Minimum Wage

Saturday morning, I turned on “Bulls and Bears” on the Fox News Channel and I heard one of the strangest stock investments to make for the next four years. Believe it or not, this guy said that the economy was going to be so bad that the best investment he could come up with was Molson Coors Brewing Company. In other words, his message was to keep plenty of booze handy because this is going to be an economy that will drive even the most ardent teetotalers to drinking.

Now, I will admit that like a lot of others, I do see a light at the end of the economic tunnel with Barack Obama being elected. However, I also hear the sounds of a locomotive coming from that general direction. For Obama’s sake and for our country’s sake, I would prefer that the economy be in a boom. Sadly, I don’t see it happening.

Last night, I was reading on the causes of the Great Depression and there is a real possibility that we could get a miniature version of a depression. In looking at the signs and the symptoms of the Great Depression, I couldn’t help but notice how each of the signs and symptoms are going to create an even worse economic crisis. All four of them adversely affected the business community and ultimately affected the American public. Consider them the four horsemen of the economic apocalypse: Tight credit (pestilence), stock market dives (war), price destabilization (famine), and tax increases (death).

The first thing that happened was a tightening in the credit market. Back in the 1920’s, lending was such a fast and loose practice that there was speculation on the part of investors to make money off of debt. The end result was a deflation in debt caused by liquidation that ultimately tightened the credit market.

Compared to today, we are now in a state where the economy is seeing a tightening credit market. It’s harder to get loans because the banks are trying to get their balance sheets in order after the collapse of the subprime loan market.

The second thing that happened was the fall of the stock market. In 1929, the Dow Jones Industrial Average dropped 68.90 points, or a drop of 23 percent. It wouldn’t be until 1954 until the full drop was recovered. This was the kind of equity crunch that firms had difficulties with for years.

Back on May 19 of this year, the market closed for the last time over 13,000. Since then, the market has dropped from 13,028.16 to 8,943.81 for a total percentage drop of 31.4 percent. Granted it was over a period of almost six months, but it’s been enough to drive down stock prices and create tightening of equity.

The reason that these first two items, debt and the stock market, is because of the importance the two of them have in the life of a business. In order for firms to expand, they need to have cash. To generate cash, aside from sales and profits, they need to be able to acquire loans or to generate a higher stock price. As this environment is now and may be for the next four years, it will be harder for firms to generate more money.

The first is the possible increased tightening of the credit market. President-elect Obama has proposed loan forgiveness and a freeze on foreclosures. This will create an environment where a loan officer may as well take his paid vacation time because the banks won’t lend unless under threat of the government to commit financial suicide.

The second is that the Democrats want to take over 401(k) funds from individuals who have them. By the government taking over the 401(k)’s, it will create less incentive to buy stock. Instead of allowing for your retirement to be the result of successful investing yielding in high rates of return, the rate of return is a fixed four percent per year before inflation. If inflation above four percent, you actually lose the inflation-adjusted value necessary to retire more comfortably.

By comparison, if someone had opened a 401(k) fund and invested in the Dow Jones Industrials Index Fund on October 20, 1987, your value would have increased by 314.3 percent. In other words, that would be an average gain of almost 15 percent per year or 3.75 times the rate of return of the government’s 401(k) rate of return. Sadly, the government is the only entity that can make bad business decisions and still stay in business all these years later.

The third of these problems was price destabilization. Because of the deflation of debt and the stock market crash, prices wildly deflated as a result of the United States loaning gold to Germany to industrialize in order to pay France who needed the money to pay debt to the United Kingdom and the United States. This was in response to the early 1920’s hyperinflation in the Weimar Republic.

However, the current situation could be increased inflation due to higher energy prices from the proposals of Obama, a contraction of oil supply by OPEC, and the desire to implement cap-and-trade programs that have the goal of reducing global warming, but will have the effect of reducing industry.

Inflation will be further fueled by record-high deficit spending by the next Congress when it convenes in January. With the bailouts being proposed, a second stimulus package in the works, increases in government spending for programs, fighting two wars, and an economy that is providing less tax revenue, a deficit of $1 trillion will probably become a reality before the mid-term elections if not by this year.

The increases in regulations and the increases in wages that will result from the increase in the minimum wage from $7.25 to $9.50 (the inflation-adjusted figure of the original minimum wage is less than $4) that Obama and the Democrats want will result in increased job losses and reduced production. When you have fewer goods in the marketplace, the price has nowhere to go but up.

Finally, there is the last of these: increased taxes. Following the prior three things happening to the economy, Herbert Hoover and the Republican Congress in 1930 enacted the Smoot-Hawley Tariff Act that raised taxes on imported goods (tariffs) to record levels despite the pleas and protests of over 1,000 economists and a number of business executives including Henry Ford who called it “economic stupidity”.

Despite these pleas and protests, Hoover signed Smoot-Hawley in to law and the goods imported from Europe alone decreased by half of what they were before the act. Also, there was a backlash where a number of other nations increased their tariffs on American goods.

