Today on Blogcritics
Home » Culture and Society » Romney is Focusing on the Wrong Mechanism

Romney is Focusing on the Wrong Mechanism

Coming off derogatory remarks he recently made about the underclass in America, Republican presidential hopeful Mitt Romney apparently felt the need to throw them a bone. Last week, he reaffirmed his support for linking regular increases in the minimum wage to the rate of inflation. Given that Romney has held this position since he ran for governor of Massachusetts in 2002, one could assume that he really believes the proposal would go a long way to helping the working poor. But, what he is really doing is focusing on the wrong mechanism to help them.

On the surface, Romney’s proposal seems reasonable. As prices increase, so should wages. After all, aren’t Social Security benefits indexed for price inflation? However, the first realization that must be acknowledged is that government economic policy causes the price increases that allegedly make the minimum wage necessary for some to live a minimal existence. In other words, if the federal government would simply live within its means and cease using the Federal Reserve to monetize huge amounts of debt and maintain artificially low interest rates, there would be little or no need for a minimum wage.

As the late Austrian economist Murray Rothbard pointed out in his book, The Mystery of Banking, from the mid-eighteenth century until 1940, prices in the United States actually fell on average from year to year,except during war years. Since 1940, the Federal Reserve, which became responsible for maintaining price stability and the value of the dollar through monetary policy, oversaw a decline in the dollar’s value of more than 93 percent. That calculates to a 1506 percent annual rate of inflation change! It’s no wonder we have become a society with a low savings rate and two partners working to make ends meet.

What was the difference between these two economic epochs in our nation’s history? The first had a gold standard and the second was based on a fiat dollar standard.

The bottom line is that minimum wage laws are a reaction by politicians to their own historical bungling of the economy. If Mitt Romney and his ilk really wanted to help the working poor in America they would endorse a sound money policy instead. In particular, a gold backed currency that would alleviate the ability of politicians and central bankers to devalue the dollar and cause price inflation by printing money and running deficits. In short, a return to the gold standard would stabilize and eliminate the need for a minimum wage.

About Kenn Jacobine

  • troll

    Glenn Contrarian -

    *guffaw*

    I see that you have no interest in addressing your penchant for putting words in others’ mouths

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Why should that be of any concern?

    It’s the truth that matters.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Since I appear to have joined this conversation, watch all the resident liberals come out of the woodwork in defense of Glenn.

    I’d tickle me to death if I was proven wrong.

  • troll

    personally I value honesty as much as truth

  • Kenn Jacobine

    I don’t have a problem with deflation if that is what the market calls for. The price of housing got totally out of control during the 2001-2007 housing boom. Apparently the enormous price increases were artificial and unwarrented. We are currently in a deflationary spiral in terms of housing costs. This is necessary given the glut of housing that was built and the unrealistic price levels achieved.

    I don’t pretend to know how much money should be in circulation or what the interest rate should be. That would be what Hayak called the “Fatal Conceit”. Ben Bernanke doesn’t know what it should be either. That is why I believe, unless he gets lucky, with all the new money he has created we are heading for a period of high price inflation. Prices are on the rise already as the money supply has begun to enter the market. As consumers realize their money will not buy as much they will seek to spend it thus speeding up the velocity of money causing even higher prices.

  • Glenn Contrarian

    Again, Hayek spoke out against deflation as well as inflation (and the fact that the quote came from Wikipedia doesn’t mean the quote isn’t accurate – check the referenced used in Wiki).

    I agree with you about what happened to the housing market (though you and I would probably disagree on the root cause thereof).

    But back to the gold standard, I still want to hear how we’re supposed to protect our monetary system from manipulation by other nations, especially given that transactions now take place in minutes or even seconds whereas they would have taken days or weeks before.

  • Kenn Jacobine

    Glenn,

    The Chinese and others can manipulate our economy precisely because our dollar is backed by nothing which has allowed Washington to borrow trillions from them Actually, I’d like to see the government get out of the money business altogether. Money, when backed by a commodity, is a good like rice, chickens, or cars. It is a medium of exchange that relieves us from carrying around cumbersome items like desktop computers and wheelbarrows. It is also divisible allowing us to make change. If money were private like other goods, it would be free from political manipulation. In fact other money would enter the market like different brands of cereal. There would be competition which would improve the quality of money and produce a stable environment for economic growth.

  • Igor

    #55-Kenn illustrates the problem that economists discovered 200 years ago in the capitalist system: the boom/bust cycle in capitalism is not triggered by outside influences like drought, war, flood, etc., but by systemic forces within capitalism. Now we know that capitalism has inherent instability.

