Category Archives: Minimum Wage

Conflated Issues Inflated Fears

Inflation chart cause

There’s fear, right here in the outback, that raising the minimum wage will drive up inflation.  The Humboldt Sun (Sept. 18, 2015 p3)  includes a long LTE titled, “$15 minimum wage would stimulate inflation.”   The author writes:

“The government requires businesses to pay employees more by passing minimum wage legislation. This increase is not because workers are more productive, so it costs more to produce goods and services. Businesses might lay off workers to bring down labor costs, but that results in less output. Ultimately, they must raise the cost of consumer goods.”


There are several macro-economic concepts mashed into this, but let’s assume that the writer is speaking of the form of inflation diagrammed in Chart 2 above, “Cost-Push Inflation,”  defined as follows:

Cost-push inflation … occurs when prices of production process inputs increase. Rapid wage increases or rising raw material prices are common causes of this type of inflation. The sharp rise in the price of imported oil during the 1970s provides a typical example of cost-push inflation (illustrated in Chart 2). Rising energy prices caused the cost of producing and transporting goods to rise. Higher production costs led to a decrease in aggregate supply (from S0 to S1) and an increase in the overall price level because the equilibrium point moved from point Z to point Y. [SFFRB]

Cost-Push inflation might be presented as the Inflation Monster, IF it were the only kind of inflation possible – it isn’t.  There’s also Demand-Pull.  And we return to the San Francisco Federal Reserve for its basic definition:

“Demand-pull inflation occurs when aggregate demand for goods and services in an economy rises more rapidly than an economy’s productive capacity. One potential shock to aggregate demand might come from a central bank that rapidly increases the supply of money. See Chart 1 for an illustration of what will likely happen as a result of this shock. The increase in money in the economy will increase demand for goods and services from D0 to D1. In the short run, businesses cannot significantly increase production and supply (S) remains constant. The economy’s equilibrium moves from point A to point B and prices will tend to rise, resulting in inflation. [SFFRB]

And how does a central bank increase the supply of money? Monetary policy.  The textbook way, prior to September 2008, was that if the opportunity costs for holding noninterest-bearing bank reserves was the nominal short-term interest rate (federal funds rate), then we’d have a situation in which if the funds rate were low the quantity of reserves banks would want to hold would increase. [SFFed]  Note: the banks have an interest in putting reserves to work by lending them.  If a bank found itself with “excess” reserves the obvious thing to do would be to find borrowers and earn a return on the money. Thus the situation wherein the cost to the banks of borrowing money is essentially zero, in a post 2007-08 effort to support the financial markets and kick-start the economy.  Now what?

Why hasn’t there been some awesome Demand-Pull Inflation?  Monetary Policy. The situation has changed, although few outside the financial commentators have paid much notice.

“The change is that the Fed now pays interest on reserves. The opportunity cost of holding reserves is now the difference between the federal funds rate and the interest rate on reserves. The Fed will likely raise the interest rate on reserves as it raises the target federal funds rate (see Board of Governors 2011). Therefore, for banks, reserves at the Fed are close substitutes for Treasury bills in terms of return and safety. A Fed exchange of bank reserves that pay interest for a T-bill that carries a very similar interest rate has virtually no effect on the economy. Instead, what matters for the economy is the level of interest rates, which are affected by monetary policy.” [SFFed]

If Demand-Pull inflation is corralled by monetary policy which is based on the Federal Reserve now paying interest on reserves, doesn’t this argue against raising wages which will increase unit costs of production and hence raise consumer prices?  Not necessarily.

The author of the LTE maintains: “The Federal Reserve has held interest rates at near 0 percent for several years. Some claimed cheap loans would stimulate the economy. The problem is that banks have been fiscally conservative, with few loans and little interest rate to savers.”

A crucial part of this puzzle is the press release from October 6, 2008 from the Federal Reserve stating:

“The Federal Reserve Board on Monday announced that it will begin to pay interest on depository institutions’ required and excess reserve balances. The payment of interest on excess reserve balances will give the Federal Reserve greater scope to use its lending programs to address conditions in credit markets while also maintaining the federal funds rate close to the target established by the Federal Open Market Committee.”

