Promote Purchasing Power—Not the Minimum Wage

by Erik Randolph | Jul 13, 2021

Promote Purchasing Power—Not the Minimum Wage

How to help working families the most

During a focus group session on working class families we recently conducted at the Georgia Center for Opportunity, Jazmine* made an observation more perceptive than most experts.

Our focus group consisted of working-class African-Americans who did not have a college degree and who were not employed in a managerial position nor on track to become a manager.

Knowing financial stress up close, Jazmine essentially said that either the minimum wage should be increased or the cost of living should be lowered.

Her observation is a perfect segue from my prior blogs on:

the empirical economic evidence against the minimum wage,
why the minimum wage is bad news for small business and the overall economy, and
alternative strategies to the minimum wage that help everyone, instead of just some workers at the expense of others.

The Success Sequence provides an outline of how to reverse the cycle of poverty in our communities. GCO uses this as a framework for much of our work.

Promoting Purchasing Power

The Employment Act of 1946 declared it is the policy and responsibility of the federal government to:

“promote maximum employment, production, and purchasing power.”

Promoting purchasing power means lowering the cost of living, as Jazmine suggested.

Solidified in the 1951 Accord with the Treasury Department, the responsibility ultimately fell to the Federal Reserve to conduct monetary policy as we know it today.

How well has the Fed done with promoting purchasing power? Horribly, quite frankly.

Since 1951, prices have increased 3.4% annually on average, as measured by the geometric mean. In other words, the price level was tenfold higher in 2020 than in 1951. Prices doubled each generation.

It is widely accepted that the poor suffer most from inflation because they spend a higher portion of their income on necessities, and their income growth typically lags others.

For example, according to the most recent mid-year consumer expenditure report from the Bureau of Labor Statistics, consumers in the lowest income quintile spend 82.2 percent of their income on housing, transportation, food, and healthcare, compared to 64.4 percent for the highest quintile. A five percent inflation rate would cost those in the lowest quintile an additional $1,156 for these items on a budget that is already tight, averaging $28,141. A 10% inflation rate would double those costs to $2,312.

Worse, those in the lowest quintile are unable to save for their future, and inflation erodes away the value of the little savings they do have. Consider that on average, those in the lowest quintile purchased only $563 in personal insurance or toward their pensions, compared to $19,736 for those in the highest quintile. This disparity guarantees the poor will be inadequately prepared for retirement or unforeseen loss or tragedy.

Prior to the federal government taking on the responsibility of promoting purchasing power, prices not only remained fairly stable but actually decreased during times of relative peace. Typically, they only increased dramatically during times of war.

This pattern can be seen visually in the accompanying chart using the Consumer Price Index and related data from the Federal Reserve Bank of Minneapolis. For example, the price level increased 24% due to the War of 1812 but then deflated 57% over 47 years until the start of the Civil War, even after accounting for a slight bump up due to the Mexican War.

The pattern was similar for the remainder of the century. Prices increased 74% during the Civil War but then deflated 47% to its pre-Civil War level until the start of the 20th Century.* Although the price level rose somewhat during the progressive era, it was still 30% lower at the start of World War I than at the close of the Civil War.

America’s inflationary policy

Unfortunately, a 1978 law changed promoting purchasing power to become the lame “reasonable price stability,” which is not the same thing.

Over the years, the Fed has allowed inflation as a matter of policy. In 2012, Fed Chairman Ben Bernanke explicitly stated for the first time an inflation target of 2% per year. If the Fed can somehow hold to this target, which it has not been able to do historically, it equates to doubling the price level every 35 years. Last August, it backed away from this policy. Because of all the pandemic spending and monetary expansions, the Fed approved a policy to allow inflation to rise “modestly” above its 2% target.

It is not just the Fed that has shied away from promoting purchasing power. In 1978, and in the midst of the stagflation years, Congress legislated the modest goal that inflation should be 3% or less, but the target rate was supposed to come down to zero percent by 1988 unless it might have impeded employment.

