Your government is failing small business. Americans looking for work just had their chances for employment greatly reduced. This Friday the minimum wage will increase 41% while unemployment is at a 26-year high. How the current minimum wage law came to be is an example of government legislation creating unintended consequences and essentially bankrupting small businesses, the lifeblood of our nation’s economy.
In 2007, the Fair Minimum Wage Act (FMWA) was introduced by George Miller (D-CA) and was passed by the Democratic Congress led by Speaker Nancy Pelosi. It then went before the Senate and was rejected in a vote by 43 Republican senators calling for more tax cuts for small businesses.
Republican senators knew how damaging wage control would be on small businesses. But they kept it alive with the following give-and-take play. To save face with small business owners, Republicans proposed The Small Business and Work Opportunity Tax Act of 2007 (SBWOTA) promising $5 billion in tax cuts and incentives over a 10-year period. At the same time, to dodge anger from minimum wage laborers, they gave Democrats the green light on FMWA and it was passed in the Senate by a vote of 94-3. Both FMWA and SBWOTA were part of the U.S. Troop Readiness, Veteran’s Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007, signed by George W. Bush on May 25, 2007.
Fast-forward 18 months and over 100,000 companies-about one in every 270 American businesses-have landed in bankruptcy court according to data compiled by Oklahoma City-based Jupiter eSources, which tracks bankruptcy filings through its AACER database. That number is grossly understated.
Regarding The Myth of the Disappearing Business Bankruptcy by Robert Lawless and Elizabeth Warren, John Tozzi of BusinessWeek writes, “Basically, the official statistics collected by the federal bankruptcy courts show that business filings dropped from 18% of all bankruptcies in 1985 to 2.3% in 2003. That helped create a narrative that the overwhelming majority of bankruptcies were consumers who got themselves too deep in debt, with a handful of big business failures that ended up in bankruptcy court. ‘The entrepreneur who gambles on a new business undertaking seems to have virtually disappeared from the bankruptcy system,’ Lawless and Warren wrote.” They continue by explaining that ambiguous cover sheets on bankruptcy petitions led to the court statistics systematically counting business-related bankruptcies as consumer filings.
The real number of bankruptcies over the last 18 months, I estimate, is a lot closer to 650,000 or 1 in 41. The 10 years in tax cuts and incentives sponsored by the U.S. Senate are of no use to them now. The kicker is that we now have wage controls that hurt the businesses that actually survived.
As the Cato Institute rightly says, “Simply stated, if the government coercively raises the price of some good (such as labor) above its market value, the demand for that good will fall, and some of the supply will become ‘disemployed.’ Unfortunately, in the case of minimum wages, the disemployed goods are human beings. The worker who is not quite worth the newly imposed price loses out. Typically, the losers include young workers who have too little experience to be worth the new minimum and marginal workers who, for whatever reason, cannot produce very much. First and foremost, minimum-wage legislation hurts the least employable by making them unemployable, in effect pricing them out of the market.”
Unfortunately the unintended consequences of government legislation cannot be undone. A lot has happened in 18 months. When George Miller (D-CA) introduced FMWA, his state of California wasn’t writing IOUs. Back then Congress was looking at a 4.5% unemployment rate, not the current 9.5%. Thanks to a higher minimum wage control, that number is much more likely to increase.
E.J. Smith is Managing Director of Richard C. Young & Co., Ltd. an investment advisory firm managing portfolios for investors with over $1,000,000 in investable assets.