Monday, August 25, 2014

The Upside Down Logic of Today’s Economy

People used to buy homes because it was cheaper to own than to rent. Let’s face it, the ability to pick up and move at the drop of a hat, is real freedom. And just that alone should dictate that renters pay more for that freedom. That doesn’t seem to be the case. Selling a home in California can cost 20K, and that’s a year’s rent.

Common sense suggests that if you want people to save their money, you should pay them a reasonable interest rate so they would forgo immediate gratification. I can’t think of one reason if you are young, to put money in a bank at these interest rates. Buy something real and enjoy it.

If you are ready for retirement, even Suze Orman is suggesting that you hop into the stock market. The return on bonds is so low that you need to invest in stocks with some reasonable amount of return even if the risk is greater. Otherwise you will outlive your savings. And to think, that the eighth wonder of the world used to be “Compound Interest.” Right now the spread between Junk and Treasury’s is about 100 basis points and at times in the past, used to be as high as 800 to 1400 basis points (that's before the government insured everything).

It used to be that the minimum wage was an entry rate into the labor force. You couldn’t live on it as a career wage, but it gave you training and gave your employer a way to measure you for advancement. Now we have the realization by the masses that you can’t support a family on the minimum wage. Plus we have a new economic concept that raising the minimum wage will solve problems. Let me ask you one question, does a law solve a problem or set fines for violators? Just maybe pointing out that the minimum wage won’t support a family sells more newspapers. Everyone earning the minimum wage has a pretty good idea that family life will really suck on the minimum wage.

The infrastructure in most of the states is over 60 years old and needs to be replaced. “Infrastructure is a fancy name for; roads, sewer, water and electricity. On top of that, my state, California is in the middle of a drought. Add insult to injury, consuming less water by everyone will raise everyone’s water rates. A lot of the fixed costs used to be passed on to the large consumers. So in a down economy, consuming less costs more and we are not even talking inflation.

Inflation appears to have disappeared if we look at all of the government statistics. But if we examine the national debt, a jump of 10 trillion in the last 9 years, kind of makes one wonder. When I pointed out to someone some wastefully spending in our organization, the reply was, “Oh, that’s government money.” There appears to be a complete disconnect between the taxes we pay and government spending. So it’s not surprising to see that the average man on the street looks at the national debt as a government thing that has nothing to do with the people. Then carry it one step further; this form of government financing has worked great so far, why not continue it? Don’t rock the boat.

I remember as a kid offering up an excuse for bad behavior to my parents with “The other kids do it or their parents think its ok.” The response from my parents was wisdom for growing up into adulthood, “they might do it, but it doesn’t make it right. In this house you live up to our standards, not their lack of standards.” So when you open the morning paper and find out that all of the other countries are printing money at a very rapid rate just as we are; what you can deduce from the fracas, is that there are no “adults” in charge.

Common sense suggests that the economy is stressed to the limit. We are not sure, why or how but the facts don’t fit any model we use. Something is wrong, there is an economic conflict that has to be resolved. We cannot spend what we have not taxed, forever. There comes a point to where it has to fail. Of course we are not there yet, so as long as it works, it works.

It kind of reminds me of a roller coaster ride video from a blogger a few years ago about the Stock Market, we are now most certainly near a top and are ready for the real ride to begin. Or better yet, it's enjoying snow cones on the Titanic after the iceberg hit. Are we having fun yet? Do you get the idea that reality and common sense, are traits lacking from the players at our "roulette table" commonly referred to as the stock market? "Faites vos jeux."

Tuesday, August 12, 2014

War and Non Wars

I wrote this a week ago and published it for about 12 hours and then unpublished it. It didn't really conform to what this blog is about and that's why I pulled it. But it seems to have a of a lot of relevance when we watch the cruelty going on in the third world news.

This is a little off topic, but right now the world is in the midst of several armed conflicts and many are mislabeled “wars.” Wars are fought by two differing groups wearing uniforms to designate their affiliations and there are rules of engagement. If you remove your uniform and go behind enemy lines, you are then considered a spy and entitled to be immediately shot if discovered. In these types of conflicts, civilians are a protected group.

