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Fallacies of a Minimum Wage Hike: Three Ways a Company Will Respond


For minimum wage advocates, their position is clear: more money in the hands of the worker is better for the worker — a tangible result. Though their hearts may be in the right place, they lack the basic understanding of the invisible effects of minimum wage policies, especially when it pertains to the business side of the equation. What does the business grapple with? Here are three typical responses to a minimum wage hike.

1) By raising minimum wage, many people, especially the poorest among us, will either lose their job or not be able to get jobs at all moving forward. The cost of raising the minimum wage is just like the cost of raising a commodity. For instance, consider the scenario where the price of apples — a basic pantry item for most everybody — goes from $1.50/pound to $2.50/pound. Fewer people will buy the apples, or buy less of them overall. So it is also with a higher minimum wage; with more money going to basic business costs, fewer businesses will hire, or they will hire fewer people overall. An added effect is that the economy will likely contract because of the loss of jobs resulting from a wage hike.

2) Businesses earn less money. Employees are the number one cost for businesses. If even more of the earnings must go to the capital cost, the business earns less profit overall. For some minimum wage advocates, perhaps that is the actual goal — to keep businesses from earning too much at the top. But in reality, the loss of business capital (from both large corporations to small mom and pops) means there is less money for future business endeavors. Whether it is reinvested directly back into the business with equipment upgrades or growing the business through expansion, whatever the case may be, earning less money for the company creates a ripple effect. The less a company can earn, the less it can help grow the economy. Impeding its ability to do so, through the imposition of mandated wage increases, is harmful.

3) In order to offset the increased wage cost, a business can also choose to raise its prices. This will attempt to ensure that the company earns the same amount as before. But the effect of the price increase is negative. As prices increase, people are wont to adjust their purchasing habits and will end up buy less of the product. When consumption decreases, the health of the economy worsens.

Every one of these responses — cutting jobs, loss of business capital, and raising prices — are either bad for the employees or the economy as a whole. Though the minimum wage hikes sound good in theory, in reality, economies don’t exist in a vacuum. These types of policies hurt more than help.

Jeb Bush Speaks Out Against Overregulation


It was refreshing to read an Op-Ed about overregulation in the Washington Examiner today. Presidential candidate Jeb Bush is absolutely correct that the explosive expansion of regulations during Obama’s Administration has been a major factor in the tepid economic recovery. I enjoyed seeing a candidate speak to this issue. Below are his remarks in full:

“President Obama has presided over a massive expansion of the federal government during his six and half years in office. He shepherded Obamacare into law — a $1.7 trillion spending bill that vastly increased Washington’s role in the healthcare industry. He has raised taxes by nearly $2 trillion, while adding $8 trillion to the national debt. The president has also imposed more than 2,500 new regulations on the American economy that carry a staggering price tag of $670 billion.

It should come as no surprise then that our economy has limped along during the Obama presidency. The anemic two percent rate of growth on his watch is one of the weakest recoveries in American history and it has resulted in labor force participation falling to a 38-year low. Middle class families’ incomes have fallen by $2,000 and there are six million more people living in poverty today than when Barack Obama took the oath of office.

Right now, federal regulations cost our economy $1.9 trillion a year. This works out to an average of $15,000 per household. We need to cut excessive federal red tape and unleash the entrepreneurial spirit in our nation.

Obama-era regulations such as those in Dodd-Frank, Obamacare, and his War on Coal are having a chilling effect on our economy. As president of the United States, I will conduct a spring cleaning of existing regulations to get rid of the ones that are too costly or not providing value to the American people. I will establish a regulatory budget that ensures that for every new dollar of regulations we impose on the American people we cut a dollar of existing regulations somewhere else. I will appoint judges to the judiciary who are committed to reining in regulatory excesses and preventing unelected regulators from exceeding the intent of Congress.

Finally, I will sign into law the REINS Act, which will provide another check on executive agency regulatory authority. The REINS Act would ensure that major rules and regulations are approved by Congress before they can take effect.

