Will Obama Escape The Next Financial Crisis?

Market Timing & The Bursting of The Bond Bubble

-Austrian Markets

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Bernie Sanders’ Welfare Trap

With the ever growing popularity of Senator Bernie Sanders on the Presidential campaign trail, I thought it would be high time to discuss the concept of the social safety net. Bernie Sanders touts, ad nauseam, the importance of the government to step in and help the poor in our society. Although it may seem altruistic of Sanders and other socialists to insist that government “do something” for the poor, the outcome ends up being quite the opposite. They are down-right harmful and are sending this country over a cliff.

Some History

President Lyndon Johnson declared war on poverty in America when he signed the Economic Opportunity Act on August 20, 1964 which then created the Office of Economic Opportunity. The OEO gave rise to the Community Action Program, Jobs Corps and VISTA (Volunteers in Service to America). Shortly on their heels the Food Stamp Act, the Elementary and Secondary Education Act and Medicare and Medicaid were enacted. As a matter of fact, there are some 126 agencies, bureaus and offices and 92 federal programs that have sprung up to fight the war on poverty. Since Johnson made his infamous war declaration, Americans have spent over $22 trillion on poverty. That’s right, $22 TRILLION. Adjusted for inflation, that’s more than three times the total spent on all American military wars combined. Let that sink in for a few minutes.

America is actually the Johnny-come-lately to the altruistic welfare party. It began in the mid-late 19th century with Chancellor Otto von Bismarck of Prussia. After he defeated France in 1871, taking his cues from Abraham Lincoln, he unified the several German provinces into one empire. This centralization of power gave him the ability to control both foreign and domestic policy without the concern of another German province interposing. It also created a captive national citizenry. He then created the first welfare state in the modern world which he called the Sozialstaat. Let’s be clear, the Iron Chancellor didn’t create the welfare state out of kind heartiness. He did so to garner support of the working class away from the up-and-coming socialists. What Bismarck discovered was, as long as the welfare kept being doled out to the masses, he could build a dependence on the state and cement his control.

Otto von Bismarck’s social state gave rise to literally hundreds of bureaus and offices with an intricate maze of regulations and laws that were near impossible to circumvent or even navigate. This lattice work of red tape was still in place when Adolf Hitler came to power in 1933 with his National Socialist Workers’ Party or Nationalsozialists. It was relatively simple for the Nazi’s to set up shop in a governmental infrastructure that was already centrally controlled. What the German people thought to be a good deal under the Sozialstaat, turned out to be their worst nightmare only a couple of generations later.

The Economics

We know through basic economic principles that people make decisions based on their subjective valuations. People act on the incentive that their actions will leave them either better or worse off. This is known as subjective utility. Another key principle to human action is opportunity cost. That is, in our world of limited resources, it describes the value of the best alternative forgone, where a choice has to be made between several mutually exclusive alternatives. The best example would be the choice to go on public assistance (welfare) or take a job. There are certain trade-offs which the individual has to consider, that is the marginal benefits and marginal costs. Simplified, what we are describing is the choice to increase someone’s satisfaction by either taking welfare or working. Of course the choice an individual would have to make is based on that person’s own subjectivity. For some, the stigma of accepting welfare is too great and they would rather go back to work, even if employment may lower their standard of living. For others, peer pressure or generational welfare might influence whether the individual even considers any stigma at all. Since the 1960s there have been many generations of families reliant on the welfare state. To them it’s an ordinary fact of life and a means to increase their marginal utility.

poverty-rate-welfare-spending-2013-12

The above chart is a clear illustration of the choices people have made since the war on poverty began. The poverty rate was on a steady decline until shortly after the Economic Opportunity Act was signed into law in 1964. After which, it has moved into a meandering horizontal trend keeping between the 12% to 15% range. Simultaneously, federal spending has done nothing but increase over time. The marginal cost, the cost of increasing one unit of production, has greatly outpaced any marginal benefit, an overall reduction in the poverty rate. In other words, if the goal of the war on poverty is to actually reduce the poverty level, it ain’t working.

What the bureaucrats and apparatchiks haven’t considered is, over time, total welfare payments (housing, power assistance, food stamps, SCHIP, WIC, healthcare, etc.) have set up a competition between the welfare state and labor markets. The benefits a welfare recipient may derive may out pace the benefits someone could expect from gainful employment. As usual, the long term consequences of a policy pales in comparison to the short term benefits the war on poverty has provided for politicians.

