Myth: If prices are too high, the government should step in.
Fact: The government cannot possibly know what prices should be because it doesn’t know what the costs are to produce a product.
Overview:
When a business decides what to charge for a product it produces, it takes many things into account. Primarily, it considers the cost to produce it – raw materials, equipment, human labor, storage, distribution, marketing, sales staff, facilities, administrative overhead, taxes, licenses, fees, etc. It also considers what its competitors charge for the same or similar products. The price it sets must cover all of its costs and at the same time be equal to or less than the price of its competitors in order for consumers to purchase it. If the price is too low, the business will not be able to cover its costs and it will eventually fail. If the price is too high, there will be few, if any, customers and the business will also fail. So clearly prices are extremely important. Government pricing mandates, often sold as “compassionate,” have unintended consequences that make everyone worse off.
The Minimum Wage
Myth: The minimum wage is too low to support a family. It is not a livable wage.
Fact: The entry-level wage paid to new workers is not meant to support a family, it is intended for a person new to the workforce to learn new skills, most importantly how to be a good and responsible worker. Once that happens the worker will contribute more, and therefore deserve to be paid more. A minimum wage that is too high simply results in the employer either not hiring the worker, or having to raise prices. This causes inflation, which simply erodes the increased wage to begin with. It is a zero-sum game.
Every single thing that is purchased by anyone has a price. That includes human labor. The price which is paid may be called wages or salary; it is nevertheless the price of the labor. The price of labor is primarily determined by the skills necessary to perform the job. Jobs that require lower skills pay less than jobs that require more skills; it is important to remember that it is the skills for the job that determine what the price of the labor will be. If a company does not pay enough for the skills they are trying to hire, no one will apply for the job. If they overpay, the cost of their product will be too high and they will have to charge too much to remain competitive. More/Less...
Minimum-wage jobs are low-skill jobs. They are the type of job that most people start out in: fast food, restaurant server, lawn mowing, clerical, retail sales, etc. These jobs allow people to build their skills, which will help them get better-paying jobs later on. What happens when the government mandates a minimum wage? This type of price control forces business owners to either raise prices or, to keep their costs the same, they can reduce the number of hours their employees work, reduce the number of employees overall, or explore other options to keep costs down such as customer self-serve or automation. If prices go up, it makes inflation go up. If employees bring home less pay or lose their jobs, they are worse off. And they don’t get a chance to get the skills they need to get a better job. So minimum wage mandates hurt everyone: consumers through higher prices, businesses through higher costs, and employees with fewer jobs or lower take-home pay.
Rent Control
Myth: When rents are too high, government must step in and establish controls. Rent controls will make the price of housing affordable and fair with no other unintended effects.
Fact: Rent controls cause property to deteriorate and landlords to go bankrupt.
Rent is the price paid to “borrow” property. You can rent an excavator to landscape your yard, furniture and tableware for a wedding celebration, or a truck to move. The key thing to understand is that you are paying for the temporary use of property that you do not own; someone else owns the property, and you are compensating the owner for the use of the property by paying rent. More/Less...
When we sign a lease to rent a living space, we are doing the same thing – borrowing someone else’s property (the “landlord’s”) for a period of time. The lease terms specify the price (rent) and a period of time that the price will remain the same, generally month-to-month or annual. If it is month-to-month, the landlord can change the rent whenever they want. If it is annual, the monthly rent cannot be changed until the anniversary of the lease.
Individuals or businesses that own residential property which they offer for rent have the same kinds of expenses as businesses which offer equipment or vehicles for rent. They had to acquire the property, and often have mortgage loans on which they must make monthly payments. They must pay taxes, fees, and insurance. They must maintain the property in a condition that not only meets all applicable legal requirements, but also ensures that people want to live there.
When the government decides how much landlords can charge, the landlords often can’t cover their costs. Taxes and mortgage interest may have risen, along with insurance premiums. They can’t afford to improve or maintain their property, and may actually be incurring a loss. While renters may be able to keep their payments low, they end up living in spaces that are deteriorating and becoming less “livable” over time. Both landlords and renters lose with these mandates.
Call to Action:
Educate your family and friends about the negative impacts of price controls, including the examples of the minimum wage and rent controls
Know where your representatives (local, state, and national) stand on these important issues
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