Focus on Minimum Wage is Misplaced

May 17, 2013

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


The Dow is an Indicator of Price Inflation

March 17, 2013

Proponents of the Austrian School of Economics have been predicting that Obama’s lavish spending and Fed Chairman Ben Bernanke’s money printing through his various quantitative easing schemes would cause price inflation in our economy.  For their part, Keynesians have been highly critical of Austrians for this prediction claiming that current government fiscal and monetary policy will not lead to price inflation.  They claim we have had 4 years of stimulus spending (however not enough for their liking) and quantitative easing, yet if you look at the government numbers on price inflation prices are not rising.

Well, I suppose if you trust in government like Keynesians do, you will follow its rigged statistics without asking questions.  Over time the Bureau of Labor Statistics (BLS) has changed how its price inflation number is calculated.  For a full review of how it has changed consult statistician John Williams’ site Shadow Government Statistics.  Consistently, the BLS’s current calculating method has yielded a price inflation number averaging between two and three percent.  However, if price inflation were still calculated the way it was before 1980, the price inflation average would be closer to ten percent.  If it was calculated the way it was between 1980 and 1990 the number would be closer to six percent.

Comparing price inflation numbers of the 1970s with today is like comparing apples and oranges.  Washington has changed the parameters of the measure making a comparison useless unless, like John Williams, you calculate the number using the old formulas.

The same is true about the current euphoria over the Dow’s breaking of its all-time high.  In nominal dollars the Dow is at an all-time high.  But, what good is it if the value of the Dow has lost its purchasing power?

Let’s look at USDA retail price data for beef for example.  Currently, the value of the Dow will buy 3,332 pounds of beef at the retail level.  But at 14,500 points that is about 20 percent less beef than the Dow could buy in January 2000 when its level was at 10,600 points.

But, what’s that, you are a vegetarian so the increased price of beef doesn’t matter to you?

Okay, well, the Dow’s value could currently purchase 15.35 tons of bananas.  That sum would keep any troop of monkeys occupied for a while.  But, it is the same amount of bananas the Dow could have purchased in February 2008 when it was only at 12,266 points and 60 percent less in 1999 when the Dow was around 10,000 points.

And who could argue against the fact that the price of gasoline affects the prices of all other goods and an increase thereof is the most harmful to the working class.  Once again, price inflation can be seen by comparing the Dow’s current high with its previous value.  At today’s current high value, the Dow could purchase 3,812 gallons of unleaded gasoline in the U.S.  This is about the same amount it could have bought in January 2012 when the Dow was only worth 12,633 points.  The short window of time, 15 months, is indicative of how price inflation does exist in a big way in our economy.

In the final analysis, Austrians are right and Keynesians are wrong.  There is significant price inflation in our economy that has been caused by Obama’s prolific spending and Bernanke’s reckless money printing.  In fact, the numbers are indicative that price inflation has been with us for a lot longer time.  When will Keynesians realize this? Perhaps they will when the BLS publishes a true price inflation statistic.

Article first published as The Dow Is an Indicator of Price Inflation on Blogcritics.

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


Keynesians are Clueless

March 25, 2012

Paul Krugman, New York Times columnist, Nobel Prize winner, and Keynesian economist extraordinaire is about to have his new book released entitled, End this Depression Now.  In it, the Duke of Deficit Spending argues that a speedy, robust recovery from the Great Recession which started in 2008 is just a quick policy decision away.  If only our leaders can muster the “intellectual clarity and political will” needed to raise federal spending further, Americans will begin consuming again, businesses hiring, and the current depression will be over in a flash.  Once again Krugman is being true to his economic philosophy – namely that increasing aggregate demand through loose fiscal and monetary policy is a cure-all for what’s ailing the economy.  Let it be said that there is not a more consistent deflationist than Paul Krugman in all of the economic profession.

Now, why anybody would still listen to Krugman is a mystery to me.  After all, he entirely missed calling the financial crisis of 2008 while Austrian economists were spot on with their prognostications.  I suppose most laymen don’t know the difference and most economists and academics are as Milton Friedman proclaimed so long ago “All Keynesians now”.  Thus ignorance of and loyalty to a failed philosophy are powerful forces to make people do irrational things.

