A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Wednesday, January 2, 2008

Minimum Wage and other non-stories of 2007: Podcast transcript

Today we look back at some of the non-stories that were widely reported in 2007.

That is, things that did not happen that were widely reported as having happened or were certain to happen.

Among the non-stories covered in this podcast:
  • The minimum wage hike causes unemployment to rise

  • A weaker economy sends the stock markets tumbling

  • Banks and the shadow banking sector face up to their problems with write-downs

  • Housing slump nears its bottom

  • Federal Reserve Bank liquidity puts confidence back in lending, or rescues credit markets

  • Falling dollar does not mean higher inflation.

  • Market stability will follow from newly sobered investors

All right, so the last hasn’t been reported yet.

First: Unemployment
If you’ve listened to us very long, you will remember our distrust of the official employment figures coming out of Washington in the past year, in particular the strength of the so-called birth-death assumption which has propped up payroll numbers.

BUT one thing about a strong employment record is its reflection on the great non-event of the rise in the minimum wage. The compassionate free marketeers were telling us that a hike in the minimum wage was going to adversely affect those it was intended to help. The lowest paid would lose their jobs as a result of the extra, what, five dollars a day in wage costs. Didn’t happen.

Where I live here in Washington state, we have the highest minimum wage in the nation at $7.22, and the only reason there’s any slack in the labor market is people keep moving here. Ours is, by the way, indexed to inflation. This is the right thing to do to start with, since it doesn’t require grandstanding to keep up.

That was my favorite non-story, but there were bigger ones.
The stock market collapse.
In full view of the biggest housing recession in postwar history and the current and continuing crisis in credit markets, the stock market has not tanked. In spite of many reports to the contrary. The Dow and the S&P 500 are actually up for the year. So is the NASDAQ, and by ten percent, its biggest calendar year rise since 2003.

Volatile? Yes. Down substantially? No. This non-event was actually announced several times by over-eager journalists who pronounced the inevitable as already having happened. Now it is just ignored, pushed under the table with the minimum wage.

Also under the table are the early reports that banks were facing up to their losses and taking write-downs that would clear their balance sheets, return transparency to their operations, and allow us to get on with business. No. They are holding onto as much of the toxic paper as they can as long as they can and being as opaque as possible. Occasionally they sell five or ten billion dollar chunks of themselves to foreign countries and announce writedowns of five or ten billion dollars the next day. Sometimes the same day.

We are going to see the so-called “fiscal option” in 2008. We only hope Americans get the same equity as the other sovereign wealth funds for their bailouts. Likely we’ll just get more debt, as in the bailout of the Savings and Loan banks in the Reagan-Bush I era.
Perhaps only realtors are clinging to this. But the variant that the mortgage meltdown would not affect the broader economy is still getting substantial play after the data is in. Again, the so-called mortgage meltdown should really be called the financial sector collapse. We can’t call it the banking sector collapse unless we acknowledge that these shadow banking institutions and the hedge funds are also included. We’ve yet to see the sickening results of so-called innovation in commercial real estate and corporate debt markets.
The liquidity happened. Money is getting easier and cheaper for these guys to get. It bought about three weeks of very timid confidence.
No. Exports need to offset imports before they start offsetting any other sectors.
Usually this claim is followed by, “After all, imports are a relatively small part of consumption.” Yes. But the flip side of higher exports is higher priced domestic goods with export markets. Like food. Food inflation may not show up on the Fed’s preferred list of prices – core inflation. Higher food prices may not even be a completely bad thing. But it is inflation.
The subprime meltdown was an isolated phenomenon. No. This story was a complete non-story. It wasn’t reported wrongly. It was just not reported. Speculation moved from the stock market to real estate after the dot.com bust of the late 1990s. Now we have the housing bust. Speculation has moved to commodities and currencies. While the individual market experts identify speculation as a likely culprit for ninety-six dollar oil instead of sixty dollar oil, the mainstream media reports the higher price as a function of supply worries or demand pressure. Maybe the day-to-day variations have something to do with storms or wars, but the baseline is determined by the money in the market.

This is bad news for inflation. Speculation in wheat, corn, soybeans, food of all kinds, metals, natural gas, and so on, is bad news at the front end for inflation and at the back end for farmers and others who invest in expectation of high prices and will have to go sit in line with the subprime mortgagees when the bubble bursts.