In an Illinois Policy study, the potential sum of welfare benefits provided for a single-parent home can reach $47,894 annually and $41,237 for two-parent homes. Welfare benefits can even be made available for some who earn $78,880 annually. A full-time working single mom earning between $8.25 and $12.00 an hour has the most benefits available to her. This means she has to consider her family’s subjective utility before taking a pay increase. An $18 an hour job would spell a loss of one-third of her family’s total resources. In order to off-set any losses and bring her family to the previous level, she would have to earn $38 an hour or about $76,000 annually.

The incentive to remain in a cycle of welfare dependence is startling, when analyzing these figures. But what about the disincentive for “the poor” to maintain a two-parent home? It’s no surprise why minorities have a 72% illegitimate birth rate. It simply pays better.

Conclusion

One of the planks of the Communist Manifesto was a destruction of the family unit by a dependence on the almighty State. The economic concepts and principles we discussed are rudimentary to a learned economist. Concepts of incentives, subjectivity, marginal utility and so on are taught to high school students in an introductory economics course. One would have to consider the incentives the economists have who are employed at the myriad of federal, state and local welfare agencies.

Truth be told, the welfare state has been nothing less than departmental for society as a whole. The moral cost outstrips the financial cost the war on poverty has amassed over the decades. How can you put a monetary value on the security of the family and all of its benefits? Lyndon Johnson’s “The Great Society” has ushered in an era of moral decline that has never been seen before in America. It just furthers the notion of what Murray Rothbard coined decades ago, “Whatever the government tells you, just believe the opposite.”

We can conclude that welfare doesn’t make anyone well, socialism comes at an unbelievable cost and The Great Society was anything but great. Bernie Sanders aspires to the young who think of him as some wise, kindly old truth-teller. But, how wise is it to ignore long term consequences of well intentioned ideas? How kind is it to ensnare millions of Americans in a system of dependency? Honestly, how truthful is it to distort the facts to fit one’s own ideology?

Bad week for wall street? Or worse?

The beginning of a new week on the NYSXE yesterday, people had their hopes up for the possibility of the markets last week being only a minor bear, however after opening up the markets we saw the crash propel even more furiously than before. It is happening world-wide, not only in the NYSXE. The nasdaq compsosite dropped from 5,000 to 4,300 in 4 days. The shanghai composite dropped from 3800 to 3200 in the same time, and the ESTX 50 dropped from 3450 to 3000 in the same 4 days. Analysts have been attributing it to the fact that there was a recent yuan depreciation to the cause of the current bear markets. However, I would argue that there is much more to it and not only is the yuan depreciation not necessarily important, the federal reserve banking system will use it as an excuse to continue on the 0% interest rate path towards destruction

The fed chairwoman, Janet Yellen, signaled that we should expect a rate hike in September of this year, however with the new situation with the global markets crashing analysts are now suggesting that we will not receive a rate hike. While a falling yuan would contribute to dollar strength—potentially giving the Fed pause—” he said, how can the fed introduce rate hikes? The suggestion that the rate hikes are going to be even close to enough to offshoot the years of free money printing is absurd in the first place. We are talking around a .01 or .02 percent increase, though we have been bamboozled in round after round of quantitative easing for over 4 years now. After which, we now see where the economy is.

After quantitative easing we have started to witness a shrinking stock market, which is due to the nature of quantitative easing. Considering the fed can now buy up all ill-gotten assets, many people are being weary of entering into certain markets. The result has been a decline in U.S. business dynamism. Also, we see that long term yields have been steadily declining, which means there is a lack of long term investment. Yet all of this is caused by the cheap monetary policy given by the fed.

So then, devaluing the Chinese yuan is causing investors to not invest due to market turmoil? I think not. This shows that the easy money policy within the United States, and the world, has caused a shrinking stock market, has caused a lack of entering firms, and a fall in long term investment. This is all due to the fact that nothing of value was created by Q.E. The fact that the entire policy of Q.E. is geared at leveraging failing businesses towards a national debt is a sham, and should have never occurred. Thus, the fact that this has occurred has now set into a cycle of endless Q.E. where no matter which way the fed looks, they will always need to continue with easy money. This is because when the Fed creates money, what it is initially doing is leveraging debt. Since, the fiduciary media never existed before, the central bank will create it and loan it out with massive leverage ratios. With those massive leverage ratios, it then becomes nearly impossible to reverse the lending simply because those ratios are pyramided on top of each other. When the fed goes into a “contractionary policy”, after QE, it will dismantle all the pyramided debt and cause an implosion in the banking system due to the fact that the leverage ratios were propped up by the expansion.

