Focus on Minimum Wage is Misplaced

In spite of the abysmal unemployment problem in the United States, President Obama was in Texas last week touting his plan to raise the minimum wage to $9 an hour.  Recently, New York, Chicago, St. Louis, and Detroit have seen fast food workers walk off the job and strike demanding higher wages.  Specifically, in Detroit, the Michigan Workers Organizing Committee, a coalition of labor, religious and community organizers is calling for a national minimum wage of $15 an hour.

The common denominator for everyone who wants to raise the minimum wage is the claim that the current government mandated floor price for hourly workers is too low for them to make a decent living.  Then there are the recipients of low wages, who claim their value, after years of faithful service to an employer, is much higher than the wages they receive.  For them, raising the minimum wage is the only way they can potentially get what should be coming to them – a higher rate of pay.  At the end of the day, proponents of raising the minimum wage assert that it is simply a matter of fairness to give those at the bottom rungs of the socio-economic ladder a little more.

Well, there are a lot of problems with the above reasoning.  In the first place, only two percent of wage earners in America work for minimum wage.  While workers under 25 years of age account for just 20 percent of hourly paid workers, they make up close to 50 percent of those earning the federal minimum wage or less.  In other words, very few workers are affected by the minimum wage and those that are tend to be young, first time wage earners.  You know, the teenager working at McDonald’s after school.  Naturally, older folks with familial responsibilities should find it hard to live making the current minimum wage.  The system is not really set up for them.

Then there is the economic problem caused by the minimum wage, namely unemployment.  Now, I know that there have been studies on both sides of the issue.  But, it is an economic fallacy to believe that the minimum wage does not cause unemployment.  Basic supply and demand tells us that as the price for a good or service increases, demand decreases.  Conversely, as price falls, demand increases.  By its very definition, the minimum wage is a price fix for labor above the market rate.  Thus, as the minimum wage level is greater than the equilibrium wage or wage level where demand equals supply, fewer workers will be demanded and a consequent surplus of workers will result.  Put another way, unemployment caused by the minimum wage is the difference between the amount of workers demanded and the amount supplied at the minimum wage level.  To decrease unemployment (surplus of workers) wages have to drop, just like the price of a good, to reach the clearing equilibrium price.  Naturally, this is impossible under federal and state laws, so unemployment persists until the minimum wage is overtaken by the market wage rate.

Instead of raising the minimum wage to help the working poor make ends meet, the focus should be on the cause of price inflation – the Federal Reserve Bank (the Fed).  Since 1971, when President Nixon ended the convertibility of the dollar to gold that foreign creditors enjoyed, the Fed has monetized over $16 trillion in U.S. government debt and created trillions more dollars out of thin air helping the American banking cartel increase its profits.  The result has been an 82 percent loss in the value of the dollar and consequent general price inflation.  For instance, in 1971, a basket of groceries that cost $30 would cost $173 today.  It’s no wonder minimum wage workers are hard pressed to make ends meet.

In the final analysis, only a return to sound money will ultimately help those currently working for minimum wage.  It wasn’t perfect, but a return to the pre-1971 gold exchange standard would eliminate the need to constantly raise the minimum wage, cure our chronic youth unemployment problem, and be a “matter of fairness” for all wage earners.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina

Bernanke’s Publicity Stunt

Federal Reserve Chairman Ben Bernanke has taken his defense of the Federal Reserve System on the road.  In response to recent critics of the central bank, notably Republican presidential candidate Ron Paul, Bernanke is scheduled to deliver four classroom lectures at George Washington University.  In his first discourse, Bernanke was Bernanke, extolling the virtues of the Fed while criticizing calls to return the dollar to a gold standard.

One of Bernanke’s criticisms of a return to the gold standard is that it is not practical.  By that he means “it can be a waste of resources to secure all the gold needed to back currency, moving it from South Africa to the Federal Reserve Bank of New York’s basement”.  But, the benefit of using gold to back currency is precisely because it is scarce and difficult to dig up and transport. Otherwise, it would have little value and be about as valuable as paper money.

A more significant criticism lodged by Bernanke against the gold standard is that it doesn’t prevent “short-term volatility”.  According to the Fed chairman, “Since the gold standard determines the money supply, there’s not much scope for the central bank to use monetary policy to stabilize the economy”.  By short-term volatility, Bernanke must be referring to those periods in the 19^th Century when the Second Bank of the United States and the federal government from time to time allowed banks to suspend payment in species thus enabling widespread currency inflation and financial volatility.  The fact is that under a true gold standard short-term volatility would not exist.  Prices would be stable and the artificial booms and inevitable busts caused by Fed monetary price fixing would not happen.

