Friday, May 30, 2014

Causing Inflation By Increasing the Minimum Wage Would Benefit Me

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