Minimum Wage Vicious Cycle

[Anthony60]

I never recommended such a system and to suggest so would exhibit a basic ignorance of monetarily sovereign governments who don't have to take to spend.

Oh, then where is the money coming from to pay these people? Or are you suggesting that the government just go deeper into debt to pay people? Please, there must be some source of these funds!

 

[JP Hochbaum]

I would dispute it's financially possible as well .

Certainly not to the benefit of society to cater to the laziest 5% of the population

Then go ahead and dispute it with facts. As far as calling 5% of the people lazy well, I would call 100% of the population lazy, that is entirely subjective lol.

 

[JP Hochbaum]

Oh, then where is the money coming from to pay these people? Or are you suggesting that the government just go deeper into debt to pay people? Please, there must be some source of these funds!

The government doesn't go into debt, they practice double entry accounting in which anytime they create a dollar they also create a treasury bond.

Here is an accounting description of how this happens.

https://hereticaldruthers.wordpress.com/2015/03/27/t-accounts-of-monetary-operations/

Federal Reserve
Assets Liabilities
+ Reserves held in Treasury’s Reserve account
-Reserves held in Commercial bank’s reserve account

Treasury
Assets Liabilities
+ Reserves held in Treasury’s Reserve account + Treasury Note
Commercial banks (private sector)
Assets Liabilities
–Reserves held in Commercial bank’s reserve account -Deposit owed to individual investor
Non-Commercial banks (private sector)
Assets Liabilities
+Treasury Note
– Deposit owed to individual investor

 

[Anthony60]

The government doesn't go into debt, they practice double entry accounting in which anytime they create a dollar they also create a treasury bond.

Here is an accounting description of how this happens.

https://hereticaldruthers.wordpress.com/2015/03/27/t-accounts-of-monetary-operations/

Federal Reserve
Assets Liabilities
+ Reserves held in Treasury’s Reserve account
-Reserves held in Commercial bank’s reserve account

Treasury
Assets Liabilities
+ Reserves held in Treasury’s Reserve account + Treasury Note
Commercial banks (private sector)
Assets Liabilities
–Reserves held in Commercial bank’s reserve account -Deposit owed to individual investor
Non-Commercial banks (private sector)
Assets Liabilities
+Treasury Note
– Deposit owed to individual investor

Now, now... you can't present a balance sheet which, of course, balances out, and then claim that the government doesn't go into debt. Well of course they don't, it is us and our children that they have taken into debt. Let's return to the real world, shall we?

 

[JP Hochbaum]

Now, now... you can't present a balance sheet which, of course, balances out, and then claim that the government doesn't go into debt. Well of course they don't, it is us and our children that they have taken into debt. Let's return to the real world, shall we?

So when did you pay the debt for WW2 or the Civil War?

 

[EMNofSeattle]

The government doesn't go into debt, they practice double entry accounting in which anytime they create a dollar they also create a treasury bond.

Here is an accounting description of how this happens.

https://hereticaldruthers.wordpress.com/2015/03/27/t-accounts-of-monetary-operations/

Federal Reserve
Assets Liabilities
+ Reserves held in Treasury’s Reserve account
-Reserves held in Commercial bank’s reserve account

Treasury
Assets Liabilities
+ Reserves held in Treasury’s Reserve account + Treasury Note
Commercial banks (private sector)
Assets Liabilities
–Reserves held in Commercial bank’s reserve account -Deposit owed to individual investor
Non-Commercial banks (private sector)
Assets Liabilities
+Treasury Note
– Deposit owed to individual investor

Translation, they issue debt

 

[Anthony60]

So when did you pay the debt for WW2 or the Civil War?

I don't remember issuing any debt for them. Wait, I wasn't alive.

 

[imagep]

Now, now... you can't present a balance sheet which, of course, balances out, and then claim that the government doesn't go into debt. Well of course they don't, it is us and our children that they have taken into debt. Let's return to the real world, shall we?

When the Federal Reserve purchases treasuries, our government doesn't really go into debt the same way as if I borrowed money from a bank.

The Federal Reserve simply exchanges money for a bond, and the treasury exchanges a bond for money. The federal reserve NEVER has to be repaid, the debt can just keep rolling over....for ever. It's not really debt, it's just a method of creating money.

 

[imagep]

Translation, they issue debt

It's only debt for accounting procedure purposes. In reality it never has to be repaid, it can just keep rolling over until the end days.

If I "loaned" you a dollar, and told you that you didn't actually have to pay it back, would you be in debt, or would you simply have an extra dollar?

