oftwominds-Charles Hugh Smith

Income Disparity Solution: Restore the Minimum Wage to 1969 Levels

2012-05-31T07:59:00.004-07:00

If we want to lessen income disparity, the solution is easy: restore the minimum wage to levels considered reasonable 43 years ago in 1969.

There is much hand-wringing about the vast income disparity in the U.S. between the top 5% and the bottom 25%, and precious little offered as a solution. Once again we are told the problem is "complex" and thus by inference, insoluble.

Actually, it's easily addressed with one simple act: restore the minimum wage to its 1969 level, and adjust it for the inflation that has been officially under-reported. If you go to the Bureau of Labor Statistics Inflation Calculator and plug in $1.60 (the minimum wage in 1969 when I started working summers in high school) and select the year 1969, you find that in 2012 dollars the minimum wage should be $10 per hour if it were to match the rate considered "reasonable" 43 years ago, when the nation was significantly less wealthy and much less productive.

The current Federal minimum wage is $7.25, though states can raise it at their discretion. State rates runs from $7.25 to $8.25, with Washington state the one outlier at $9.04/hour.

In 40 years of unparalleled wealth and income creation, the U.S. minimum wage has declined by roughly a third in real terms. "Official" measures of inflation have been gamed and massaged for decades to artificially lower the rate, for a variety of reasons: to mask the destructiveness to purchasing power of Federal Reserve policy, to lower the annual cost-of-living increases to Social Security recipients, and to generally make inept politicians look more competent than reality would allow.

The full extent of this gaming is open to debate, but let's assume inflation has been under-reported by about 1% per year for the past two decades. That would suggest the minimum wage should be adjusted upward by about 20%, from $10 to $12/hour.

All those claiming such an increase will destroy the nation (or equivalent hyperbole) need to explain how the nation survived the prosperous 1960s paying the equivalent of $10-$12/hour in minimum wage. Exactly what has weakened the economy such that the lowest paid workers must bear the brunt of wage cuts?

To understand the modest scale of such an increase in the context of total household income and wealth, consider these charts. Let's start by recalling that 38 Million Workers Made Less Than $10,000 in 2010-- Equal to California's Population. (Why the Middle Class Is Doomed April 17, 2012).

There are about 140 million jobs in the U.S., including part-time and temporary, and roughly 40 million workers earn less than $10,000 a year. This is the vast population earning minimum wage, and their earnings constitute a small share of total income.

The bottom 90% have seen their wages stagnate for 40 years, but the bottom layer earning minimum wage have seen their real earnings decline by roughly one-third (not counting entitlements they might qualify for as members of the "working poor.")

In the good old days of more widely distributed incomes, the bottom 20% who generally earn minimum wage actually saw significant increases in income. That has reversed in the financialization era.

Those earning minimum wage hold a tiny sliver of the nation's wealth.

Apologists for low wages claim we must "get competitive" with low-wage nations, as global wage arbitrage has cut wages everywhere. This claim overlooks the fact that the vast majority of minimum-wage positions are precisely the jobs that cannot be outsourced: cleaning offices, fast-food jobs, pizza delivery, agricultural work, and so on.

Other apologists claim that since these positions are "low productivity," they "deserve" lower wages. If we as a nation reckoned them worthy of $10-$12/hour 40 years ago, then why are low-productivity jobs less deserving now?

Still other apologists claim that raising the minimum wage would 1) destroy small businesses and 2) trigger painful increases in food and other prices.

The only way the minimum wage can hurt small business is if some small businesses are allowed to cheat and pay illegally low wages as a way of lowering the cost of their service. If the law were uniformly and aggressively enforced, for "black market" and above-market wages alike, then those cheating their employees would slowly be eliminated from the economy via heavy fines.

Once everyone is paying $10-$12/hour, even for informal work, the "playing field" will be leveled at a higher scale.

Given the modest share of the national income earned by low-paid workers, claims that costs would skyrocket are groundless. Yes, costs would rise, but not by enough to impoverish the nation.

What all those decrying restoration of a reasonable minimum wage overlook is that the working poor will spend most of their increased wages, and that will actually aid the economy where it counts. Aren't we tired yet of Federal Reserve policies that enable more skimming by the top 1% while giving nothing to the bottom 50%? The simple, straightforward way to correct the vast income imbalances is to restore the minimum wage to 1969 levels and adjust for under-reported inflation.

