In a radical shift, economists have begun to subscribe to an emerging economic theory called “common sense.”
This theory is based upon two new concepts: “reality” and “facts.”
The idea behind common sense economics is that we should only institute policies that work. Policies that do not work, on the other hand, should be abandoned.
Since this is a new economic theory, those who believe in its principles are few and far between. Nevertheless, occasionally a study that adheres to its teachings will be published.
A recent paper from the National Bureau of Economic Research is the newest example of common sense economics in the public sphere.
See what it concluded about Seattle’s 2016 minimum wage hike:
From the National Bureau of Economic Research:
This paper evaluates the wage, employment, and hours effects of the first and second phase-in of the Seattle Minimum Wage Ordinance, which raised the minimum wage from $9.47 to $11 per hour in 2015 and to $13 per hour in 2016.
Using a variety of methods to analyze employment in all sectors paying below a specified real hourly rate, we conclude that the second wage increase to $13 reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs increased by around 3 percent.
Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016.
Evidence attributes more modest effects to the first wage increase. We estimate an effect of zero when analyzing employment in the restaurant industry at all wage levels, comparable to many prior studies.
Indeed, this is a perfect example of common sense economics in action.
When the minimum wage is set at an above-market rate, businesses need to take action to offset the costs. Often, the actions do not help low-wage workers.
For many small businesses, which can barely stay afloat in the first place, that means cutting back employee hours to save money.
In many instances, prices rise as well. This is because common sense economic theory states that businesses which spend more end up charging more.
Fortunately, common sense economics presents a catch-all solution to economic woes: let the free market take its course.
Common sense economics states that the best way to fix economic problems is to let the problems fix themselves. This operates off the fundamental belief that the people, rather than the government, know what is best for themselves.
According to this solution, government should limit its level of economic interference. Only a government-free economy will operate as it is supposed to, with wages naturally increasing and prices naturally decreasing according to the will of the people.
Common sense economic theory, however, is still wildly unpopular within progressive circles. Liberal politicians and activists alike are reluctant to accept its principles, and it looks like it might be a while until their anti-common sense stigma goes away.
Thankfully, experts believe that President Trump himself subscribes to common sense economic theory. Many are hopeful that he will use the theory’s principles to indeed Make America Great Again.