In a second type of conflict many times labeled “a war,” are religious conflicts. There are no uniforms to designate participants, in fact, most are masked. These barbarians think nothing of killing a man’s family, if they cannot get the man himself. What we need to realize is that these people are terrorists and do not even deserve the right to surrender and be captured. They claim to be innocent civilians when discovered.

We need to recognize what terrorism is, it is an attack on everyone, not just the military of a country. We have a war in Syria and at least half of the combatants wear uniforms; in Israel, the same thing. In both cases, only one side is held accountable, only because they follow the rules of war.

In the Ukraine, they have a civil war and the war is real, they’re not trying to kill civilians. It is soldier killing soldier. When it’s over, the winner’s rule and it has nothing to do with religion.

Most of the civil unrest in the world right now involves the Muslim religion. They are using terrorism to conquer those who block their path with mindless senseless trails of death and destruction, through terror and intimidation, with the hope to conquer, kill and convert what is left.

A pressure cooker blows up during the Boston Marathon and it sets a whole nation on edge. Our airlines could be on the verge of collapse with one or two future successful terrorist attacks.

As a suggestion, why not drop one or two nuclear bombs on ISIS to show them what we are using for a pressure cookers? We don’t need boots on the ground to vaporize someone who is a terrorist. This might give Iran second thoughts on producing a nuclear device. If they want to wear a uniform and play by the rules of war, then that would change the game plan. Right now our game plan doesn’t work because they don’t play according to the rules of war. They are playing to win and are succeeding, the threat to kill your wife and kids will make anyone toe the line.

A nuclear bomb would bring home to them the absolute horrors of real war, more so than a car bomb or a pressure cooker. The certainty of the lethal impact of a nuclear weapon makes a car bomb seem like an act of futility. If you get vaporized, you don’t get the 60 virgins. Of course I could be wrong on that, no one has come back to complain that they didn’t get their quota of virgins. And if we are talking sheep, I can see a realistic possibility of filling that quota of virgins.

We need to examine the rules of engagement for terrorists. Do we play by our rules, or do we give them a dose of what they are handing out to the rest of the world?

I'm sure that I will be more on topic next week.

Sunday, July 27, 2014

Show Me a Company That Pays Taxes

The most idiotic statement I heard the other day was from President Obama stating that these "Business Inversions" going on, were a way for business to avoid paying U.S. taxes. Show me ANY company that pays government taxes. There are NONE! The tax is added on to the price of the product and THE CONSUMER PAYS THE TAX.

Basically a corporation makes widgets at a reasonable price, or goes out of business. There are all sorts of taxes the corporation has to collect and turn into the government. If the government decides it wants 26 percent of the company’s earnings and call it taxes, so be it; it is a cost of business and is factored into the price of the final product. So when you buy a new American car, built for 20K the selling price has a 26 percent markup just for the tax --- figure $25,200 with GM’s tax added in. Then figure profit for dealer and producer and the price hits $30,000 also envision all of the car parts from suppliers paying the same government tax. And add that on to what the car company has to pay to acquire parts to produce the vehicle. When done this way, the buyer has no clue to as to what goes into his 10 percent sales tax tacked on to his purchase price— he is paying tax on taxes already paid by the auto producer and his suppliers.

The President and Congress express the need for tax reform, and big business has figured out what that means, there won’t be any. Moving your mouth is not the same as rolling up your sleeves and picking up a shovel. This country wasn’t created because of religious freedom and voting rights, it was created over unjust taxation. People were tired of paying the King of England tribute taxes with no visible benefits. Obama thinks that it is our patriotic right to pay taxes. We fought a war to fix that 200 years ago and it looks like we are facing the same problem again.

All governments are incredibly stupid when it comes to taxes. The Great Depression of the 1930’s was greatly exacerbated by municipalities using the logic; “If we raise taxes, we will increase the amount collected.” People couldn’t pay the taxes and gave the city their keys to the property. The net effect, the tax revenues collected, dropped drastically. The politicians didn’t comprehend the cause and effect of what they had done, but that mattered little, they didn’t get reelected, so there was no lesson learned. The tax rate on the rich at one time was almost 90 percent and when the government dropped it down to 20 percent, there was no change or decrease in tax receipts, the rich now had more places to invest without being penalized. Changing the rate on the rich, in no way affected the amount collected. You can be stupid and poor forever, but you can’t be rich and stupid for very long.