Yes, the interest rate remained low, but the banks with excess reserves on hand had less incentive to loan out those reserves if they could simply leave them on the books and earn interest.  The Financial Services Regulatory Relief Act of 2006 allowing this situation  [S 2856 109th] was quite generous to the bankers, such as section 201 which “(1) authorize payment of interest on funds maintained by a depository institution at a Federal Reserve bank; and (2) authorize the Federal Reserve Board to reduce to 0% the reserves required to be maintained by a depository institution against its transaction accounts. (The current requirement ranges from 3% to 14%.)” [GovTrack]

While the Federal Reserve makes a nice scapegoat for those who believe in broader extensions of consumer credit, it really doesn’t do to belabor its role (or lack thereof) in stimulating the consumer end of the economy when Congress provided the vehicle by which the wall between brokers and bankers was breached (Title 1, Section 101) and compounded the issue by enacting authorization for banks to sit on reserves in order to earn interest (Title 2, Section 202).

And, here’s where the LTE author swims in shark territory – a monetary policy which encourages broader consumer lending would also be a factor in the creation of Demand-Push inflationary pressures.  A person really can’t have it both ways.

How much is too much?

There are, in both fact and theory TWO forms of inflation.  Nor can we assume that inflation is always a bad thing.  Most economists like an inflation rate of just under 3%. [Investopedia]  Why? Because the alternative – deflation —  is even worse.  During deflationary periods workers get laid off, consumers spend less, people hold off major purchases believing prices will fall further, and the spiral continues – downward.

Consumer Price Index 2005 to 2015 The blue line includes items like energy/food which are inherently more volatile, the line for all others shows a fairly consistent rate of inflation right around the 2.5% mark – remember 3% is the economist’s ideal. It’s also useful to note that the wide variances occur between January 2008 and January 2010 – when the U.S. economy was trembling before and  in the wake of the financial crash.

Consumer Price Index chart If fact, before we become too alarmed by inflationary trends we might want to take a look at the column highlighted above from the Bureau of Labor Statistics, and note that we are well below that 3% threshold.  In other words, it’s time to stop worrying excessively about inflation – both forms – and start being concerned with why wages and salaries have tended to stagnate over the past thirty years?  [Pew]

“…after adjusting for inflation, today’s average hourly wage has just about the same purchasing power as it did in 1979, following a long slide in the 1980s and early 1990s and bumpy, inconsistent growth since then. In fact, in real terms the average wage peaked more than 40 years ago: The $4.03-an-hour rate recorded in January 1973 has the same purchasing power as $22.41 would today.” [Pew] see also: [EPI]

Our local author is still alarmed, “Recent price spikes are more noticeable than the usual gradual increases.  That naturally leads to call for a minimum wage increase. But if granted, the inflation cycle will begin again.”  To which we’d have to ask:

  • What recent price spikes? The annual inflation rate as calculated by the BLS Consumer Price Index, the figures the economists use, has been less than 2.5% since 2006.  Further, the prices of gasoline has dropped from about $4.11 in July 2008 to $2.73 as of August 2015. [EIA]
  • If not those phantom price spikes, then what else could raise the call for an increase in the minimum wage?  The trends in stagnant wages and salaries?
  • What inflation cycle?  The annual increase in inflation hasn’t risen above 2.5% since 2006 and 3% is the threshold used by most economists to determine a “significant” increase.  During five of the last ten years we’ve experienced inflation of less than 2%.
  • However, let’s not assume that the author is referring to the here and now but to the ubiquitous “awfulness to come somewhere down the road about which we should be terribly alarmed.”  Is there anything in the statistical tables indicating that an increase in the federal minimum wage would yield inflation rates in excess of traditionally  held economic standards?  Given that the federal minimum wage has been raised 22 times since first authorized in 1938, has there been any drop in the real GDP per capita in the last 75 years? (Hint: no)

If it’s not consumer spending driving an inflation cycle in the modern economic environment – what is?  There is something about which we ought to be worried, but it’s not your father’s inflation cycle – it’s the climate created by the financialists:

“Both gross and net business debt have continued to rise since 2007, but the proceeds have been almost entirely recycled into financial engineering—including more than $2 trillion of stock buybacks and many trillions more of basically pointless M&A deals.