When enacting Q.E. the central bank set into motion that ability to buy up assets, as well as pyramid out debt even quicker. This means, now, the leverage ratios for key players will be even higher and more consolidated than prior. So, how can the Fed effectively “combat inflation”, when all of their debt is pyramided out? Simple, the fed can’t combat inflation, leaving it wide open for a dollar devaluation. After the next few rounds of QE, considering we can not afford another massive stock market crash, we can see an abandoning of the US dollar, such as Peter Schiff warns. The United States is in one giant currency bubble, and it will pop.

Binary intervention

After many years of working in jobs that exchanges a specific gross wage, then comparing said wage to the net (after tax) wage, would relentlessly leave me upset and frustrated. Why was the nominal amount of money taken out of my paycheck becoming increasingly higher and higher after traveling through the temporal scarcity our mortality brings us? How did I directly benefit from the taxing, and was it really worth it? For many years I would always relinquish my frustrations by creating a paradoxical assumption that the taxes actually went to benefit me in more ways than not. Then, I was led to one strange antagonism. Initially, it was the concept of the fact that bureaucracy was a contradictory entity in the role of methodological individualism. After beginning to understand this fact, I uncovered that binary intervention (taxation) was a form of aggression, and was in place to advance nationalism and state coercion.

How can bureaucracy initially be a contractionary force against the individual, and their conquest to conquer scarcity? The beginning stages of bureaucracy was at the time of the expansion of absolute monarchs within the countries of europe. The issue that many of these monarchs faced, when attempting to rectify their absolute monarch status, was the fact that manor lords throughout their kingdom were not necessarily bound to honor the king. In fact, as one might discover, the history of medieval europe shows us that a majority of the kingdoms were very de-centralized. How did these monarchs begin to, then, expand their “rightful power”? Rather than having a kingdom compiled of several lords, with their own loyal servants, the monarchs created bureaucracies. Initially, with bureaucracies, the monarchs could employ people to do the bidding of the absolute monarch with less worry of dissidence.

It is no coincidence, during the rising times of the bureaucratic systems that plagued europe we saw an explosion of mercantilism. Once mercantilism became a normal aspect of economic achievement, liberal philosophy quickly dispelled all the myths through various reasonings of the classical economic laws. However, the rising trend of economic laws was unjustifiably plagued with the beginning fanatical attempts of wealth re-distribution and protectionist policies. All of these new concepts begin to emphasize the philosophy of the omnipotent powers of the state. This became very lucrative for the bureaucrat. We will not delve into the invalid premises and the assault on reason state compulsion brings to us in this article because it will be too vast.

While the stages of nationalism and state power were beginning to be melded, it became apparent that protectionist policies were only favored by socialists. Whether it be conservative socialist, people redistributing wealth to the bourgeoisie in an attempt to maintain said power, or it can fall under marxian socialism, where people wish to redistribute wealth to the proletariat class. Each and both forms of wealth redistribution will always be a result of aggression. This aggression is called binary intervention into the market.

The fact that wealth redistribution can only be a result of a cost to one entity, in the attempt to empower another, leads us to now understand that taxation is a mercantilist policy. The fact that the state will attempt to drive the power of the consumer, negates the role of the individualist in society. Do we really have a say in what we can create, expand, and produce when the state has built purposeful restrictions with a blatant attempt to benefit one caste and dismantle another? Taxation, by its purest definition is a form of aggression and robbery. The ever expanding power of the state has only resulted in giving us less productive ventures. Ventures such as endless wars, mass starvation, forced collective education, concentration camps, prisons, and a shrinking of the power each of us, as individuals, conceals.

The attempts to justify these negative effects of binary intervention forces the state to propagandize against its own people. They will create different enemies to justify their expansion. Such as the warrantless wiretapping in the United States shows commonalities to that of the Nazi state of Germany forced polylogistic laws to incarcerate people of “unclean genes”, to be easily identifiable. The connection between the vagueness of legal definitions pertaining to the word “terrorist” and the the concept of “unhygienic genes” leads us to understand that the omnipotent power of the state only comes through the expansion of the bureaucracy. With the perceived threats, created by the state, the bureaucratic system can expand relentlessly in its conquest against individualism.