The cost of running a business in the USA is chasing manufacturing off shore. Taxes are only one item; there is Obamacare, Social Security, unemployment insurance, workers comp and liability from ambulance chasing lawyers.

This country was settled by people voting with their feet. Corporations are now considered people, and they seem to be voting with their feet. Why do I get the feeling that the political logic doesn’t fit here? The real question that needs to be asked, is this: Why does government need more money to fix what isn’t broken, and at the same time, need less money to fix what is broken?

Common sense suggests that if it works in the USA, it will work a hell of a lot better in another country at half the price. Why does that seem like the wrong answer, but the right conclusion?

Monday, July 21, 2014

Socialism a Humorous Explanition




Below is a web link if it doesn't show up right.
Web link

Sunday, July 13, 2014

The New Housing Bubble in California

Housing prices in San Marcos are about back to pre-bubble prices. A house like we rent for $1750 a month is now going for 560K. That would be about $3,000 a month to own it plus another $5,600 in property taxes. So renting costs us about $21,000 a year while owning would cost us about $41,600 a year. Notice the cost difference. If you wanted to turn the property into a rental, it wouldn’t be worth the effort at these prices.

In the past, many people said, that paying rent was just throwing your money away. Owners rationalize when the home is paid off, "they get to live in it rent free." Actually, they forgo the interest of the dollar value of the home. A paid off 560K home would generate 17K at 3% interest. So if you take the 17K and add the property taxes, of $5,600, you get $20,500. Divide that by 12 and they are still paying $1700 rent a month. We are not even talking repairs here, I've got a $7,000 repair bill to rebuild one bathroom on my rental.

The real reason for home ownership in the past; it was cheaper to own than to rent. The renter paid extra for the freedom to pick up and move when they felt like it. With housing prices up 160K in two years, that thinking has changed a bit. The funny thing for this area is that the people that bought at the height of the last bubble are still underwater after 8 years. They need 34K in equity just to pay the realtors fees if they were to sell without a loss.

In a roundabout way, the Federal Reserve and your retirement funds are what keep the real estate prices artificially high. Beginning in October, the Feds will no longer be buying the real estate paper. The estimates of the dollar value of the paper owned by them is around 2.3 trillion dollars. No big deal on this, the home loans will be paid off over thirty years and the 2.3 trillion will go to zero ---if the real estate doesn’t go back into foreclosure.

The trouble begins in October. Here is a simplification of how the present banking system handles real estate. The bank loans a home buyer 500K for a home loan. The bank then sells the loan to whomever, in this case the Federal Reserve and keeps a half percent of the loan for management fees. The bank then loans the money out again and does the same thing and gets another management fee. If the bank does this 10 times, it is getting 5% in management fees on their depositor’s 500k with little or no risk. Before the Federal Reserve and the Fannie and Freddie bail out, the loans were sold to private parties. So now, it looks as if interest rates will have to rise up about 300 basis points to create interested third parties willing to invest in the real estate note market. You ask why?--- the banks don't want to hold on to 30 year 5% paper. Will rates rise, or will the Fed throw in the towel and start buying more paper?

I think all of us can agree that the stock market has reached new highs for no good reason. A lot of hard working people have retired because they can’t find a job. Many college grads are finding out that their degree isn’t worth the money they borrowed to get it.

Our government has enabled every dreamer the right to become a failure. Buy a home, get a college education and become a part of the American dream. Buy a Lotto ticket and win. And if you can't speak Spanish, you'd better learn.

So we have a housing bubble in San Marcos, I wonder how it will end? If the government rewards failure, I guess we will get more of it; it’s tragic to think that we earned it by hard work rather than ineptness.

Saturday, June 28, 2014

The Invisible Derivative's Market Reprinted

This is a reprint from June 25, 2006, and later Aug 5, 2008 that may be of interest to some of you.