In the first place, Krugman shows his ignorance with the title of his book, End this Depression Now.  The statistics indicate that we are not currently in a depression.  Secondly, current numbers indicate that the deflationary spiral that Krugman has been predicting and fears the most is not happening.  On the contrary, while he continues to fret over falling prices leading to a double-dip recession, long-term trends point strongly toward oncoming double digit price inflation.

What it all boils down to is that Krugman and other Keynesian economists are about to miss the next economic crisis.  Austrians have been arguing all along that we can’t solve our economic problems by doing the same things that got us into the mess in the first place.  Deficit spending and a ridiculously loose monetary policy will not cleanse the market of all the mal-investments made during the preceding artificial boom (housing bubble).  It will only put us deeper into trouble.  What was needed was a drastic cut in government spending, a cut in taxes, and the setting of interest rates by the market not the monetary oligarchs at the Federal Reserve.

So because policy makers in Washington listened to Krugman and his ilk over the voices of reason, we are about to enter the next cycle of boom and bust.  It will consist of phony growth, rising prices, and rising interest rates which will ultimately pop the bubble and send the economy into another tailspin.  The proof is in current trends.

In spite of Krugman’s ill-timed book, we are not in the middle of a depression.  Consumer spending is way up.  In the fourth quarter of last year balances on credit cards rose 9.27 percent.  In February, retail sales in the U.S. improved in 11 of 13 industry categories and marked the biggest gain in five months according to Commerce Department figures.

Then there is job growth.  400,000 private sector jobs have been created just in the first two months of this year.  More workers mean more spenders and more spenders mean more jobs, right?

Oh, and let’s not forget how well the financial markets are doing.  The Dow is up 7 percent YTD, the S&P 500 is up 11 percent YTD, the Homebuilders Index is up 23 percent YTD, and the S&P Financials are up 21 percent YTD.  These are not numbers indicative of a depression.

But, all of this good news is coming at a cost, literally.  We are approaching the place this commentator wrote about on October 16, 2009.  Bernanke and the Federal Open Market Committee are going to have a big decision to make in the near future – raise rates and burst the Fed induced bubble or leave rates low and watch prices skyrocket.

Price inflation is already heating up.  It was only a matter of time before all the stimulus, low interest rates, and money printing kicked in to produce higher prices.  The money supply has increased by 14.6 percent year over year ending in February.  That makes 39 consecutive months of double digit year over year rates of monetary inflation.

The result has been higher gasoline and food prices.  College and healthcare costs continue to rise.  And the Manufacturing ISM Report On Business® for the 4th straight month shows the number of industries experiencing higher raw material costs on the rise and the number of industries experiencing  lower raw material costs on the decline.  It will be just a matter of time before those higher raw material costs find their way into higher prices on the merchant’s shelf.

So while Krugman and other Keynesians clamor for more federal spending and easy money to produce a speedy, robust recovery from the Great Recession, they are missing that the next boom and bust cycle has already begun.  But, that’s okay because Austrians have been predicting it for some time.  In the words of Yogi Berra, “It’s déjà vu all over again”.

Article first published as Keynesians Are Clueless on Blogcritics.


Romney is Focusing on the Wrong Mechanism

February 14, 2012

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.


We Can’t Afford to Raise the Debt Ceiling

July 20, 2011

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies.”

Senator Barack Obama

Senate Floor Speech on Public Debt

March 16, 2006

Senator Obama ended his speech with a profound yet often neglected fact, “Every dollar we pay in interest is a dollar that is not going to investment in America’s priorities.”  He went on to vote against raising the debt ceiling in 2006.

What a shame Barack Obama has such a short memory.  If only he would have paid heed to his own words once he became president in 2008 we wouldn’t be about $3 trillion more in debt and in the worst fiscal crisis the world has ever seen.  But, of course, the President and his supporters claim that he had no choice but to spend us even farther into oblivion.  After all, he inherited an awful economy from his predecessor.  The story goes that his spendthrift policies are what saved us from an economic meltdown.  How they know that exactly is not clear?

What is known is that Obama’s policies have not solved our economic woes.  In fact things have become far worse under his leadership.  The two statistics that the ordinary American cares most about are unemployment and price inflation.  Both have headed in the wrong direction since Obama assumed the reins of power.  The government’s unemployment figure stood at 7.8 percent the month Obama became president.  Today, 9.2 percent of our workforce is without work.  In spite of his “stimulus” spending the unemployment rate has increased 18 percent!