The Fed is not alone to blame for the inability of the federal government to control inflation. Congress’s lack of fiscal discipline resulting in soaring budget deficits place the Fed in a tenuous position to keep interest rates low so federal debt service costs also remain low. Furthermore, recent Fed direct purchases of Treasury debt because of all that federal spending adds to the money supply, eroding—not promoting—purchasing power.

How Congress can better help the average working family

If economics has any immutable law, it must be that you can’t get something out of nothing. This explains why the Consumer Price Index increased 5.4% since last year, as announced today by the Bureau of Labor Statistics. And the rate of increase appears to be accelerating. The monthly rate was 0.6% in May but 0.9% in June. If this June inflation rate persists, and hopefully it does not, we will have double digit inflation. A 0.9% monthly rate equates to an 11.4 % annual rate.

Considering all the recent deficit spending by Congress and expansionary policies by the Fed, expect more of the same, or worse. In fact, according to a survey of economists in yesterday’s Wall Street Journal, “Americans should brace themselves” because economists are waking up to the prospect of higher inflation, expecting “brisk price increases for a while.”

Economic history indicates deflation should be the norm. In fact, innovation spawns increased productivity that allows prices to fall, which should show up as deflation. We have the opposite: productivity gains with inflation. This outcome places the blame squarely on monetary and fiscal policy.

In the meantime, Jazmine and other hard working Americans struggle to keep up with rising prices. Instead of pushing for increases in the minimum wage that help some at the expense of others, Congress needs to renew our nation’s purchasing power policy and get its fiscal house in order.

*Jazmine’s last name withheld for confidentiality.

*This is not intuitive. It takes a smaller percent decrease to offset a percent increase, such as a 43% reduction will offset a 74% increase. For example, suppose you receive a 20 percent pay raise this week, but next week you receive a 20 percent pay cut. Are you back where you started? The answer is no; you are worse off. If your weekly pay was $100, the increase took you to $120, but then your pay cut took you to $96, even lower than your starting point.

Erik Randolph is the Director of Research at the Georgia Center for Opportunity.

Biden’s ‘Illusions Of Economic Magic’ Fail The Forgotten American | DAILY CALLER

by Corey Burres | May 27, 2021

Biden’s ‘Illusions Of Economic Magic’ Fail The Forgotten American | DAILY CALLER

In a very different time — yet in similar economic straits — then-presidential candidate Franklin D. Roosevelt spoke of the “forgotten man,” the American left behind by seismic trends and sweeping changes beyond his control.

“These unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power,” FDR told Americans on April 7, 1932 in a radio address. He went on to call for policies “that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”…

A team of economists at the Georgia Center for Opportunity have for the first time published a study that demonstrates how people receiving government assistance from multiple programs —such as the Earned Income Tax Credit, food stamps, free school lunches and Medicaid — face a difficult benefits cliff if they were to find work. The study calculates “benefit cliffs” for families in 888 counties across eight states. For example, a working single mom with two children in Memphis, Tennessee, would astoundingly lose more than $8,000 in combined earnings and benefits if her pay were bumped up less than $2 to a $15 hourly wage.

Read the full article here

Guaranteed Income Subsidizes Poverty And Trivializes Those In Need

by Corey Burres | Apr 28, 2021

Guaranteed Income Subsidizes Poverty And Trivializes Those In Need

GUARANTEED POVERTY

We need to have a frank discussion about how we view our fellow man and what we want for ourselves, our families, and our neighbors.

At the forefront of this discussion are policies that seem to want to help people. Policies that are labeled “anti-poverty” or expand social services indeed have good intent. However, I suggest these policies often are pandering and dismissive of the value of the person we hope to help.

For instance, Los Angeles recently set out to become the largest U.S. city to institute a guaranteed income for the poor. On its face, this sounds like a way to help those in need find help. But as we dive deeper we begin to see that we are subsidizing rather than alleviating poverty. It reeks of the idea that we would simply pay off the poor and want nothing substantive for them.

“I just don’t think anyone making the rules knows what we are going through.”

INTERGENERATIONAL POVERTY STUDY

Understanding how poverty is perceived by those in it, so that we can better understand how to address it.