The people that truly benefit from taxation are the bureaucrats, the people honoring the absolute monarchs. Just as the old economic policies of mercantilism are the ones that suggest that if the nation is not highest, then it is “losing”. The new power of the state expansion by bureaucracy has allowed the caste of state officials to maintain a higher caste in society. Taxation, not only is it robbery, but it is a protectionist policy to maintain a power structure of bureaucrats and thieves.

There is no principle that can rightfully justify this compulsion. Collectivism, by its very nature, is a logical structure to empower one individual or principle above the others. If the ego of one person A falls into a certain methodological structure, then that structure can only be the epistemological structure of A, for A can never be B, and B can never be C. However, the role of collectivism suggests that the epistemological structure of A will actually fall into the same epistemological structure of B and C. Considering then that if it benefits A, it must benefit B and benefit C. Yet the proponents of this concept fail to represent how this is even possible, considering A can never be B and B can never be C. This leads us to understand that the mere intervention brought on to relinquish the ability of B to act, in the name of benefitting A, will ultimately grant both disutility. Considering the fact that B’s ability lend aid to the powerful division of labor, will free up access to that same division of labor for A to participate in. Forcing B and A to act as one collective unit; we begin to see the destruction of the division of labor, through various impossible attempts to make A and B act the same way.

Yet binary intervention, though dubious, suggests it benefits society; we have shown that it only hinders the division of labor. However, it does benefit people within society above others. The biggest beneficiaries towards binary intervention are the ever powerful bureaucrats. The bureaucrat gains all of their income from the force of aggression. The bureaucrat might suggest that they pay their taxes as well. This assumption is ludicrous, considering all their income derives from taxes. Bureaucracy can not function as a private entity, it can not function as a firm, and it can not function as a salvage of human waste. It only brings waste, considering the fact that it faces no profit and loss structure, leads us to understand that there is absolutely no economic calculation possible inside a bureaucracy. The entire role of a bureaucracy is to do the bidding of the state, attempt to dismantle methodological individualism, and bring compulsory power to themselves. After understanding that this is the role of binary intervention, I realize that the taxing of my labor has not benefitted me at all. In fact, it has led to the expansion of the state and brought psychic waste to society.

Sources:

Disquisition on government, John Calhoun

Human Action, Ludwig V. Mises

Power and Market, Murray Rothbard

Bureaucracy, Ludwig V. Mises

Omnipotent Government, Ludwig V. Mises

Man Economy and State, Murray Rothbard

A Theory of Socialism & Capitalism, Hans-Hermann Hoppe

Time Our Most Scarce Resource

The recent passing of Nobel Laureate Gary Becker had me reflecting on some of his work. Specifically, his thought on how time is our most scarce resource. In his Nobel lecture he begins by explaining that economics impacts more than just the financial decisions that people make. Economics, when properly applied, allows the student to study the outcomes of almost all areas of our lives. He continues to expound that no matter how efficient production methods may become, how many new stocks of resources we discover or how much technology enables mankind to prolong his life, our time on this planet is always limited. There are always only 24 hours in any given day and only so many years for any individual to realize the outcomes of his decisions. Becker concludes that there will never be Utopia, for time will always be scarce.

In his book, Human Action, Mises explains in Chapter 1, Section 5 that the theory of acting man and the temporal state of his action are inseparable. The person who takes on an action distinguishes the time before the action, the time the action has absorbed and the time after the action has been finished. All action is temporal and changes the current state in which the actor finds himself in at each stage of the action. With each step in action, through time, the acting man is changing his condition from disutility towards a state of utility. He strides to make himself better off. All of this costs resources and that requires the economizing of time.

Economizing Time: Rationality and Irrationality

Before Gary Becker postulated his discovery of time’s scarcity, Mises stated in Human Action,

“Even in the land of Cockaigne man would be forced to economize time, provided he were not immortal and not endowed with eternal youth and indestructible health and vigor. Although all his appetites could be satisfied immediately without any expenditure of labor, he would have to arrange his time schedule, as there are states of satisfaction which are incompatible and cannot be consummated at the same time. For this man, too, time would be scarce and subject to the aspect of sooner and later.”