Regulations act as a hidden tax on the American people. Reining in their cost is just as important as reducing taxes. When coupled with my bold plan to reduce tax rates and simplify our tax code, my regulatory reform agenda will help drive America to four percent annual growth. Together, these policies will result in the average family seeing their income increase by $3,000 and their tax burden decline by $2,000. This is a significant boost in a middle class family’s budget that will make it easier for them to pay the mortgage, buy groceries, save for college and build a nest egg for retirement.

I know how to do this, because as governor of Florida, I cut taxes every year, by $19 billion total. I streamlined regulations and made my state the national leader in small business creation. During the final seven years of my governorship, Florida led the nation in job creation. Our unemployment rate fell to 3.5 percent and we added 1.3 million new jobs. Over the course of my full two terms in office, Florida averaged 4.4 percent economic growth.

Secretary Hillary Clinton will double down on the massive expansion of taxes, debt and regulations we have seen under President Obama. I am offering the country a different vision that will empower entrepreneurs and American businesses to grow and provide better wages and benefits to the American people. I look forward to having the debate with Hillary Clinton and her allies on the defeatist Left about how best to unleash the entrepreneurial spirit in America and provide a boost to a middle class that hasn’t seen its wages rise in 15 years.”

Puerto Rico Proves Liberal Policies Destroy the Economy

If a higher minimum wage, higher regulations, the Jones Act, and other protectionist rules are actively destroying Puerto Rico’s economy, how can those same policies not also be harming the United States? Can Puerto Rico be considered the experiment proving this?

On June 28th, Puerto Rico announced that it was unable to pay back the $72 billion in public debt that it owed, money that was borrowed repeatedly to bolster an anemic economy for the last decade. Puerto Rico’s GDP has contracted an average of 1.7% yearly since 2005. Much of that can be attributed to the repeal of the IRS Code 936 which had encouraged specific industries to headquarter on Puerto Rico. The subsequent loss of business has resulted in tepid revenue collection which has not been enough to cover the government’s social programs and bloated government payroll. You can read the Puerto Rican Debt Report here.
In order to help Puerto Rico back on a path to economic recovery, it is imperative that more systemic changes are needed. The Manhattan Institute outlined some major ideas, such as repealing the Jones Act. For a more in-depth discussion on the Jones Act in relation to Puerto Rico, check out their article. Other suggestions include “offering Puerto Rico an exemption to the federal minimum wage, loosening territorial labor laws, and reducing benefits that disincentivize work.”

These very policies have impeded the economy’s ability to grow and recover from the fiscal woes that began last decade. When minimum wage requirements are high relative to the local average, employers hire less workers. And when receiving benefits can be more generous and lucrative than working full-time, less people participate in the workforce.

These types of policies have been shown to be extremely detrimental to Puerto Rico, and yet our country continues to expand them here. We see the effects in our own sluggish recovery, yet the Obama Administration ignores it, and then deflects the blame elsewhere. Puerto Rico should be a wake-up call for the U.S., but it’ll likely be ignored too.

Obama’s Low 1st Quarter GDP Numbers


In lieu of the recent news that the GDP actually contracted during the 1st Quarter, some folks at the White House seem fit to blame both the winter and the actual process and algorithms by which 1st Quarter numbers are analyzed.

CNS News decided to take a look at Obama’s 1st Quarter numbers and compare them to previous presidents all the way back to 1947, which is the earliest data offered by the Bureau of Economic Analysis. The result shows that Obama has the lowest 1st Quarter numbers of all Presidents. I reproduced the article below, because it had some great graphs which shows the comparison data nicely. This just reaffirms what we know and what I wrote about the other day: the economy is still not that strong.
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Even if you leave out the first quarter of 2009—when the recession that started in December 2007 was still ongoing–President Barack Obama has presided over the lowest average first-quarter GDP growth of any president who has served since 1947, which is the earliest year for which the Bureau of Economic Analysis has calculated quarterly GDP growth.

In all first quarters since 1947, the real annual rate of growth of GDP has averaged 4.0 percent.

In the seven first quarters during Obama’s presidency, it has declined by an average of -0.43 percent. And if you leave out the first quarter of 2009 and look only at the first quarters of the six years since the recession ended, it has averaged only 0.4 percent.