VIEW OUR FINDINGS

HOW DO WE VIEW THOSE IN NEED?

We must realize that these actions cause us to look at our neighbor as a purely numerical transaction— a phrase often used to push against the ideas of capitalism, but one resoundingly relevant when we discuss these guaranteed incomes. The idea is that a person who is homeless or without work deserves to only be given a small living wage to simply survive.

And survive on what? The quality of housing affordable on such services is usually in dangerous areas or ill-suited for long-term living. The quality of food affordable often leads to obesity or unhealthy lifestyles. Yes, they survive but we have afforded them no dignity or purpose in life.

The bottom line is the utter lack of compassion or humanity in this response. The idea that we view fellow humans as so incomplete that we ask nothing of them. This mentality simply says, “You can give us nothing so we will expect nothing of you.”

As a society, we have sold this idea as moral or righteous, but we sell short the potential of the people we hope to serve. We have robbed them of being fulfilled and feeling successful.

I am in no way saying that people hold no value unless they have a job. But what I am saying is that everyone has something to contribute and a way to bring value to those around them. More importantly, we desire to contribute and find self-worth in doing so.

DEFINING HUMAN FLOURISHING

We at the Georgia Center for Opportunity refer to this as “human flourishing.” We seek to help ensure that everyone has access to it, no matter the circumstances of their birth. In doing so, we understand that flourishing will look different for each person. That is a beautiful thing.

Recently a famous YouTuber, Mark Rober, shared the story of his autistic son. Mark’s son will likely never hold a job or be able to do the same things 99% of people will but he still desires to contribute and bring value to those around him. So yes we will need to adapt our understanding of success and human flourishing, but I would challenge us to consider that merely existing is not flourishing. And expecting that you will not flourish shows a severe lack of compassion and empathy.

Compassion requires that we would want more for people. Not merely enough material possession to be appeased but to truly desire for human flourishing.

On the opposite end of flourishing is merely surviving with no hope or want for more. Hopelessness occurs when we expect nothing from someone.

This is why we must look at policies that do more than simply address a felt need. We must build systems that restore and promote dignity and purpose. They must not trivialize human value to a monetary transaction. Instead, they must instill hope, purpose, and an expectation of human flourishing.

BE PART OF BRINGING OPPORTUNITY TO OTHERS!

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GIVE TODAY

Benefiting Low-Wage Workers without Minimum Wage Laws

by Erik Randolph | Mar 4, 2021

Benefiting Low-Wage Workers without Minimum Wage Laws

Strategies to help everyone

If it is a bad idea to raise the minimum wage, or even have a minimum wage law to begin with, where does this leave the low-wage worker?

We already examined the empirical evidence showing that minimum wage laws reduce employment among the groups the laws are intended to help. (If you missed it, check out my blog.)

We also looked at the negative impact on small business—that most important job-creation engine. (Check out this blog.)

Now we want to know what we can do to help low wage workers.

A job is better than no job

True. Some workers earning a minimum wage will find themselves better off with a law that increases their pay. However, millions others will be hurt. Some are harmed because their hours might be reduced. Worse, many others will not be able to find a job or lose their job. The nonpartisan Congressional Budget Office predicted this number will be 1.4 million people if the federal $15 minimum wage proposal becomes law.

If you cannot find a job or lose your job, you are not better off. This is especially true for workers starting out in the labor force. They learn things on the job that they cannot learn in a classroom or at home.

They learn the all-important soft skills required to function in the workplace, such as getting along with coworkers, meeting expectations, and showing up on time prepared for work.

Importantly, they also begin building their net worth. At a minimum, they do this by putting away for their future with contributions—matched by their employer—to Social Security and Medicare.

No minimum wage law does not mean no standard

The minimum wage is an arbitrary number with little meaningful relationship to the particulars of a specific job. The United States has nearly 6 million business firms with 7.9 million establishments in thousands of industries in over 3,000 counties, according to the Economic Census. Each has its own characteristics in terms of expectations, skills, and pay.

