenda of financial and economic deregulation that saw large corporations begin a major migration of U.S. manufacturing to Asia, Mexico and, later, to China. This loss of jobs hit black Americans particularly hard.
Infamously, the U.S. has the highest level of inequality in the developed world.
It peaked under laissez-faire economics in 1929, the year of the Wall Street stock-market crash, which marked the beginning of the worldwide Great Depression.
Inequality in the U.S. fell during the Great Depression and continued falling under the postwar Bretton Woods settlement, then rose again after 1971 with the advent of stagflation and the adoption of laissez-faire economics in the 1980s.
Robert Reich, a former U.S. Secretary of Labor, has shown that the U.S. is back to the 1929 level of inequalities (See diagram below).
Reich confirms the argument of the late Australian commentator, B.A. “Bob” Santamaria, that doctrinaire free-market policies, such as radical financial deregulation and the abolition of the basic wage, would strip the wealth out of the middle class.
High unemployment levels among American blacks are the result of the very laissez-faire policies that Dr Colebatch endorses in his review of Jason L. Riley’s book, Please Stop Helping Us.
To give people a clearer idea of the extent of U.S. inequalities, Nobel Prize-winning American economist Paul Krugman showed that in 1894 John D. Rockefeller — the richest man in Gilded Age America — made $1.25 million, almost 7,000 times the average per capita income in the United States.
In 2006, American hedge-fund manager James “Jim” Simons took home $1.7 billion, more than 38,000 times the average income. Two other hedge-fund managers also made more than $1 billion, and the top 25 combined made $14 billion.
“How much is $14 billion?” asked Krugman. “It’s more than it would cost to provide health care for a year to eight million children — the number of children in America who, unlike children in any other advanced country, don’t have health insurance” (New York Times, April 27, 2007).
Not surprisingly, even the International Monetary Fund has recently complained about growing inequalities slowing economic growth and leaving millions of Americans in poverty.
Americans could learn from the enlightened self-interest of the great industrialist, Henry Ford. He realised that if he paid his workers a decent wage, they would able to buy the cars he produced.
Today, the American multinational retail corporation, Walmart, in common with many other large U.S. corporations, pursues the opposite policy.
As Robert Reich has pointed out, Walmart is the largest employer in the U.S. and its profits are falling because it doesn’t pay its own workers enough (US$8.85 per hour) to buy the cheap products Walmart imports from China.
Such workers once had well-paid manufacturing jobs that have since shifted offshore to China (Huffington Post, November 17, 2013).
Also, Dr Colebatch complains about the failures of government-to-government foreign aid programs. His main complaints are that such aid has enriched corrupt politicians in developing countries and that such aid has not correlated with economic growth in these nations.
First, for the most part, Western government-to-government aid to developing nations stopped over a decade ago because of the corrupt siphoning of money.
Today, almost all Western aid is delivered to the needy through aid-agency programs, not to governments of the Third World. Only the U.S. still delivers significant government-to-government aid to places like Iraq.
Secondly, the first priority of aid has been the provision of health and education. So declining rates of infant mortality and rising literacy are the first measures of aid’s success, not economic growth.
These are basic human necessities for which developed nations have an obligation to help under-developed countries, and they are the foundation of future economic growth.
Dr Colebatch is attacking aid programs that mostly ceased over a decade ago.
His views on foreign aid and the minimum wage may have currency in the United States, but they would make all but the most hard-line Australian free-marketer blush.
Patrick J. Byrne is national vice-president of the National Civic Council.
 Robert Reich, op. cit.