This odd way of creating money is more about appearance than anything else. There are just way too many people in this world who object to our government printing money (which is really odd because that's where US$ come from), so we pretend that they are borrowed from a bank (the Fed), totally ignoring the fact that this "bank" just printed them up from thin air.

There is one legit purpose of this though, it's so that if the fed overprints money to the point that it caused inflation over it's target rate (which is very unlikely and darned near impossible), the fed could stop purchasing treasuries, and as it cashed in it's mature treasuries the money supply would start to reduce, constraining inflation. Of course the problem with this is that the treasury would either have to find more people to purchase treasuries (which wouldn't be very difficult) or congress would have to spend less or tax more (and no one really wants higher taxes or less spending).

 

[Anthony60]

When the Federal Reserve purchases treasuries, our government doesn't really go into debt the same way as if I borrowed money from a bank.

The Federal Reserve simply exchanges money for a bond, and the treasury exchanges a bond for money. The federal reserve NEVER has to be repaid, the debt can just keep rolling over....for ever. It's not really debt, it's just a method of creating money.

Yes, they just create money as they need to for their market operations. But, the part we need to worry about is the fact that the government must make payments on all the debt, that supposedly doesn't exist.

 

[imagep]

Yes, they just create money as they need to for their market operations. But, the part we need to worry about is the fact that the government must make payments on all the debt, that supposedly doesn't exist.

As treasuries mature and are "cashed in", others are purchased either by new buyers, or from the old bond holders just rolling over the matured bonds into new ones. There has never been an unsuccessful treasury auction, and there never will because the system is designed to guarantee success.

When the Fed earns interest on the bonds that it purchases, that interest is sent to the treasury, so essentially, much of the interest that our government pays is paid to itself. It's a lot like if I made myself a loan charging myself interest. The interest then becomes and expense, but it's also income (or an asset depending on how you look at it) and it more or less offsets.

The only part of the debt that may become an issue is the part that is held by foreign entities. In the unlikely event that they decided to stop purchasing treasuries and to cash in on maturing treasuries, then that would represent a claim on US assets. So exactly why would foreign entities decide to do this? Maybe because they desire to purchase more US goods, or to move their investments from US Treasuries to private sector investments in the US. If this happened, then we would have a job boom in the US as businesses seek to meet foreign demand for our products (in other words, our trade balance would have shifted). More foreign investment in US business, more demand for exports to foreign nations, business expansion, job growth and increases wealth creation isn't exactly a bad thing.

The "we are spending our grandchildren into oblivion" meme is bullcrap made up for political purposes in order to deceive the average American on the street who knows absolutely nothing about economics.

 

[Anthony60]

I think you are missing the point. We are heading to a situation where we will not be able to pay all our obligations. I remember Ted Kennedy saying, as if it was pretty good, that SS would still be able to pay 70 cents on the dollar in 40 or 50 years. But hey, no big deal, that's just us paying ourselves. Right?

 

[Xerographica]

There certainly is no evidence that minimum wage laws encourage people to make poor decisions, or that it sends a signal to foreign workers that "demand for labor is high." If you have any, let's see it.

But why would bad information only have beneficial consequences for unskilled labor? That's what I can't wrap my head around.

Let's try and visualize things...

Is this a better market? Gabe (the gay) is paying Alex (the atheist) for a cake. Isaac, who's wondering what to do with his life, is observing this exchange take place. Because neither Alex nor Isaac are omniscient... they can't see how much Gabe values the cake. All they can see is how much he pays for the cake. Only Gabe knows that he values the cake a lot more than he's paying for it.

By sharing the wrong information, Gabe increases the chances that Isaac will do the wrong thing (not supply cakes). Garbage in, Garbage out.

Is this a better market? In this scenario Gabe is paying a lot more than he values the cake. Gabe is lying again. This increases the chances that Issac will do the wrong thing (supply cakes). Garbage in, Garbage out.

X < Y = free-rider problem
X > Y = forced-rider problem

A minimum wage is an example of the forced-rider problem.

Let's think about water. Is Isaac always going to value water equally?

In the Sahara... Isaac is suffering from a severe shortage of water (dehydration). In Niagara... Isaac is suffering from a severe surplus of water (drowning). Therefore, he values water very differently in these two very different circumstances...

Y1 > Y2

Whether it's water, cake, labor, a Netflix show or national defense... what we pay should accurately communicate our valuations. This increases the chances that other people will do the right things. Otherwise, we all end up with more of what we want less and less of what we want more.

