Wednesday, January 21, 2015

Did minimum wage play a role in the 2008 financial crisis?

Have you ever set a goal that was too ambitious?  Perhaps the goal itself was not too ambitious, but you were overcommitted and underprepared.  You were going to be completely dedicated to changing your diet, or learning that language or fixing your budget.

The first week or so it might go great, while it's on the forefront of your mind, but then it gets harder.  You start to compromise or resent the expectations you created for yourself.  After a couple weeks, or maybe a month, or maybe more, you say "fuck it" and in a blaze of glory you burn down everything you were building.  Freedom, in the form of a box of donuts, never felt so good.

I don't have to tell you that people sometimes fail to keep their new years resolutions.  What is it about resolutions that look so good on paper, but are so hard to follow through with in reality?

People do keep their resolutions, all the time.  It is possible.  One thing it takes is maturity.  You have to set accurate expectations.  Your goal can be ambitious, but your expectations for the amount of effort and impact need to be accurate.  Change always requires sacrifice, it requires maturity to understand what that means.

Resolution keeping requires more zen and less zeal.  It requires patience and persistence more than it requires passion.  Most of all, it requires an accurate understanding of your true priorities.  If a competing interest is more important to you, your resolution may get compromised to pursue that other priority.

Wait, didn't you say that this post was about minimum wage and the 2008 financial crisis?

That's what I'm trying to tell you, that's exactly what I've been talking about.

Minimum wage is like a new year's resolution for the entire country.  Okay guys, everybody is going to earn at least $10.50 next year.  $10.50 is reasonable, it's not too ambitious, and it's very important.  We should make it a priority.  Business owners and employers, employees, all of you, big or small, successful or struggling, let's make this your #1 priority.  We'll even offer to help guarantee you have enough incentive!  If you don't meet that resolution, we take you to court and shut you down.

Let's rewind.  It's 2007 and the federal minimum wage has been $5.15.  Over the next couple years it gets bumped up to $6.55 and then $7.25.

But did this bump cause the financial crisis?  Claiming that would be a classic case of post hoc ergo procter hoc (I've been watching me some west wing).  Just because the crisis happened right after the bump, does not mean that the bump caused the crisis.  In fact, I think that in this case it is evidence that the bump did not directly cause the crisis.  The mechanisms that triggered the crisis were already in full swing when the bump happened.  At most the bump was straw on the proverbial camel's back.

So why am I entertaining the notion that minimum wage was an important factor in the crisis?

Subprime loans.  Subprime loans.  Subprime loans were a massive trojan horse for an army of irresponsible financial practices, metrics and mathematics that obfuscated risk instead of clarifying it.  I would encourage you to watch the TARP documentary by PBS frontline for all the nitty gritty details.

Suffice it to say that our most trusted, beloved institutions, the stewards of our dollars, were hiding their messes instead of cleaning them up.

But the pretext for these shenanigans was subprime loans.

Before the crisis there was a big push for home ownership.  Politicians, public servants, and activists were pushing to give everyone the opportunity to experience the American dream in the form of home ownership.

Financial instutions responded by expanding their lending practices.

What does this have to do with minimum wage?

Only this: minimum wage is a politically backed guarantee for better lifestyle.

I think the existence of minimum wage is one thing that may have made it risky to lend to poor people in the first place.

Minimum wage places strict constraints on what people can do to earn a living and it's especially limiting to the poor or disadvantaged people.  If you have ever gone looking for a minimum wage job you know that they suck.  The bosses don't treat you that well, they have lots of turnover, the people who take those jobs tend to less reliable.

Some people interpret this as a sign that minimum wage is not high enough, but I think it's really a sign that minimum wage is very limiting.

New workers and disadvantaged workers need opportunities that fit them well.  Not all these opportunities will pay great, but they give these individuals opportunities to be beneficial to an employer, to understand how the workplace works, and to understand their job needs and priorities.

If people have a positive experience working, they will increase their experience and value to their current employer and potential employers.  I think a lot of those who struggle have negative experiences with employment.  They become frustrated and disillusioned.  Can we blame them?  Most of the low wage jobs out there suck.  They are thankless and soul sucking.  They involve activities like stuffing cheap plastic toys from china into bags with unhealthy meals for kids.  I mean who wants to do that?  Fuck that.

If we want to help improve the lives of low wage workers, we need abundant opportunities doing important and rewarding things.  Politicians love talking about adding jobs to the economy.  They talk about jobs as if we should be grateful just to have one.  We have started thinking like there should be a 1 to 1 relationship between jobs and people.  That for every one person there should be one job.

Let me tell you, that is not nearly enough.  Having only 1 job available for every 1 person in an economy has a name.  That name is slavery.  If you don't have lots of options, you have no freedom.

One job per person is not enough.  We need 10 available jobs per person, or 100 available jobs per person or 1,000 available jobs per person.  We need real market choice for what we do to earn a living!

When people don't have real choice they don't have freedom.  They become frustrated and unreliable.  They become targets for well intentioned home ownership campaigns.  When they get told they should sign this loan to get a better life, they do it, even when the conditions are shit.  When someone has been kicked around and shitted on, something like that can seem like a lifeline.

Minimum wage affects jobs well above its payscale.  It creates a universal fear of failure from the bottom to the top, because we all know what the bottom looks like and it's not good.

But the bottom doesn't have to be ugly.  The bottom doesn't have to be feared and shunned.  We can be poor but free.  And when we are free, we are free to become rich.  We can choose our own priorities and we can make our own new year resolutions.