State of the Union – A recipe for disaster

In tonight’s State of the Union address, our Offshorer-in-Chief, announced a plan custom made to destroy jobs. By combining an ill advised increase in the minimum wage with an utterly blind commitment to two additional “free trade” pacts President Obama is creating a perfect storm of structural unemployment.

The inverse relationship between wages and the availability of jobs is one of the most fundamental concepts in economics. – in fact, I taught it just last night at Chapman University. Employer demand labor, like demand for any commodity, obviously goes down when the price goes up. Further, the supply of workers increases with higher wages as non-workers in various categories (stay at home moms for instance, or students) choose to enter the work force to grab the new higher wage.

Consequently, there are very few economists (whose paychecks don’t come from the administration) who would dispute that wage floors kill jobs. Now, in a robust economy the employer’s burden is offset by strong market demand for their products and services. In those good days, liberals have a foot to stand on when they sing the praises of helping the working poor through wage mandates. In the middle, of a deep, dark employment abyss raising the cost of labor in hopes of helping the poor is simply insanity! And make no mistake, despite the President’s hand waving, we are still very much in that abyss.

The real measure of those who can’t find adequate work is at least twice the government’s fantasy unemployment number. Consider the chart below from the folks at Shadow Government Statistics who have added back in the long-term and short-term discouraged workers that the government wants to bury as well as those who are stuck in part time jobs but want full time. OMG! Not only is that blue line above 20%, but unlike the number we get from the job each every month, this very real situation for millions of struggling Americans is getting WORSE.

Now, I don’t want to see any American trying to raise a family on minimum wage. Those jobs should be going to teenagers, eager to cut their teeth and learn responsibility. But the sad reality is that the victim of the President’s higher minimum wage who get laid off from Joe’s Burgerstand are more likely to be a 30 year-old former assembly worker or a 55 year old factory foreman. These folks shouldn’t have lost their jobs in the first place and the primary cause of their burger flipping nightmare has been a two decade long, bipartisan effort to export America’s manufacturing capacity, technology and capital to China. We’ve lost not just millions of jobs, but more than 2% of our GDP growth every year – just to China.

Trade  is a great thing for consumers and exporters for nations that play it smart and understand the game is hardball. Countries like South Korea and Germany have been able to power right through the Great Recession and even face down a mercantilist China. Even their neighbors in Asia and Europe are feeling the pain of this. Ask Taipei or Rome what they think about the way Seoul and Berlin conduct their business and you will get an earful. We need to emulate that aggressive and successful approach, but we don’t do that. America prances into the world series of trade wearing shorts and swinging a badminton racket at 100mph fastballs. Our goal always seems to be some fuzzy headed idea like engaging our trading partner not beating them fair and square. Frankly, while it sounds good, that is NOT how a free market actual works. Most of the time real capitalism is a brutally competitive arena with actual winners and very real losers. Apple Computer didn’t get where it is today by trying to find a “win/win” with Dell or HP. Steve Jobs was out to kill and the results of that are pitilessly obvious as Dell tries to crawl under a private equity rock in hopes of staying alive. This ruthless process of creative destruction is how the market improves efficiency and increases the standards of living – for the survivors.

So while we do want to expand trade with our friends in Asia and in Europe, the last thing we should be doing is signing up for another naïve American led trade pact full of wishy-washy objectives with the open-ended specifics left to negotiators who already know they are going to be working as “consultants” for our “trading partner” as soon as they roll out of public service.

The worst possible jobs program I could imagine is a higher-minimum wage combined with more “free trade.” On the other hand, to quote my buddy, Peter Navarro, “The best jobs program is trade reform with China.” Do that and you won’t have to worry about the minimum wage.