There
has been a lot of talk lately about increasing the minimum wage. Conservatives often argue that increasing
the minimum wage leads to greater unemployment in the short-term and inflation
in the long run. I believe that,
but I don’t think that ends the analysis, as some people seem to suggest. I am not necessarily arguing that we should increase the minimum wage. I am simply expressing why it would not
upset me personally for reasons that I don’t often hear articulated. Reasons that you could argue, if you
were so inclined, support raising the minimum wage.
The
unemployment then inflation argument suggests that both unemployment and
inflation are always bad things.
Is greater unemployment always bad? No. Child labor
laws cause greater unemployment (or under-employment), but I don’t hear people
on Fox News calling for more relaxed child labor laws… not yet anyway… I kid. I
kid! In any
case, my point is simply that increasing unemployment or under-employment is
not always a bad thing.
Whether
the rise in unemployment (or under-employment) due to increases to the minimum
wage is a good thing or bad thing is less clear because it’s a less extreme
question. Sure, ideally speaking,
we want people to earn a basic level of income for working, but ideals can be
expensive so it would be useful to know how much unemployment or
under-employment we are talking about.
The unemployment then inflation argument suggests answering that
question is unimportant because increasing the minimum wage only causes
inflation, which, it further suggests, is a bad thing so there is no point in
analyzing the issue further. I am
not so sure about that.
Inflation
is one method of transferring wealth.
That is, inflation is one way to redistribute wealth from one group of
people to another. I, for example,
would benefit from inflation because I have two houses, which are each
encumbered by mortgage loans that have fixed interest rates, and a number of
large student loans, which also have fixed interest rates. Thus, for the foreseeable future, while
my income may rise with inflation, my three largest expenses will remain
constant. So holding everything
else constant (an economist way of saying assuming away all potential problems
with my argument) I am better off with inflation. As my income gets bigger with inflation my three biggest
expenses become a smaller percentage
of my budget, which means I am better off in real (inflation adjusted) terms. Thus, even if food, gas, and other
prices rise with inflation and remain the same percentage of my inflated
budget, I still have more money to go around in real terms because the payments
on my loans remain the same despite the inflation.
Who
is worse off? The banks that I am
paying for my mortgage loans and for my student loans, their investors, and
anyone else they have convinced to join them in their investment in me (i.e.,
investors in mortgaged-backed securities). I have two houses essentially as a result of a combination
of the housing crisis and the student loan crisis. The “cute starter home” we
bought in 2006 is now worth probably thirty to forty thousand dollars less than
we paid for it even after we spent around twenty thousand dollars making it even
nicer. We had to move, in part,
because of a bad economy and the lack of jobs. Law school was not quite the investment I envisioned. Don’t get me wrong, I loved my home, career,
firm, and life in general, but it was rocky getting to where I am today to say
the least. Thus, I have two houses
and mortgages, tenants in one of the houses, and student loans with payments
the size of a third house payment.
It
should be no surprise that I believe the housing crisis and the student-loan
crisis are two of the biggest problems with our economy today. The basic problem of the housing crisis
is that many houses are not worth what people owe on them. Inflation would seem to help not hurt
that problem. Inflation would
cause the value of houses to rise.
And for at least the houses encumbered with fixed-rate mortgage loans,
the debt tied to those homes would remain constant even with inflation. So inflation would cause fewer homes to
be “underwater” to use the nomenclature.
The
basic problem of the student-loan crisis is that students have borrowed too
much money for what they can reasonable expect to get paid in the workforce. In other words, payments on student
loans use up a greater portion of income than expected. Inflation would seem to help fix that
problem too. Inflation would cause
salaries to go up. And for at
least the student-loans with fixed interest rates, the portion of income
devoted to repaying student-loans would go down with inflation.
So,
you could make the argument that inflation will help us move past both the
student-loan crisis and the housing crisis and that the people that would be
hurt the most by that same inflation would be the banks who made the mortgage
and student loans. While I am not
exactly arguing that we should increase the minimum wage, I also won’t lose any
sleep over the idea of these banks being worse off from increasing the minimum
wage. I say this with some slight
hesitation because, being a shareholder in my firm, I am a small business
owner. However, even if you were
to add that layer of complexity to this analysis, I still think that I would be
better off with inflation. So, if
you argue that increasing the minimum wage will lead to inflation, then just
remember that some people may view that as a good thing even if they do not
tell you that.
That’s
My Argument.
© May 2014 Brandon J. Evans