Call it gamblers insurance. The most common derivatives are Puts and Calls. If you think that Google is going to go down and you want to still hold it because of its upside potential you would buy a Put at say $375. So if Google was to drop to $200, you could "put it" to the option seller at $375. The cost of this insurance option varies, depending on the volatility of the stock. Now, if you thought Google was going to go to $1,000 you could purchase a Call at $400 strike price. If the stock rose to $600 you could exercise the Call and get the stock at the $400 dollar price or the difference between the Call price and the current value.

The figures vary somewhat, but about 90% of all options expire worthless in the U.S. Stock Market.

Enter the Gunslinger (slang term for wet behind the ears Mutual Fund trader) (never seen a real bear market in his life---there hasn't been one). This guy gets the bright idea to sell both Puts and Calls. As long as the market lumbers along the guy is raking in the coin.

Say the Dow has a bad day and drops 300 points. It seems like a big move, but since it is a measure of 30 stocks bought way back in 1910, multiply the 300 point drop in value by the Dow divisor (0.123) and you get a real dollar loss of $36.90 on the Dow. Divide that by the 30 Dow stocks and you get $1.23 per stock. If that were to happen, no big deal pay out to the Puts exercised. Notice, you only get burned on the Puts OR the Calls NOT BOTH in any one point in time. I stress the words "Point In Time."

The Derivatives Market is bigger than our stock market. One analogy used the comparison of an elephant to a mouse; here is a graph from one source that puts it at 35 trillion dollars.


Graph courtesy www.gold-eagle.com. [postnote:The graph is somewhat dated, present figures suggest around 55 trillion.]

Now suppose the Dow Jones drops 1000 points. Then by some miracle the market comes back to even at lunch time. Then, it soars up 1,000 points by the close. The gunslinger gets hit going down and nailed again when it goes up (the double whammy). He would be selling Calls like crazy while the market is going down trying to recoup losses from his naked Puts, then as the market heads north he gets eaten alive by the Calls he wrote earlier.

We only picked one market; there is the bond market, the commodities market, and foreign exchange markets, to name a few. At this point, the gunslinger is in a situation that looks like the kiddy game Whack a Mole, where you have a hammer and hit the head that pops out of one of many different holes. The model turns into a real mess, when you realize that there are thousands of Mutual Fund Managers that will all be playing this game in real time. Naturally these different markets will be doing different things. The word "panic" comes to mind.

My suspicion with Mutual Funds and IRA's, is that when you specify how you want your portfolio invested, they are not moving your money from one investment to another, they are purchasing a derivative to satisfy your demands of asset allocation. This leaves them free to pursue the line of investment they feel most confident with.

So much for "what ifs," the Derivatives Market is a Fantasy Land; the playground of hedge funds and mutual funds. Where will it end? My best guess, somewhere between Ab Surdum and Ad Nausea (no, they are not towns in Iraq).

Sunday, June 22, 2014

Nest Egg Inflation

As I get older, retirement seems further off in the distance. Inflation is nibbling away at my savings. But there are bigger problems that lie hidden just beneath the surface.

The Robert Reich movie "Inequality for All," talks about the 1% getting richer and the middle class getting poorer. On the one side, the middle class still earns the same amount, but it doesn’t go as far anymore. This is called inflation, but a better description would be government printing of dollars. If we look at the rich getting richer, one item eludes people, the increase in wealth doesn’t mean that they now spend more, it most probably goes into a bank account. These extra dollars are not sloshing around in the economy, they have been absorbed into what could be labeled a “wealth sponge.” The excess of printed dollars is effectively removed from circulation.

On top of that, we have many people approaching retirement squirreling dollars away in their IRA’s and 401K’s. Many people believe that Congress enabled these retirement plans to help people save for retirement. That concept was a great vote getter, but the real reason for these plans was to increase the money available for Congress to borrow.

In two years’ time, my mint flavored Altoids have increased in price from one dollar to three dollars. The dollar double cheeseburger at McDucks is now $1.69. On Reich's documentary, he interviewed a guy making 12 million a year, and the gentleman pointed out that he only needs three pairs of blue jeans a year. So we can’t depend on the rich to stimulate the economy, and at the same time, I’ve cut down on double cheeseburgers and Altoids. Put it another way, the burn time on retirement funds has halved.

