Saturday, March 26, 2016

California to Raise Minimum Wage to $15/hour

Lawmakers are in discussions to raise California's minimum wage to $15/hour by 2022. While this sounds like great news for the poorest workers in this economy, one has to consider the cost-of-living in California to be able to properly assess what difference this will make in the lives of those affected.

A one-bedroom apartment goes for about $1,190 in California. If you are making $15/hour working full-time (40 hours/week) that translates to about $2000/month, after taxes.

That leaves you about $810/month left over after paying rent. This amount is all you would have to pay for food, utilities, insurance, transportation, cell phone, internet, education and any other expenses you may incur. Clothing and entertainment would also need to fit into this $810/month figure.

Of course, these numbers assume you are able to find 40 hours/week of work. Many low-paying jobs fail to offer 40 hours/week of work so it is possible one would have to work multiple jobs to reach the 40/hours week that would get you near to $2000/month of take-home pay. Obviously, working two jobs may also cause one to incur additional expenses that would need to be factored in.

Finally, the cost-of-living will likely rise in the next six years before this $15/hour is phased in. That means full-time minimum wage workers will be looking at even less than $810/month for expenses once 2022 rolls around.

Problem
In the event that the poorest full-time workers in California make $15/hour by 2022, they will earn barely enough to cover basic living expenses.

Put yourself in this person's shoes: how would you cope with earning just enough to cover your expenses, perhaps not even knowing if you would have enough for unexpected costs? What if you knew you absolutely could not afford to go on vacation? What if you knew you couldn't fly out for a friend's wedding or to attend a relative's funeral? Clearly, this would not be a very fun situation to be in- stressed out all the time, feeling stuck.

Solution
The Equal Life Foundation proposes a two-pronged approach to ending this suppression of Life. The first step would be to implement a basic income guarantee indexed to the cost of living to ensure that every person always has access to an income sufficient to cover their basic needs. This would be granted to anyone who desires it on an unconditional basis.

The second step is to make the minimum wage double the basic income. For simplicity's sake, let's say that $2000/month is a good target for a basic income. The minimum wage would be double this: $4000/month. This comes out to about $25/hour after taxes.

Reward 
Put yourself again in a minimum wage worker's shoes. Now you have $4000/month to spend. $1,190 still goes to rent. But now, you have $2,810 left over for expenses. Suddenly, you have enough for gas, utilities, etc. Not only that, but you have money left over! You can buy that special item you've been eyeing. You can travel. You can save. You can contribute to the economy. The stress related to money is gone.

This is what you would like if you were in that position.

For more from the Equal Life Foundation:
Living Income Guaranteed Proposal
Living Income Facebook Group
@LivingIncome on Twitter 

Friday, March 25, 2016

Basic Income Guarantee: Deflation Cure

Japan just reported 0% inflation for January. If you follow economics, you know that governments are very scared of negative inflation (also called deflation). Without going into an in depth explanation, suffice it to say that deflation means prices for goods and services are dropping and economists tend to view such a phenomenon quite poorly, as it may indicate the economy is entering a recession (shrinking). Of course, a recession often triggers unemployment, which is obviously a bad thing.

In an attempt to fulfill its target of 2% inflation deemed healthy by some economists, the Bank of Japan (Japan's central bank) has recently implemented a negative interest rate policy, essentially charging banks for holding their money. This policy is a more extreme version of the zero interest rate policies implemented by many central banks during the Great Recession and is intended to encourage economic activity by making it more attractive for banks to loan out their money.

Problem 

The problem is, despite these zero/negative interest rate policies, banks aren't really loaning out that much money. Banks and businesses are wary of making/taking on loans because they aren't confident consumer demand is sufficient to make such investments worthwhile (as indicated by lower-than-desired inflation).

Prices are failing to rise at a rate that would indicate to central banks that economies are healthy. Central bankers like those of the Federal Reserve in the US and the Bank of Japan believe that inflation of around 2% indicates the economy is growing at a rate that ensures the threat of a recession is low. While it is OK if inflation occasionally falls below the 2% target, what economists really fear is deflation. This indicates very low demand for goods and services in an economy and thus could be a sign a recession is on the way (or already happening).

Despite near-zero or negative interest rate policies implemented by central banks worldwide in an attempt to achieve their positive inflation targets, some economies are very close to deflationary realities. The recently reported 0% inflation in Japan for the month of January is just another sign that zero or negative interest rate policies designed to encourage economic activity have failed to do so in a way that would cause prices to rise at a healthy 2% rate.

The Bank for International Settlements (BIS), the so-called "bank for central banks," has issued a warning to central banks against the long-term use of negative interest rate policies. This is because if these policies don't work, central banks' perceived role as the agents of last resort to maintain economic stability may deteriorate. As of yet, we've conceived of no better way to maintain price stability and stave off recession than through the signals central banks send by altering interest rates.

Solution

Governments need to be proactive in addressing the issue of poor economic performance. They could pass laws requiring banks to lend out their money and thus ensure the effectiveness of central banks' zero/negative interest rate policies. Aside from the expected backlash from those who would argue it's unfair to force banks to lend out money they don't want to, it's unclear if such policies would even work. We have to remember that the entire reason why banks aren't lending out money in the first place is because business owners are wary there is sufficient demand in the economy to make such loans feasible. In short, we cannot even force the banks to loan out money if there are no businesses willing to take on that risk (not to mention it might be a bad idea as it would equate to banks losing money).

Enter basic income guarantee (BIG). An idea gaining attention worldwide, BIG is a policy of governments guaranteeing every citizen an income sufficient to cover their basic needs. Instead of worrying about the effectiveness of interest rate policies in getting banks to loan money to businesses who don't even want to take out loans, we can give money directly to our poorest citizens with the knowledge that they will likely spend all of it within a short period of time.

The problem in global economies right now is a lack of demand: by directly transferring cash to everyone who needs it, huge demand will be created instantaneously and maintained so long as people keep on receiving a guaranteed income.

Reward

With so much new guaranteed demand in the economy, businesses will be much more likely to invest in new workers and equipment. Economies will start growing in such a way that constantly pushes prices up at the healthy rate sought by central banks. Central banks will, in turn, be able to lift their interest rates back above zero/negative levels and thus regain a valuable tool in fighting off recession, all while avoiding the unknown consequences of long term negative interest rates. Finally, even if recession should come back, we will have implemented a policy that shields those who are/would become most vulnerable.

Further reading:
Economist's Journey to Life
Living Income Guaranteed