This diversion of the $2 trillion gain in business debt outstanding since 2007 to financial engineering is owing to the near zero after-tax cost of corporate debt. The latter has caused the enslavement of the C-suite to the instant gratification of rising share prices and stock options value in the Fed’s Wall Street casino.” [ZeroHedge]

Not to put too fine a point to it, but the brakes will be applied to any inflationary pressure by the bursting of the next financial bubble.

References and Sources: Federal Reserve Bank of San Francisco, “What are some of the factors that contribute to a rise in inflation?’ October 2002.  John C. Williams, “Economic Research: Monetary Policy, Money, and Inflation,” Federal Reserve Bank of San Francisco, Economic Letters, July 9, 2012.  Bernard Shull, “The impact of financial reform on Federal Reserve Autonomy,” Levy Economics Institute of Bard College, working paper 735, November 2012. (pdf)  Douglas Rice, “Inflation: It’s a Good Thing,” Investopedia, May 22, 2009.  Bureau of Labor Statistics: Consumer Price Index, 12 month percentage change. (2015) “For most workers wages have barely budged for decades,” Pew Research Center, October 9, 2014.  EPI, wage stagnation in nine charts, January 6, 2015.  CBPP, “A guide to statistics on historical trends in Income Inequality,” revised July 15, 2015.  L.E. Hoglund, “Gasoline prices: cyclical trends and market developments,” Beyond the Numbers, BLS, May 2015. (pdf) EIA, “Petroleum and Other Liquids: Retail Prices all grades and formulations, August 2015.  Department of Labor, “Minimum Wage Mythbusters.”  CNN, “Minimum wage since 1938,” interactive graphic.  “Meet the New Recession Cycle,” Zero Hedge, April 4, 2015.

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Filed under Economy, financial regulation, income inequality, Minimum Wage, Nevada politics, Politics

Happy Fourth of July: A More Perfect Union

Flag July 4th

It’s a good 4th of July weekend.  The benefits of citizenship have been affirmed for members of the LGBT community, but as the founders told us we’re on a path to create “a more perfect union.”  Therefore, there’s more work to be done to insure that housing, employment, and other areas of American life aren’t stumbling blocks of discrimination. We will have to keep up efforts toward building that “more perfect” union.

Ravenal Bridge

There may be some dead-enders, some battle flag flying remnants of blatant racism, but no matter how hard the Klan and their allies try, their proposed demonstration will be nothing compared to the thousands who walked along the Ravenal Bridge in Charleston, South Carolina.  We’re closer to being a nation of people who are taking Dr. Martin Luther King Jr.’s message to heart:

“When evil men plot, good men must plan.  When evil men burn and bomb, good men must build and bind.  When evil men shout ugly words of hatred, good men must commit themselves to the glories of love. “

At least two churches in the south have been the target of recent arson attacks, so in order to form that more perfect union it’s time for people of good will to build and bind.   It’s been a long walk from the bridge in Selma to the bridge in Charleston, but we’re getting there.  We still have to acknowledge the often painful accuracy of Winston Churchill’s backhanded compliment, “You can always count on the Americans to do the right thing, after they’ve tried everything else.”  

In a more perfect union, we’d not have maps showing that a person earning minimum wages cannot achieve a point at which only 30% of his income can pay for a one bedroom apartment.

Rent map

The darker the blue the worse the problem.  We’ll have a more perfect union when we address the complications of living on inadequate wages.  It does no good to march behind banners proclaiming that hard working Americans should “save for the future,” – when simply meeting basic needs for food, housing, and adequate clothing consume all the family’s income. It takes us no closer to a more perfect union to proclaim, “if the poor would just work harder they’d get ahead,” when elements of our judicial system, parts of our educational system, and the myopia of commerce combine to force workers into multiple jobs at minimal wages.  We are no closer to forming a more perfect union when we reward those who prosper at the expense of those who produce.