People today, are not saving for retirement like they used to. The silver foxes are starting to withdraw their retirement dollars, while the young question the concept of even saving money. Why put it in the bank at one percent when you can get a new car instead? Interest rates this low almost demand that you satisfy your urge for immediate gratification.

If we go back to Bernie Madoff, we stumble upon another problem not considered. All of his investors were rich up until they were advised he was broke. It's amazing how an excel spread sheet and a LaserJet printer can give an investor the appearance of a fabulous monthly statement, while in reality they're dead broke and clueless of the fact.

The real feat of accomplishment, is the 14 trillion dollars borrowed by the US government. It was sucked out of the financial system in a span of 10 years. This money was deposited in the banks when interest rates were 8% and higher. What happens now, when the baby boomers retire and start to withdraw their nest egg dollars? What happens if there are no new dollars coming into the system to replace the ones withdrawn?

It's kind of like the government selling 14 trillion dollars worth of tickets to the latest movie and the theater only seats 2,000. There is no problem until you decide to see the movie.

inflation has had 40 years to ravage your nest egg. As you run out of funds in retirement, your kids will try to help you out and will come to the conclusion that you just didn't save enough. They will grow up wiser--- When it comes time for them to retire, they can use their government Social Security checks to pay off their government student loans. ---Why do I get the feeling that I'm missing something here?






Sunday, June 01, 2014

The Computer Age, The New Brick Wall

Computers have changed the way the world works beyond imagination. Just as in the early 1920, the industrial age transformed the United States from an agrarian economy to an industrial one. The 80% farming the land in 1910 didn’t give up willingly, but the number of farmers dropped drastically as the Great Depression progressed. That was the “New Age” of; incandescent lighting, the telephone, electricity, the airplane, radio and the automobile. This new technology was going to make life better, and that was 1929. And it did for some.

Our present economy is in bad shape. Raising the minimum wage is not going to make better hamburger flippers, minimum wage jobs are already filled to beyond capacity. People need to realize that the work place has change dramatically with the introduction of computers, many jobs are gone for good. Try going to the Unemployment office to file a claim; you have to get on a computer and fill out the forms, and god help you if you can’t type. Just entering your data for a claim yourself, eliminates about 4 people that use to work in the unemployment office; the receptionist, the data collector, the interviewer, and the guy to match you up with a job. Type in your claim and the computer will search the data base and print out possible job positions and at the same time, determine if you are eligible for unemployment.

People without computer skills are the new frontier of unskilled laborers. Surprisingly college grads also enter into the unemployed mix. Many field have no jobs waiting for them, this includes lawyers, dentists, and health care techs. There are jobs in those field, but not tens of thousands of them. Colleges don’t guarantee jobs, they only enable the student to pursue the career selected. It is not their fault that more people will graduate this year as lawyers as there are people already practicing law.

Then you have middle management who have lost their jobs because of the computer revolution. One worker with the right software can now replace twenty people. Many people over 45, even with retraining, can’t expect to receive half of what they were previously earning--it probably took them 10 years to get to their present pay level. So they collect two years of unemployment and retire early at age 62.

This new age of technology has caught everyone flat footed just like it did in the roaring 1920’s. You could even go back to about 1906 when the mechanical calculator went into production and discover that the hundreds of thousands of accountants employed by the banking industry disappeared overnight. One person with a calculator replaced 80 workers.

Jump forward to today. The internet supplies us with many services we used to pay for. With Google, you can fix a washing machine, replace a garbage disposal or replace the brakes on your car. You can sell odds and ends to the rest of the world from the comfort of your own home.

Computer technology has made all sorts of tasks simpler and easier to accomplish. So it’s not surprising with all of the software, around, entrepreneurs have figured out that it is more cost effective to move simple repetitive jobs overseas. So in effect, we have a double whammy, a new work paradigm that revolves around computers, and an out sourcing of jobs that can be done cheaper in the third world.

