Obama: We can’t cut our way into prosperity.
Republicans: We can’t tax our way into prosperity.
Man behind the curtain: Hey, why not inflate our way into prosperity?
It’s a simple theory. If you have a lot of fixed costs (mortgage, car loans, student loans, credit cards, medical bills, etc.), and your income doubles, then your fixed expenses will account for a smaller percentage of your income. You now have more money to spend on consumer goods, right? You’ll help the economy, right?
It makes a certain amount of sense for people who already have a home, car, etc., and are not planning to purchase any new goods in the foreseeable future. However, the real problem with this plan will be the cost of “new” money. The banks, because they are no longer profiting from “old” money, will automatically make new money much more expensive. And, it will be expensive. After all, they have will have to compensate for what they are losing on old money.
So, if you want to purchase a new home, or a new car, or a new student loan… well, good luck. Investments? Not likely. If the rate of return is less than the cost of money, the money stays put. No investment means more recession.
This is apparently what Obama wants according to his call for raising the minimum wage from $7.25 to $9/hour during his State of the Union address. Raising the Federal minimum wage by the extent he’s asking (a $1.75 increase) WILL BE inflationary. The eventual result will be an increase in everyone’s wage and an increase in consumer goods prices.
This fraudulent Keynesian economic ploy was attempted back in the 1970’s during the Ford and Carter administrations. Result? Inflation + recession = stagflation (something new we had to make up a new name for). It didn’t work back then, and it won’t work now – even with wildly increasing Federal spending. It might be attractive to people in good positions financially (heck, who wouldn’t want to see their mortgage expense drop from 30% of their income to 20% or less?), but it lends nothing to increasing future growth and more often than not stagnates it.
FDR increased the minimum wage 5 times during the Great Depression in the 1930’s. Each time resulted in a dramatic downturn in industrial growth. There is no reason whatsoever to think it will work differently now (what did Einstein say about “Repeated the same thing expecting different results”? Insanity).
On top of that, the last time the minimum wage increased, tens of thousands of teenagers lost their jobs. It made sense considering that most of those jobs were in fast food restaurants where the margins are pathetically slim. The response, in that case, was to drop the least efficient workers (generally younger workers) and increase the number of hours for more productive workers (generally older workers).
Can we really handle another influx of unemployed workers in this current economy?
Bad plan, Obama, bad plan.
- Minimum Wage and Monetary Policy(anirrationalviewoftheirrational.wordpress.com)
- Obama’s proposed minimum wage hike could cost D.C. jobs(bizjournals.com)
- What’s the Minimum Wage in Your State?(blogs.wsj.com)