But, to his credit, Bernanke did acknowledge that historically countries using the gold standard have experienced long periods of price stability.  In fact, in the United States from the mid-Nineteenth Century until 1940 prices in the United States actually fell on average from year to year – the main exceptions being during war years.

So while even Bernanke admits that the gold standard is an effective means to produce stable prices which after all benefit the poor, the elderly, and others on fixed budgets, why is he still so resistance to a return to the gold standard?  The key is in the answer he gave to one student’s question about why Fed critics are pushing hard to return to a gold standard. Bernanke indicated that they want to remove some “discretion” the Fed has over the economy.  It is this “discretion” that Bernanke and his monetary oligarchs used to dole out trillions of dollars in secret loans to their bank buddies who nearly brought the whole financial system to its knees.  Many of them got a piece of the action – Citigroup – $2.513 trillion, Morgan Stanley – $2.041 trillion, Merrill Lynch – $1.949 trillion, Bank of America – $1.344 trillion, Barclays PLC – $868 billion, Bear Sterns – $853 billion, Goldman Sachs – $814 billion, Royal Bank of Scotland – $541 billion, JP Morgan Chase – $391 billion, Deutsche Bank – $354 billion, UBS – $287 billion, Credit Suisse – $262 billion, Lehman Brothers – $183 billion, Bank of Scotland – $181 billion BNP Paribas – $175 billion, Wells Fargo – $159 billion, Dexia – $159 billion, Wachovia – $142 billion, Dresdner Bank – $135 billion, and Societe Generale – $124 billion.  You see with a gold standard these loans and other Fed schemes to benefit the bankers would not be possible.  Thus, when Bernanke criticizes the gold standard it is more than just professorial theorizing, it is a defense of the current corrupt banking cartel in America.

In the final analysis, Bernanke’s lecture series at G.W. is nothing more than a publicity stunt and not a very good one at that.  The Federal Reserve is an indefensible institution.  Compounding his problem are arguments he is attempting to make against the gold standard which served our country well for so long.  Anything he says cheats the students of valuable educational time.  Perhaps the powers that be at G.W. should invite Ron Paul to debate Bernanke.  Only then will the students get their money’s worth.

Article first published as Bernanke’s Publicity Stunt on Blogcritics.

 

Romney is Focusing on the Wrong Mechanism

Coming off derogatory remarks he recently made about the underclass in America, Republican presidential hopeful Mitt Romney apparently felt the need to throw them a bone. Last week, he reaffirmed his support for linking regular increases in the minimum wage to the rate of inflation. Given that Romney has held this position since he ran for governor of Massachusetts in 2002, one could assume that he really believes the proposal would go a long way to helping the working poor. But, what he is really doing is focusing on the wrong mechanism to help them.

On the surface, Romney’s proposal seems reasonable. As prices increase, so should wages. After all, aren’t Social Security benefits indexed for price inflation?

However, the first realization that must be acknowledged is that government economic policy causes the price increases that allegedly make the minimum wage necessary for some to live a minimal existence. In other words, if the federal government would simply live within its means and cease using the Federal Reserve to monetize huge amounts of debt and maintain artificially low interest rates there would be little or no need for a minimum wage.

As the late, Austrian economist, Murray Rothbard pointed out in his book, The Mystery of Banking, from the mid-eighteenth century until 1940 prices in the United States actually fell on average from year to year with the exception being during war years. Since 1940, the Federal Reserve which became responsible for maintaining price stability and the value of the dollar through monetary policy oversaw a decline in the dollar’s value by more than 93 percent. That calculates to a 1506% annual rate of inflation change! It’s no wonder we have become a society with a low savings rate and two partners working to make ends meet.

What was the difference between these two economic epochs in our nation’s history? The first had a Gold Standard and the second was based on a fiat dollar standard.

The bottom line is that minimum wage laws are a reaction by politicians to their own historical bungling of the economy. If Mitt Romney and his ilk really wanted to help the working poor in America they would endorse a sound money policy instead. In particular, a gold backed currency that would alleviate the ability of politicians and central bankers to devalue the dollar and cause price inflation by printing money and running deficits. In short, a return to the Gold Standard would stabilize and eliminate the need for a minimum wage.