I wanted to post a quick little thought exercise for everyone today. In light of this unprecedented catastrophe, at least since the last catastrophe, in our economy I want to talk a bit about wage and price controls.
Since we are comparing today with the Great Depression and FDR's New Deal, let us look back a bit. One of the pillars of the New Deal were wage and price controls in industry. FDR, the good capitalist he was, thought that competition between firms was a bad thing. It brought prices and wages down as firms competed for business. For a current example, see WalMart of today and the outrage that company causes. He passed the 'National Industrial Recovery Act,' a "package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces." This, according to a paper by Lee Ohanian and Harvey Cole, two UCLA economists, prolonged the recovery of that first Great Depression.
Just last year a higher minimum wage was passed for the nation. We in California have an even HIGHER one. The timing of that wage increase could not have been better, it seems. We are now also in a position where the Federal Government bailout program is set to artificially keep the price of a good higher than the market is obviously able to bear, i.e. housing. (A quick aside. When M and I moved out here we looked at potential places to live and maybe buy somewhere. There was a development of loft condos in downtown LA that were interesting but the starting price was about 400k. This was for a small condo, maybe 1br or a studio. They just did an auction for these same condos: cheapest condo went for 207k and the penthouse, which was originally thought to be a million dollar property, sold for about $500k. Gotta love a sale.)
Now, some of you may feel that minimum wages are a good thing. Why should someone work for what is a 'non-living' wage? It is intuitive and it just feels good to think of minimum wages. We must do something so a person dropping fries into oil gets 8 bux an hour, even if it is not worth that much nor take 8 dollars worth of skill, because that person might have a kid or something. But, if you accept that you have to accept the ability to set price floors. They are the same principle on either side of the equation. Who among us would be okay with Best Buy, Circuit City(well, maybe not them), Target, Costco, etc. having the same price for the same merchandise? That seems strikingly counter-intuitive but the logic is the same as wage floors.
Are we set for another prolonged recession because the government feels it has to do something? Housing prices cannot go down, we hear. You can be damn sure any job funded by the recectly passed Trillion Dollar Blank Check Bill will have a floor to what can be paid to workers. The recent change to the Fannie/Freddie mortgage limit from $400k to $700k is essentially a price floor for housing. You don't think home values would seek that level of support?
How do you see this shaking out? What do you think of the UCLA economists take on FDR's policies? It certainly is not popular right now. The article was, in fact, written in 2004. It references the unemployment rate of 2003 being 6.1% - a then 9-year high. Didn't we get all panicked when it hit 6%? Funny how soon we forget.
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Excellent commentary.
I doubt you are going to recieve much dissent from your opinion on here, so I will take this as a moment to leave this comment.
Moments such as this are key for the liberty minded to exploit by pointing out the gaping flaws in Keynesian economics. Granted, this is stuff thats been disproven since the 1800's, but I digress.
The argument is that stimulus, essentially must occur from a top down, ordained manner. This is of course ludicrous as planned economies dont work.
People spend money on essentials in tough times, and as a result, those key economic areas are strengthened, as well as the best and brightest of less needed, or even luxury sectors of the economy.
What needs to be stated clearly is that the trillion dollar stimulus is not only due for failure, but is an illusion. If the tax payer kept his money, that would be roughly 3500 for each man woman and child in the US. What is the governments argument? That if that money stayed with the tax payer that it wouldnt stimulate the economy? That they would toss it into would chippers rather than spend it?
Bollocks.
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