Gerald (Jerry) Zezas

Home » Monetary Policy

Category Archives: Monetary Policy

The Facts About Minimum Wage

The minimum wage was enacted in 1938 as part of the National Recovery Act for the express purpose of increasing the salaries of workers to that of a living wage and “to keep them out of poverty”. No mention was ever made of the minimum wage being for college kids or people just starting out. Its sole purpose was to keep companies from underpaying workers who had no other options in the job market, which was a common occurrence at the time. It was challenged in the Supreme Court as unconstitutional. The court upheld the law in 1937.

It started out at $.25 per hour and is currently $7.25. According to the Bureau of Labor Statistics, 4.4 million American workers (out of 102 million employed) receive minimum wage. More than ½ of them are under 25 years old. Texas, Alabama, Mississippi and West Virginia have the highest percentage of workers making minimum wage. All of those states have Republican governors, all of whom are against raising the wage. So, the states with the most workers to benefit from an increase in the minimum wage have governments which don’t want their workers to receive it, although West Virginia did pass an increase to $8 over their governor’s objection and “no” vote.

In 1978 the minimum wage was $2.65. It was incrementally increased every year, until 1981, to $3.35 after which the country saw a dramatic increase in economic activity, for which Ronald Reagan is typically given credit by Republicans. The point is not to debate who was responsible for this economic upturn, but simply to illustrate that after a 26% increase in the minimum wage, prices didn’t “skyrocket” and industry didn’t have to lay off millions. Quite the contrary, the economy expanded and unemployment was under 5% for most of the next 10 years. This is in direct contrast to the Republican argument that raising the minimum wage kills jobs.

The next increases occurred in 1991 through 1997, when it reached $5.15, a 53% increase over the 1981 level. Any student of history is quite aware that the US entered the largest economic expansion in its history during those years, for which, conversely, Democrats like to give Bill Clinton accolades for having managed. Once again, this is not to decide who was responsible for the economic activity, but whether or not the huge increase in the minimum wage somehow caused prices to “skyrocket” and companies to lay off workers. As in the 1980s, the increase in minimum wage did nothing to hinder the huge economic expansion and under-5% unemployment that we all enjoyed for most of the 1990s.

Finally, the minimum wage started its latest climb in 2007, when all with reasonable memories will remember was during the largest recession since the 1930s. This was done under George Bush, who was President at the time. It went to its current level of $7.25 in 2009. The period between 2007 and 2009 was one of weak economic recovery, with little growth, but which has turned into a huge economic expansion, which has continued to this day, with the unemployment rate now at 5.4%. This, after the minimum wage has gone from $5.85 in 2007 to $7.25 today. Those who deny that we have seen enormous economic growth since that time are simply denying facts that are unpleasant to them. This serves, once again, to dispel the notion that raising the minimum wage has ever had a deleterious effect on the economy, wages, business or employment.

GM, Apple, Microsoft, IBM, GE, Google, Yahoo and others are bigger and richer than any companies in the history of the world, all while the minimum wage has been increasing. The minimum wage has doubled since Apple was founded, yet Apple now has nearly a $1 Trillion valuation. So much for minimum wages hurting industry profits.

Those who claim to care about facts will likely use this information to determine their stance on minimum wage and possibly change it. Those who care more about ideology and some time-worn pull-yourself-up-by-your-bootstraps idiocy will simply remain stupid. This will be by choice.

Reference:
Bureau of labor statistics http://www.dol.gov/whd/minwage/chart.htm

Oh The Karma, the Irony, the Opportunities to Say I Told You So…

Today, Reuters news service had a piece about an announcement by Walmart and Sams Club. They are downgrading their earnings projections because their customers aren’t spending as much due to federal cutbacks in food stamp assistance!

By Dhanya Skariachan

Jan 31 (Reuters) – Wal-Mart Stores Inc said on Friday that bad weather and reduced food stamp benefits in the United States had dragged down comparable-store sales in the fiscal fourth quarter, more than offsetting a positive bump from the holiday season.

Yes fellow Libs, calm down. Stop the the fist pumps and yelling “I told you so you idiots” and similar exhortations. Be respectful…

Now, to my Repub readers…really guys, could you have made this any easier? Wal Mart, that bastion of conservative views, that anti-union, anti-female, anti-minority supreme soviet of capitalism, is proving that government assistance to the poor is good for the economy!

This is the company which pays its workers so little that some enormous proportion of them must collect food stamps just to eat, is now complaining because they’re losing money due to cutbacks in food stamps!

Hmm, could it be that government programs like food stamps and other forms of assistance for the poor is actually good for our good-ole capitalist, up by your bootstraps, Adam Smith/Milton Freedman/Ayn Rand based economy! Could it be that food stamps and unemployment checks go right back into the economy, generating wealth and jobs, as compared to tax cuts for the 1%, which tends to generate more off-shore bank accounts?