Naturally, with all the new spending and monetized debt over the last two and one-half years, it is reasonable to expect that goods priced in dollars would see an increase.  As I have predicted many times on this post, they have.  If we just use the government’s CPI numbers it is easy to see that prices under Obama’s program have taken off. When Obama took office the government’s CPI number stood at 0.0 percent.  The number released for June 2011 stood at 3.6 percent.  Additionally, gas prices have doubled under Obama and food prices are soaring.

If one were to calculate unemployment and price inflation like they were prior to 1980, we are clearly in a depression.  Bread lines have simply been replaced by food stamps.

The point is that Obama’s polices have been a dismal failure.  The current issue before Congress is whether to raise the current debt ceiling.  It is interesting to note that Obama and his ilk will only talk about what alleged calamities will befall us if the debt ceiling is not raised.  Seniors, soldiers, and the disabled will be relegated to the streets begging for change to support their families they tell us.  No mention is ever made of what calamities will befall us if the debt ceiling is raised and the reckless spending is allowed to continue.  Right now, 43 cents of every dollar Washington spends is borrowed.  Over the next decade, interest payments on that debt assuming interest rates rise gradually will total $5.5 trillion.  That is revenue that cannot be used to invest in America – roads, schools, jobs…  If the current debt ceiling is raised for further deficit spending a greater percentage of each future dollar will not be available for American investment or as Senator Obama put it so aptly in 2006, “Every dollar we pay in interest is a dollar that is not going to investment in America’s priorities.”

The President and Congress have tried to spend our way out of economic crisis.  Predictably, it has failed and even made things worse.  Raising the debt ceiling further will only exacerbate the crisis.  To avoid a “leadership failure” Obama should do whatever it takes to cut trillions in spending.  It is the only way to get “our Government’s reckless fiscal policies” under control and ensure a viable economic future for all Americans.

Article first published as We Can’t Afford to Raise the Debt Ceiling on Blogcritics.


Evaluating Obama’s Record After More Than Two Years as President

April 26, 2011

Recently, President Obama kicked off his 2012 reelection campaign.  Looking past all the political jabbering of the talking heads and pundits, the most astounding prediction of all about the next race for the White House is that Obama is expected to raise $1 billion for his campaign efforts.  Given the president’s failure to fulfill his previous campaign’s promises of hope and change, a great question to ask is, who is going to donate that large amount of money to his campaign coffers?

I mean the guy has an absolutely abysmal economic record as president.  Adhering to a dogmatic Keynesian policy, in just two years he has increased the national debt by 50 percent with nothing good to show for it.  Unemployment, counting the underemployed and discouraged workers, was about 19 percent when Obama took office.  Currently that number is at about 22 percent.  After more than two years in office, Obama’s economic policies have given no hope to millions of unemployed Americans.

Of course, all of the spending and inflating of the money supply under Obama is beginning to have a huge negative effect on the economy.  Anyone who has grocery shopped or purchased gasoline lately has certainly noticed higher prices.  Now, many would blame Federal Reserve chairman Ben Bernanke and his ridiculous easy money policy for current rising prices.  They are correct.  But, let’s not forget that Obama nominated Bernanke for a second term as chairman in 2009.  The president had the opportunity to do the right thing and nominate an individual that could have brought sanity back to our monetary policy.  But then again, Obama and his cohorts in Congress need Bernanke to monetize their lavish spending programs to ensure their reelections.

In fact, Obama won’t recognize his or the Fed’s culpability in bringing about inflation.  Instead he is resorting to the famous political technique of scapegoating.  According to Obama, speculators are potentially to blame for high gas prices and thus rising prices in general.  His Justice Department is going to investigate whether speculators are driving up the price of oil and therefore harming consumers.

Well, of course speculators are driving up the price of oil because they know more about how economics work than anybody in the Obama Administration.  They know that with the trillions of new dollars the Fed has pumped into the economy since 2007 oil prices which are priced in dollars are going to go up, probably way up.  They would not be bidding up the price of oil today if they believed that in the future they will not be able to find a buyer for their oil futures.   They are not causing harm to consumers.  Fed policy under Bernanke is the culprit, but the president seems clueless about this fact.  As general prices continue to rise because of Obama’s Keynesian policies, Americans will continue to lose hope that their lives are getting better.