One of my first jobs was in a machine shop. I still recall how the employer misrepresented the minimum wage when he hired me. He tried passing it off as a pay level sanctioned by the federal government. I did not buy it and was offered higher pay. Later I learned others in the shop fell for his ruse—and were receiving just the minimum wage.

If we would eliminate the minimum wage law, then low-wage workers would look to other standards reflective of the job and industry.

Think of Kelley Blue Book that helps consumers know the value of a car. There are also companies—like PayScale—helping job seekers know what to expect in terms of pay. Moreover, the U.S. Bureau of Labor Statistics conducts 12 surveys on pay and benefits—including wage data for over 800 occupations by area—that can be used as guidance.

It would be better for workers to have knowledge about pay scales based on real factors than rely on arbitrary and artificial standards set by government law.

The Success Sequence provides an outline of how to reverse the cycle of poverty in our communities. GCO uses this as a framework for much of our work.

Career ladders and skill sets

The Georgia Center for Opportunity works with community groups helping job seekers link with employers. Setting career goals, understanding the skill requirements of various occupations, and having realistic expectations of pay are all important components of putting together a plan to help job seekers grow in their career and compensation.

These plans are what will help them the most if they are stuck in a minimum wage job. It gives them a plan of action on how to meet their goals. It also helps employers who often complain they can’t find good help with the skill sets they really need. This solution involves working with individuals on a one-on-one basis.

It also takes time—there is no magic button to push. However, in the end, it will be a win-win situation for both workers and employers. Raising the minimum wage is a win-lose situation—some people will win, but many others, including the overall economy, will lose.

Understanding the needs of employers in the labor market also requires us to do a better job at education in preparing our children for their future. As research has shown, giving parents more choices improves the quality of education—and will ultimately benefit our children and society.

We need to stop coming up with solutions that help some people at the expense of others. It makes little sense to damage the entrance ramp to employment in order to increase the pay for just some workers. Or for the government to have an inflation policy that hurts the poor the most, which I pointed out in this blog.

Instead, let’s focus our attention on solutions that help everyone. If you have comments, especially on what are the best solutions, we would love to hear from you. Be sure to post them in the comments.

*Erik Randolph is Director of Research at the Georgia Center for Opportunity. This blog reflects his opinion and not necessarily that of the Georgia Center for Opportunity.

Why the Minimum Wage is Bad News for Small Business

by Erik Randolph | Mar 2, 2021

Why the Minimum Wage is Bad News for Small Business

Why that’s bad for everyone else, and how raising costs can have disastrous economic consequences.

In a prior blog, I explained how empirical research supports the side of the debate asserting negative consequences due to minimum wage laws. Now we’ll look under the hood to understand more why this might be the case.

After the stock market crash of 1929—yes, I’m taking you back that far—President Herbert Hoover rolled into action to get the U.S. economy out of the recession that would become the Great Depression. Among his activities were efforts to boost prices and wages, including White House conferences to cajole business leaders to maintain wage rates.

His successor, Franklin D. Roosevelt, went further to promote higher prices and wages, especially with the Wagner Act intended to strengthen labor unions and the National Industrial Recovery Act (NIRA) that established a system of industry cartels that regulated, among other things, wages and prices.

In 1935, the U.S. Supreme Court struck down the NIRA. In response, the minimum wage became a platform issue for his 1936 reelection campaign, and FDR succeeded in getting a federal minimum wage of 25¢ per hour in 1938.

Economists seemingly agree on little, but one thing they do agree on is that the policies of Hoover and Roosevelt did nothing to get the U.S. out of the Great Depression. Keep this history in mind when you hear advocates who want to raise the minimum wage.

Importance of small business

Small businesses are at the heart of the American economy. They are a major engine of prosperity and job growth, enriching society and helping to spread wealth at a time when economic disparities are receiving more attention.

Examples of small businesses are too many to list but include your local restaurant, hair salon, construction firm, dentist, bakery, and small-town law firm. It also includes many franchisees who may own your local McDonald’s, Subway, UPS store, hardware store, senior home care service, or handyman service.