What about the wealthy? Shouldn't they pay more than the rest of us? Well, actually, they already do, for the most part: the top 25% of taxpayers--34 million workers out of a workforce of 140 million--pay almost 90% of all Federal income taxes. But we'll address that aspect of income disparity tomorrow.

My latest conversation with Gordon T. Long, on Crony Capitalism: (YouTube)

Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

Read the Introduction (2,600 words) and Chapter One (7,600 words) for free.

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution, and it combines cultural, technological, financial and political elements in a dynamic flux.History is not fixed; it is in our hands. We cannot await a remote future transition to transform our lives. Revolution begins with our internal understanding and reaches fruition in our coherently directed daily actions in the lived-in world.

Thank you, Kerry W. ($50), for your splendidly generous contribution to this site--I am greatly honored by your support and readership.

"Big Idea Solution": Radically Lower the Cost Basis of the Entire Economy

2012-05-30T07:24:00.000-07:00

Our choice is simple: either continue on the State-cartel path of complexity and rising costs that leads to a death spiral, or re-energize the forces of the market and community.

We are constantly told all our problems are too complex to be addressed with simple "big idea" solutions. Complex problems require complex solutions, we are assured, and so the "solutions" conjured by the Central State/Cartel Status Quo are so convoluted and complex (for example, the 2,319-page Dodd-Frank Wall Street Reform and Consumer Protection Act or the 2,074-page Obamacare bill) that legislators say they must "pass the bill to see what's in it." (What If We're Beyond Mere Policy Tweaks? February 6, 2012)

The real "solution" is to see that complexity itself is the roadblock to radical reformation of failed systems. Complexity is the subterfuge the Status Quo uses to erect simulacra "reforms" while further consolidating their power behind the artificial moat of complexity.

Over the next three days, I will present three "big idea" solutions that cut through the self-serving thicket of complexity. Nature is complex, but it operates according to a set of relatively simple rules. The interactions can be complex but the guiding principles can be, and indeed, must be, simple.

Big Idea One: Radically lower the cost basis of the entire U.S. economy. The cost basis of any activity is self-evident: what are the total costs of the production of a good or service? The surplus produced is the net profit which can be spent on consumption or invested in productive assets (or squandered in mal-investments).

We can understand surplus by way of simple examples. If it costs two barrels of oil to extract one barrel of oil from a well, there is no surplus at all to this activity; rather, it is a losing proposition. If it costs $100 to plow, plant, nurture and harvest $50 of crops, there is no surplus generated by this economic activity.

Anyone pursuing these kinds of zero-surplus activity will soon go broke and be eliminated from the financial "gene pool" of investors.

Central States and cartels by definition face no market forces on their cost basis.Central States (governments) have no competition and so there are no market pressures to contain costs. As a result, governments are intrinsically incapable of radically reducing the cost basis of their activity.

Cartels (the sickcare industry, the defense industry, etc.) by definition profit by fixing prices, not by adapting to competition, and so rising costs are simply shifted to consumers, with the aid of an over-regulating, moat-building "complex" Central State.

I cover this dynamic in depth in my books Survival+: Structuring Prosperity for Yourself and the Nation and Resistance, Revolution, Liberation: A Model for Positive Change.

Unproductive layers of activity are essentially friction within the economy ( How Much of Our Economy Is Essentially Friction? September 20, 2011), and as with a machine, when the friction consumes all the surplus, the machine freezes up. Greece is an excellent example of this dynamic.

As I explain in Resistance, Revolution, Liberation, there are three fundamental forces in society: the State, the market and community (i.e. the non-market social order).

As friction from the State and its crony-capitalist partners, the various cartels, inevitably rises, the surplus left to distribute via entitlements or invest shrinks.

The State has two mechanisms to counter this decline in surplus: it raises taxes on the productive enterprises and people, and redistributes that money to less productive dependents of the State via entitlements. Secondly, it prints money and redistributes the new cash.

Both are short-term expediencies that inevitably lead to collapse. Once taxes skim the economy's surplus for consumption, there is not enough left over to invest in productive assets that increase productivity. This triggers a death-spiral (positive feedback loop): as productivity stagnates, so does the surplus generated by economic activity. This leads to lower tax revenues, so the State raises taxes on the remaining productive elements, further bleeding the economy of funds that could be invested in future productivity gains.

Printing money debases the purchasing power of the existing currency, and over time this destroys the value of the currency and the wealth of those holding the currency. As people retreat to gold and land, the liquid capital necessary to invest in new ventures dries up, adding to the death-spiral described above.

