The Minimum Wage isn’t a Living Wage because the Federal Reserve devalued the Dollar

Posted by PITHOCRATES - February 1st, 2014

Week in Review

The Democrats like to talk about income inequality.  Which they say isn’t good.  So they want to raise the minimum wage.  To reduce income inequality.  Even President Obama said during the State of the Union address that he wanted to raise the minimum wage.  To $10.10.  To give them a living wage.  Because they can’t make it on the current minimum wage.  Of course, there’s a reason for this.   And it’s not because of the wage rate.  It’s about the depreciation of the dollar (see Hiking wages with worthless dollars by Seth Lipsky posted 1/29/2014 on the New York Post).

The most startling thing about President Obama’s State of the Union message is what he failed to say about the minimum wage. “Today the federal minimum wage is worth about 20 percent less than it was when Ronald Reagan first stood here,” he declared Tuesday night.

But wait, wasn’t the minimum wage $3.35 an hour throughout Reagan’s two terms? Isn’t it now $7.25 an hour? How does that add up to a drop in value by 20 percent? The president glided right past that point. Maybe he thought nobody would notice.

It strikes me that the president owed the country more of an explanation. After all, he spoke exactly on the 100th anniversary of the start of the Federal Reserve System. The central bank is about to begin its second century. Obama made no reference to any of that history.

Yet a century ago Congress refused to agree to a Federal Reserve until there was a promise about the value of the dollar: It insisted on having the Federal Reserve Act state that it would not lead to an end of the convertibility of the dollar into gold.

That legislative promise came to an end in a series of defaults that started in the Great Depression and ended under President Richard Nixon. By the mid-1970s, America had moved to a fiat currency, meaning a dollar that is not redeemable by law in anything of value. Only what one critic calls “irredeemable electronic paper ticket money.”

The minimum-wage crisis is a sign that fiat money is not working. It’s not, after all, that the nominal minimum wage has failed to go up (it’s been raised seven times since Reagan). It’s that the value of the dollar has collapsed. Today it has a value of only a 1,250th of an ounce of gold, a staggering plunge from an 853rd of an ounce on the day Obama took office.

Back in 1907 some people tried to manipulate the stock price of a copper company and long story short the Knickerbocker Trust Company collapsed and caused a panic in the banking system.  Enter the Federal Reserve System (the Fed).  A central bank that can inject liquidity during a banking crisis.  And forever eliminate these banking crises.  Or so went the theory.  But central banks have a nasty habit of devaluing their currency.  Because they can print money.  Fiat currency.  Well, the deal with the Fed was that they would not succumb to the central bank disease.  But, alas, they did.  Which is why minimum wage workers have less purchasing power today than they did during the Reagan administration.  Even though they are paid more dollars.


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State of the Union, Benghazi, Sequestration and the Politics of Spending

Posted by PITHOCRATES - February 14th, 2013

Politics 101

President Obama’s Idea of Compromise and Bipartisanship is Unconditional Surrender

President Obama’s State of the Union Address was a little light on details.  But the general gist is no spending cuts.  And more taxes.  Which makes the sequestration about to hit a crisis in the making for the president.  For it was sort of his idea.  And he did sign it into law.  But to him it was more like playing a game of chicken.  Confident that the Republicans would cave and roll over.  Giving him whatever additional tax increases he wanted to prevent cuts in defense spending.  But the Republicans aren’t blinking.  Because this is the only way they’re going to get any spending cuts.  Even if it means gutting defense spending.  Something the president didn’t consider.

Despite being an architect of the sequestration he called it a stupid idea during the State of the Union.  He doesn’t care about the cuts in defense spending.  He is, after all, a leftist liberal.  And they hate defense spending.  He even denied Ambassador Stevens’ request to beef up security in Benghazi.  Which led to Ambassador Stevens’ death.  Along with three other Americans.  But it’s the equal cuts in things he does care about that has him worried.  That social spending.  The kinds of things that buy votes.  And makes people dependent on government.  Helping to endear the Democrat Party to the American people.  While making them hate the Republican Party.  Who want to take away the great things the Democrats so generously give them.  Even if the government can’t afford to give these things to the American people.

President Obama may talk about compromise and bipartisanship but he doesn’t mean it.  His idea of bipartisanship is unconditional surrender.  He has no interest in meeting Republicans halfway.  He wants to destroy the Republican Party.  And undo the Reagan Revolution.  And bring back the Big Government of the Sixties and Seventies.  When the Democrats ruled supreme.  And you do that with spending money.  Not cutting spending.  Which is why the sequestration bothers him so much.

Running Deficits is OK if it provides for Senior Citizens, Our Children and Clean Stuff

Leading Democrats are saying we don’t have a spending problem.  We’re just not paying enough for the stuff we want.  Which also happens to be the stuff that buys votes.  So the excess spending to buy votes is not the problem.  The problem is that we’re not raising taxes enough to pay for this orgy of spending that is the problem.  We’re not taxing rich people enough.  Or corporations.  And once we do then we won’t be taxing the middle class enough.  And once we do that it probably won’t matter what we do as the country will be so deep in debt that no amount of new taxes will help.  Unless they figure out a way to tax away more than 100% of a person’s earnings.