Unassisted graph

In a more perfect union this graph would be significantly lower.  How do we care for the least able among us? The learning disabled young man with nerve damage, but not quite enough to meet disability standards?  Unmarried, with no dependent children, unemployed except for odd jobs paying about $10 per hour?  A victim of child abuse, and now a victim of a system in which he doesn’t qualify for benefits because he’s never been able to find employment which sustains them. [Reuters]

We’ll be a more perfect union when we are more aware that the able-bodied are not necessarily able to fully function in our modern economy.  In a more perfect union there is more educational, job, housing, and food support for those who live on the margins of despair.

I look to the diffusion of light and education as the resource most to be relied on for ameliorating the condition, promoting the virtue and advancing the happiness of man.” Thomas Jefferson to Cornelius Blatchly, October 1822

And yet:

“About seven in 10 (69%) college seniors who graduated from public and private nonprofit colleges in 2013 had student loan debt. These borrowers owed an average of $28,400, up two percent compared to $27,850 for public and nonprofit graduates in 2012.   About one-fifth (19%) of the  Class of 2013’s debt was comprised of private loans, which are typically more costly and provide fewer consumer protections and repayment options than safer federal loans.”  [TICAS]

In a more perfect union, education advances the “happiness of man,” not merely the bottom line of banking institutions, and certainly not the unrestrained avarice of some for-profit operations who once having the federal funds in hand look to more recruitment without much concern for those already recruited.

And, then – predictably – there’s the Wall Street Casino, which has created SLABS (Student Loan Asset Based Securities).  While certainly not in the mortgage meltdown class, these are problematic because:

“What I find most disturbing about SLABS is that they create a system where an increase in tuition (and the debt-burden on the borrower) equals an increased profit for the investor. When you consider the role that unscrupulous speculators played in the mortgage crisis, one can’t help but wonder if a similar over-valuation of college tuition is taking place for the benefit of SLABS investors. With the cost of attending college increasing nearly 80% between 2003-2013 while wages have decreased, it’s no wonder that so many people are having difficulty paying off their student loans.” [MDA]

This situation is NOT the way to “diffuse light and education.”

There are countless other topics and issues on which we might dwell, assistance for the elderly, transportation, trade, economic security, police and community relations, infrastructure issues, voting rights,  domestic terrorism, domestic violence, gun violence, climate change … the list is  as long as the population rolls, as we try to create that more perfect union of imperfect human beings.

What we need is Churchill’s optimism – that eventually, after avoiding problems, exacerbating problems, tinkering with problems – we’ll do the right thing.

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Filed under banking, civil liberties, education, financial regulation, Global warming, homelessness, income inequality, Minimum Wage, poverty, racism

>Reid threatens clean vote on minimum wage bill

>OMB Watch doesn’t seem to have this posted in their Press Release section yet, so here’s a cut and paste of their e-mail regarding Republican obstruction of the Minimum Wage bill and Senator Harry Reid’s (D-NV) reaction:

“It may be impatience, or posturing, or good policy (in our view), but for whatever reason, Senate Majority Leader Harry Reid (D-NV) threatened last night to scotch the minimum wage tax package negotiations and schedule another vote on a “clean” minimum wage hike.

House and Senate taxwriters remain far apart in efforts to get the $1.3 billion House and $8.3 billion Senate “small business” tax packages into conference. Reid ironically favors the smaller House version, saying “I don’t know how much more [Republicans] want.” Senate Republican Conference chair Jon Kyl (R-AZ) meanwhile is calling for a “more robust” package than the House version, saying “it would be very difficult to send that bill to conference.”

The prospect of the GOP blocking the conference has prompted Reid to threaten a clean wage hike vote: “They’re going to have to make a decision on whether they wage to kill the minimum wage.” But on January 24, the Senate failed to invoke cloture on precisely that measure, falling six votes short, 54-43. And most of the outside agitation has come from business groups wrangle over the two tax packages.” –Posted by Dana Chasin

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>Ensign: In errore perseverare

>”Cuiusvis hominis est errare; nullius nisi insipientis in errore perseverare.” -Cicero*

