Hurting the Poor...by "Helping" Them

By Greg Harvey, Treasurer

It’s hard to advocate against policies designed to help the misfortunate. However, one of the worst ideas floating around Washington is to raise the federal minimum wage to $10.10 an hour. But before you call me heartless and say I hate poor people, let me quote Milton Friedman, who said that “one of the great mistakes is to judge policies and programs by their intentions rather than their results.” I believe that many have made this mistake over raising the minimum wage because, while it’s noble, it’s not an effective way to alleviate poverty in America.

The main reason is that a higher minimum wage causes lower employment among low-skilled workers, most often teenagers. A study by economists Sen, Rybczynski, and Van De Waal found that every 10% increase in the minimum wage rate causes a statistically significant 3%-5% drop in teenage employment. In addition, it also corresponds with a 4%-6% increase in the number of households categorized as “Low-Income” (2011). Interestingly, the increase in poverty constitutes lower earning families relying on working children for a significant portion of their wages. Therefore, the loss of teenage employment hurts them significantly.

Other studies have found the effects to be greater. Joseph Sabia while at the University of Georgia found that a 10% increase in the minimum wage causes teenage employment to drop between 5%-9%, and it reduces working hours for still-employed teens by 5% (2006).

The reason youth employment data are important is because, according to The Entrepreneur, the vast majority of minimum wage jobs are either entry-level positions useful for career advancement or low-skill ones that give quality work experience. In addition, “employers often select teenagers from middle-class families over poor adults” for minimum wage jobs due to teenagers’ “greater job potential.” Consequently, under 20% of minimum wage earners are actually from impoverished households. Therefore, raising the minimum rate would hurt young workers’ future job potentials more than it would reduce poverty (Shane, 2012).

Finally, data from the CBO suggests that raising the rate would be ineffective. To highlight the findings, an increase in the federal minimum wage to $10.10 an hour would cause a loss of 500,000 jobs. Of the 45 million people currently considered impoverished under law, just 900,000 (2%) would see their earnings increase enough to escape poverty (of course, we must “net out” the 500,000 newly unemployed, so it’s really only a 400,000 person improvement). Furthermore, while total earnings for minimum wage workers would increase by $31 billion annually, only 19% would actually go to impoverished households. 30% of the increased earnings would go to families making over 3 times the poverty limit, for reasons already discussed (2014). Clearly, the results aren’t optimistic.

Therefore, we must use different tactics to help the poor. One possible solution, according to The Economist, is to increase the Earned Income Tax Credit. By doing so, we’d be ensuring that help goes only to lower income families (unlike raising the minimum wage), and it does so without losing jobs or harming businesses (2006).

Of course, I’m not against increasing workers’ pay. Nor am I advocating to abolish the minimum wage. But I am against most government regulations and believe that consumers have more power than we exercise. Keep the rate at $7.25 nationally, with some higher state rates. But let businesses be free to decide whether or not to increase their own employees’ compensations above those levels (a few already have; a quick Internet search shows that Gap, Ben & Jerry’s, and Ikea, among others, already have self-imposed minimum wages above the mandated floor). Then, we as consumers must support those companies with our money. That’s the beauty of the free market; businesses cater to consumers’ desires. If consumers demand higher hourly wages, and back up demands with our spending, businesses will willingly oblige, all without government intervention.

Higher Education Funding

By Greg Harvey, Treasurer

Published in November 20, 2014 issue of The Voice

Let’s state the obvious: college isn’t cheap, and it’s getting more expensive. Total student debt in the United States is at record levels. Truly, something needs to be done. However, before we start offering free, government-paid tuition to all students, let’s review a few reasons for the costs and see if there are any less dramatic approaches we can take.

There are a number of reasons why student debt is exploding. The most major, of course, is rising tuition costs at universities. However, that doesn’t tell the whole story. According to the higher education think-tank Minding the Campus, there are more students than ever attending out-of-state colleges and paying more for their education than in-state students. In addition, as much as 40% of the increases have been from room and board. Collectively, these account for much of the student debt increase.

Right away, there is a simple, though unpopular, solution: more students can stay in-state and commute when possible. Commuting costs half that of living at an in-state institution and a third of living at an out-of-state one. Speaking as a senior who’s commuted my whole career, I can attest that, while commuting isn’t fun, the lower tuition makes up for it. This is a simple solution that requires no government intervention; instead, it depends on students making better choices.

Similarly, the subjects students choose can be just as important as where they attend. According to The Economist, much of college’s ROI depends on one’s major. Those who study technical fields like engineering do much better than those in the arts. It’s just the way it is. Therefore, another easy fix for students to lower bills is to compare the costs and benefits of particular majors before choosing.

Another major reason for increased tuition costs is, not surprisingly, governmental regulation. As Arthur Kirk, Jr., president of Saint Lao University, states, his college has hired a plethora of staff to meet regulatory requirements and spends thousands of hours annually completing federal compliance forms. If we made universities more public, these costs wouldn’t go away; instead, making higher education free would eliminate the incentives colleges have to manage costs.

Now I must address the points in last week’s article. First, forgiving all current student loans is infeasible. There’s over $1 trillion in such debt outstanding; simply writing it off would cause massive losses to the federal government and private lenders. While the idea sounds good, it would be catastrophic in reality.

 Finally, completely subsidizing higher education is impossible in the United States. Think of it this way: the Federal Government runs a massive deficit each year and states struggle to balance their budgets. Governments don’t have a lot of money available to pay for tuitions. Cutting other spending to make room in the budget sounds good, but other programs can’t make money like colleges do. Is it really fair to cut funding for roads or pensions to pay for higher education, when colleges can raise revenue?

Therefore, we’d have to raise taxes, likely on the rich. However, higher earners are more likely to be college graduates. Therefore, raising taxes would actually cause students to pay for their education over a lifetime instead of a defined period. If you run numbers, you’ll find that even small tax increases on the wealthy would cause them to pay vastly more than under a normal student loan. In other words, if we try to make college free, it’ll actually become more expensive for those who succeed.

In conclusion, student debt is a problem, but the solution isn’t massive government reform. Rather, we need to make better choices about the schools we attend and what we study. Will higher education ever be free? No, and it’s pointless to think so. But if each student worked harder at reducing their own college bills, we’d see immediate decreases in personal debt, and it’s the only guaranteed way we can achieve that.