In essence, the State and its cartels raise the cost basis of getting by from $10,000 to $40,000 by letting unproductive friction absorb all the economy's surplus. Layers of bureaucracy, paperwork and outright fraud consume roughly half of the funds spent on healthcare in the U.S.--not coincidentally, this aligns with the fact that the U.S. spends twice as much per person on sickcare compared to our developed-world competititors.(The "Impossible" Healthcare Solution: Go Back to Cash July 29, 2009)

The State overcomes this by raising taxes on the productive and printing money.The State's "solution" isn't to reduce its own fiefdoms' spending or dismantle the high-friction cartels: it's to tax or print $30,000 and send this money to those making $10,000, so they can consume as much as those earning $40,000.

As noted above, consuming the nation's surplus in consumption and friction starves the nation of market-driven productive investment, which then leads to the death spirals of lower productivity and rising unproductive friction.

The only way to lower the actual cost basis of the economy is to reduce the role and power of the Central State, dismantle its favored cartels and re-empower community and the market forces of innovation and competition. The Central State and its cartels are incapable of innovation or reducing costs because they dominate the market and the community.

Community must play a central role in lowering the cost basis. The market cannot address all problems, though its ideological boosters wear blinders that demand allegiance to nothing but the market.

Community gardens are non-market social orders that enliven and empower communities and neighborhoods, yet their "market value" is negative: on a strictly cost basis, the food produced by agribusiness is cheaper on a kilocalorie/dollar basis than the food raised by community members in their garden. But this calculation is akin to reducing a human to a handful of ash and valuing that person at the market value of the calcium and other minerals in the ash.

Much of value in human life is beyond the market. Agribusiness would rather the State send money to people so they can sit at home "consuming" TV and media and then go out and buy highly profitable packaged food that sickens their bodies and spirits. That is the end result of an economy dominated by the State and cartels: a deeply and perniciously pathological society and economy.

Market forces in housing see the "solution" as wealthy Elites and corporations buying up all the housing and then renting it to recipients of State aid for high rents. Co-ops, co-housing and a host of other community housing solutions that radically lower the cost-basis of housing are rejected because they don't generate large profits. Their purpose is to lower the cost of housing while greatly enhancing its liveability and non-market value--"assets" that the market simply doesn't recognize unless they can be exploited for high profit margins.

This is why both the non-market forces of community and the market forces of efficiency and profit must share the economy if the cost basis is to be radically lowered. If people only make $10,000 in the market economy, the State's solution is to redistribute or print $30,000 so their consumption can equal that of people earning $40,000.

The solution I suggest is to radically lower the cost basis of the economy so those earning $10,000 can live simply and well on what they earn.

This solution does not compute for the Central State and its protected cartels, as they would lose their dominance over the economy. They have chosen the death-spiral for our future, and that's what we'll get until we restore some equilibrium between the State, the market and the non-market commmunity.

Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

Read the Introduction (2,600 words) and Chapter One (7,600 words) for free.

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution, and it combines cultural, technological, financial and political elements in a dynamic flux.History is not fixed; it is in our hands. We cannot await a remote future transition to transform our lives. Revolution begins with our internal understanding and reaches fruition in our coherently directed daily actions in the lived-in world.

Thank you, Chad W. ($10/mo), for your outrageously generous re-subscription to this site--I am greatly honored by your steadfast support and readership.

Safe Haven: Could U.S. Markets Rally in a Global Decoupling?

2012-05-29T07:30:00.000-07:00

The primary purpose of "safe havens" for "big money" is to preserve capital in realtively low-risk, highly liquid markets. There are few markets that offer both.

Experienced investors try to avoid the "confirmation bias" trap by asking what supports the other side of the trade. Confirmation bias is our instinct to find data to support our position once it is taken. To counter this bias, we must attempt to build a plausible case against our position. If the effort is sincere, we gain a fuller understanding of the market we are playing (or perhaps avoiding).

That the global economy is going to heck in a handbasket is self-evident. If you over-weight anecdotal "on the ground" evidence and fade the ginned-up official statistics, it is obvious the global slowdown is picking up speed in Europe and China, two of the world's largest "linchpin" economies. For example: China's once-hot economy is turning cold.

On the face of it, "growth"-related sectors such as commodities, stocks and high-risk bonds should decline across the globe as the recessionary reality sinks in, while relatively safe assets such as government bonds in Japan, Germany and the U.S. (the global economies perceived as more stable and thus less at risk) should see inflows.

And indeed, bond yields are falling as money flows into these safe-haven bonds.