Obama’s foreign policy is as abysmal as his economic policies.  During the 2008 campaign he promised “change that we can believe in”.  If by “change” Obama meant even more war than George Bush provided than he has fulfilled that campaign promise.  Since taking office Obama has not ended the U.S. occupation of Iraq.  He has increased troop levels in Afghanistan by about 30,000.  He has increased unmanned drone attacks over Pakistan killing innocent civilians and providing a recruitment tool for Al Qaeda.  He led the NATO invasion of Libya, which was supposed to be a “humanitarian” effort, but has quickly turned into a regime change operation.  Obama claimed he would not put boots on the ground in Libya and then it was reported that U.S. special operations forces had been on the ground in Benghazi for three weeks training the rebels.  Now, fighting between Qaddafi forces and the rebels is in stalemate and many analysts believe it will take a NATO invasion with ground troops to dislodge Qaddafi from power in Tripoli.  The president has put himself in a tough spot.  If his previous war-like tendencies are any indication, we can expect U.S./NATO troops to be fighting pro-Qaddafi forces in Libya soon.

Barack Obama’s first two years as president has been a catastrophe.  Unemployment and prices are up and we face a national calamity because of burgeoning debt at the state and federal levels.  He has increased not diminished our exposure to war by ramping up military attacks over Pakistan and leading the effort to overthrow Qaddafi in Libya.  These conflicts will only waste more money we don’t have and make us less safe.  Again, it should be asked, if Obama hopes to collect $1 billion in campaign contributions, where will it come from?  My best guess is Wall Street and the Military Industrial Complex.

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


Bernanke is Still Clueless

April 9, 2011

It has been a while since I criticized my favorite Federal Reserve chairman, Ben Bernanke.  I’ve been busy teaching school and Bernanke like always has been busy destroying the dollar and with it our economy and standard of living.  So, nothing new and out of the ordinary has happened to warrant a post about the 2nd term Fed chairman.  However, last Monday night he made big news when he said that our current price inflation is “transitory”, and based on supply and demand issues in energy and commodities.  He went on to say, “Our expectation at this point is that in the medium term inflation, if anything, will be a bit low.”

So why do I consider Bernanke’s remarks to be big news?  Because when predicting the future economic prospects of our country his prognostications have been less than stellar to say the least.  He never saw the housing bubble coming; he misjudged the seriousness of the problems in the auto industry; and was totally clueless about the potential for big bankruptcies on Wall Street.  What’s worse is that he was still spewing his pablum about how everything was okay on the eve of the financial crisis!  Thus, with his newest pronouncements on our current state of price inflation, why would anyone give his remarks any credence?

We can give Bernanke credit for one thing.  He didn’t deny prices for many things are rising.  Cotton is at its highest level in a decade.  Copper is at its highest price in forty years.  Corn, wheat, and soybeans are up.  Of course, all Americans are seeing steeper price levels at the pump as oil has risen above and remained over $100 a barrel.  But, for Bernanke to state that the situation is temporary is not credible.  To be sure, there are extenuating circumstances behind some of the cost increases.  Weather conditions in some parts of the world and Middle East unrest have had an effect somewhat on crop and oil supplies.  However, given the trillions of dollars Bernanke has injected into the stagnant economy through low interest rates, quantitative easing, and monetizing of the federal debt it’s no coincidence that these commodities which are priced in and bought with dollars are seeing price increases.

In fact, since about 2001 when George W. Bush and the Republican Congress began doubling the national debt, the Fed’s monetizing and low interest rates caused steady commodity price increases.  Prices dipped in 2008, due to the recession, but have accelerated upwards again beginning in about May of 2009.  Simply stated, the current inflation is a continuance of the long term trend begun before the financial crisis.  Given even lower interest rates, quantitative easing, and the monetizing of an even larger debt load since Obama took office, a reasonable observer would assume commodity price increases will not be temporary and will be even more significant.  But the Fed chair insists that in the long –run prices will stabilize at lower levels.

In October of 2009 this commentator wrote an article indicating that Ben Bernanke was between an overheated printing press and a hard place.  The gist of the piece was that Bernanke’s reckless monetary policies were placing him in a bind.  If he continued down the path of loose money there would be high inflation to pay.  If he reversed course and tightened the money supply the stock market bubble would burst and his benefactors on Wall Street would be harmed.  It seems that Helicopter Ben is at the point where he has to make that decision.  Taking his most recent comments into account, it seems he has made his decision.  As usual it is in the best interests of Wall Street.

Article first published as Bernanke is Still Clueless on Blogcritics.

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