02/03/2014 06:37 pm ET Updated Apr 05, 2014

Rand Paul, You Failed Econ 101. Supply, Demand and the Minimum Wage

Econ 101
When you raise the price of something, the supply;
a.) decreases
b.) may stay the same
c.) increases
d.) it depends
e.) Rand Paul is wrong

In his January 28th interview with CNN's Wolf Blitzer, Rand Paul stated that, "If you increase the price of something, you get less of it." Really. Perhaps he learned this from his investment guru, and advisor to his father, Peter Schiff - whom I'm hoping will become a regular on Jon Stewart's The Daily Show - spouting the same nonsense to Samantha Bee in a must-see interview . Let's take the econ question at hand.

Much to the chagrin of efficient market theorists, who believe economics is a pure science and live in an abstract world, markets are often neither rational nor efficient. There are no laws of economics. In reality, economics falls somewhere between a social science and a liberal art. Let's plug housing between 2001 and 2008 into the above problem. As the prices of housing increased, supply increased, we got more houses.

Increasing prices can create new demand. As housing prices increased, we got more mortgage-backed securities (MBS), more collateralized debt obligations (CDOs), more synthetic MBS and CDOs at increasingly higher prices. We created homebuyers. During the same period, the average pay for Wall Street bankers rose substantially, but did we get fewer bankers? No. We got more bankers, many more bankers, and banking's share of GDP nearly doubled.

If you don't like that example, let's take coffee, or water. Two decades ago, both coffee and water were virtually free. Starbucks raised the price of coffee dramatically, leading to every main street and corner in America offering Starbucks coffee at $2 or more per cup. Now you need to go to a government-subsidized McDonald's or Walmart to get a cup of coffee for a buck. Over the same time period, pricey water in little bottles became ubiquitous.

How, you may ask, are McDonald's (fast-food companies) and Walmart government subsidized? According to a study from the University of California-Berkeley and the University of Illinois at Urbana-Champaign, more than half of fast food workers rely on some form of government assistance like SNAP food stamps or Medicaid to survive, and the total tax-payer subsidy exceeds $7 billion annually. The number of Walmart workers in the same situation is enormous.

Now, a Mr. Forbes argues companies are merely paying what workers are worth. That thesis is easily disproven by the fact that the government compensates these same workers as well through the Snap benefits and Medicaid, so their "worth" must include that value. In truth, Mr. Forbes, it has nothing to do with the worth of a worker (or banker, for that matter), and everything to do with price.

We could look at oil, or any commodity, or the South Sea bubble, to witness that increasing prices can lead to increasing supply and demand, in many cases, massively. Free markets are a theoretical abstraction. Real markets for labor or anything else operate in a complex world of laws and regulations upon which their health and prosperity depend.

Economics studies are exercises of the imagination when not based on real data. Real data on raising the minimum wage, and its impact on jobs is worth examining. We are not talking about raising wages to $100 per hour, just a marginal increase. Rand Paul, Peter Schiff and the other misinformed, say, "virtually all the studies show" that if you increase wages, you get less jobs. Economists overwhelming disagree with him, (note, economists rarely agree on anything) as indicated by a 2013 survey by the University of Chicago's Booth School of Business in which leading economists agreed by a nearly 4 to 1 margin that the benefits of raising and indexing the minimum wage outweigh the costs.

For further data-based research on the lack of an impact of wage changes and differentials on employment, please see the 2010 comprehensive paper by Arindrajit Dube, T. William Lester, and Michael Reich, examining minimum wage effects across state borders, using contiguous counties. Also, read the seminal 1994 case study by David Card and Alan Krueger comparing minimum wages and employment between Pennsylvania and New Jersey, where NJ raised the minimum wage and data was collected across the fast-food industry. There is no indication that a rise in the minimum wage reduced employment in any of these studies.

Human tendency is to mistake correlation with causality - we like situations where, if this happens, that happens. But changes in employment are impacted by a complex series of factors. Mathematically speaking, the problem is a multi-variable equation that does not lend itself to simplification, and in abstract, cannot be reduced to two variables, wages and jobs. Meaning, it's likely not solvable in the abstract. We must trust the data, and the data tells us that the benefits of raising the minimum wage far outweigh any theoretical costs.

When an antiquated economic theory is refuted by data, we must go with the data, and also trust our instincts. What's your gut tell you about the potential impact of raising the federal minimum wage from $7.25 to $10 per hour?