Could it be that every economic theory promulgated by the Repubs over the last 5 years (where’s the hyperinflation that was right around the corner, Glenn Beck, Bill O’Reilly and Sarah Palin?) was just intellectual insouciance backed up by, er, ah, nothing? Could all the Mitt Romney cognitive bluestockings have been wrong when they said that trillion-dollar economies were so simple as to be compared with our personal checking accounts (presumably they both needed to be balanced).

Could it be that the subject of economics is a just a little more complicated than this week’s featured short-skirted blonde Fox spokesmodel was sufficiently adroit to explain? (although Elisabeth Hasselbeck does have some decent legs).

25-Blondest-Women-of-Fox-News

Now, will you please just stop talking and listen to us when we tell you stuff? Jeez…
.
.
.

The Myth of Austerity-Thanks Paul Krugman

In recent weeks, the housing market is showing a 10% increase. Consumer confidence is the highest it has been in years. Unemployment is slowly working its way down. The stock market has doubled in the last 5 years. The federal deficit is half what it was last year, even though our “socialist” President has been spending money, in direct contradiction to the Republicans, in an effort to jump-start the economy.

It appears that all the austerity programs promulgated by Paul Ryan, the Tea Party, Mitt Romney, Newt Gingrich et al have been completely and thoroughly debunked. Europe followed the recommendations of the two economists, Carmen Reinhart and Kenneth Rogoff, who came up with the austerity mantra that the Republicans were following, only recently having acknowledged that it was based on flawed research.

They are finally realizing the magnitude of their errors. European economies are still in recession, unemployment is high (other than in Germany, which continued spending throughout the recession), with no near-term fix on the horizon. Their demands for austerity and budget cutting were wrong and millions have suffered as a result.

Paul Krugman is the Nobel Prize winning economist who exclaimed, from the beginning of the recession,  that we needed to spend even more, and actually had the courage to say so. He was the only sane voice in the crowd telling us that austerity was the exact opposite of what we needed to do. His theory has been proven prescient, as indicated by the fact that all economic indicators are pointing toward the end of the recession. Spending was exactly what we needed to do. Barack Obama followed Paul Krugman’s message and we’re all better for it.

I was thinking this morning how the country would have reacted if Mitt Romney had been elected back in November and inaugurated last January. By that time, the economic cake put into place by Barack Obama was baked, and all this good news would likely have occurred even though Romney was in office.

Then it hit me…If Romney had been elected, he and his ilk would have been screaming to the heavens that the economy came back because businesses are more confident with a Republican President. They would have been preaching to their minions that the simple fact that there was now a Republican President in office had given people a sense of hope, which, in only 4 months or so, would have manifested itself in a recovering American economy.

To those for whom introspection and rational thought are not parts of their daily routine, it would have solidified the oft-repeated falsehood that Republicans are better for the economy than Democrats. I’m grateful that recent events have categorically proved otherwise.

:

How to make Republicans Love Obama

.
.
.
If Barack Obama wants Republicans to like him, he should immediately invade Syria and Iran.

He should then embark on the austerity plan that Republicans have been demanding, similar to that of Europe, which has caused unemployment to rise to as high as 25% and their economies to stagnate to the point of a double-dip recession.

The result of these actions will likely be that he will leave office in 2016 with the United States in the midst of two wars, and an economy on the verge of the worst recession since the Great Depression.

This, apparently, is what Republicans consider to be a job well done.

Donations for the library, anyone?

.
.
.

B-1 Bombers and Whitehouse tours

Recently the Secret Service, facing cuts from the ludicrously named Sequester, decided that one way to cut $74,000 per week from its budget was to stop White House tours. This will disappoint many, inconvenience some and be considered by others as exceedingly petty.

Now, enter the budget slashing crowd with their strum und drang, wringing of hands and perpetual ridicule of all that this government does. They have been on the major networks, expounding upon the unbelievable agony under which these Boy Scout troops and 4th grade classes will now suffer, as a result of these tours having been cancelled. The premise that the President (even though it wasn’t him) would order White House tours eliminated until the Sequester is overturned is, in their minds, further proof of how poorly our economy is being managed.

These “patriots”, who, for the last 4 years have been clamoring ad infinitum for cuts to Social Security and Medicare, Unemployment insurance extensions, The Affordable Care Act, and virtually everything important that our government does, have once again revealed that the only cuts that are acceptable to them are those that they don’t notice.

These people want cuts to anything and everything (except the military) as long as it has no effect on them (remember “Stop Entitlements, but don’t touch my Medicare”?). These are the same small government, slash the budget at all costs protestors who now, faced with cuts to one of the most frivolous, non-critical government programs, one of the least important to the future of our democracy, scream once again that they want cuts, but not these cuts.