Praxeology is the economic study of human action. It assumes certain a priori truths of acting man and employs them into a causal-reality based theory. People choose action to improve their current condition in exchange for a better state of affairs. This, in turn, requires the expenditure of scarce resources. People are subject to the passing of time. We are born, mature, grow old and die. Unlike other scarce resources, time is always temporal. Once time has passed, you cannot get it back. If an individual chooses wrongly and looses money in an investment, he can always attempt to earn more money. He cannot earn more time. Once the now is in the past it remains there. It is imperative therefore, that acting man economize his time.

Many economists attempt to impute logical rationality into human action. This is where praxeological rationality should be implemented. They make the attempt to describe irrational choices by stating, if “a” is preferable to “b”, and “b” to “c”, then logically “a” is preferred to “c”. So, if the actor chooses “c” over “a” then he is acting irrationally. As Mises pointed out, no two actions are synchronous. One action may effect future actions and thus change valuations. The mistake is by relying on logical rationality which determines consistency by the principles of non-contradiction. This should be reserved for the thinking man. Praxeological logic determines constancy of action. The subjective value scale may change with each subsequent action. Someone decides to build a house on a hill, overlooking the valley rather than in the valley where it may flood or in the city where it’s noisy. As the construction begins it is discovered that the ground isn’t stable enough for that type of structure on the hill. The actor may choose to move the house to another location or build a different type of structure. The econometric positivist equation would yield an irrational outcome if the builder moved the location.

The positivist couldn’t capture the variable of changing conditions and subsequent valuations. Praxeology tells us that actions change as conditions change because of it’s causal-reality foundation. It may be rational to prefer “c” to “a” and build the house in the city where the fear of collapse and flood are avoided. Praxeologically, he remained constant by rearranging his resources and building the house. As simple as this example may be, remember that the government is full of such “economists.” After Hurricane Katrina, brand new mobile homes were left to rot in muddy fields because the government couldn’t calculate changing conditions in Louisiana during the aftermath. Or, look at Solyndra. Although it wasted some $535 million, the government is still headlong on its nonsensical quest to subsidize solar energy, regardless of market or technological conditions. The list is almost endless.

Rationality and constancy are two different things. Human action constantly prefers the more valuable to the less valuable. Action is also temporal. Each action may bring about a change in valuations and thus different subsequent action. The time required to bring about each action may be short or long term, fleeting or over the length of years. Scarce means are valued accordingly and are employed to bring about desired ends.

Valuing Time: Time Preference

The condition of scarce resources to meet unlimited wants leaves us in the situation of which we must constantly choose which of our wants we will seek to satisfy. The scarcity of time forces us to choose whether we will take the day off or go to work. We cannot do both at the same time. We cannot spend the same dollar on two different items. As stated previously, praxeology tells us we cannot perform two actions at the same time. Either I sleep in or I go to school.

Economists call this type of choice an opportunity cost. Following along the line of marginal utility, the actor will choose the most valued action first at the cost of the second action. In our example, we chose to go to work at the cost of taking the day off. Because action is not synchronous, we couldn’t perform both actions at the same time. We had to choose, according to our value scale, which action was the most valued and postpone the second.

Each individual value scale considers the actor’s time preference. The actor can place present as well as future goods on his value scale. For example, he may prefer two shirts next month as opposed to one shirt this month. Because of time preference, an individual will always prefer the same quantity of a good sooner rather than later. Another person may find more utility in having two shirts this month and only one shirt next month. Here, an opportunity arises for an exchange, where the first individual can sell one shirt with the other’s promise to provide two shirts in the future. The exchange rate between present and future goods is known as the pure rate of interest. It is determined by the actors’ time preferences just as any other price is determined.

We find the pure rate of interest throughout so-called “time markets.” Usually in the form of loans, but also in the price spread of producing a good and then selling the good in the market. The capitalist provides a service by advancing time to those who own the factors of production. He restricts his consumption of money (savings) and provides money (present goods) in exchange for future goods. Because present goods exchange for future goods at a premium, the capitalist who invests in a particular process ends up with more capital funds than he started with. The capitalist’s return is not due to the productivity of the inputs, but rather present goods are subjectively preferred to future goods demonstrated by the owners of production factors paying him interest on his investment.

