Obama's Freeloaders Put a Drag on Economic Growth
By Michael Busler and Wendy Bidwell
By Michael Busler and Wendy Bidwell
Let's try to make this point as simply as possible: the President's economic policies are resulting in fewer people contributing to the economy and more contributors having to support freeloaders. This is the primary reason why, for the past five years, our annual economic growth has been in the 2% range instead of the 5% range we saw during the 1982 to 1984 recovery. Here's why:
If 100 people get together, form a society and all contribute to the economy, all working together to produce 1000 units of output, there are basically two options to divide the output. We could divide the output evenly, so that if 100 workers produce 1000 units, each worker receives 10 units. This represents an equal distribution.
In reality, this system has had only mild success and only in the short term, especially when societies are concerned with satisfying basic level needs like food, shelter and safety. Once past those needs the system fails because there is no incentive for an individual to work harder and increase her contribution, and the economy stagnates, like we see today in countries like Cuba and North Korea, and in some cases here at home.
Detroit's automobile industry is a great example of equal distribution going awry here in the United States. When describing the history of the UAW in a Wall Street Journal op ed on Saturday, John Schnapp said, "we highlighted its policy of demanding identical wages, hours and working conditions terms from all of the Detroit auto makers, regardless of their economic abilities."
Schnapp was a consultant from the firm coaching Nissan when it moved some of its operations to the states. The Japanese had to learn what you and I already know about the UAW... Those equal wages, equal conditions, and equal everything else didn't work out so well for the now boarded up bankrupt city of Detroit.
We are smart to choose a different way to compensate the 100 workers, which is theoretically how we do it in the U.S... to divide the output according to contribution, so that the greater the contribution the greater the output received (income). This provides incentive for everyone to produce more and, as a result, the economy grows.
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There is a problem though with those who, for whatever reason, cannot or will not contribute. Of the 100 people suppose five are unable to contribute because they mentally or physically can't. The remaining 95 people are compassionate so that they will give some of their output to those less fortunate. Now we have 95 people contributing instead of 100.
Then some individuals who have contributed little to the economy and as a result receive little output and income, decide they are better off not contributing at all and asking for the same level of output as those who cannot contribute. Another ten stop contributing. Now we have only 85 people contributing, but 100 people receiving output.
Then the current administration convinces more people to stop contributing and start pursuing their dreams, whatever they may be. So another ten people stop contributing. Now we have 75 people contributing instead of 100 so less output is produced.
We go from 100 to 75 by implementing initiatives like raising the minimum wage. The CBO just reported that raising the minimum wage will cost us 500,000 jobs...
The administration is pushing for a law so that, regardless of the contribution, each worker who does "work hard" should receive a minimum level of output. So it is decided that even if the value of a person's output is only two or three units, she should receive a "minimum wage" of at least five units. This again reduces what is paid to those who have actually earned it.
The small business can no longer pay some employees $8.50 and some 12.50 based on their contribution or merit... All the employees must receive at least $10.10, so the higher producing employee no longer has an incentive. More importantly, the owner will not rehire someone since he would be forced to pay the new employee $10.10.
In the end, with our example community of 100 people, 75 people produce while 100 people receive income and the economy cannot grow. Those contributing significantly are reluctant to increase their contribution, which slows the economy further. And we wonder why our GDP is 2% instead of 5%...Later this week, we'll get back to this discussion as we discuss the administration's efforts to narrow the wage gap for women. You won't want to miss this discussion...
Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Richard Stockton College.
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