Is President Obama really this ignorant of business and economics? Telling American employers to raise their wages sounds innocent enough, but it ceases to be innocent when people lose their jobs as a result.
In his State of the Union address, the President called for higher minimum state and federal wages and added, “I ask more of America’s business leaders to … raise your employees’ wages.”
This is not the first time a president has made this “request” of employers.
After the stock market crash of 1929, President Hoover began talking about wages. They needed to be protected from cuts, he said, and preferably increased so that consumer demand would increase. More consumer demand would supposedly get the economy through the storm.
As the economy sputtered and prices began to fall, the President acted on his pet theory. He began lobbying businesses not to reduce wages. Actually, he did more than lobby; he sent a clear signal that if his directive was ignored, the government might step in and legislate wages.
Businesses listened. But they also had their backs against a wall. With consumer prices falling, wage reductions were needed to protect profits. Without profits, a business fails, and everyone loses their job.
Faced with this reality but afraid to make any reduction in wages, businesses did the only thing they could do to try to stay afloat: they cut jobs. Millions were thrown out of work–people who might have kept their jobs at reduced pay but for Hoover’s intervention.
When the new Roosevelt administration came in, it embraced the same bogus economic theory. Prices and wages were both tightly controlled by the National Recovery Act. In a famous incident, Jacob Mageda, a New Jersey immigrant worker, was sentenced to jail for three months on a charge of pressing a suit for 35 cents, instead of the legislatively required 40 cents.
These policies had the paradoxical effect of making some Americans newly affluent even while throwing millions out of work. Since prices had fallen sharply, those who kept their jobs at the old wages could, in many cases, buy twice as much with the same money.
The Hoover/Roosevelt/Obama policy meant that some got a windfall, and others got destitution. Economic inequality sharply worsened. In general, the Roosevelt administration’s most powerful supporters, labor unions, saw to it that their members did not lose jobs, while those without unions were the ones laid off.
It is noteworthy that the same thing happened when the Obama administration bailed out General Motors. The non-unionized workers, even those in the most efficient plants, lost everything: jobs and retirement benefits. Unionized workers allied with the President kept both.
Hunter Lewis is co-founder of AgainstCronyCapitalism.org, co-founder and former CEO of Cambridge Associates, a global investment firm, and author of two recent books, Free Prices Now! about the Federal Reserve and Crony Capitalism in America: 2008-12.