Cato’s Tanner depicts liberal ‘economic alchemy’

Michael Tanner of the Cato Institute devotes his latest National Review Online column to a discussion of liberals’ efforts to conjure the results they seek.

Today, too many politicians operate as if they have discovered special powers that allow them to rise above other laws — such as those of economics. All they need to do is to invoke the proper spell or incantation and the outcome they want will come to pass.

Take, for example, the Washington, D.C., city council. They recently became the latest group of politicians to decide that many workers were not being paid enough. They might have tried to fix the city’s high taxes and anti-business regulations, the kind of reforms needed to bring better-paying jobs to the city. Instead, they simply spoke the magic words and declared that, henceforth, big-box stores, such as Walmart or Home Depot, would pay their workers $12.50 per hour.

But here’s where the laws of economics come in: The amount of compensation a worker receives is more or less a function of his or her productivity. Walmart is not going to pay workers $12.50 per hour unless those workers provide roughly $12.50 worth of productivity. As Greg Mankiw notes, “Economic theory says that the wage a worker earns, measured in units of output, equals the amount of output the worker can produce.” This oversimplifies, of course. There are other factors involved. But one can’t just arbitrarily declare a worker’s value.

So, it should come as no surprise that Walmart has already announced that, if the law goes into effect (it faces a possible mayoral veto), the company will cancel plans to build three stores in the District and will explore the logistics of canceling the three others that are under construction. The net result will be a loss of at least 1,800 jobs.

In a similar way, reality trumps magic when President Obama declares that companies have to provide workers with health insurance. A worker’s compensation is not just wages but the full cost of employing that worker, including taxes, benefits, and health insurance. Obamacare’s employer mandate — now delayed but not canceled — simply increases the cost of employing workers.

It shouldn’t be a surprise, then, when employers are reluctant to hire new workers, or when they shift to part-time workers who are not subject to that mandate.