In the six years of Harry Truman’s presidency for which the BEA has calculated quarterly GDP, the annual rate of growth in GDP in the first quarter averaged 4.5 percent.

During President Eisenhower’s eight years, it averaged 3.2 percent. During Kennedy’s three years, it averaged 4.9 percent. During Johnson’s five years, it averaged 8.3 percent. During Nixon’s six years, it averaged 5.3 percent. During Ford’s two years, it averaged 2.3 percent. During Carter’s four years, it average 2.4 percent. During Reagan’s eight years, it average 2.1 percent. During George H.W. Bush’s four years, it average 2.9 percent. During Clinton’s eight years, it averaged 2.6 percent. And during George W. Bush’s eight years, it averaged 1.7 percent.

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President Obama took office on Jan. 20, 2009. In the first quarter of 2009, GDP declined at an annual rate of -5.4 percent. In the first quarter of 2010, it grew by 1.7 percent. In the first quarter of 2011, it declined -1.5 percent. In the first quarter of 2012, it grew 2.3 percent. In the first quarter of 2013, it grew 2.7 percent. In the first quarter of 2014, it declined -2.1 percent. And in the first quarter of 2015, it declined -0.7 percent.

In these seven first quarters that Obama has been president (2009 through 2015), the annual rate of growth in GDP has declined at an average rate of -0.43 percent.

But the National Bureau of Economic Research says the last recession, which began on December 2007 did not end until June 2009. If you leave out the first quarter of 2009, and only count the six years (2010-2015) since the recession ended in June 2009, real annual rate of growth of GDP in the post-recession first quarters of Obama’s presidency has averaged 0.4 percent.

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When GDP declined at -1.5 percent in the first quarter of 2011—which was after the recession and two full years into Obama’s presidency—some blamed it at least partly on the weather.

“Some of the slowdown in growth was linked to bad weather in early 2011 and an 11.7 percent decline in defense spending,” said a Reuters story of May 27, 2011.

When real GDP declined at a rate of -2.1 percent in the first quarter of 2014, a May 30, 2014 New York Times story said: “Most economists on Wall Street and at the Federal Reserve blame a very cold winter for much of the slowdown.”

When real GDP declined at a rate of -0.7 percent in the first quarter of this year, the top paragraph of an Associated Press story said: “The U.S. economy shrank at a 0.7 percent annual rate in the first three months of the year, depressed by a severe winter and a widening trade deficit.”

But there seems something more at work here than climate patterns–or the Obama presidency.

Under previous presidents, real GDP sometimes grew massively during the first quarter. In 1950, under Truman, for example, GDP grew at an annual rate of 16.9 percent in the first quarter. In 1955, under Eisenhower, it grew at a rate of 11.9 percent.

Under Johnson, in the first quarters of both 1965 and 1966, it grew at a rate of 10.2 percent. Under Nixon, it grew at 11.1 percent in the first quarter of 1971, and 10.2 percent in the first quarter of 1973, it grew at 10.2 percent.

Under Ford, in the first quarter of 1976, it grew at 9.3 percent. Under Reagan, in the first quarter of 1984, real GDP grew at a rate of 8.2 percent.

But since 1984—more than three decades ago–there has been no first quarter, in any year, under any president, when real GDP grew even as fast as 5.0 percent. The closest it came was in the first quarter of 2006, when George W. Bush was president, and it hit 4.9 percent.

In the decades starting after World War II, average annual growth in GDP peaked in the 1960s.

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In the 1950s, annual growth in GDP averaged 4.25 percent. In the 1960s, it climbed to 4.5 percent. But it dropped to 3.22 percent in the 1970s, then 3.15 percent in the 1980s, before ticking up to 3.23 percent in 1990s. In the 2000s, it averaged only 1.82 percent.

In the first five years of this decade (2010-2014), annual growth in GDP has averaged 2.2 percent. But that is less than the 2.7 percent it averaged in the first five years of the last decade (2000-2004) which was before the recession hit at the end of 2007 and brought the decade’s average down to 1.82 percent.