So low tax revenue is the problem.  Well, that, and spending money on the wrong things.  On things that don’t buy votes.  Things that weren’t on the laundry list President Obama rattled off during the State of the Union that we need to spend more on.  Defense spending.  And…, well, defense spending.  Which is the only thing the Obama administration is willing to consider cutting.  Because we can get a lot of free things by gutting defense.  New programs that won’t add a single dime to the deficit.  Something he said more than once during the state of the union.  Obamacare, for example, will be deficit neutral.  Because the money we were going to spend on the wars in Iraq and Afghanistan will pay for it.  So even though the spending will still add to the deficit it’s now Obamacare spending.  Not defense spending.  Which is OK.

You see, running deficits is OK if it provides for senior citizens.  Our children.  If it gives us clean water.  And air.  Invests in clean energy.  And in those jobs of the future.  If it builds roads and bridges.  For less face it, we would be nothing without our government-provided roads and bridges.  Which we simply could not have it if it weren’t for government.  (Then again railroads build and maintain their own roads and bridges.  With funds they earn operating their railroads.  But I digress.)   In fact, any deficit reduction that comes from cutting this spending is just about the worst thing in the world we could do.  According to those on the left.  So we should tax rich people and corporations more.  And cut defense spending more.  Because we spend way too much on defense spending anyway.  And for what?  It’s not like we’re going to use it for anything.  Such as protecting our ambassadors in hostile lands.

Defense Spending is the only Spending growing at a Rate less than Total Federal Outlays

If you listened to the State of the Union (and didn’t fall asleep during it) you’ve learned that we don’t spend enough on our social spending.  And too much on defense spending.  That’s what the president said.  But what do the numbers say?  To find out let’s look at federal outlays (see Table 3.1—OUTLAYS BY SUPERFUNCTION AND FUNCTION: 1940–2017).  The following chart graphs the historical data from 1958 to 2011 and the projection for 2012.  We look at 4 areas of spending: defense; education, training, employment and social services; Medicare; and Social Security.  We calculate the spending as a percentage of total spending and graph the results.

Percent of Total Federal Outlays

The one area we spend too much on that the Obama administration is willing to cut is the one area that has seen the greatest decline in spending.  Defense spending.  Which as a percentage of total outlays has fallen while non-defense has trended up or held steady.  This tells us the government has pulled money from defense to pay for these other things.  But this chart doesn’t tell the whole story.  For although Medicare and Social Security have trended up they haven’t taken as big a piece of total spending as defense gave up.  And education spending has been pretty flat.  Perhaps giving credence to President Obama’s claim that we’re not spending enough on education.  But if you look at the year-to-year growth in spending you see a different picture.

Federal Outlays as a Percentage of 1958 Outlays

Here we divide each year’s spending by the spending in 1958 (or 1966 for Medicare).  Showing the increase in spending over time.  This chart also includes total federal outlays.  Which tells a startling story.  Not only is defense spending being gutted to pay for other spending it is the only spending growing less than the growth rate of total federal spending.  While the other three areas are growing at greater rates.  In 2011 Social Security spending was 8,892% of the spending in 1958.  Medicare, which came into existence in 1965, grew at an even greater rate.  In 2011 it was 17,673% of the spending in 1966.  More than twice the growth in less time.  And education spending tracked pretty close to Medicare spending.  In 2011 it was 15,744% of the spending in 1958.  While defense spending in 2011 was only 1,509% of the spending in 1958.

Note that the general trend of increased spending holds regardless of who is in power.  That’s because of baseline budgeting.  Which provides for automatic increases in spending.  When government talks about spending cuts it not really spending cuts.  It a cut in the rate spending increases.  You can see some dips in the graphs and where they may have cut the rate of growth.  But nowhere is there really a cut that results in reducing net spending.  Except for defense.

Increases in spending on education (and training, employment and social services) has grown at a rate greater than most other spending.  And what can we learn by throwing money at education?  Well, based on the president’s remarks, it doesn’t work.  It doesn’t increase the quality of education.  At least based on the great increases year after year that only give us the need to spend more money.  And this spending doesn’t even include the bulk of education spending.  That generated from property taxes.  Which can mean only one thing.  If we’re paying more and need to spend even more the quality of education is not as good as it should be.  Or all that money is going to teachers’ salaries, pensions and health care benefits.

Of all this spending the only sustainable spending is defense spending. For it is the only one growing at a rate less than total federal outlays.  While increases in the other spending is going off the chart.  With the slopes of these graphs getting ever steeper.  And the closer they get to vertical the more impossible it will be able to pay for these programs.  That’s why Medicare is near crisis mode.  With the cost of our aging population pushing that graph closer and closer to vertical.  Where our spending obligations will approach infinity.  Which is, of course, impossible to sustain.

Of all this spending the only sustainable spending is defense spending. For it is the only one growing at a rate less than total federal outlays.  While increases in the other spending is going off the chart.  Contrary to what the president said we are increasing spending in these areas so much that we won’t be able to sustain it.  For there just won’t be enough money to tax away from the people.  Unless we figure out a way to tax away more than 100% of their earnings.


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