According to the U.S. Small Business Administration:

There were 31.7 million small businesses in the U.S. in 2017.
They employed 60.6 million people, or 47.1 percent of the private workforce in 2018.
That number included 4.2 million self-employed persons of color.

Small businesses created 1.6 million net jobs in 2019.

Not all about profits

Also according to the Small Business Administration, there were 249,000 business start-ups creating 863,000 new jobs in 2018. However, those gains were partially offset by 222,000 businesses shutting down, taking 762,000 jobs with them.

This comparison is a good way of exposing a common myth about economics: It is not all about profits. It is also about losses.

If you took an economics course in college or high school, you probably found yourself spending time looking at the impact of losses and how much a business can lose before it must shut down.

What it takes to run a small business

Running a small business is hard. It requires dedication, resources, and daily decisions to keep operations viable without the benefit of an array of professional managers and departments that large businesses typically have. When a small business owner makes a mistake, he takes a direct hit. If the mistake is large enough, it could threaten his or her livelihood.

Politicians, on the other hand, can make a policy mistake impacting business, but they do not take a direct hit. Because every business is different, it is impossible for politicians to know what it takes for every type of business to stay viable and make a profit. Yet changes in government regulations, taxes, and wage laws can have devastating impacts on businesses.

The ability of businesses to withstand changes in minimum wage laws depends on the circumstances of the business and their profitability. It is naive to assume that every business relying on low-cost labor would be able to pay its employees more just because the government mandates them to do so.

Many businesses operate on thin profit margins. If their costs go up, they may substitute technology for labor, if they can, which naturally and unfortunately results in workers losing their jobs.

Worse, the business may have to shut down. It makes no sense to expect businesses to continue operating if they are losing money. Many small business owners who shut down may need to find a job themselves or risk landing in poverty. This helps no one, least of all the laid-off employees.

Final warnings

Beware of large corporations like Amazon or Walmart who might support minimum wage laws. It could be because they see it as a way to drive out competition from small mom and pop businesses.

Forcing small businesses to raise wages, especially after they sustained a financial hit from a pandemic, only promises to weaken an all-important job growth engine for the U.S. economy at a time when we need to bolster the small business sector and get the economy rolling again. This strategy of mandating wage increases certainly did not work out well during the Great Depression. There is no good reason to think it will work now.

So, what do our state and national legislators need to be doing? They need to concentrate on getting the economic job engine revving up again, and this is done by finding ways to reduce costs for businesses (not raising them), making it easier for entrepreneurs to start their own businesses (not making it harder), and making sure the financial markets are working properly so small businesses can access much-needed funds.

Where does all this leave the worker stuck in a low-wage job? Stay tuned. I’ll answer that question in my next blog.

*Erik Randolph is Director of Research at the Georgia Center for Opportunity. This blog reflects his opinion and not necessarily that of the Georgia Center for Opportunity.

Clock ticks as feds threaten to remove work requirement from Georgia’s partial Medicaid expansion | HENRY HERALD

by Corey Burres | Feb 23, 2021

Clock ticks as feds threaten to remove work requirement from Georgia’s partial Medicaid expansion | HENRY HERALD

The federal Centers for Medicare & Medicaid Services (CMS) could decide in a matter of weeks whether it will remove the work or activity requirement in Georgia’s partial Medicaid expansion plan.

The CMS said the plan, which was approved by former President Donald Trump’s administration in October, does not “promote the objectives of the Medicaid program” and would be impossible to accomplish because of the COVID-19 pandemic…

In a statement released Friday, the nonprofit Georgia Center for Opportunity (GCO) said CMS’ decision could lead to court battles, leaving the thousands of Georgians who stand to get coverage under the program in a lurch.

“Instead of using our resources and time to bicker before the courts, we should apply them to seek out the best ways to improve people’s lives,” said Erik Randolph, GCO’s director of research. “[Georgia Pathways] is based on the idea of helping adults escape poverty, plain and simple. It will propel them into situations where they have better opportunities and more resources for health coverage, such as through affordable individual markets or employed-based coverage.”

Read the full article here