Fed, Banking regulations, Capital flow, Crisis, Part 10
After president Obama’s recent proposal to increase minimum wage which by the way was made to divert our attention from his stark failures, you must be hearing lots of ridicule from liberal economists, and media and political pundits. Arguments like minimum wage will increase spending and help us getting out of recession, are being made without having any substantial piece of evidence backing those up. Economy is still doing very bad. Obama care has been a serious failure, so far. Liberal Economics is just prolonging the misery of Americans. All the rescue and stimulus packages, and QEs are not working, so far and just adding to federal government debt.
Let me give you a very good example. In 1948 president Truman decided to give a ‘fair deal’. The biggest component of that deal was almost doubling the minimum wage from 40 cents to 75 cents. About the same time Fed decided to tighten the monetary policy. As a result, in November 1948 economy went into a recession which lasted until October 1949. Contrary to liberal claims and expectations, economy did not expand. It contracted. GDP dropped by about 1.7%. Unemployment jumped to 7.9%. There was a serious drop in fixed investments. Department store sales dropped by 22%. Wholesale price and cost of living indexes fell by 12 and 5 percent, respectively.
Do you see the sharp contrast between actual numbers and liberal claims? Economy produced 1.7% less than the previous level which simply means the purchasing after the minimum wage raise, dropped, as opposed to the liberal claim of more purchasing and increased productivity. Employers quickly got rid of more expensive minimum wage workers and unemployment rate was increased to 7.9%. Investors started holding their investments, as they were not optimistic about prospects of business, as a result of raise in minimum wage. It also had a net negative effect on department store sales which dropped by 22%. Net demand decreased so wholesale prices and cost of living indexes dropped by 12 and 5 percent, respectively.
So, the whole idea, when minimum wage increases, it increases spending because minimum wage workers cannot save and pretty much the whole raise gets spent, immediately, helping the economy, in recession, did not work, at all. For liberals this is the way to get out of recession. Not true. Reduced investments and increased unemployment did not only neutralized the effects of minimum wage increase, it actually dipped down the net effects into a negative territory. I do not understand, why can’t they comprehend a very simple fact. Why would investors invest in businesses which are paying their workers more than their actual value? Why would employers hire employees on a value higher than their actual value?
We must understand, what we need is not a devalued currency due to the continuous debt financing by Fed. We need a drop in prices and cost of living, as well as in cost of doing business, the way economy ultimately adjusted itself out of 1949 recession. Unfortunately, the current government policies are doing exactly opposite of it. These policies are devaluing money. Hence, increasing prices and cost instead of letting those drop. As a matter of fact, the continuous money printing at ridiculously high rates and immense debt financing are the biggest causes of totally unwanted and unneeded inflation.
Minimum wage debate is just a distraction being caused by politicians and media to distract us from real issues which are, still very high unemployment and under employment rates. How are you going be benefited by any raise in minimum wage if you do not even have a job, anyways? To actually benefit from any level of minimum wage or no minimum wage, first of all you have to have a job. What about those millions of Americans who are out of work, right now, for long periods of time?
In addition to this, as 1949 recession showed, the rise in minimum wage will only make this problem, even worse, especially for minimum wage earning people. Employers will quickly get rid of minimum wage employees, replacing them with machines, and new hiring will slow down, even more. As a matter of fact, just the discussion about raising minimum wage is slowing down hiring, even further. Everyone is speculating. Is there going be a rise in minimum wage? How much is it going to be? Questions like this are making an already very uncertain environment even more unpredictable. We all know that investors do not invest and employers do not hire or give raises under uncertain conditions.
Some liberals claim that World War 2 was the cause of 1949 recession. This could not be further from the facts. 1945 recession was the result of Second World War, and economy had already recovered from it. War did not cause 1949 recession. Truman’s Fair Deal and Fed’s interventions caused it. As a matter of fact, economy was doing very well for three years and 1 month since after the post World War 2 recession of 1945. The major points of Truman’s Fair Deal, in addition to increase in minimum wage were expansion of government by doing things like increasing and broadening unemployment compensation, maintenance and extension of price controls, government ensuring full employment, regulate businesses to impose fair employment practices by making employment practice committee permanent, government providing jobs to demobilized veterans, increase aid to farmers, increase military enlistment, regulate housing, establishment of federal research agency, increase taxes, federal aid for war veterans, expansion of public works and natural resources, post-war reconstruction, giving raise to all federal employees and stock piling for defense needs.
You can see that this was Socialism hidden under the covers of fairness, economic welfare and national security. Once again government tricked us with the same tactics.
So, government expansion and interventions are not the answers to our recent recession related problems. These are the causes of recession not solution for it. The solution is that government must get out of our way and let our creative minds, inventors, innovators, business owners, research and developers, investors and hard working people deal with it. During every single crisis in our history, the solutions are provided and executed by American people, not the government. Our real power are people. We the people own this country. Government officials are public servants, elected by us, to serve us, not to rule us.