Wednesday, October 02, 2013
Government Ignoromics Harms Workers
California governor Jerry Brown has approved legislation that hikes the current minimum wage of $8.00 an hour to $10.00 an hour by 2016. Supporters of the legislation say this “moral imperative” will help workers and their families but it’s more likely to harm them.
As Thomas Sowell notes, 90 percent of American economists find that minimum wage laws increase the rate of unemployment among low-skilled workers. Such laws do that by pricing low-skilled inexperienced workers out of a job. That is the likely result of the hike, according to the California Restaurant Association, and the California Chamber of Commerce called the measure a “job killer.” Sowell recalls that killing jobs is sometimes the intention of those promoting minimum wage laws.
For example, the 1931 Davis-Bacon Act, the first federal minimum wage law, targeted companies using non-union black workers who were able to outbid white union members. In South Africa under apartheid, “white labor unions urged that a minimum wage law be applied to all races, to keep black workers from taking jobs away from white unionized workers by working for less than the union pay scale.” In similar style Australia’s early minimum wage law targeted the Chinese.
Politicians now believe that those working in, say, fast-food jobs should stay there for life. As politicians see it, if hiking the minimum wage increases unemployment, that can only be due to malevolent business interests. Whatever the result, hiking the minimum wage allows politicians to indulge the illusion that their actions help workers prosper, not the workers’ own productivity, experience, and efforts toward self-improvement. A business-friendly environment is also important. If minimum wage hikes were the key factor, why not raise the wage to $100 an hour for everyone? And don’t forget free hors d’oeuvres in every bar.
Alas, the world does not work that way and command economies have a record of failure. Politicians should know that too but they prefer their own brand of ignoromics over reality. One notes that their own budgetary efforts are not very businesslike, that they run up fathomless debt, and that they prefer double standards. In their own precincts politicians are fond of paying salaries much higher than in the private sector, and with much better benefits that embattled taxpayers can expect. The ruling class takes care of its own in fine style.
Destroying Household Jobs
Despite evidence from around the world that minimum wage laws can price low-skilled workers out of jobs, the U.S. Department of Labor is planning to extend minimum wage coverage to domestic workers, such as maids or those who drop in from time to time to do a few household chores for the sick and the elderly.
This coverage is scheduled to begin in January 2015 -- that is, after the 2014 elections and nearly two years before the 2016 elections. Politicians show a lot of cleverness in protecting their own interests, even if they show very little wisdom as far as serving the public interest.
If making household workers subject to the minimum wage law is expected to produce good results, why not let those good results begin early, so that voters will know about them before the next election?
But, if this new extension of the minimum wage law opens a whole new can of worms -- as is more likely -- politicians who support this extension want to insulate themselves from a voter backlash. Hence artfully choosing January 2015 as the effective date, to minimize the political risks to themselves.
The reason this particular extension of the minimum wage law is likely to open a can of worms is that both household workers and those who employ them will face more complications than employers and employees in industry or commerce.
First of all, ill or elderly individuals who need someone to help them from time to time are not like employers who have a business that regularly hires people and may have a personnel department to handle all the paperwork and keep up with all the legal requirements when government bureaucrats are involved.
Often the very reason for hiring part-time household workers is that some ill or elderly individuals have limited energy or capacity for handling things that were easy to handle when they were younger or in better health. Bureaucratic paperwork and legal technicalities are the last thing they need to have to add to their existing problems.
The people being hired to do household chores also have special problems. Often such people have limited education, and may also have limited knowledge of the English language.
Why make it harder for ill or elderly people to get some much-needed help in their homes, and harder for low-skilled people to get some much-needed jobs?
Despite all the talk about how we need more people with high-tech skills, there is also a need for people who can help clean a home or carry groceries or do other things that need doing, and which do not require years of schooling. As the elderly become an ever growing proportion of the population, there will be a growing demand for such people.
More precisely, there would be more jobs for such people if the government did not step in to complicate the hiring process and price potential workers out of jobs, with minimum wages set by third parties who do not, and cannot, know what the economic realities are for either the ill and the elderly or for those whom the ill and the elderly wish to hire.
Minimum wage laws in general are usually set with no real knowledge of the economic realities and alternatives for either employers or employees. Third parties are simply enabled to indulge themselves by imagining what is "fair" -- and pay no price for being wrong about the actual economic consequences.
That is why countries with minimum wage laws usually have much higher rates of unemployment than those few places where there have been no minimum wage laws, such as Switzerland or Singapore -- or the United States, before the first federal minimum wage law was passed in 1931.
Government interventions in labor markets have already created needless complications, and not just by minimum wage laws. The welfare state has already taken out of the labor market millions of people who could perform work that would be well within the capacity of inexperienced young people or people with limited education.
With welfare, such people can stay home, watch television, do drugs or whatever -- or else they can hang out in the streets, often confirming the old adage that the devil finds work for idle hands.
The Late, Great Middle Class
Obama promised to restore the middle class. In truth, he has enacted the very policies that have done it the most damage in years. That paradox may explain why his base of support remains the very rich and the very poor. Goldman Sachs, federal bureaucrats and aid recipients are helped in a way that the strapped hardware store owner, Starbucks barista and part-time welder are not.
For all the talk of infrastructure or stimulus, the latest $6 trillion in federal borrowing seems to have been wasted on bailing out insider banks and green companies, growing the federal workforce, regulating the private sector into stasis, and subsidizing those who are not working.
