You Can’t Legislate Prosperity

I say it all the time, “The Number 1 rule of economics is people respond to incentives.”  Anytime legislation is passed that requires employers to do something in regards to its employers the employers will find the least costly option available.  The law requiring companies to pay time and half for any hours worked over 40 is a perfect example.  I can’t tell you how many employers I worked for that made 40 hours an absolute maximum. No matter how good the intentions are of politicians, you can’t legislate prosperity.  Employers have a limited budget to spend on personnel and if spending must be increased in one segment of the personnel folder, it will be reduced in another segment.

The Affordable Care Act’s Attempt To Legislate Prosperity

The Affordable care act requires companies with over 50 employees to offer health insurance for full time workers, those who work over 32 hours per week.  So far I have seen three major responses to the affordable care act that instead of helping employees actually hurts them.

1. Reducing employees hours: Between 2004 and 2007 I worked in the service industry.  I routinely worked 39.9 hours, why? because if I went over 40 hours the company would be penalized by the federal government by having to pay me an extra $3 per hour.  What do you think happened to all the employees who were in this boat when the ACA passed, do you think they got health insurance from their employers and lived happily ever after?  Not a chance.  The vast majority of service sector jobs reduced the hours for their “part time” workers from a max of 40 hours per week to a max of 32 hours per week.  Not only did workers not get health insurance, they also got a 20% cut in pay.  Now in order to keep their earnings stable they had to get a second job, and guess what? these workers won’t see a dime of overtime because they are working for 2 employers. Some employers have even cut their part time workers to 25 hours to ensure they won’t go over 32 hours.

2. Cutting staff: For this to work an employer would have to be pretty close to the cutoff.  Tell me this, if you had 55 employees and your costs would increase substantially because you had over 50 employees what’s the most logical solution?  Looks like a few guys are getting fired and the rest will be working a bit harder.

3. Offering extraordinarily overpriced insurance:  This is my favorite right here.  One of my employers offers health insurance to stay compliant with the ACA.  The average wage for the people in my department is $13.50 per hour, which works out to $540 per week.  When I received my paperwork showing the healthcare options I couldn’t help but laugh, because it would be mathematically impossible for any of the workers to be able to afford it.  The plans for an individual ranged from $132 – $166 per week and family plans were $372 – $467 per week.  This is 25% of gross pay for the least expensive individual plan and 69% of gross pay for the least expensive family plan. Obviously no one is signing up for this plan.

Yes, employees have the option to look for a better job and the option to decline the employer offered health insurance and sign up through the health care exchange, but why should they have to?  When the entire point of the law was to make things easier for lower income people who can’t afford health insurance it’s insane that low income workers have had to adjust so much because of the government bureaucrats who were trying to help.

Minimum Wage Law’s Attempt To Legislate Prosperity

I’ve written about the minimum wage before, and once again the debate over the minimum wage has come to the forefront in today’s economic discussions.  The people who are most vocal for a change are asking for the minimum wage to damn near double to $15 per hour. Personally I would like to see the minimum wage tied to inflation so we don’t have this debate on a constant cycle.  What do you think would happen if the minimum wage next month jumped to $15 an hour? or $25 per hour for that matter?  Once again the fix is short sighted.

For starters, many companies would shut down.  It simply isn’t possible to pay people these wages in some industries.  Other companies would adapt and automate processes that had previously been done by humans.  Bag boys are virtually non-existent, self check out lanes are increasing, and some fast food joints now have computer terminals for customers to input their own orders.  All of these responses to an artificial wage hike would increase unemployment.  When you increase the price of something, you lower the demand.

People who already have jobs above minimum wage would be hurt the worst.  How would you like it if over the past 5 to 10 years you worked for a company and took on slightly higher wages and responsibility, only to have someone coming in the door today with zero experience earning the same amount as you do?  This happens all the time when minimum wages are hiked, employers are forced to give new employees more money, but existing employees who are above minimum wage rarely see a wage increase. This lowers the gap between experience valuable employees who take on leadership roles and brand new employees.

Perhaps the people hurt the most are those who have yet to enter the job market.  When there isn’t a shortage of labor and the price of labor is relatively high,  companies will be less apt to hiring kids in high school with no job experience.

Legislation That Could Increase Prosperity:

So we discussed a couple things that don’t work, but what could government agencies do to help increase prosperity for all Americans?

• 1. Repeal Obamacare: This would allow workers to go back to 40 hours per week instead of 32.
• 2. Balance The Federal Budget: Saddling our children and grandchildren with $20 Trillion of debt is completely unacceptable.  We need to balance the budget and work on paying this enormous debt down. There may be some initial pain to the adjustment of lower government spending and higher taxes, but down the road a nation not saddled in debt is much more likely to be prosperous.
• 3.  Make Financial Literacy A Required Class in Grade 7, 9, and 11. The world of personal finance has become much more complicated than it used to be.  At the same time there are also a plethora of amazing tools to make managing finances simpler.  A strong financial education is needed for all students in America.
• 4.  Improve the retirement savings playing field by increasing the IRA contribution level to that of the 401K. Or…eliminate the long term capital gains tax in its entirety,  essentially making ALL retirement savings a Roth IRA.
• 5. Return us to sound money:  In 1971 before we exited the gold standard, minimum wage was $1.60, which would be the equivalent of $9.40 today according to an online inflation calculator….however in 1971 US currency was tied to gold and the exchange rate was $35 per ounce, which means workers earning minimum wage earned 4.57% of an ounce of gold per hour.  As of November 2015 with gold prices at $1,080 per ounce, the minimum wage would be $49 per hour!

When it comes down to it, we can’t rely on Washington to bring us to prosperity, we need to do it on the individual level for ourselves. You want to be more prosperous, work more, increase your delta, and invest.

 What do you think of our governments attempts to legislate prosperity? What role, if any, do you think the Federal Government can/should play in increasing prosperity for its citizens?