The other tax increase was in 1932 with a Democrat-led Congress and Hoover. This time, it raised the top marginal tax rate was raised from 25 percent on those making $100,000 or more to a top rate of 63 percent on those making $1,000,000 or more (by comparison, the rate on $100,000 to $149,999 was raised to 56 percent). On top of that, the corporate tax rate was increased from 12 to 13.75 percent (an increase of almost 15 percent).

The end result was a jump in the unemployment rate from 7.8 percent in 1930 to 25.1 percent in 1933. It would not be until 1943 when the unemployment rate dropped below 10 percent.

By comparison, President-elect Barack Obama is proposing an increase in the capital gains tax from 15 percent now to anywhere from 20-28 percent (which would make buying in to the stock market a less desirable proposition), closing corporate tax loopholes that will ultimately increase the tax burden on corporate America (a tax rate that is already the second highest in the world), and raising the top effective income tax rates from 33 and 35 percent now back to the Clinton-era levels of 36 and 39.6.

What makes matters worse is that high taxes at the state level have devastated the state of Michigan perhaps more so than any other economy. Along with Oregon, the state has one of the two highest unemployment rates of any state in the country because of high tax burdens.

I bring up Michigan because of the incompetence of Governor Jennifer “Jenny No Jobs” Granholm who was right behind Obama during his Friday press conference. Granholm has done more to drive jobs away from her home state as governor. It was because of a bad Republican year in 2006 that she was able to get reelected, but her political career will officially end when she leaves office because of how damaged she has left Michigan with tax increase after tax increase.

As it stands now, the unemployment rate under “Jenny No Jobs” rose to 8.7 percent in September, more than two full percentage points higher than the unemployment rate above the national unemployment rate for October. Overall, the Granholm administration in Michigan has cost the state 143,000 jobs since she took the helm in 2003 (an average of more than 21,000 jobs a year).

What’s scary is that Obama is embracing Granholm’s high tax, no jobs approach to economics. This is why Obama’s economic policies will fail Americans. It will not provide jobs, sustainable growth, or stable prices. Instead, it will provide unemployment, higher taxes, more regulations, and more big government.

I may be Chicken Little or Nostradamus depending on the outcome. For the time being, I will be monitoring not whether or not those who voted for Obama will have buyer’s remorse, but when.

The outcome of the election, as reported by the media, was one of a historic victory by Barack Obama and the Democrat Party. However, I want to put a look on this going forward as opposed to going backwards. My take on it is that Obama and the Democrats have swallowed the poison pill of a bad economy and John McCain and the Republicans were spared from a Pyrrhic victory.

Defined, a poison pill is that of a strategic move in politics or business designed to increase the likelihood of negative results as opposed to positive ones during a takeover. By winning the 2008 Presidential and Congressional elections, President-elect Barack Obama and the Democrats have willfully swallowed a big poison pill left behind by George W. Bush.

Meanwhile, a Pyrrhic victory comes from King Pyrrhus, the ruler of Eprius, who won a series of battles that his army won in 280 and 279 BC against the Romans but the casualties they took on were devastating. Had John McCain been elected President, it would have been one such victory that would have been enough to strengthen Democrat majorities in the House and Senate while setting up the Democrats for a landslide win in 2012. For that, McCain and the Republicans spared themselves what would have been a costly victory.

The good news for the Republicans is that there are a number of ways that Obama can consume poison pills and do so happily while fooling himself by proclaiming it as an “engine of change”. Believe me, that the Republicans will be more than happy to keep supplying the poison pills. All of this with the GOP’s rise back to the top by 2012.

Had the roles been reversed with McCain winning and a Democrat-led Congress to work with, the Democrats would have blocked many of McCain’s economic policies and would force him to cross the aisle for the policies they wanted, which would have made McCain the second-comings of Herbert Hoover and Jimmy Carter.

In the end, it would have made John McCain’s Presidential win that very Pyrrhic victory that would have lengthened the minority of the Republicans in government and turned John McCain’s legacy from that of “Maverick” John McCain the war hero to John S. McCain the failed President. Instead, Obama and the Democrats took a tighter grip on power that could ultimately give the public one reason to vote Republican.

What Obama and the Democrats are proposing could be a prescription for an unmitigated economic disaster that could lead to GOP victories in 2010 and 2012. Those victories also assume that the Republican leadership in Congress and party back in working order.

If nothing else, it would be highly unlikely that Obama governs from the political center. Back in 1992, then-President-elect Bill Clinton was told by House Democrats that they would pull support for centrist positions of his if he tried to get Republicans to vote for his proposals. They told Clinton that if he stayed within the confines of the Democrat Congressional and Senatorial Caucuses, they would deliver other policy proposals. That ended in 1994 with a Republican landslide in the House and Senate elections.

Before that, Jimmy Carter decided that he was not going to govern from the left in the early stages of his presidency. The end result was a clear alienation of his own party that led to Carter vetoing in four years more than double the bills that George W. Bush did in eight years. By the time Carter tried to woo the liberal base of his party, it was too late. Thanks to not governing from the left and his ineptitude, Ronald Reagan defeated him in a 44-state landslide in 1980 in an election that was over one hour before the polls closed on the west coast.