The Federal Reserve still keeps interest rates at near zero. That mostly helps Wall Street, where money flows madly in search of any sort of return.
Most real interest rates for consumer purchases somehow remain exorbitant. Banks obtain their money cheaply and lend it out expensively. No wonder that so many Wall Street and banking executives -- Timothy Geithner, Jack Lew, Peter Orszag, Gene Sperling, Larry Summers -- revolve in and out of the highest levels of this "no revolving door" administration.
Middle-class workers see little chance of retiring when their meager savings earn almost no interest, so they are apt to stay on the job longer. In circular fashion, their continuance only makes unemployment rates for young entry-level workers even worse.
Obama always threatened higher taxes on the well-off. He achieved that goal with a new 39.6 percent federal rate on upper incomes -- well apart from state and payroll taxes. Yet such steep taxes do not much affect the super-rich. Their income is often exempted through sophisticated tax-avoidance or, more often, earned through less taxed capital gains.
Small employers in many states have no such recourse and now pay more than half their incomes in assorted federal, state and local taxes. Naturally, they are hiring fewer people and making fewer capital investments.
That greater tax hit might have been worth it had the new rates been part of a balanced-budget agreement like the Bill Clinton-Newt Gingrich deal of 1997 that froze spending levels and for a time stopped our ruinous borrowing.
Not this time. We end up with the worst of all worlds: once again a 39 percent top tax rate, but now with out-of-control federal spending and more multibillion-dollar budget deficits.
By virtually shutting down gas and oil leases on federal lands, the administration has declined the chance to create millions of new energy jobs and to lower fuel prices. For now, cheaper power bills and gasoline prices, and the creation of more jobs in energy, depend entirely on those who drill on private lands -- despite, not because, of federal efforts.
Even the many sires of Obamacare now deny their past parentage. Unions want out of it. Congress demands exclusion from it. Well-connected businesses won exemption from it.
The poor who mostly do not pay federal income taxes will get a largely free, bureaucratized federal health-care system. Many of the rich praise Obamacare but will quietly use their own money to avoid it. The middle class will see their premiums soar and the quality of their coverage erode.
These are surreal times. Wealthy elites who help to shut down jobs in energy, timber and mining are deemed liberal -- but not always so the middle classes, who suffer the consequences in lost jobs and higher prices.
Universities voice progressive bromides, but they care mostly for the tenured and the technocrat, not the part-timer and the indebted student. Despite soaring tuition, campus is now the haunt of the very wealthy who can afford exorbitant tuition and the very poor who are often exempted from it. The less romantic middle class goes $1 trillion into debt for their high-interest student loans.
Never has it been so good to be invested in a vastly expanding federal government -- either to distribute or receive federal subsidies. Never has it been so lucrative to work in banking or on Wall Street. And never has it been so bad to try to find a decent job making something real.
To paraphrase the Roman historian Tacitus, where we have made a desert of the middle class, we call it a recovery.
$9 Gas and $3800 Gold coming?
Although the analysis below is from a gold bug, it is conventional economics. The only real question is WHEN the greenback will drastically lose its purchasing power. China is buying everything it can worldwide while their big store of greenbacks will buy something
Now that the Fed has announced they will not taper their enormous stimulus program, it's more obvious than ever that a few powerful men have hijacked our economic, financial and political structure. And here's a news flash: They aren’t socialists or capitalists. They’re criminals. The Fed's decision to continue buying $85 billion worth of toxic banking assets and U.S. debt per month means the money-printing factory has just gone into high gear. Not only can you say goodbye to your paper-based savings and retirement, but the Fed just guaranteed $9 gas and $3800 gold.
Every month in 2013, the Fed has been increasing its balance sheet by $85 billion, consisting of $40 billion in mortgage-backed securities and $45 billion in 10-30 year treasuries. The Fed is on pace to monetize roughly half of the US budget deficit in 2013. Putting it all together, the Fed's balance sheet will increase to $4 trillion on December 25, 2013. A total increase of $1.17 trillion in one year!
The Fed has been promising to taper their stimulus program pending the improvement of the labor market. But as the labor market continues to stagnate, now the Fed has reversed course and announced that they will continue their reckless stimulus program (a.k.a "money printing") for the foreseeable future.
They call it “Quantitative Easing," or QE. The reason QE is like the gift that keeps on giving for a holder of gold is because it blatantly debases the U.S. dollar. Allow me to illustrate:
Round one (QE1) started November 25, 2008 and ended March 31, 2010. During that 17-month period, a gallon of gas rose from $1.75 to $2.75 and gold rose from $725/oz. to $1125/oz.
QE2 was started Nov 3, 2010 and lasted seven months until June 30, 2011. During the seven months of QE2, gas prices rose from $2.80 to $3.60 and gold from $1325 to $1700. QE2 was also marked by massive global food inflation and global riots. QE2 ended June 30, and we have had no further ‘major’ balance sheet expansion until mid-September 2012.
In the last few weeks leading up to QE3 and the week after, gold rose 15%. During the summer of 2013, when the Fed starting backing off their "tapering" talk, gold rose a staggering 13% in a matter of months. The proof is in the numbers.
This policy is complete insanity. By 2018 when the debt peaks, gas will be over $9 per gallon! These same factors put gold at $3800 by 2018! It debases the U.S. dollar significantly at a time when we need fiscal responsibility more than ever.
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Posted by JR at 1:39 AM