Econ 101 Part 3 Minimum wage What happens when you raise the minimum wage? There is only one crucial issue in play; will low-income wage earners be able to successfully support themselves and their families? Thats it. Everything else is noise. 1. I won’t bother with the economic value to the wager earner, thats obvious. Not trivial since that is the key issue, but I don’t think it requires explaining. They won’t starve, they may not have to work 3 jobs and they can buy necessities for their family. 2. Where is the increase most heavily felt? This is in large part an urban issue. Certainly there are minimum wage earners who live in rural areas but the vast majorities live in the greater population density areas and work at substance wage levels at McDonalds, Walmart, etc. That concentrates the costs and the benefits in our larger cities and should render the rural areas indifferent. They are not, but that is a political, not micro-economic issue. While it is true that those living in rural areas should be indifferent or positive biased based on humanitarian considerations, people tend to follow who they consider their political leaders even when the issue is of no great concern to them. 3. There may very well be a racial component to the question since a much larger percentage of minorities work in the minimum wage jobs. That is not a pretty issue to confront, but a white farmer in Urbana, IL may have no emotional tie to the problems of an urban black low-wage worker in Chicago. 4. The impact on small businesses, an often-expressed concern, is really an illusion. The number of employees in small businesses is, by definition, few in number and a jump in wage to even $13/hr. will likely have no great impact on their cash flow. It will have even less impact on their profits since all wages paid are tax deductible. There is now enough experience in other states to demonstrate that workers receiving a higher wage, whether voluntary or mandated by the state, are better workers. They tend to be healthier, enjoy better nutrition and have healthier children which reduces days off for caring for sick kids. 5. The cash-flow impact on larger employers is real but they also benefit from the better worker effect of higher wages. Costco is a great example of this. Comparing Walmart and Costco workers shows that the Costco employees are happier. That yields better productivity, better health, nutrition, fewer absences and reduced turn-over which reduces training time and expense as well as HR costs involved in higher turnover. Since the larger employers also deduct all salary costs there is really marginal negative impact on profits. (Deductions are not tax credits, so its not dollar for dollar, but the increased productivity more than off-sets the higher wage) What is the impact of a shift to $13/hr min wage? Happier and healthier workers and less turn-over. The workers may not actually earn more in total in some cases because they might be working three jobs today and they may be able to reduce that to 1 or 2. However, there are real gains in that. Reduced travel time will give more family time, which might have a positive effect on our crime rate. Workers will be more productive because they will get more sleep. The financial impact on the economy is really not substantial other than the workers may have some more (any) disposable income. (But I doubt that. Even $13 is not much money to live on if you have a family.) There might be a bigger social impact and thats very valuable. We may see some business talking about cutting staff because $13 is just too expensive. But I think that is really a bluff. Like ACA, you hire the number of employees you need to run your businesses. Only the very biggest businesses can afford to juggle staffing to try and dodge taxes. In the end, like McDonalds they face so much negative publicity that they cave in anyway. For those that missed Parts I and II, They are here: Econ 101 I’m going to write explanations in plain English so everyone can understand. If you have questions, let me know. If you think Im nuts, keep it to yourself, Im really not interested. To understand macroeconomics in today’s environment its impossible not to touch on politics a bit and the fundamental difference in beliefs between real economists and pretend economists who have run for office but actually know as much about economics as they know about the average run score for a cricket match in India. So, with that, lets begin. What is the debt vs. deficit? Debt is our history. Deficit is what we are doing now. Debt is the amount of money that we have spent in the past while deficit is the difference between what we take in, revenue primarily from taxes, and what we spend. So which is the right one to look at? If you want to know what we have spent our money on you can look at debt, but thats not very instructive. The much more important measure is deficit. That is the one that tells us if we are digging a deeper hole in debt or moving toward less debt. But first, lets demystify debt a bit. Is debt good or bad? The answer to that is yes. It can be good or bad depending on the circumstances. Lets see what that means. Lets say you have a company and need a road to connect your factory with a main highway. You would borrow money (thats debt) from a bank or sell commercial paper or take it out of savings, and build the road. You have now acquired debt, but you also have an asset, the road. Was that good or bad? If you really needed the road its good. How about the debt you acquired? Isn’t that a bad thing? No, if your business will prosper for having the road you made a smart decision. So you have an asset that offsets the debt. Lets now say a government decides to build a road. They are going to build it for all the same reasons as the company in the previous example. They spend a few billion dollars on the road and they issued some bonds (debt) to raise the money to afford it. The government now has a debt of a few billion dollars and if thats all you looked at it would seem to be a real issue. However the public now has a new asset, a highway. It will be used to improve