The frustrating thing about the new technology is that you can spend a whole day on the phone trying to get a live person to talk to. And when a real person answers, you'll discover that you're talking to someone in India with an extremely limited English vocabulary; -- which proves you can work in this country without even being here. Theoretically a person in Hong Kong could robotically flip hamburgers in the US at 40 cents an hour---That has to be easier than flying a drone half way around the world and launching a stinger missile into Afghanistan. Let's see, I'll have one drone-burger, hold the onions and the missile.

Computer technology is the future. The trouble is, it's has transformed the labor market without telling anyone, leaving many people ill prepared or too old for tomorrow's jobs.

Monday, May 26, 2014

Federal Reserve "Saves" the Real Estate Market

The Federal Reserve bailed out of the banks, Freddie and Fannie a while back. Just before the real estate bubble burst, houses were sold for big bucks. The seller got the cash from the banks and the buyer got the house, which they gave back to the bank. Notice in a real estate transaction, the buyer normally will over a span of 20 to 30 years, pay back the loan with interest. At this point, the bank has an insurance loss on the home. It’s worth a couple of hundred thousand less than what the bank loaned money on.

What is not real clear here is the economic ramifications of a buyer walking away from a home and living in it for free for one to two years. The Federal Reserve is the insurance company that covers these failed loans and reimburses the banks for their loss. The original seller got 500K for the home and the Federal Reserve picks up the property. The Fed has an IOU written to itself for the amount it covered for the bank, in this case 250K plus the house itself. It now can offer very enticing interest rates to any buyer that would like to purchase the home at say $400K. Since the Federal Reserve doesn’t have to make a profit, the interest charged and the total payments over 30 years will probably cover to total cost that the Feds are on the hook to cover, 500K.

The seller got 500K when the buyer took possession. The bank was made whole with a 250K payment from the Federal Deposit insurance. That 250k was supposed to enter the market slowly over many years out of the buyers paychecks from wages earned. This was money that the homebuyer would not be able to spend on consumption because it was committed to house payments. That is no longer the case. The buyer took a walk, and the deficiency was dumped back into the market as an insurance payoff to the bank. Plus now, the ex-buyer is free to consume other things with his paycheck.

I could be shot again for my generalizations, but if we examine the real estate bubble, the house was well worth 250K pre bubble and sold for 500K. The seller made a 250k profit and the Fed dumped 250K into the banks’ balance sheet. And when you look at it, the money in the banks belongs to the savers, so everything is just terrific nobody has lost a dime. At this point you have 250k (seller profit) + 250k (FR insurance)=500K extra added to the economic market in purchasing power that no one ever even worked for. Now true, if the Fed sells the home for 400k, the 500K will come back to the Fed and we have a zero sum game, the trouble is, that date is 20 to 30 years away.

Where did all of this unearned money go? The answer is not really clear here. It is quite possible that it went into the real estate market, the stock market and IRA’s. If the banks wanted your money real bad, they would pay more than the paltry one percent interest. The one thing that is for certain, the Federal Reserve wants the highest price it can get for the real estate it manages (ergo keep interest rates low). Uncle Sam, the used car salesman, will give you the deal of the century on a used home. The lender of last resort, the Federal Reserve, has taken all risk out of the real estate market. Maybe that’s why the stock market is so inviting, no government controls.

The defaulted loans were a promise by the buyer, to surrender future earnings for the house being purchased. His labor over 20 to 30 years was going to pay for the house in a long drawn out time release program. Well, that didn't happen. The money that the seller received was his to keep. The money lost by the bank was depositor's savings and the amount was made whole again by the Federal Reserve. The sale of just one home worth 250k has blasted the financial market with 500k of money that was never earned by producing product. The funny thing is, all dollars are equal, the one you had to work for is no different than the one that was printed to cover up the real estate fiasco. Common sense suggests, that there is more money out there than there are goods to buy at present prices. And if you don't have a job, this sort of common sense is no consolation when it comes to paying the bills. But if you do have a job, it kind of explains why your paycheck doesn't go as far anymore. Two different perspectives and they are worlds apart.