Nevada Senator John Ensign (R-NV) positioned himself squarely in the “I’m no Socialist” category [BB] by voting “NO” along with 9 others in the Senate who opposed cloture on the Baucus Amendment to H.R.2 the Minimum Wage Bill. [Roll Call 34] Joining Mr. Ensign were Burr (R-NC), Chambliss (R-GA), Coburn (R-OK), DeMint (R-SC), Gregg (R-NH), Inhofe (R-OK), Isakson (R-GA), Kyl (R-AZ), and Vitter (R-LA) Clearly, if opposition to raising the minimum wage is the definition of a non-Socialist, then the 87 Senators who voted in favor of cloture just joined the Wobblies — in addition to the 394,058 citizens in Nevada who voted in favor of Question 6, or 69% . [CNN] Who knew?

*(Any man can make a mistake; only a fool keeps making the same one.)

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>Stall ball and the Iraq Occupation Resolutions

>It’s all beginning to make more sense now, thanks to Bob Geiger’s article in the Huffington Post. [HP] The Republicans in the Senate, including our very own John Ensign (R-NV) will stall the Minimum Wage bill thus protracting the time before they’ll have to vote on the Iraq occupation resolutions. Geiger quotes Nevada Senator Harry Reid on the GOP strategy: “If they defeat cloture on minimum wage, they think we’re going to bring this right back? Oh, no we’re not. We’re going to move to another subject they don’t like to talk about: escalation of the war in Iraq… they know when minimum wage is finished, we’re going to Iraq.” [Hill] []

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>Ensign Joins Minimum Wage Increase Stall Ball Game

>”Do you have such disdain for hard-working Americans that you want to pile all your amendments on this? Why don’t you just hold your amendments until other pieces of legislation? Why this volume of amendments on just the issue to try and raise the minimum wage?” Senator Edward Kennedy [C&L] [BGg]

Nevada Senator John Ensign (R-NV) evidently shares some of that disdain with his ultra-conservative colleagues. As Blue Lyon pointed out, Ensign was among the few, the dubious, and the dead wrong, to vote in favor of the Allard Amendment that would have abolished the Federal minimum wage. [Amdt 116 to Amdt 100 to H.R. 2, roll call 24] [DB] However, that wasn’t all Nevada’s junior Senator tried to do. Ensign’s been on board with all the amendments piled on by the Republican leadership in the Senate.

He joined their bandwagon on the DeMint Amendment (158) to increase the Federal minimum wage based on applicable State minimum wages. This one went down to a worse defeat than the previous amendment proposal — 18-76. [Roll Call 25] A reasonable person could conclude this really was a bad idea if the Republican leadership in the Senate could dragoon only 18 votes in favor of it. It was. In summary, in those states that use the current Federal minimum wage the increase would be a “wonderful” 70 cents, then $1.40, and finally two years from now the full $2.10. [LOC] {text amendment January 23, 2007; page CR-S962}

Then Senator Ensign piled on with an amendment of his own, No. 154. Failing to outright defeat the increase in the minimum wage, and then to delay it for two years; Ensign sought to attach the minimum wage increase to small business health care coverage. Ensign’s marginally relevant amendment called for including, “…a high deductible health plan, other than a group health plan (as defined in section 5000(b)(1))” [LOC] This back door attempt to include the GOP’s highly questionable small business health care associations in the minimum wage bill fell 47-48. [Roll Call 26]

Batter up? Kentucky Senator Jim Bunning struck out with his amendment to alter the minimum wage bill by including a repeal of the 1993 income tax provisions on Social Security benefits. This, too, was rejected, by a 42-51 vote. [Roll Call 28] This might be expected since Bunning’s batting average for 17 seasons in the Majors was .167 — a Hall of Fame pitcher, but no heavy hitter. [BStat]

The Kyl Amendment (no. 148) fundamentally said that if the Democrats wanted to give American workers an increase in the minimum wage, then restaurant corporations should be give special treatment for depreciation on their books. It was tabled on Roll Call 32 50 to 42.

Even accepting that the Senate is the “saucer that cools the legislative process” — the current hundred + possible amendments to H.R. 2 (Minimum Wage Bill) seem a bit excessive if the GOP is, as it claims, in favor of raising wages for American workers.