Since "big money" tends to move markets, let's put ourselves in the shoes of someone tasked with managing $100 billion. If we understand the world's investment options from this point of view, we might gain some insight into the direction and dynamics of where "big money" will be flowing.

Our prime directive is not to make a lot of money with the $100 billion--it's to preserve this precious capital and keep it liquid so opportunities that arise can be exploited.

The traditional "safe havens" of gold and real estate have served the wealthy well for thousands of years, and they remain attractive capital-preservation safe havens. Moving capital out of inherently risky financial instruments into real assets is a time-honored risk-management strategy ("make it on Wall Street, bury it on Main Street"). We can discern this strategy at work in stories of Beverly Hills, Calif. houses drawing multiple bids for the first time in years and the long-term bull market in gold.

But gold and real estate have their downsides: first, they are relatively illiquid, that is, it's not that easy to "park" $10 billion in either sector and then sell it quickly to move the capital elsewhere. Second, each market has its own risks: the gold market is relatively small and volatile, and it's simply not big enough to move $100 billion in and out. Its role in risk management and capital preservation is important but limited.

Real estate is highly local, and its liquidity and return on investment subject to many dynamics. Various macro-conditions can turn a "hot" market into a cold one, and a "safe" investment can become dead-money or even a losing investment if rising property taxes eat away at the net return from rental income.

As an example of these limitations, Warren Buffett recently observed that he would buy thousands of single-family homes in the U.S. if it were possible to do so on a wholesale basis. Eevn if we discount this sentiment as propaganda aimed at supporting the housing market, it highlights real estate's fundamental limitations as a place to park $100 billion or more.

That leaves financial markets as a necessary part of any serious-money allocation. So where do you park $100 billion? The sums allocated to precious metals and real estate are limited by the conditions noted above, and that leaves a significant percentage to park in capital markets somewhere.

The choices are not unlimited. Europe and the euro: risky, for all the reasons we know; a quick "solution" is essentially impossible. You could wake up and find you've lost 20% just as a reflection of a weakening euro. China: anecdotally, money is leaving China as the boom is over, and all sorts of difficult-to-gauge risks are rearing up. Emerging markets: too small to be liquid, and despite the happy-talk about permanent developing-world booms, they're all linked to the markets in Europe, the U.S., China and Japan. (For example, the Indian rupee is in a free-fall against the U.S. dollar.)

That leaves Japan and the U.S. as the only available large, liquid markets. But Japan's basic dynamic is stagnation and malaise; corporate and government players there are questioning the entire Japan, Inc. model, as it is obviously failing to meet global challenges and spark a new era of growth. Japan's 20-year Keynesian "experiment" is an abysmal failure, having accomplished little while digging the nation a fiscal debt hole.

Even with these difficulties, Japan is perceived as a "safe haven" of stability, and that explains the relative strength of its currency, the yen.

In other words, there are visible limits on the stability of Japan and limited opportunities for growth in that economy.

That leaves the U.S., warts and all. Anyone responsible for $100 billion needs transparency, predictability and good intelligence to manage risk and return. For all its many problems, the U.S. offers relatively plentiful transparency, predictability and market data. Its equity, bond and currency markets are so vast that you can move $100 billion in and out with relative ease.

This "safe haven" status can be discerned in the strengthening U.S. dollar. Despite a central bank (The Federal Reserve) with an avowed goal of weakening the nation's currency (the U.S. dollar), the USD has been in an long-term uptrend for a year--a trend I have noted many times here, starting in April 2011.

That means a bet in the U.S. bond or stock market is a double bet, as these markets are denominated in U.S. dollars. Even if they go nowhere, the capital invested in them will gain purchasing power as the dollar strengthens.

All this suggests a "decoupling" of the U.S. bond and stock markets from the rest of the globe's markets. Put yourself in the shoes of someone responsible for safekeeping $100 billion and keeping much of it liquid in treacherous times, and ask yourself: where can you park this money where it won't blow up the market just from its size? What are the safest, most liquid markets out there?

The answer will very likely point the future direction of global markets.

Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

Read the Introduction (2,600 words) and Chapter One (7,600 words) for free.

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution, and it combines cultural, technological, financial and political elements in a dynamic flux.History is not fixed; it is in our hands. We cannot await a remote future transition to transform our lives. Revolution begins with our internal understanding and reaches fruition in our coherently directed daily actions in the lived-in world.

Thank you, Michael N. ($100), for your outrageously generous contribution to this site--I am greatly honored by your steadfast support and readership.