Sunday, May 11, 2014

The Minimum Wage " A Tempest in a Teapot"

Listening to the radio driving home from work the other day I heard a 19 year old single mom saying she couldn’t raise her child on the minimum wage. I’d go so far to say that her wages probably wouldn’t even cover paying for day care while she worked. She had problems before she started looking for a job.

In the early 1980’s I couldn't find any work in Colorado, so I bought a lawnmower and placed an ad in the local paper. I had no trouble making lots of money, but cutting the same lawn time after time was not mentally stimulating to me, I was bored to death, but it left my winters open for skiing. My only point is that many people expect someone to offer them a job. It doesn’t have to be that way, you can create a job yourself---no job application required.

If we were to examine a small business today, employing 20 workers, at 8 dollars an hour, for 40 hours, just the payroll would be $6400 for the week. Now raise wages to $15 an hour. The employers’ budget is still $6400. He has 20 employees currently earning $320 a week. Divide that by $15 and we get a 21 hour work week. On the downside, the more productive employees will move to jobs with more hours, so in the long run, a worker who can hustle, will get the better wage. Over time the successful employer will have to pay more to keep their most productive employees. The increase in wages also changes the economic factors that determine if it is more practical to move production overseas.

Notice however, in the public sector, when you pay more to keep employees, you are also committed to paying the "dead wood" the same rate and there is no way to fire these bad apples. 40 years ago, civil service was a way to get experience for your future job in the private sector. The dead wood employees stayed there, at a low wage forever. Back then, there was a stigma attached to civil service employees—-loser was a polite term for them; they couldn’t get a real job. The neat thing about that era, was that the taxpayer didn’t pay extra for civil service incompetence, if you were good at what you did, the private sector had a job waiting for you at twice the pay. Things have sure changed since then.

Raising the minimum wage doesn’t necessarily increase the number of jobs available and lowering the minimum wage suggests that there might be more jobs offered but with fewer applicants applying for them. The minimum wage is really just a labor entry point, all the employer is saying is that he will train the employee and give them work experience. With the increase in the minimum wage, the worker is demanding more money for a job that takes no skills, with the thought, “I can do this until a real job comes along.”

In the fast food business, it is now practical to build a machine to grill hamburgers and I'm sure French fries won't be far behind. The entrepreneur has the option, to replace labor with machines. Robots don’t join labor unions and can work 24/7. If an automatic hamburger griller costs 100K and replaces 3 people, how long would it take to pay for the grill? At $8 per hour, about 2 years, at $15, a little more than a year. Do the math, that job will disappear.

These people picketing for an increase in the minimum wage to $15; how did they all of a sudden arrive at the “earth moving revelation” that you can’t raise a family on the current minimum wage? The graph below displays the minimum wages paid in other countries:

A school janitor today probably makes about 20 dollars an hour. Do you think that he graduated from high school and got hired for the job on the spot? I can still remember our high school janitor 50 years ago; an immigrant from Italy with a bad limp named Luigi (raising 3 boys). The school kids were cruel, they use to mimic his Italian accent and his limp. But there was a certain harsh reality that hasn't changed over time; “A high school education only prepares you for an entry job as a laborer.” Luigi worked hard to get a decent paying job and it didn't come overnight.

In today’s world, many jobs start at X amount more than the minimum wage. So raising the minimum wage increases everyone’s wages. Will the new reality reflect itself in the government Cost of Living Adjustment (COLA)? Of course, maybe we ought to create a Gullibility Index for the nation based on an inverse of the COLA value. As the COLA’s decrease, the Gullibility Index for the nation increases.

The neat thing about raising the minimum wage is that it increases tax revenues. The poor will no longer be at the poverty level and will now pay taxes and consume less welfare---Why does that sound so absurdly insane?

So with the proposed pay raise, everyone will get paid more for the same amount of work and everything we consume will cost more. Economics tells us that the minimum wage is set by supply and demand not government edict. I'm sure that we can get Congress to repeal the Law of Supply and Demand. And while we are at it, maybe Congresswoman Pelosi will introduce a bill to rewrite Newton's Third Law so we can get better gas mileage.