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California’s Crony Capitalist Minimum Wage Law

On April 1, California raised the minimum wage for large fast food restaurant franchises to $20 an hour. This law will threaten seven hundred thousand jobs by destroying the state’s food franchising business; however, there is one notable fast food franchise exempted from this minimum wage hike: Panera.

Greg Flynn is the second-largest Panera franchisee in the world, but he is also known for his close relationship with California governor Gavin Newsom. This relationship stretches back to their high school years and presently takes the form of support and donations to Newsom’s political campaigns. With this close relationship well-documented, it is clear that there is more to this exception, as a recent article by Bloomberg speculates.

When pressed on this exemption by a number of California Republicans, the Newsom administration denied any crony dealings, labeling these accusations as “absurd.” The administration maintains that Panera will not be exempt from the law. To make matters worse, Flynn had met with Newsom’s staffers prior to the final passage of the bill and was allegedly surprised that the exemption made it into the final version of the bill. There is one thing that is not surprising about this ordeal and that is how much Newsom and Flynn are denying accusations of cronyism. They would deny collaboration under any circumstances no matter how obvious it may seem.

The bill provides that all fast food restaurants pay the new minimum wage, defining “fast food restaurant” as “a limited-service restaurant in the state that is part of a national fast food chain”:

“Fast food restaurant” shall not include an establishment that on September 15, 2023, operates a bakery that produces for sale on the establishment’s premises bread, as defined under Part 136 of Subchapter B of Chapter I of Title 21 of the Code of Federal Regulations, so long as it continues to operate such a bakery. This exemption applies only where the establishment produces for sale bread as a stand-alone menu item, and does not apply if the bread is available for sale solely as part of another menu item.

This certainly sounds like Panera, right? According to Panera’s own website, they do have a bakery that has numerous stand-alone bread items for sale. Additionally, some menu items—such as the French baguette—are described as “freshly baked,” implying that the so-called bakery produces the bread for sale on the premises.

The governor’s office states that the fact that Panera mixes dough off-site disqualifies Panera from being exempt. However, given these excerpts from the law, it is not clear that such a fact would disqualify Panera. This would further raise the question of who the exception is even for. The exception did not just appear in the law; it was deliberately inserted. The exception should not just be taken for granted as Newsom suggests us to. Newsom simply dismisses this exception as “part of the sausage making” legislative process—whatever that means.

What is more likely is that Flynn had this condition inserted into the bill and crossed his fingers that it would not garner much attention from the press or political opponents. Now that it is receiving a lot of attention, Flynn can maintain plausible deniability given that he, as far as we know, never personally met with Newsom about the bill. Flynn may raise his company’s minimum wage voluntarily to “prove” that he is not exempt and then, when the attention from the press subsides, loosen the wage requirement and begin hiring people below the state’s minimum wage. He has already announced an increase in the minimum wage, but will it remain? It solely depends on whether Flynn believes he can get away with lowering the wage or not.

How should this be analyzed?

As defenders of the free market, libertarians are against wage regulations. This law will, if followed, generate unrivaled labor surpluses, otherwise known as unemployment. Over seven hundred thousand jobs will be threatened, and the state’s food franchising system will be in dire straits.

An article published by Reason summarizes the potential consequences of this bill. One potential consequence is that fast food restaurants across the state may enter the bakery business to escape having to pay a higher wage. This may not be difficult given the presence of many bread-related items on the menu at such places like McDonalds. If nothing else, further automation will occur, and at worst, franchises will be driven out of business, creating food deserts and giving the remaining restaurants artificial advantages—monopolies.

Given the immense cost of this law, it is understandable that Flynn might have pushed for this exemption, and libertarians should not blame him. In fact, libertarians should welcome such exemptions in laws. If someone can escape the aggression of the state by inserting an exemption for themselves into law, more power to him. Some may interpret such action as “unfair”; however, there is nothing fair about aggression. If some aggression can be eliminated without imposing additional aggression on another, it may seem unfair, but it would be a good, ethical act.

However, there is something else to consider. Should politicians have pushed for this exemption to be added to the law? That is not as obvious. The Bloomberg article that broke this story claims that if this exemption were not in the bill, Newsom would not have supported it. The article states that the exemption “was adopted as a means of winning the governor’s support for the legislation, said a person with knowledge of the discussions.”

In this case, the exemption sufficiently decreased the cost of passing the bill. Disallowing or avoiding such exemption granting from the onset would have eliminated the necessary condition for Newsom signing the bill into law. The result? The bill would not have passed, and California would be in a much better situation.

Therefore, exemption granting must be taken on a case-by-case basis. In this situation, the choice was never between a higher minimum wage and a higher minimum wage with some exemptions. The choice was between a minimum wage increase with exemptions and no minimum wage increase at all. This bill should not have been amended to include such an exemption.

The silver lining to all the attention this bill is receiving is that politicians are taking actions to ameliorate its negative consequences. For example, in light of the Panera controversy, the California state legislature is passing more exemptions to the minimum wage. Let’s hope that they continue passing these exemptions, but let us also not forget the controversy surrounding the bill.

Will this exemption pay off for Flynn in the long run? Perhaps. However, this kind of cronyism should not be surprising. Newsom and the California Democrats will continue to support laws that drive their political enemies out of the state in search of greener pastures. This law is no different. Their political control of the state will strengthen, and the people will be made worse off. California will unfortunately continue to be a cautionary tale of the consequences of interventionism.

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