BREAKING – It is very difficult to model the world’s largest economy.
I get it, Macroeconomics is hard. It’s hard not only because of the math and statistics but it’s hard because Macroeconomic models must attempt to model one of the most difficult variables – human decisions. These models are routinely asked to predict how people will alter their saving and spending habits based on a tweak of a minor variable (like the minimum wage). I doubt there is any group that can accurately do that but I’m quite certain that a research arm of our Federal Government has about a 0% chance of getting this part right.
So when the Congressional Budget Office (CBO) asked the question – What would happen to US employment if we raised the minimum wage to $10.10? – We got this answer (emphasis mine):
“Effects of the $10.10 Option on Employment and Income. Once fully implemented in the second half of 2016, the $10.10 option would reduce total employment by about 500,000 workers, or 0.3 percent, CBO projects. As with any such estimates, however, the actual losses could be smaller or larger; in CBO’s assessment, there is about a two-thirds chance that the effect would be in the range between a very slight reduction in employment and a reduction in employment of 1.0 million workers (see Table 1).”
The 43 page CBO report basically says this – There’s a 67% probability that job losses will be in the range of 0 to 1 million 2 years after raising the minimum wage to $10.10.
Wow…..How much money did we spend to generate this report?
I’m no fan of raising the minimum wage ANY, never mind increasing it 39%. I do believe that doing so would be very detrimental to the US economy and yes, we’ll lose tons of jobs. So I agree with the CBO findings but I can’t bring myself to treat this report as some economic gospel. Yes, let’s continue to hammer the Left when they attempt to push legislation to raise the minimum wage but using this CBO report as our only weapon is not the best strategy. When someone makes a prediction and says that the margin of error is +/- 100% then I take that report with a huge boulder of salt.
Sidebar prediction from me that requires zero tax payer dollars and is just as accurate as this latest CBO report – On February 18th 2016, the high temperature in my city in South Carolina will be 50°F and there is a 67% chance the high temperature will be in the range of 0° F and 100° F.
I do, however, think this CBO report can teach us something very important – The Federal Government shouldn’t be tweaking variables in our economy in the hopes of manipulating its outcomes.
It’s a far wiser course of action to keep the Federal Government out of the economy as much as possible and let the “Invisible Hand” do its thing. The Free Market is like a supercomputer that not only analyzes the variables in current macroeconomic models but it also has a way to accurately account for human emotion/decisions because these individual decisions are at the heart of the Free Market’s Invisible Hand. Consumers making individual choices every day will cause the Invisible Hand to pick winners/losers, set prices for goods/services, make innovation more successful by determining what products get developed and set salaries for every job in every industry.
The Invisible Hand is like magic and best of all it doesn’t require any big spending stimulus bill or massive legislation bill that polarizes the nation. We should get back to that, right?