commerce, recreation, etc. It has a real value. Where does the government show the debt? On their financials, just like the company. Where do they show the offsetting asset, the road? They don’t. Governments don’t look at assets the same way as companies. But doesn’t that distort the meaning of the debt we just acquired? Yes, it does. Here is debt that is well worthwhile but all you see is the money owed to the public by paying interest and principal on the bonds but no where does it show the asset we obtained and are using. That seems a bit skewed doesn’t it? To whom do we owe our debt? The vast majority of the United States debt is owed to the people of the United States. That is, the US Treasury issued Treasury notes or bonds and sold them to the public. If the Treasury issues a $100,000 T-Note and sells it to the public through the FED, thats $100,000 that the government owes to the holder of that T-Note. Or, put another way, we incurred debt but its owed to the holder of the Note and they will be paid interest and at the end principal as the Note is held and then cashed in. Well, I have heard that China has a lot of our debt. Is that true? Yes, they do hold some of our T-Notes and T-Bills and they too will be paid back as the debts mature just like anyone else. But wait! Isn’t that a bad thing? No, why would it be. What is China going to do? Come take a road? But, doesn’t debt hurt the economy? It can, and if not managed properly, as it was not during most of the Bush administration, the debt can become huge and the interest payments can cause inflation. That is, the value of every dollar that people hold is worth less. But the Fed has, at the direction of the Treasury Secretary, first under Bush and now under Obama, kept interest rates very low, close to zero. So the biggest danger in debt, inflation, has not been an issue. That sounds smart, was it? You bet it was. Ok, that all makes sense but what about the idea that we are selling our future, the future of our kids? If we are incurring debt past our ability to control it, that is a bad thing. And with the two unfunded wars (we had no budget for them) that Bush created and the collapse of the housing markets and banking sectors caused by removing necessary regulatory control on key industries, we were on the verge of exactly that. However Paulson, the Sec of the Treasury under Bush and then Obama realized that the policies we were following in creating debt faster than we could create revenue (taxes) was killing us. That brings us to the Deficit. Are we now spending more or less? We are spending much less. The deficit, which was well over $1 Trillion per year is now going to finish at the end of 2014 at about $400 Billion. That takes a huge amount of pressure off our economy and allows businesses and the stock market to start to feel more secure and be willing to invest in their businesses. Consumers shift from saving (which slows the economy way down) to spending. So why is the debt still growing? We still need bridges and roads and hospitals and an army and navy and police, etc. Ok thats it for today. In further lessons Ill explain why we need taxes and how tax cuts for the rich are dumber than putting chocolate in front of a dog. (its poison to dogs.) Econ 101 Part 2 Taxes vs. Spending If you as a consumer spend more than you earn you must fill the difference with borrowing. You might use credit cards or a home equity line, but since you are spending money you don’t yet have you are making the assumption that you will have that money at a later time. The bank that issued you the credit card, for example, is agreeing with you. You are creating debt. If you have no real anticipation of ever being able to pay that debt back you have no business borrowing the money in the first place. How does a country “get money” to pay for its bills or repay its debt? The primary way is though taxes. Corporate taxes, consumer taxes, fees, licenses and permits. It is a fair method since everyone makes use of the services of the economy, for example: Street lights, hospitals, roads, police, fire, military protection, airports buses, etc., that the public should, indeed must, pay for that. Thats where taxes come in. You earn money; you pay a portion of it to a government agency to cover a percentage of the commonly available resources from libraries to an aircraft carrier. That seems fair and logical. So why do we hate taxes so much? Much like our earlier discussion of debt, we tend to forget about our using the streetlights, police or roads when we pay our taxes. We see the expense, but not the value. Is that fair? No, of course not, but thats how people think. What is the difference between companies who pay taxes and consumers? Quite a bit actually. The government knows that some things are absolutely necessary, or highly desirable, for people to do so they allow them to deduct those activities (at some level) from the taxes they pay. So if you donate to a charity, drive miles for volunteer work, take classes that are necessary for your career, you can typically deduct those from your taxes. There are a limited number of things that a consumer can deduct. There used to be many more, such as interest paid on credit card debt, but those have been disallowed. Companies, on the other hand, can deduct pretty much anything. If its an expense to the business, its deductible as a business expense. Well, that seems a bit unfair. Yes, it is. The number of deductions allowed to businesses has been growing substantially, especially in specific industries, while the deductions allowed to consumers has been shrinking. Put another way, Congress, really the republicans in the house, are saying that businesses are more valuable to the country than the people that work in those business. How does that make any sense? Here is the logic. (It is highly flawed logic and Ill explain why we already know that but the GOP is ignoring that fact.) They say, businesses create jobs. (ok, so far so good) That as business grow, they will hire more people (oh, oh, just got a bit shaky there) and that is going to create higher payrolls and more people that can buy