Accurate information = treasure in, treasure out
Inaccurate information = garbage in, garbage out

Coincidentally, Alex Tabarrok recently shared some relevant thoughts in his review (Is Capitalism Making Us Stupid?) of Joseph Heath's new book Enlightenment 2.0...

Advertising may sometimes trick us into buying products that don’t serve our interests, but the more we are tricked the greater the incentive to become informed. In the market, we can act on information to improve our purchasing decisions. In politics, it doesn’t pay to be informed because as individuals we have nearly zero power to improve collective decisions. In the market, information is power. In politics, information is impotent.

Also...

Heath’s conservatism makes him unwilling to suggest radical ideas. But big problems often need radical solutions. Voting, for example, reduces the cost of ignorance and irrationality. Raise the cost and people become more informed and rational. When pollsters ask Democrats and Republicans factual questions such as did inflation fall during Reagan’s presidency or were weapons of mass destruction found in Iraq, they answer in a highly partisan manner. But partisan bias greatly diminishes when voters are told that they will be paid if they answer correctly. Betting is a more reliable guarantor of objectivity than voting. Or, as I once wrote, “A bet is a tax on bull****.”

 

[JP Hochbaum]

I think you are missing the point. We are heading to a situation where we will not be able to pay all our obligations. I remember Ted Kennedy saying, as if it was pretty good, that SS would still be able to pay 70 cents on the dollar in 40 or 50 years. But hey, no big deal, that's just us paying ourselves. Right?

That will never happen, our country is monetarily sovereign. Which means any debt denominated in US currency can be paid back in US currency forever and ever. (Don't take that as me saying we should just print like crazy, just wanted to get rid of the myth that we can't pay all debts).

 

[Anthony60]

That will never happen, our country is monetarily sovereign. Which means any debt denominated in US currency can be paid back in US currency forever and ever. (Don't take that as me saying we should just print like crazy, just wanted to get rid of the myth that we can't pay all debts).

That's a given.

 

[imagep]

I think you are missing the point. We are heading to a situation where we will not be able to pay all our obligations. I remember Ted Kennedy saying, as if it was pretty good, that SS would still be able to pay 70 cents on the dollar in 40 or 50 years. But hey, no big deal, that's just us paying ourselves. Right?

You aren't paying attention.

How is it possible that a country which can print it's own money without any restraints other than inflation, could ever "run out of money"?

 

[imagep]

That's a given.

Apparently it's not "a given" for everyone. When someone claims that the US will eventually not be able to pay it's obligations, that's proof that someone doesn't understand how our system works.

 

[Anthony60]

Apparently it's not "a given" for everyone. When someone claims that the US will eventually not be able to pay it's obligations, that's proof that someone doesn't understand how our system works.

Perhaps I need to make this clear... that's really not a viable option, to get to the point that we have to start printing money to pay debts. If we were to amass so much debt that we had to do that, we would be in serious trouble. If you are going to say that the debt doesn't matter because we can always print money to pay it, then you've really got a narrow view of the effect that would have on the country. You need to understand that that would be a very bad thing.

 

[imagep]

Perhaps I need to make this clear... that's really not a viable option, to get to the point that we have to start printing money to pay debts. If we were to amass so much debt that we had to do that, we would be in serious trouble. If you are going to say that the debt doesn't matter because we can always print money to pay it, then you've really got a narrow view of the effect that would have on the country. You need to understand that that would be a very bad thing.

We print money every year. Where do you think it comes from? And worse comes) to worse, the money that we would have to print to honor the treasuries would be over a course of 30 years, not all in one year (which is why the GDP milestone doesn't particularly matter).

The federal debt NEVER has to be repaid.

First of all, a big chunk of it is owned by the federal government, thus that portion is merely and accounting entry and not debt. It would be like if my left pocket owed money to my right pocket.

The next chunk of it owned by individual and institutional investors within the US, and the vast majority of these investors simply keep rolling over the treasuries that they own - so when an old one matures, they use the proceeds to purchase a new one. These are places like insurance companies, retirement funds, and college endowment funds.

The third part of it is foreign investors. Now why would these investors would decide to stop purchasing US treasuries? Because they needed the US dollars right? And why would someone in Japan or China need US dollars? Obviously to purchase US goods and services. So if they started cashing in their treasuries, our trade deficit would reverse, and business would boom in the US because of increased demand for our products. We would approach 100% employment, and we would start creating new wealth like crazy.