President-elect Obama is now in a bad spot electorally. If the economy goes from bad to worse post-2009, Obama and the Democrats will not have Bush to blame. Instead, they will have to answer the question “What have you done for me lately?” If they’re not careful, the Republicans will start by making significant electoral gains in 2010 and could regain power back from the Democrats in 2012. That would be the final, fatal poison pill.

There was no secret by the Obama campaign about their desires to raise the capital gains tax from 15 percent to anywhere between 20 to 28 percent. The last time an increase in the capital gains tax was implemented was back in 1986 when the tax code was reformed under Ronald Reagan to make the capital gains rate the same as the top rate of 28 percent. When implemented, capital gains tax revenues dropped 44 percent because selling stock became less desirable.

What could make matters worse is the desire of Obama and the Democrats to raise the top marginal income tax rate from the current 35 percent rate to that of the 39.6 percent it was back in 2000. There are a number of serious consequences that would arise from a tax increase in an economic slowdown or an economic recovery. According to Obama’s proposals to repeal the Bush tax cuts for the top five percent of wage earners ($153,542 in adjusted gross income or more) and Obama’s proposed removal the income cap on FICA taxes could impose a federal tax rate of 54.9 percent.

As for the rest of the Bush tax cuts, they will be set to expire on January 1, 2011. If there is now tax cut extension put in to place, an economy that could be poised for a recovery would instead suffer a contraction. George W. Bush will not anywhere close to the scene of the crime (he’ll probably be getting ready to go fishing in Texas by this time) to be blamed and Obama would take the hit. In other words, Obama will be the first President to run for reelection on the heels of a recession since George H.W. Bush lost to Bill Clinton in 1992.

Spending can also get out of hand with the Democrats wanting more money for more spending programs. John Kerry has called for a new New Deal and Barney Frank has called for more spending, deficit be damned. This, combined with Speaker Nancy Pelosi’s push for funding for embryonic stem cell research (which is more throwing good money after bad since embryonic stem cell research has produced no cures while over 80 cures have been found via adult stem cell research) and Ted Kennedy’s push for socialized health care will be enough to generate our first-ever trillion-dollar deficit.

Once the recession is over, the next monster the economy will become hyperinflation that has gone unseen since the 1970’s. The contributors will be record deficit spending, energy prices run amok, and artificially increasing wages.

Obama has proposed raising it from the $5.15 it was back in 2006 when the economy was actually good to the $7.25 per hour wage that it will be next summer to $9.50 by 2011. The dirty little secret about labor pricing in economics is that if you inflate wages against the will of employers, you actually create more unemployment—like what is happening right now.

If you look at the inflation-adjusted number of the original minimum wage when it was implemented in late 1938, today’s minimum wage would only be $3.64 an hour. The $9.50 an hour that Obama would attempt to implement would be the 1938 equivalent of 68 cents. In other words, when adjusted for inflation, non-skilled workers—mostly high school teenagers, people working for the first time, and those looking to start a business by learning a trade—are making more than 2.61 times more than what they were making 70 years ago.

In some ways, inflation was made worse by the Carter administration in the 1970’s by increasing the minimum wage every year he was in office. When Carter took office, the federal minimum wage was $2.30 an hour. That figure went up to $2.65 an hour in 1978, $2.90 an hour in 1979, $3.10 an hour in 1980 and to $3.35 an hour when he left office in January 1981. By comparison, the Reagan administration never passed a minimum wage increase and one would not take effect for more than nine years.

Why does the minimum wage matter? It is the only real way to create a trickle-up economic effect. It will increase wages across the board by an even bigger percentage than that of a minimum wage increase. Employers will respond to higher taxes and higher wages with higher job cuts. We will be longing for the days of a 6.5 percent unemployment rate.

Then there is the credit crisis as we are facing as banks are more reluctant to give loans for any reason. Obama wants to give selected homeowners the ability to refinance during a 90-day foreclosure freeze. That will lead to a freeze on lending for either the same length of time to one that’s even longer. That is, unless of course, Congress decides to force banks to lend (which is what got many of the banks in this mess in the first place).

With the shrinking equity from Wall Street and the reduced lending of the banks (barring mandatory lending against the better interests of the banks), businesses will be harder-pressed for cash which will lead to more layoffs and less production of goods. When inflation by contraction (stagflation) on this scale happens, more Congressional bailouts won’t be enough to save corporate and small-business America.

Speaking of bailouts, there will be a push to bailout the automotive industry to the tune of $250 billion. For once, I agree with Congressmen like Dennis Kucinich. It is only on the issue of equating this to corporate welfare. However, he and his fellow far-leftists in the Democrat Party will likely acquiesce thanks to all of the additional goodies thrown in the form of pork-barrel spending projects to win votes just like what Nancy Pelosi did with her first Iraq spending bill that George W. Bush promptly vetoed.

The end result is a Democrat Party and an Obama administration overwhelmed with political poison pills gladly accepted on their part from the Republicans. By 2012, Obama will likely go down as one of America’s worst presidents and could make Americans long for the days of—dare I say—George W. Bush. At that point, the American public will vote probably for Republicans…any Republican.