To these citizens, it’s acceptable for childhood education programs like Head Start, the EPA which protects our environment, the FDA which inspects our food, the FAA which keeps planes from crashing into each other, Aid to Dependent Children which provides food stamps for the hungry and many other important government programs to fail in the name of slashing government spending.

But, if you cut even one $2.2 billon B-1 bomber, one $5 billion aircraft carrier, one ridiculously cool but entirely useless $150 million F22 Raptor, or, apparently, tours of the White House, well then, you’ve just gone too far.

Wealth Redistribution, Cognitive Dissonance and Stockholm Syndrome

I accidentally redistributed wealth the other day.

I bought gas at the local gas station. The price, $3.79 a gallon, was fully $.40 more than just a few weeks ago. Now, I hadn’t heard anything about oil leases having gone up in price, or drilling rigs costing more, or even the going rate for an off-shore platform having jumped recently. But the price was higher-and I paid it-because the sign said so.

My personal wealth had been redistributed to Exxon/Mobil via my gas purchase, in addition to the fact that it had been redistributed to them via $5 billion in government subsidies (about as much as they pay in taxes)* already.

Then, I did it again.

I bought something at Walmart. Due to the low wages that Walmart pays, a large portion of their workers live below the poverty line and have to subsidize their income with food stamps. I, personally, pay the taxes that pay for the food stamps that subsidize Walmart’s workers. Every time I buy something from Walmart I make them just a little more successful, ensuring that their business model of paying near or at poverty wages continues.

My personal wealth has been re-distributed to Walmart via my having to support their workers with food stamps.

Minimum wage in real, inflation adjusted 2009 dollars has decreased from $10 in 1968 to about $7.00 today. A car that cost $1,995 in 1970 costs about $15,000 today. A house that cost $20,000 in 1970 costs about $200,000 today, even with the housing market collapse.

Yet the per capita GDP has gone from about $15,000 in 1968, to $45,759 last year, in the same constant dollars.

History_of_US_federal_minimum_wage_increases.svg

So, while workers at the bottom of the pay scale have lost $3.00 per hour in real dollars, their contribution to the overall US economy has tripled. Their wealth, if you can call it that, has been redistributed to the overall economy. But where has it gone?

This graph indicates the increase, according to the Federal Reserve, in corporate profits since 1965.

corporate-profits

So, to put this into perspective:
This graph indicates the divergence of personal income compared to corporate income. It is based on a University of Mass study.

Blog_Corp_Labor_Graph

So, to all of you who are so vehemently fighting the righteous battle against redistribution of wealth, you may need to reconsider just whose wealth we’re discussing here. Those who believe that the least wealthy among us are somehow getting wealthier at our expense need to spend some time reading the economic facts, some of which I have very briefly laid out here.

According to Merriam-Webster:
Stockholm Syndrome is the psychological tendency of a hostage to bond with, identify with, or sympathize with his or her captor.

When those of us who work for a living sympathize more with those to whom our wealth is be given than with those from whom it is being taken, it may be time to reconsider which of us is the hostage, and which is the captor.

*Oil subsidies http://www.becker-posner-blog.com/2011/05/the-us-tax-subsidies-for-oil-companiesposner.html

The Gold Standard and the Dollar

With all the talk of Fiscal Cliffs, Debt Ceilings and the like, it seems as if everyone is an armchair economist, suggesting things like “If I have to balance my checkbook, the government should do the same”, or “The government just keeps printing money, it has no value anymore”, or some such or other complaint of the fact that we’re no longer on a “gold standard”, as if anyone really knows what that is.

Here are what I consider to be some of the fundamentals of our economy. Some will consider me insane to suggest the things I do, but these are so fundamental as to be overlooked by most. First, some background about money. To wit:
The value of money is an illusion. It is extrinsic in nature. It is valuable because we decide it is. The fact that we’ve decided that a small sheet of high cotton content paper varies in value based on the number that is printed on it is, on its face, ridiculous. That sheet of paper with a $100 in the corner has no more actual value than the one with the $1 in the same corner, yet we are willing to give 100 times more for the former than the latter. Well, you say, it’s not the face value, really. It’s the fact that it represents that much in gold. Keep reading…

The value of gold is an illusion. It, too, is extrinsic. It is a useless metal, (other than some limited use in electronics and dentistry, but there are many substitutes) and doesn’t have any major uses other than for the purpose of frivolous adornment. The fact that the price of gold has gone from around $300 per ounce to about $1600 per ounce in 12 years is not the result of a shortage of gold. It is not the result of some new technology for which gold is an essential element. It is not the fact that that metal has changed in chemical structure. It is because someone with a lot of financial clout decided that since the world was in such turmoil, he’d better obtain a horde of it as some presumed hedge against the coming world financial collapse, so he started buying it en mass. This led others, having seen his fear of the unknown, to commence doing the same, leading to a slow, methodical increase in its value, and we followed along. That’s it.

