Is raising the minimum wage to $15 an hour and tax increases good for the economy? Not according to history.

Joe Biden’s Economic Stimulus Plan includes $15 Minimum Wage and Tax Increases. The U.S. Congress hasn’t raised the minimum wage, currently at $7.25 an hour in more than a decade. Employers generally have to pay their workers the highest minimum wage prescribed by federal, state and local law. Since July 24, 2009, the federal minimum wage in the United States is $7.25 an hour although as of January 2020, there were 29 states and D.C. have a minimum wage higher than the federal minimum. The effective nationwide minimum wage is $11.80 as of May 2019.

Biden’s plan neglected an important consideration that wages are a cost of doing business. By demanding high wages, particularly when businesses are closing in a rapid phase or about to close, suffering from lockdown is the worst the government can do. It would be difficult for businesses to hire people. It will result in more business closings and mass unemployment.

It happened during the Great Depression when President Hoover demanded the same. Hoover’s mistake was to presume that high wages were the cause of American prosperity which was not. If high wages could produce prosperity on their own, we could eliminate world poverty by merely enforcing a minimum wage of $100 an hour. No intelligent person would support such a policy since the result would be unheard of unemployment levels and utter devastation to the economy.

President Hoover should have learned from President Harding, whose strategy for the downturn of 1920-1921 was to do nothing at all except to tighten the government’s purse strings by cutting spending. The economy was hopping within the year.

When President Harding took office on March 4, 1921, the United States was in a postwar economic decline. At the suggestion of its leaders, Harding called a special session of Congress to convene on April 11. When Harding addressed the joint session the following day, he urged the reduction of income taxes (raised during the war), tariffs’ increase on agricultural goods to protect the American farmer, and wide-ranging reforms like support for highways, aviation, and radio. Does that sound like President Trump, whose tax cut bolstered the economy to new heights during his term till the pandemic hit our shore? I give credit to who the credit is due.

Treasury Secretary Mellon also recommended to Congress to cut the income tax rates. He also asked to abolish the excess profits tax on corporations. The House Ways and Means Committee endorsed Mellon’s proposals, but some congressmen, who wanted to raise tax rates on corporations, fought the measure. Harding tried to compromise and gained passage of the bill in the House after the excess profits tax was delayed a year.

Mellon ordered a study that demonstrated that historically, as income tax rates were increased, money was driven underground or abroad. That is happening now as more and more companies are moving out of high-tax states like New York and California. Mellon concluded that lower rates would increase tax revenues. Based on his advice, Harding’s revenue bill cut taxes, starting in 1922. The top marginal rate was reduced annually in four stages, from 73% in 1921 to 25% in 1925. Taxes were cut for lower incomes starting in 1923. The lower rates substantially increased the money flowing to the treasury. They also pushed massive deregulation and federal spending as a share of GDP fell from 6.5% to 3.5%. It sounds like Trump’s policy again.

By late 1922, the economy began to turn around. Unemployment was pared from its 1921 high of 12% to an average of 3.3% for the remainder of the decade.

The misery index, which is a combination of unemployment and inflation, had its sharpest decline in U.S. History under President Harding up to that time. Wages, profits, and productivity all made substantial gains; annual GDP increases averaged over 5% during the 1920s.

Historians argued that “Mellon’s tax policies set the stage for the most remarkable growth yet seen in America’s already impressive economy. So does Trump’s.

That is the difference between Trump’s economic policy and Biden’s proposed economic plan. So would you embrace Biden’s economic plan? Whether you like Trump or not, he knew how the economy works. Some congressmen and congresswomen should go back to school and study economics 101.

Raising the minimum wages and tax increases have proven disaster results for the country, and history should teach us something. The government should know better than to impose the worst economic policies in history.

References:

Wikipedia

The Politically Incorrect Guide to American History by Thomas E. Woods, Jr.