Writing about the record number of Americans purportedly living in poverty, Think Progress blogger Travis Waldron makes a huge economic error when considering the effects of government “safety net programs”. See his quote below:
“The number of workers in poverty would be even higher were it not for government safety net programs that have reduced poverty rates during the recession.”
Such misguided economic analysis is far from uncommon at Think Progress, but this claim is especially naive. I don’t doubt Mr. Waldron’s motives and concern for the poor, but to think that government “safety net” programs have benefited America’s poor exhibits a failure to see the big picture when it comes to programs like welfare and minimum wage (both of which Waldron cites as examples of helpful “safety net” programs).
Regarding minimum wage: We’ve written about this before and defended what I believe is an irrefutable conclusion: Minimum wage does not raise the welfare of the lowest class, but indeed harms the lowest class of workers by outlawing employment at their marginal revenue product. Put more simply, minimum wage makes it impossible for millions of people to get jobs.
A smart business-owner will pay his employees less than what they contribute to his business. Oftentimes the actual wage seen on the market is almost identical (barely below) the laborers contribution to the employer. Minimum wage, however, makes it impossible for a business-owner to negotiate a wage with a potential employee that is below a legal minimum. This means that any laborer who does not produce more per hour than the specified legal minimum wage will simply not be hired, as any business-owner who hired him will suffer losses and ultimately harm both himself and all of his customers and other employees.
Ludwig von Mises put it this way:
“Where there is neither government nor union interference with the labor market, there is only voluntary or catallactic unemployment. But as soon as external pressure and compulsion, be it on the part of the government or on the part of the unions, tries to fix wage rates at a higher point, institutional unemployment emerges.”
In sum, minimum wage does not increase anyone’s wealth, and it only results in increased unemployment rates for the lower class.
Regarding welfare: While it certainly seems obvious like welfare aids the poor, it is not necessarily the case. I can explain this, but Walter Williams does it better. See the video below:
So not only does welfare not increase the welfare of the poorest class, but it may very well encourage the perpetuation of poverty among the lowest class and discourage such individuals from working their way out of poverty “step by step”. I recognize the above video is not a full economic analysis of welfare, but I point you to chapter 7 of Murray Rothbard’s famous book Power and Market: Government and the Economy for a thorough, hard-hitting analysis of the harms of the welfare state–especially to the poorest class.
I’ll hearken back to this repeatedly, but Frederic Bastiat’s timeless essay What Is Seen and What Is Not Seen exposes Waldron’s type of economic analysis for what it truly is: a failure to look beneath the economic surface. Such shallow analysis is common in popular media, but it is far too destructive to let go without correction.