Now, I’m not suggesting that there is anything wrong with this. A common currency is essential to the workings of any society. In the days of the cave-man, various rocks were reportedly considered valuable, to the point they would be placed on the outside of the cave, to indicate the relative wealth of those residing within.

Now, as with any commodity, relative rarity is also a factor in its value. The easier it is to acquire, the less it is likely to be worth. So, by extension, once the market has more of that commodity than it can use, its value drops.
But our money is “backed” by gold, is it not? Well, actually, nope. As stated above, gold has increased in value by a factor of 5 or more in the last 12 years.* So if that bill in your wallet was worth $10 in 2002, then it would be worth $50 today, correct? If the gold is worth more, then the money it backs should be worth more, yes?

If you were to find out that Fort Knox had been robbed last week and that all the gold was gone, would you take all the money in your wallet and burn it? After all, its value has just been lost to thieves, right? It’s no longer worth anything, correct?

Well, of course you wouldn’t, because it would still be worth its face value to you, to the corner grocer, to the cable company, to Amazon and to everyone else you pay. The only way that this presumed value of the dollar can be its actual value is if we, society, determine the value of that bill. What is stored at Fort Knox or the Federal Reserve Bank in NYC really means nothing other than to give us a good feeling that our paper money actually represents something that weighs a lot. Hogwash. The dollar is worth a dollar because others will give us a dollar’s worth of goods and services for it.
Now the promised treatise on the economy.

Any government can print money. It’s what governments do. It’s what gives them the power to regulate commerce. The perpetual question is: how much is too much money?

That question rarely gets answered based on empirics. Instead, various pundits throw out a multitude of calculations based on the cost of bananas in Bogota and the price of a box of Creme-of-Wheat in Peoria.

The perpetual cynics of the world will always say that too much is being printed. Most of us think it wrong to be able to print money, irrespective of how much gold is “behind” it. (See above). It just seems too easy, so there must be something sneaky about it. Like unprotected sex, it’s assumed that sooner or later it will catch up to you and you’ll end up with some nasty disease.

The licentiousness of printing money ad infinitum is based on long-held beliefs that you can’t make something out of nothing. In truth, however, you can. You just have to be big and powerful and have a really expensive printer.
The United States is in a unique position globally. It is the financial powerhouse, whose currency is the standard of the world. US Treasury bonds are always in demand, as evidenced by the fact that the reduction by the S&P of our bond rating 2 years ago (as a result of the last time Congress resisted raising the debt ceiling) has had no effect on the rates our bonds pay-the world ignored the downgrade and kept buying.

So, how do we know when we have printed too many dollars? How do we know when their value is becoming diluted? You already know this one. It’s called inflation.

Inflation, as most with a 7th grade education can tell you, is when there are too many dollars chasing too few products. Like snowballs to an Eskimo and sand to an Afghani warlord, the more dollars I have, the less I value each of them. It follows that if the dollar becomes less valuable in the eyes of the merchant, (having nothing to do with any shiny metal), he will require more of them to buy the same thing. A box of cereal that cost $5.00 yesterday might cost $5.10 today, since today’s $5.10 is worth yesterday’s $5.00. The cost of the item has inflated.

But if you look at our inflation rate, it’s incredibly low. In January of 2013 we are below 2% annual inflation. That means that our currency is maintaining its value quite well throughout these 4-5 years of financial turmoil. It means that there are not too many dollars flooding the financial markets. It means that we can print more dollars, build more infrastructure, and spend on healthcare, military and the other things a powerhouse like the US requires. We can print money until the rate of inflation starts to rise, and then we can back down. The fact that inflation is low says that we have not printed enough money!

Now, your gut may tell you that this is somehow wrong. That just printing money can only lead to no good. But, try and remember the last time you relied on your gut and turned out right.

Gambling, relationships, drug addictions and bar-fights are usually the result of one following his gut. How many people win at the roulette wheel, what percentage of relationships turn into successful marriages, how many drug addicts became so intentionally and how’d that last bar-fight work out for ya?

Facts, not home-grown, grade-school economics are what drive financial markets. We need to ignore those who think that managing a $15 trillion GDP has any resemblance to balancing your personal checkbook.

*This does not begin to address the fact that gold doesn’t wear out, and more gets mined every year. This should indicate that the supply of gold increases every year, yet the price doesn’t drop, as it would with any other commodity. This should be another indicator of the manipulation of the value of gold, having no relevance to any market conditions.

%d bloggers like this: