There’s been a lot of talk about raising the minimum wage over the last decade, and that’s intensified dramatically in the last few years. Last week it may have reached peak ridiculousness when Rep. Barbara Lee proposed a $50 minimum wage as a way to “combat inflation” during a debate last week.

During the debate, Ms. Lee called out, “Do the math!  Do the math!”

But has she actually done the math?  If so, she didn’t care to show her work, which would be the basics of any proposal that involves financial orchestration.  One would also have to wonder, has this candidate ever signed her name on the front of a check (a payroll check as an employer)?  It’s easy to create media buzz about irresponsible fiscal mandates when it’s all about other people’s (business owners) money and not yours.  It's pretty much the way all politicians throw money to the wind, and the debt winds up on the backs of the citizen taxpayer.

While dismissing this as just another politician pandering for votes may be tempting, I wouldn’t make that assumption because data shows it’s a different and much larger problem.

Yes, Lee is absolutely pandering for votes, but she’s doing so because she, like a staggering percentage of Americans, lacks an understanding of financial literacy. That fact is exactly why consumer debt is at an all-time high, savings are at an all-time low, and voters are demanding a repeat of the same fiscal policies that led to today’s out-of-control inflation. After all, who’s counting (the debt in trillions of dollars)?

Look, there’s no denying that wages have been stagnant for a long time, so it's no surprise that people are hurting in this economy and looking for solutions. Americans are essentially being squeezed on both sides, by low wages and high costs. It’s an untenable situation for a lot of people today. But arbitrarily raising the minimum wage would be disastrous.

294% INCREASE

In reality, wages are just one variable in our economy, but they have an oversized impact on the entire economy. This is because labor costs can account for as much as 70% of the costs involved in running a business. To put this in perspective, at the highest minimum wage in the US at $17 in Washington DC, a new $50 minimum wage would equate to at least a 294% increase in labor costs, and that’s just counting the people making minimum wage.

By increasing the minimum wage, employers would also be forced to increase wages across the board. This would bankrupt most small businesses overnight. Some people don’t think this will impact them because they don’t run a business, but they don’t realize that small businesses provide 99% of jobs in this country.  Without private businesses, the government would be in charge of all commerce…welcome to Venezuela.

It’s not just that the economics of a dramatic wage increase won’t work as intended—numerous things are also impacted downstream. For example, business owners would be forced to raise prices by an equally dramatic percentage to stay afloat, but the problem is consumers don’t have unlimited funds, so they’ll have to start cutting back on their spending. This creates a vicious downward spiral for everyone.

Now, if you’ve spent any time on social media, you’ve probably seen the comments lambasting business owners with claims like, “If you can’t pay more, you deserve to go out of business,” but these people fail to understand how the economy works. Again, this comes from a lack of financial literacy.

MARKET-DRIVEN

Our economy is based on a voluntary exchange, where consumers buy the products and services they feel best suit their needs and budget. That means wages must be based on what consumers are willing and can pay for these products and services. You can’t simply raise prices infinitely and expect consumers to foot the bill—they will pay what they feel is fair and by necessity, and not much more. This is the real world.

The real problem isn’t wages, though. That’s just a symptom of the actual problem. Wages have stagnated because of inflation, driven primarily by rampant government spending. Spending programs like PPP loans, COVID stimulus, bank bailouts, and cash for clunkers, for example, have diluted the value of the US dollar, which is why the cost of everything has gone up. Actually, to be more accurate, while prices have mathematically gone up, it’s because the dollar's value has plummeted, so purchasing things requires more money. If you purchased the same product ten years ago and today using a tangible asset, like gold, it would require about the same amount of gold for each transaction. This highlights the fact that inflation is the real culprit.

At the end of the day, it all comes down to financial literacy. No one financially literate would push for the fiscal policies that led to today’s inflation, and they would hold elected officials proposing these policies accountable.
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Dr. David Phelps created Freedom Founders to help its members achieve the freedom they wanted in their lives by building the necessary financial foundation. He is a noted financial expert who is regularly cited by the media, and recently helped the FL Dept. of Education develop its new financial literacy curriculum.