Stimulating Inflation

I was watching talking heads on TV yammering about the need for a second stimulus package while griping about the sudden emergence of inflation. The talking heads seemed to miss an obvious connection.

We had a stimulous package where the Feds borrowed a pile of cash which came largely from China, oil producing nations. There were also investors who pulled their money out of risky investments in the stock market and in mortgages.

Not surprisingly, after the stimulus packages we saw the value of the dollar drop, and the price of gas skyrocket. As smart investors yanked their capital from risky investments in the stock market and mortgages, the market tanked and the housing crisis worsened as borrowers find that investors would rather own treasury bonds than investing in housing.

It appears to me that the stimulus package was a qualified and quantifiable flop.

Of course, not all of the economic news is bad. Apparently, many Americans have taken conservation to heart and they reduced their fuel consumption. The result is that oil inventories rose when the pundits were predicting a decline. Oil prices tumbled on that news last week.

Energy is currently the limiting factor for growth. Each and every step that we take to reduce the waste of energy at this point in history has a magnifying effect. The Pelosi stimulus failed to address the problem. In fact, one might argue that the artificial stimulus simply subsidized bad behavior.

Anyway, since Nancy Pelosi voted for inflation, I decide to inflate my prices. I decided to increase the listing fee for SL Sites from $10 to $12. That is a nice round 20%. Art organizations, non-profits, content sites and blogs can still list for free.

I actually wrote the program so that I can easily adjust the price. Since I figure that the Democrats will have complete control of Congress and the White House, I programmed the site so that it will automatically inflate the price at a rate 20% a year.

The Minium Wage and Job Losses

The two great victories of 2006 election victories were the British retreat from Basra and a massive increase in the minimum wage.

Today we find Basra in flames, and we find ourselves suffering a drop in the number of jobs.

Both the goals of an end to war and a more equitable distribution of wealth are worthy. The problem is that the ways we try to achieve our worthy ends seems to be lacking.

The economy is so complex that no-one really knows the effects of wage and price controls. Such controls tend to be controlled by the groups that buy economic influence. Since government wage and price controls are determined by politics, they almost always are out of sync with the real economy.

I do not know if the government set minimum wage is too high or too low. Personally, I think the very existance of government set wages is problematic.

My criticism of minimum wage is not the set value of the wage, but the thinking behind the wage. Our current thinking about wages is that wages are somehow inelastic. Since wages are inelastic, we find that companies choose to lay off workers in down cycles rather than decrease salaries.

The mass lay off cycle, of course, tends to undermine wages. During the bust cycle, companies lay off their highest wage workers. At the beginning of the next boom, they hire on new workers at a low wage. It is idiotic. Wages tend to be flat during the boom (when labor is actually most valuable). The pressures to increase wages often happen at the height of the market when the market value of the labor is actually falling.

The expectation of inelastic wages is also the primary factor behind the consumer debt and credit crisis. Lenders make loans assuming that the borrowers income is a constant. The borrowers who were laid off get crunched.

It seems to me that the best path toward long term economic health would be to create financial instruments that make wages a bit more elastic. With elastic wages, companies would be less prone to lay off workers in economic down turns. Such a system would sychronize pressures to increase wages with the boom. Empoloyees who've shared the hardship of the bust with the company are in a better position to demand their portion of the next boom. (employees who've been laid off have no political power and are simply lucky to get employed during the next boom).

Workers who realize that their wages are not elastic are also less likely to borrow heavily and are more likely to save (which, of course, would increase their life time earnings).