The girlie-man approach to economics

Posted: Jan 04, 2006 12:05 AM

Gov. Arnold Schwarzenegger (R-Calif.) is feeling unpopular. His approval ratings have plummeted dramatically since four ballot measures he endorsed in the November special election went down to flaming electoral defeat. Since his election in 2003, his favorable rating has dropped below 40 percent.

 So Schwarzenegger has decided to do what all liberal Republicans do when the going gets tough: cave to liberal causes. To begin the new year, members of the Schwarzenegger administration announced that the governor would endorse the legislature's proposal to raise the minimum wage in the state of California from $6.75 per hour to $7.75 per hour.

 Conservatives have long known that Schwarzenegger is a social liberal. But if there were one issue upon which Schwarzenegger could peg his Republican self-identification, it was his fiscal conservatism. Schwarzenegger has long touted his love for the laissez-faire philosophy of Milton Friedman and Adam Smith. In a Sept. 24, 2003, editorial in The Wall Street Journal, Schwarzenegger explained that if elected, he would push for "removing, one by one, the innumerable impediments to growth -- excessive taxes, regulations and deficit-spending."

 Perhaps that strong fiscal libertarianism was meant only for show. Schwarzenegger's aides insist that the governor does not "prescribe political calculations to a public policy evaluation. … This governor does what he believes is in the best interest of the people of California and the economy of California." But it is hard to believe that the same governor who has twice vetoed proposed increases in the minimum wage has been convinced by all available evidence of his own error.

 Every reputable economic study demonstrates that raising the minimum wage leads to job loss. The reason is very simple: Businesses only have a certain amount of money they are willing to spend on jobs. If the wages for each job are increased by law (and not by the business' own cost-benefit analysis), fewer jobs will be available. The current minimum wage in the state of California is $6.75 per hour ($1.50 above the federal minimum wage). If a business can afford 30 employees at $6.75 per hour, it can afford only 26 employees at the increased minimum wage. Four people will have lost their jobs. If you are a business owner, do you do business in California, where the minimum wage is $7.75, or Nevada, where it is $5.15 per hour? Or how about Arizona, which has no state minimum-wage law at all, meaning that those businesses not covered federally under the Fair Labor Standards Act may pay whatever wages are agreed upon by the contracting parties?

 The California Chamber of Commerce estimates that increasing the minimum wage will add $2 billion in labor costs while discouraging businesses from coming to California. Raising the minimum wage has another effect, as well: It creates a greater incentive for California businesses to hire illegal immigrants. Illegal immigrants provide a deep source of labor for any business unable or unwilling to hire Americans at the minimum wage standard. And so more and more illegal immigrants cross the border to find jobs and/or take advantage of California's generous social safety net. The economic burden on citizens of the state of California continues to grow. Is this the economic revivification Gov. Schwarzenegger promised when he took office?

 It is especially strange that Gov. Schwarzenegger chooses to focus on the minimum wage issue now. Yes, his approval ratings are low. But the Democrat-dominated legislature has even lower approval ratings -- after the November special election, Californians disapproved of the legislature by an 80-20 margin. Capitulating to a legislature with basement-level approval ratings isn't only a bad policy move, it's a bad political move.

 But fear motivates liberal Republicans to do strange things. Faced with the prospect of an uphill battle, Gov. Schwarzenegger is retreating rather than advancing. In that September 2003 Wall Street Journal editorial, Schwarzenegger criticized then-Gov. Gray Davis, stating: "Mr. Davis says he wants jobs, but he has done everything possible to chase away job creators. Thanks to the economic policies of this administration, for the first time in California history, more native-born Americans are leaving this state than are moving here. No one would confuse the destructive economic policies of Gov. Davis and Lt. Gov. Cruz Bustamante with the pro-growth ideas of Milton Friedman or Adam Smith."

 Well, Gov. Schwarzenegger, no one would confuse adding additional wage regulations with the axioms of Friedman or Smith, either.