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President Obama’s Policy Problem

In a recent speech, President Obama chided American businesses for merging with international companies as a way to decrease their American tax burden. “I don’t care if it’s legal. It’s wrong,” he stated.

The problem here, of course, is that when American corporations merge with international businesses, jobs are transferred overseas, where labor is cheaper. This is a perfectly legal practice that many businesses continue to make to help lower their overall costs to provide goods and services in the market.  It makes sense, from an economic perspective—go where the labor and production will be cheapest. Unfortunately, many times this means businesses choose not to remain in America.

What President Obama fails to see is that he has supported many of the very policies that have encouraged businesses to take their production elsewhere. In this year’s State of the Union address, he called for a federal minimum wage increase from $7.25 to $10.10 per hour. In 2013, he called for minimum wage to increase to $9.00 an hour.

[pq]Raising wages only decreases employment opportunities in an already competitive market.[/pq]

Mandating that companies increase minimum wage for minimally skilled workers is not an incentive for a business to keep their production in America. In fact, it’s quite the opposite. The big corporations, who can afford it, will move some of their production costs elsewhere. Meanwhile, smaller family-owned businesses will have to lay someone off, or not be able to buy the second location for their blossoming store. This stifles job growth and perpetuates the stagnant economy.

Every time a new celebrity shills for the minimum wage, the overall message is that it will help alleviate poverty. If only it were that simple.

Writer Cathy Reisenwitz explained the problem with minimum wage increase excellently over at TownHall. “Raising the minimum wage only works to alleviate poverty if two things are true. First, it must be true that low wages, and not unemployment, is the biggest factor in poverty. Second, it must be true that raising the minimum wage does not, in fact, lead to decreased employment.”

Unfortunately, neither of those assumptions is true in economics. The bigger problem here is employment opportunities, as opposed to a low wage itself. Raising wages only decreases employment opportunities in an already competitive market, and makes the unemployed, poverty-stricken citizen’s job hunt even harder.

So, while President Obama may think the minimum wage is too low and not like that companies merge internationally to decrease their tax burden, the best way to reverse these trends is to decrease, not increase, regulations and taxes. So, essentially, the opposite of what he is pushing for now.