Now treasuries are divided up between short, medium and long term maturation dates. If your concern is that everyone who owns treasuries would suddenly demand their money back, then that's not a valid concern because they don't have the right to redeem those treasuries before they mature. The only thing they could do is to sell them on the private market. Now if everyone was selling, and no one was buying, then the treasury or the fed could in theory repurchase those bonds for pennies on the dollar. That would be a wonderful exchange for the US taxpayer, a lot like Apples recent buy back of stock.

And of course we create money by lending it into circulation. If all debt was to be repaid today (which would be the dream world for a lot of right wing debt hawks), there would be no more money in existence. Trade would come to a halt, people would stop getting paychecks, and we would likely return to the way we lived in the stone age (the last time that we didn't have government issued money was 5,000 years ago).

There litterally is no downside to the federal debt.

 

[Anthony60]

Well, I guess I wasn't clear enough, or you felt like giving us all your unsolicited understanding of federal debt.

 

[imagep]

Well, I guess I wasn't clear enough, or you felt like giving us all your unsolicited understanding of federal debt.

No, you weren't clear enough. You never bothered to explain WHY you feel like you do, you just make a particular claim, with no validation or reasoning behind it.

I offered an alternative opinion, and explained it.

Neither our opinions have to be "solicited" on a public forum.

 

[Anthony60]

No, you weren't clear enough. You never bothered to explain WHY you feel like you do, you just make a particular claim, with no validation or reasoning behind it.

I offered an alternative opinion, and explained it.

Neither our opinions have to be "solicited" on a public forum.

So, trying to be oh-so-clear, we must make payments on the debt. Service it, if you will. You keep going on and on about how we can just print more money to pay it, which I think everyone here already knows. Which, if I remember correctly, does not actually increase the money supply, but dilutes it.

But my point is that if we are to the point that we have to do that, we are in pretty rough shape. And people/countries will stop buying our securities if we were in that condition.

 

[imagep]

So, trying to be oh-so-clear, we must make payments on the debt. Service it, if you will. You keep going on and on about how we can just print more money to pay it, which I think everyone here already knows. Which, if I remember correctly, does not actually increase the money supply, but dilutes it.

But my point is that if we are to the point that we have to do that, we are in pretty rough shape. And people/countries will stop buying our securities if we were in that condition.

We don't HAVE to print more, we could always increase taxes or cut government or borrow more from those who desire to purchase treasuries, or whatever. Anyhow, the point is that we don't HAVE to do anything, including defaulting on the debt. We have lot's of options which can be used as appropriate. Certainly cutting government spending or increasing taxes isn't the wisest move in a weak economy, so that pretty much means we should print money.

Personally, I'm all for cutting the budget, as long as we are cutting means tested welfare and military spending abroad. I don't hear any republican politicians pushing for any specific spending cuts though, they just talk about decreasing the size of government, but never actually do it.

Governments either print money, borrow money, or forcibly tax it away. the first two are far preferable than forcible taxation.

 

[RGacky3]

The Nobel Prize liberal economist Paul Krugman recently argued that we need more government because people tend to make poor education/career decisions. Shortly after reading Krugman's case for bigger government, I read an article in the LA Times about how some people in the Philippines were lured to America with the false promise of high wages.

Somewhat inspired by this very popular blog entry... A Week of Shorter Rod Drehers... I patched together some relevant snippets from Paul Krugman...

Krugman: The world economy is a system -- a complex web of feedback relationships -- not a simple chain of one-way effects
Krugman: Wages, prices, trade, and investment flows are outcomes, not givens
Krugman: Wages are a market price--determined by supply and demand
Krugman: Money still talks — indeed, thanks in part to the Roberts court, it talks louder than ever
Krugman: Raise minimum wages by a substantial amount
Krugman: The price of labor--unlike that of gasoline, or Manhattan apartments--can be set based on considerations of justice, not supply and demand, without unpleasant side effects
Krugman: Your decision to stay in school or go out and work will shape your lifetime career
Krugman: Now, the fact is that people make decisions like these badly
Krugman: Bad choices in education are the norm where choice is free
Krugman: He and his unwary readers imagine that his conclusions simply emerge from the facts, unaware that they are driven by implicit assumptions that could not survive the light of day

If you'd like the context, just click the links. As you can see... Krugman used to be an opponent of minimum wages... but now he's a proponent.

From my perspective, a minimum wage is a problem because it doesn't accurately communicate the demand for unskilled labor in any given area. This increases the chances that people will make really bad career/education decisions. Here's how I've illustrated this...

And here's another attempt...