Time and Money

We often hear the adage, “You either have money or time. You can’t have both.” This is true, in a sense, when it comes to the wage earner in the labor market. When a worker “sells” his labor to an employer he is really selling his time. He promises to perform a certain amount of labor in a determined amount of time or to perform a certain skill in a determined time. Even if the worker is paid in accordance with units produced (piece work) he must expend his time to produce the units. Salaried employees must also expend their time to perform their duties. In exchange for the time, the employer agrees to pay money wages or salaries. We run up against the individual’s value scale yet again in determining just how much time (present goods) will be spent in return for a paycheck (future goods). Everyone who participates in the market is a capitalist in his or her own right. Albeit, the time differential between the entrepreneur and the laborer may be different, essentially, they both are investing their present goods for future goods. Both goods are scarce. Each one must give up something scarce in exchange for something more valued. For the worker it’s time, and for the entrepreneur it’s both time and money. Undeniably, time preference plays a role as well.

Uniquely, the capital investor can actually use his money to “work” for him, thus freeing up his time. The worker must use his time in exchange for money, the investor can use his money, which earns him a return, in exchange for time. The key is that the investor must have the savings required to allow the time for a return on investment in the distant future. The risk assumed by the entrepreneur is a loss on investment which includes the loss of time. The wage earner gets paid whether the finished product sells or not. The auto workers at Ford still got paid to produce the Edsel. Labor is time paid, not risk taken.

Conclusion

Time is, in fact, our most scarce resource. What we choose to do with our time fully depends on our individual value scales. Texas University Professor Daniel Hamermesh has studied the scarcity of time for almost twenty years and says that prosperity has come at the ever growing expense of time. As societies become more prosperous, time decreases. He suggests that perhaps people should consider trading in some prosperity for more free time.

One glaring issue is that for many people, time is a substitute for capital. They only have their time to exchange for money in order to maintain a desired standard of living. You’d be hard-pressed to find a worker who wouldn’t gladly shorten their work week in exchange for the same amount of wages. But, as the central bankers continue with the delusion of our purchasing power through inflation, more time will be spent to maintain current living standards. Since the 1970s, families have been employing the time of both spouses to keep up with diminishing purchasing power and increasing tax burdens. There is still only 24 hours in a day, 7 days in a week and so on. The limited time of two people is not keeping up with inflation to maintain that middle class dream. Families are having to rely on consumer debt to keep their heads above water. This isn’t how capitalism is supposed to work. As innovative production methods are introduced, workers are supposed to become wealthier and have more free time (leisure). Through increased productivity, producer goods are supposed to become less and less expensive (deflation). Central banking and central planning is interfering with individual time preferences. We must conclude that a debt based fiat currency system is not compatible with free market capitalism.

Time, like all scarce resources in this economic system, is becoming harder to come by for the average citizen. Many have thrown in the towel and have gone on the government dole. Others are struggling with two or three part-time jobs, family life and maybe some sleep. Retirement has become a lost dream. The choice between money or time is ever slipping away. The solution is simple, free people

making free choices in a free market. Freedom is the solution. Freedom will bring more free time. But, like time, freedom is also a scarce resource.

Source material:

The Economic Way of Looking At Life, Gary Becker

Human Action, Ludwig von Mises

Man, Economy and State, Murray N. Rothbard

Minimum Wage Hike? Take a Hike!

Raising the minimum wage is something that the lower waged workers of society are demanding, so why not raise the minimum wage? This consensus comes from the misconceptions given to us by current theories presented which are that of increasing of minimum wage will directly increase the laborers standard of living. How will increasing the minimum wage cause increases in productivity and efficiency?

There is absolutely no economic law that suggests increasing the minimum wage will increase the proficiency of the market economy. People that do not understand the dynamics of economic theory create misconceptions that create this post hoc assumption that increasing the minimum wage will increase employment, and will increase the standard of living. One very interesting “empirical evidence” that employment does not drop, comes from the fable of the advancing economy of Washington. According to the B.L.S it seems that the unemployment rate is at a steady decline. Considering Washington has the highest minimum wage in the United States, we see the fable that increasing the minimum wage does not cause unemployment with this empirical “cut and dry” case.