    That’s the big problem with a market economy: it is inherently unstable, it swings wildly between highs and lows until it explodes.

    So it reduces everything to gambling. Forget hard work, forget ingenious innovation, forget planning. Just put your money on red at the casino.

    The smart thing to do is to introduce the stabilizing influences that every Sytems Engineer is familiar with: friction, energy storage, amplitude control, etc.

    In an economy, taxes take the place of friction (by imposing a cost on artificial sales), federal fiscal policy creates storage (by saving resources during booms and spending them during busts), etc., progressive taxes work against excessive allocations of financial resources (soft limits).

    But just standing around doing nothing, as so-called free marketers seem to advocate is a recipe for violent overthrow. There’s a limit to how far and how often you can screw the 99%.

  • http://www.squidoo.com/lensmasters/IanMayfield Dr Dreadful

    The Chinese and others can manipulate our economy precisely because our dollar is backed by nothing which has allowed Washington to borrow trillions from them

    And the Chinese yuan is backed by…?

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    The entire premise is wrongheaded, as though we had nothing to do with “our economy,” that the straits we’re in are none of our doing.

  • http://www.squidoo.com/lensmasters/IanMayfield Dr Dreadful

    Roger, that’s the most clarity you’ve shown on these threads for a long time, and you’re absolutely right.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Why does Kenn fall for the bait, that’s what I like to know. It’s as though he’s so intent on proving his point he can’t even think straight.

  • Glenn Contrarian

    Kenn –

    The Chinese and others can manipulate our economy precisely because our dollar is backed by nothing which has allowed Washington to borrow trillions from them

    Um, didn’t I just show you earlier how the French DID manipulate the strength of our currency when we were on the gold standard? Yet you’re now implying that the gold standard would somehow protect the strength of our currency?

  • Kenn Jacobine

    The point is that the French and potentially the Chinese can manipulate our currency because of our actions – massive inflating of the dollar. It wasn’t the Gold Standard that caused it but Keynesian politicians in Washington. These are the policies you, Glenn, advocate. Nixon got around it by defaulting (closing the gold window). Obama is out of options – if he stops spending the economy (the previous bubble that was not allowed to burst) will finally burst. If he continues spending it will result in the collapse of the dollar because no one besides the Fed will want to buy our debt which means they will have to print even more causing at that point Weimar style hyperinflation.

    All this because we are intent on perpetuating the failed welfare/warfare state. Or we don’t have the courage to do what is needed.

  • Kenn Jacobine

    Igor,

    Capitalism is not inherently instable in relation to other economic systems. If you look at the economic history of the U.S. In those times of wild swings (inflation) they were generally times of national banks, central banks, and times when those institutions allowed banks to suspend payment of specie. That is the primary cause of booms and busts and wild fluctuations in inflation. It is central banking, which is no better than the old central planners at the Soviet Politboro, that is responsible for instabilities.

  • Glenn Contrarian

    Kenn –

    Obama is out of options – if he stops spending the economy (the previous bubble that was not allowed to burst) will finally burst. If he continues spending it will result in the collapse of the dollar because no one besides the Fed will want to buy our debt which means they will have to print even more causing at that point Weimar style hyperinflation.

    So what will you say when that said gloom-and-doom doesn’t happen? You won’t change your mind – you’ll continue waiting for Godot, saying that it’s “just around the corner”, that it’s “going to happen eventually”…and when we eventually do have a financial crisis – as there always is sooner or later – you’ll pat yourself on the back and claim it as proof of the failure of Keynesian economics.

    Kenn, we could both go on for weeks on this with neither of us giving an inch. I know this may come as a surprise, but I do have a healthy respect for you, for you do strive to back up your beliefs with educated discourse…and, since you are the more educated and more experienced, it’s only proper that you have the last word.

  • Igor

    65-Kenn: you are simply wrong when you state: “Capitalism is not inherently instable in relation to other economic systems.”

    No. Capitalism IS inherently unstable. And it has nothing to do with other systems: it’s not relative, it is absolute.

    The old time economists, Hume, Smith, Ricardo, etc., realized this as a unique characteristic of capitalism: capitalist instability comes from WITHIN the system. It is inherent. Hundreds of Econ grad school theses have been written about this since then (maybe thousands, maybe millions!) describing what those forces are and even how to rein them in (you won’t like this, but one of the best ways is to impose taxes that greatly reduce reaction time by increasing costs).