My drawing skills aren't that great... but hopefully you should get the idea that, in this drawing, the US has more than enough people pushing brooms (unskilled labor). In economics... "more than enough" means that there's a surplus. Usually when there's a surplus of something the price will accurately communicate this information to the entire world. A low price says "hey, we have more than enough!". This important information helps people make informed decisions. When this important information changes, people's decisions will change accordingly. So in order for the US to have ended up with such a massive surplus of unskilled labor... something must have gone wrong with the price system. And that something is the minimum wage. A minimum wage says, "hey, we don't have enough unskilled labor!".

If you'd like to read more than 5,000 characters... Minimum Wage Vicious Cycle.

Do you really think that higher wages for unskilled labor means a less educated workforce?

You do realize that this is empirically verifiable right?

(and empirically you are wrong).

 

[Visbek]

But why would bad information only have beneficial consequences for unskilled labor?

As in, you don't understand your own argument? :shock:

Let's try and visualize things...

In the future, let's not. Words are much more precise.

Is this a better market? Gabe (the gay) is paying Alex (the atheist) for a cake. Isaac, who's wondering what to do with his life, is observing this exchange take place. Because neither Alex nor Isaac are omniscient... they can't see how much Gabe values the cake. All they can see is how much he pays for the cake. Only Gabe knows that he values the cake a lot more than he's paying for it.

By sharing the wrong information, Gabe increases the chances that Isaac will do the wrong thing (not supply cakes)....

What nonsense is this?

What does sexual orientation or philosophical outlook have anything to do with the value of a cake?

What "value" are you discussing here? Are you suggesting that Gabe is going to resell Alex's cake at a profit? Do you mean that Gabe thinks he's getting a good deal? Is Alex taking a loss by selling Gabe the cake?

We also constantly run into situations where the value of a good doesn't match its price. Why is that a "lie?"

And what does this scenario have to do with minimum wages?

Is this a better market? In this scenario Gabe is paying a lot more than he values the cake. Gabe is lying again. This increases the chances that Issac will do the wrong thing (supply cakes). Garbage in, Garbage out.

What the what?

Consumers and sellers constantly mismatch information. There are all sorts of examples where a company can receive bad information, and ramp up production, or reduce production too much. There are many conditions where the price one pays for a good is more than one wants to pay, or more than its strict economic value, e.g. inelastic goods or when supply is low. There are numerous instances where consumers purchase higher-priced goods that offer no benefit (economic or otherwise) over a cheaper version.

Billions of dollars are made every year via arbitrage, which is basically the exploitation of a pricing discrepancy. What you call "garbage," hedge funds call "profit."

A minimum wage is an example of the forced-rider problem.

Next time, you can just say that's the case, instead of going into these bizarre irrelevant asides.

There are some elements to this, namely that employers are essentially forced to bear the primary costs of a public good (making sure employees have a living wage). At the same time, some of us view it as unethical for the employers to pay their employees the lowest possible wage, or see how minimum-wage employers benefit from those minimum wages, as it often improves the market as a whole for their goods.

Let's think about water. Is Isaac always going to value water equally?

Congratulations on learning about how supply affects pricing. :roll:

Whether it's water, cake, labor, a Netflix show or national defense... what we pay should accurately communicate our valuations. This increases the chances that other people will do the right things.

If that was the case, then we wouldn't need minimum wage laws, or any other price regulations.

The reason why we establish those laws is because the market has no ethics. It is amoral. Its job is merely to connect buyers and sellers, not to pass judgment on the outcomes. Price controls make the market more equitable, and usually decrease market efficiency. Again, this is Macroeconomics 101. Even Friedman's own textbook discusses this, using rent control as an example of how such systems can cause problems.

The recent Friedman article -- the one you quoted several times in your initial post -- gives his arguments for why that is not a major problem in the case of current minimum wage increases, including a lack of empirical evidence for the type of results we'd normally expect (e.g. employers aren't firing minimum wage workers en masse.) Maybe you should read the article you're trying to criticize.

Accurate information = treasure in, treasure out
Inaccurate information = garbage in, garbage out

Please.

The markets are awash with inaccurate information. An entire industry (advertising) is dedicated to misinforming consumers.

Further, homo economicus is a myth. It's not real. There are a huge variety of cognitive, psychological and emotional mechanisms that prevent people from making economic decisions on a purely rational basis. Do you think people are buying the Apple Watch because it's increasing their productivity? Does an 18 karat gold-case Apple Watch offer $9,450 more in value than the model with a stainless steel case? Is eating a McDonald's burger ever truly rational?