However, while looking at the employment graphs in correlation with the age level we see teenage unemployment is much higher than the United States average. Considering teenage unemployment is higher in washington is perfectly explained through economic analysis. The fact that minimum wage hikes happened most densely in the washington area has caused a surplus of labor. How will minimum wage cause a surplus of labor?

When the supply of labor is ascending through its supply schedule it hits a point where the two separate schedules meet and interlock. This is referred to as the present state of rest. This occurs when everyone demanding labor and everyone supplying labor, at a given price, can leave the labor market at a state of rest. Such as a willing person to exchange their labor for greater than $10/hr, while the demander of labor will not pay more than $11/hr for the labor. So, the catallactics suggest that the price for the state of rest is between $10/hr and $11/hr.

Minimum wage is an outside coercive entity, the state, forcing a price floor on the market. This aggression against the dynamic functions of the market pushes the price above the state of rest. When this occurs, the demand for labor will ascend backwards on the schedule, while the supply of labor will ascend forward. This will always cause a surplus of labor, simply because at the new price there is a excess amount of people willing to work at the low-wage level. Yet, the people demanding the labor will reduce their quantity-demanded. So, therefore, there is no longer a market clearing price.

So, how do we look at the teenage rising unemployment rate to give empirical proof that this occurs? Certain firms are now faced with an ultimatum. One choice is to reduce the interest income owed to the capitalists who have advanced capital. The first choice will cause investment to decline and will force the business to close. The second choice, then, is to boost the firm’s entrepreneurial ability to reduce expenditures in other factors of production in order to maintain the employment of labor. This becomes very problematic for small-business, because they have less room to cut factor prices.

However, the marginal firm that can maintain production after the wage hikes now are employing a factor of production at a higher wage level, higher than the market rate. This induces the business owner to decide to pick La Crème de la crème, meaning they will go for a laborer that has a less risk factor. How will they look at risk factors? Easy, they just need to assume with people between 16-19 are far less reliable than the average adult. Also, 21-25 would be a little more dependable, in the eyes of the business owner. At last the business owner reaches their target employee at the age of 25-39. Why not choose people younger than 25? Because life experience has all taught us too well that youthful energy, rather fun at times, can be very undependable in regards to responsibility and maturity.

So then what occurs? We see a crowding out effect emerge in minimum wage level jobs because now the minimum wage level job seems more lucrative than before, and the employer is much more stricter. So people that were at one point unwilling to work for $10/hr now are willing to work at $13/hr, and the people with the least amount of experience are truly shafted. This turns into a vicious circle, in the long-run, because now when that teenager who was forced out of the labor market through aggression becomes an adult no longer has any experience. So, now measuring the “risk-factor” of the potential employee, the employer is becoming less impressed with the same person who has now reached the age of 25. Therefore, the long-term effects of raising the minimum wage causes forced unemployment in exchange for voluntary unemployment.

How does this affect the production cycle? When the laborers now receive a higher wage, higher than the market clearing wage, the laborer will then go around and spend this money. What happens next is the intertemporal market needs to adjust to rectify new spending patterns. So when the present output capacity of the production cycle is at the level of X, the increased spending into the products will signal to producers to increase production. When that occurs, considering we are holding the present supply, X constant; the only option for the market to equilibrate itself is for producers to raise the prices from p to p’ . When the prices raise, as a result of the wealth effect, we see increased production. This is where the proponents of minimum wage hikes fall apart.

When the prices raise, we increase production, however the wages of laborers have only increased nominally and not in real terms. The fact that the nominal wage increase correlates with the increase in prices we will actually see the real wages of the laborers drop. This is because now, in the aggregate, prices have risen (p to p’). The worst effect is what occurs after the prices rise and the market adjusts to the new nominal wealth levels; the production cycle is still in full force due to the initial price increase and now there is an abundance of supply that can no longer meet demand causing surpluses. However; since the coercive force of the state has aggressively forced higher wages; the firm can no longer drop the prices, from p’ back to p, in response to the newly achieved surplus. This is due to the fact that now factor prices are propped up artificially, there is downward nominal wage rigidity which cause a ratchet effect on consumption prices. Thus, when next round of production occurs the firms create a lot less output, resulting in a shrinking level of output.
It is clear from our analysis that the wishes of the labor market to raise the minimum wage will result in inefficiency, and a subjective drop in consumption. The laborers wishing to improve their standard of living will cause an over inflated consumption market, crowding out of teenage labor, and involuntary unemployment.