How many of these amendments, in addition to the one already rejected, come from the office of junior Senator John Ensign? Most of Senator Ensign’s amendments (listed below)* pertain to insuring that “illegal” workers who pay into the Social Security system are not eligible for benefits. The “Totalization Agreement” is a reference to the International Social Security Agreements that coordinate protection across national boundaries. The U.S. has such agreements with most European countries, and most recently with South Korea, Chile, Australia, and Japan. [SSA] It should be of interest that with the notable exceptions of Chile and Canada, the U.S. has not reached a Totalization Agreement with any other country in the Western Hemisphere.

*Ensign’s additions:
No. 149 – precludes Social Security credits prior to enumeration to anyone assigned an SSN after the date of enactment.
No. 150 – transmittal and approval of totalization agreements
No. 151 – attach a proposal for high deductible health plans
No. 152 – preclusion of Social Security credits prior to enumeration
No. 153 – an additional amendment concerning totalization agreements, their transmittal, adoption, and oversight

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Filed under Ensign, Minimum Wage, Social Security

>Berkley on SOTU Health Care proposal, Ensign votes to stall Minimum Wage bill

>Berkley critiques Bush’s Health Care plan:
If you aren’t on Congresswoman Shelley Berkley’s (D-NV) mailing list you might have missed her commentary on the President’s health care proposals:

If you have health insurance through your job, look out! The president has laid out a plan that ‘robs Peter to pay Paul,’ as a leading business organization (the National Retail Federation) describes it. And labor organizations agree. This plan will increase taxes on millions of middle class families who have health insurance while only helping a relatively small number of lower income workers. It’s a complicated, piecemeal scheme that that refuses to recognize that hundreds of thousands of Nevadans and nearly 50 million other Americans will be uninsured this year. Worse yet, President is playing a shell game with the tax code that creates a lot of losers and a few winners at best. This is hardly the comprehensive solution we need—a solution born of health care professionals, insurers, and federal, state, and local governments working together to roll back medical cost inflation and provide cost-effective care emphasizing prevention and wellness.” The Berkley Bulletin is available on her website.

Ensign votes to stall Minimum Wage in Senate:
Senate conservatives are blocking the adoption of the Minimum Wage hike, apparently wanting to add more tax breaks for businesses attached to the bill. [BG] “Harry Reid, Democrat of Nevada and the Senate majority leader, scheduled yesterday’s vote to demonstrate the Democrats’ lack of Republican support for a minimum-wage bill without tax cuts. Every Democrat present voted to end debate, and five moderate Republicans joined them.” […] It isn’t like Senate Majority Leader Harry Reid (D-NV) isn’t trying to be accommodating: “Reid is backing an $8.3 billion tax package that would extend for five years a tax credit for employers who hire low-income or disadvantaged workers. It also would extend until 2010 tax rules that permit businesses to combine as much as $112,000 in expenses into one annual tax deduction. The cost of the proposal would be paid with revenue realized from a proposed cap of $1 million on executive compensation that can be tax deferred. The tax package also would end deductions for court settlements or punitive damages paid by companies that have been sued.” Among the Senators who don’t feel this is enough of a boon for corporate restaurant operations — Nevada junior Senator John Ensign (R-NV) [Roll Call 23]

The GOP members of the Senate also sought to attach amendments to “afford States the rights and flexibility to determine the minimum wage” [Roll Call 24] (rejected) Ensign voting in favor. Interesting how “state’s rights” are important except when they aren’t — as in the federalization of the National Guard? Ensign was one of only 28 Senators to support this amendment. Undaunted the GOP holdouts tried another amendment — to increase the Federal minimum wage “by an amount that is based on applicable State minimum wages.” [Roll Call 25] (also rejected) This one went down 18-76. Again, Senator Ensign found himself in a distinct minority.
The next presidential election is TWO years away, but it doesn’t seem like it with the Horse Races already in progress. If you have $60 extra and happen to be in Minden, NV there’s an opportunity to meet with New Mexico Governor Bill Richardson at the DCDCC’s “Turn Nevada Blue Dinner.” Contact Bud Orange or Cindy Trigg

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