If it were to maintain an average annual rate of 2.2 percent for the next five years, the American economy of this decade would still be growing at less than half the rate of the 1960s.

Should the long-term decline in U.S. economic growth be attributed to cold weather? Or should people in Washington, D.C., start looking around them for an anthropogenic cause.

Economy Still Down and People Don’t Have Money To Spend


I came across this little piece in the NYPost discussing the sluggish economy and the arbitrary numbers that come out of the Labor Department. It starts off discussing the 1st Quarter GDP contraction, which stumped many “economists”, and even went so far as to possibly blame the algorithms themselves by which the government analyzes 1st Quarter numbers. Because it certainly couldn’t be domestic policies, could it?

This writer posits that we could indeed be on the bring of a recession, the definition of which is 2 straight quarters of economic contraction, and points out something fairly obvious. People just don’t have a lot of money to spend. I concur this is a major part of assessing the health of an economy, although I would argue that investment spending spurs economic growth even more than consumptive spending, which is this writers argument. Putting that aside, however, he does a decent job pointing out the concerns about the economy that we should all be paying attention to. Here’s the article and food for thought below:

“Anyone with even a quarter of a brain now understands that the US economy got off to a bad start this year.

There was an economic contraction in the first three months — when the nation’s gross domestic product fell at an annualized rate of 0.7 percent — that some quarter-brainers are still blaming on the cold weather, strikes at ports, the strong dollar, solar flares, Martian landings and (insert your own poor excuse here).

The truth: Most of these excuses are part of the problem, although I didn’t personally see or not see the Martians.

But the biggest part is that people don’t have enough money to spend. Interest from savings is down to zero, people don’t liquidate stock gains to make purchases, and job and income growth has been sketchy.
The economy isn’t doing much better in the current quarter either. The Federal Reserve Bank of Atlanta, an independent observer if ever there was one, measures growth so far in the second quarter at an annual rate of just 1.1 percent. That means growth — un-annualized — is a paltry 0.275 percent with less than four weeks left in the quarter.

It’s quite possible that we will eventually be told, after all revisions are made, that the economy met the official definition of a recession in the first half of 2015, which is two straight quarters of contractions.

But the quarter-brainers will probably get something to cheer about when Friday’s employment numbers come out. And, if they don’t strain their quarter-brains looking too deeply into the numbers, they could come away with a smile that can only happen because ignorance is bliss.

Wall Street expects the Labor Department to report that 235,000 new jobs were created in May. That would be higher than the 223,000 new jobs that — before any revisions are made — were created in April.
I’ve written before about the so-called birth/death model, which is the government’s fist-on-the-scale way of adding jobs they assume but can’t prove exist when new companies suddenly come into business in springtime.

The only problem is, entrepreneurs — especially those just starting out and risking their own capital — aren’t very daring when it’s clear to everyone that the economy isn’t doing well. So maybe, just maybe, there are more companies dying this spring than being born.

Labor must be having some second thoughts about the validity of that model since it guessed that only 213,000 phantom jobs were created by newly born companies in April. That’s way down from the 263,000-phantom-job guesstimate in April 2014.

The guesstimate for May should still be substantial. In May of 2014, Labor’s phantom jobs guesstimate added 204,000 jobs. Even if that’s been adjusted downward, this will still give a nice boost to the job growth that will be reported Friday.

There’s no guarantee, of course, that Friday’s number will be good. Any number of things could go wrong. Seasonal adjustments could hurt Friday’s number. And, of course, companies could have actually cut jobs in April. There were plenty of announcements of such cuts.

So, will Wall Street get the 235,000-job growth it expects? I say there’s a 60 percent chance Friday’s number meets or exceeds that guess.

But even if you guess right on Friday’s jobs figure, the prize could be elusive. Most folks don’t know how Wall Street will react to a better-than-expected number. If the figure is too strong, it’ll causes interest rates to rise and bond prices to fall in anticipation that the Federal Reserve’s interest rate hike is back on the table. If the number is weaker than expected, even the quarter-brainers will start worrying the economy is tanking.”