Minimum wages and poverty

A $15 minimum wage would be great for those employed by the fast food chains but would probably do little to alleviate poverty for those who remain unemployed or otherwise close to the line.

This observation follows from a Business Insider video interview with Paul Krugman.  I was concerned because it is not clear the headline is supported by what he said.   Here’s the headline: “Watch Paul Krugman, in 2 minutes, Destroy The Argument That We Can’t Pay Fast-Food Workers Higher Wages” and here is what he said:  “But what all the evidence says is we can raise these wages without losing a lot of jobs.  The best research on minimum wages all says that when the minimum wage is as low as it is in the United States there is hardly any cost to raising it.”  I know the guy won a Nobel Prize in economics but that is all the more reason to carefully evaluate a statement such as this.  Sometimes people who are recognized as experts make unsupported statements outside their specialty.

In this case he may be partially right.  Some firms in industries that usually employ  low-paid workers have found they can do well by paying their staff better than usual and providing decent benefits.  Employees who are being treated well stay on the job longer and provide better service to customers. This may not apply to all firms in all industries. 

But the reality is that generally wages are determined by supply and demand and governments that try to fight market forces often make things worse.   That people are willing to work for current wages paid by the fast-food industry indicates the supply exceeds the demand.  There may also be small firms paying low wages that genuinely cannot pay $15 per hour.  There could also be lots of owners or self-employed people not making that much.

Perhaps this should be considered a problem of poverty and we should be looking to alleviate all poverty rather than just for those who make the most noise.

I believe we should have a collective responsibility to ensure everyone has the opportunity to live at the same standard as most other people.  One way to do this would be a universal income scheme.  As well as dealing with poverty such a scheme would in effect set a minimum wage determined by supply and demand in that people would not have to work for low wages for life support.

Poverty is a big issue in North America and around the world, one which is probably going to get worse as the economy continues to slide.  Let’s try to arrange our economy so that no one has to live in poverty.

 

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An alien invasion or the consequences of stimulus

With austerity seemingly not working to resolve economic problems and the apparent success of Abenomics and recent announcements that there may be thousands of earth like planets,  it may be time to have a second look at Paul Krugman’s proposal for governments to start preparing for an alien invasion from outer space. On second thought,  the consequences of launching into a major stimulus program may be worse than the slim chance of an invasion.

As there are two sides to the economy, financial and real,  we should look at both of them.

On the real or physical side we need to look at two things – resources and labor reducing technology as the goal of stimulus would be economic growth and full employment.

For there to be economic growth there will need to be an increase in the quantity of goods and services we produce.  The limit on services may not  be clear but regardless of the service economy we all need physical things to survive.    The production of more goods will require more mineral and energy resources and that could be a problem.  There are lots of resources left in the earth’s crust but we have used up the most accessible and those that are left are difficult and require a lot of energy to extract.  That could be a limit on further economic growth.

So what would be the consequences of attempted stimulus on the resource base?  Probably more energy would be required leaving less for other things and probably we would bring forward the timing of a major economic collapse.

Another limit on full employment is labor reducing technology of which we use a lot.  Here I see two questions:  How is the freed up time to be used and who is to make that decision.  Personally I enjoy reading, thinking and writing this weblog and I enjoy wood turning.   I don’t want Paul Krugman telling me and others that we have to spend a lot of time preparing for an alien invasion.   We now have the technology that most people don’t need to spend most of their lives “working”.  I would like to see some sort of universal income scheme which would allow individuals to decide what they want to do with their time.

On the financial side of the economy stimulus means two potential problems – inflation or a financial crash.  A government stimulus program would be trying to increase the production of goods and services.  With limited potential for growth this would put upward pressure on prices.  With all the excess money supply which central banks have been pushing into the economy I wouldn’t want to rule out hyperinflation.

The other potential financial problem is another crash within the banking system.  The way we create money is a Ponzi scheme which has to crash from time to time.  If inflation doesn’t get us a crash will.

I fear that Krugman was only half-joking.  He wants governments to undertake a massive stimulus program and I fear that could bring forward a major economic collapse.

Austerity appears not to be working either and it is causing problems for lots of people, especially the young.  The challenge then is to find a third way and at this point I must refer you to the essay “LETS go to market: Dealing with the economic crisis” on this weblog.

Oh, oh.  Did I just see an armed flying saucer go by my window?

Dangerous debt

I came across this article from the Guardian about the U.S. spend or cut debate shortly after I started reading This Time is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth S. Rogoff.  The article reports Paul Krugman is urging  the Obama administration to go with a trillion dollars of stimulus.

In the book the second paragraph of the preface talks of excessive debt accumulation.  Granted that the authors are talking about dept during a boom, but if that is a problem what is it during a  recession.

If there is one common theme to the vast range or crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations or consumers, often poses greater systemic risk that it seems during a boom.  Infusions of cash can make a government look like it is providing greater growth to its economy that it really is. Private sector borrowing binges can inflate housing and stock prices far beyond their long-run sustainable levels, and make banks seem more stable and profitable they really are.  Such large-scale debt buildups pose risks because they make an economy vulnerable to crises of confidence, particularly when debt is short  term and needs to  be constantly refinanced.  Debt-fueled booms all too often provide  false affirmation of a government’s policies, a financial institution’s ability to make outsized profits, or a country’s standard of living.  Most of these booms end badly. Of course, debt instruments are crucial to all economies, ancient and modern, but balancing the risk and opportunities of debt is always a challenge, a challenge policy makers, investors, and ordinary citizens must never forget

My own reasons for objecting to stimulus spending is stated in the post Economic policy, least squares and the Elliott wave

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