consumer goods. (that sounds good, but are they really hiring more people or paying higher salaries as they increase their profits? Um, no. So that argument quickly falls apart. More on that in a few minutes.) So what is going on? Im not going to look up the actual number, Ill leave that to you, but of the top 20 companies in the US, I bet 12 of them pay no taxes at all other than payroll and real estate taxes. How on earth can that happen? They are selling their products in the US, making money, tons of money in the US, how can they pay no taxes? The GOP has been saying that its simple, these are the job creators we need to give them more and more tax breaks so they create more jobs (this is the much aligned “Supply-side” or “Trickle-down” theory. Its total crap by the way, and its easy to see that. So what is really happening? The so-called job creators are not creating new jobs in any substantial amount. But the employment numbers are improving. Who is creating these jobs? This is a fairly simple question. The US economy goes through patterns of boom and recession on a regular, but unpredictable, basis. When we slide into a recession (this was explained in Part I and due to two major wars that were not budgeted and removal of key controls on certain industry sectors allowing them to make very poor decisions without the oversight they needed.) the job market is impacted very heavily. That is not the most important factor in measuring a recession, but if you are out of a job, its number one to you. What industry sectors lose employment first? Thats service industries, architects, doctors, restaurants, really any business that sells services such as advertising, marketing, consulting, etc. The second sector to shrink is light manufacturing and retail, which is followed by heavy manufacturing. When an economic recovery occurs, as we are seeing right now, the first sector to rehire is service, followed by light manufacturing and retail and then finally heavy manufacturing (who hires many, many workers, often unionized.) So the new jobs we are seeing are in large part the old jobs that were lost due to the recession and the bulk take the longest to come back because they are tied to heavy manufacturing. Now, there are those readers who will say, “Yes, but, its much more complex than this.” Well, maybe. There are certainly more factors to be considered such as how many jobs did the large companies push offshore to India, et. al. that will come back slowly or not at all, but I would contend it’s the same damaged and selfish thinking as not raising wages as profits soar. So what happens when we cut taxes on companies? The owners, shareholders in those firms make more money by profit distributions called dividends. What do the employees get? They get to keep their low paying jobs. How does this help the economy? It doesn’t. It only helps those that are owners of the firms. Is this true for all companies? No, there are some very well run, highly ethical and pro-American firms out there that work hard to be fair to their employees, firms like Berkshire Hathaway and Costco. There are also those firms that have to get hit on the head a few times but they finally see the light. Thats McDonalds. There are those that seem to not care at all about the US. Thats the companies, like Mobil, Exxon, WalMart, and Im sure you know the list as well as I do. What is the solution? Taxes are as low right now as they were during the administration of Harry S Truman. Think about that for a minute. We as a country are massively more complex, have broad global interests, a military that keeps watch world-wide and our richest tax payers are paying taxes that would be familiar to Truman. Do we need to raise taxes on everyone? The middle class is pretty much choking right now. No, we don’t. If we reversed all the tax gifts we have given to the corporations who are larger than $1 Billion in revenue and added a small increase in taxes to our wealthiest citizens the debt would begin to erode very quickly. If we continue to give tax breaks to those most easily able to pay them, you can count on a very slowly moving economy for a very long time. Ok, where did this supply side crap come from? An economist named Laffer (no pun) thought it up and sold it to Reagan. He claimed that rather than looking at demand, the traditional way all economists look at a marketplace, look at supply. The idea is that if you build a better mouse trap the world will beat a path to your door. No, it does not work that way and never has. If there is no demand, you cant sell. You cant really create demand, its either there or its not. So a company that says, I have new jobs is welcomed, but then they add, Oh, Im going to pay you nothing, give you no health benefits and that will keep you from looking for a new job and from taking your unemployment benefits. Cool huh? The market place reacted exactly as you would expect. Now, this part is really important. Alan Greenspan, who was the Chairman of the Fed was arguably the most respected economist in the US. He endorsed Supply-side and that convinced many to give it a chance. Reagan loved the idea because it really killed unions, (look up the Air traffic controllers union under Reagan) and massively benefited the very wealthy who where all his friends and donors. (Here is where it gets interesting) As the economy slid further and further down and nothing seemed to be working any more, Greenspan decided that at the end of his term he would retire. He appeared before a congressional committee, (I saw this hearing) and he apologized. HE ADMITTED HE, and SUPPLY SIDE WERE WRONG and they greatly hurt the US and its efforts to rebuild the economy. Greenspan apologized for the damage he and it caused. How did the republicans who were still flying the “Trickle-down banner” react? They totally ignored their former hero. Thats it for today. Please let me know if you have any questions. If you disagree, put it in the form of a question, if you violently disagree, tell your mother, I’m not interested. ☺
Posted on: Tue, 02 Sep 2014 17:12:00 +0000
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