Minimum wage increase by other means

The employer mandate provision included in the House Democrats' bill requires employers to either provide health insurance (with upto 72.5% of the premiums) to all employees or pay an additional payroll tax. Based on the average employer-based family plans cost of $12,700 in 2008, it means additional $8,255 per employee per year. Dividing by the number of hours worked in a year (40 hours per week * 50 week), we get additional hourly wage increase of approximately $4 per hour. The current federal minimum wage is $7.25 per hour. Thus, the employer mandate effectively increases the minimum wage by more than 50%. Wonder what that will that do the already high unemployment ratio of more than 9%!

Poor Texas?

Paul Krugman ridicules the Matthew Yglesias's claim that Texas is rich due to its low taxes and less regulation because he used median income instead of per-capita income for the comparison. He goes on to point out that "free-market" Texas has a per-capita income of $37,187 vs $49,194 for nanny-state New Jersey.

As many people noted in the comments, this does not take into account cost of living differences between the two states (Texas has much lower cost of living than New Jersey). Additionally, the median incomes figures are before-tax. Since, the point is to compare economic well-beings of people living in states with different tax rates, we should be using after-tax income. I couldn't easily find after-tax median household income data for Texas and New Jersey, but I suspect, New Jersey will fare much more poorly on that measure. 

Financial vs Real investment

James Kroeger makes this ridiculous claim in the post "The New Deal Didn’t Always Work, Either":

Here you are guilty of conflating the two definitions of 'investment.' Rich people, generally, do not spend money on economic investments, but only on financial investments. While it is true that some financial investments (made by firms) are also economic investments, most financial 'investments' by rich people are not.

The purchase of a piece of land, for example, is a financial investment if it appreciates in value over time, but it is not an economic investment if it just sits there, undeveloped. Purchases of stocks in secondary markets (e.g., NYSE, NASDAQ) are clearly financial investments if the stocks appreciate in value, but they are not economic investments because they involve nothing more than exchanges of titles of ownership of already existing assets. They do not typically put any money into the hands of firm managers that could be used for economic investments. That normally happens only when stocks are first sold to underwriters, prior to an initial public offering.

So what happens to the money paid to buy financial assets (say, stocks on NYSE)? The person who sold the stocks must either spend the money (increase consumption) or fund new real investment(s). The seller can indeed use to money to buy other financial assets but the chain has to end in real consumption or real investment ultimately!

Minsky and Housing Bubble

Dr. Hyman Minsky's explanation of boom and boost in a capitalist economy is based on structure (or rather change of) of financial relationships. It is highly relevant today as it describes what is happening with the housing sector. The practice of ARMs and various option mortgages are nothing but Ponzi finance schemes.

“In order to understand why our economy has behaved differently since the middle of 1960s than it has earlier in the post-World War II epoch we have to appreciate how the broad contours of the financial structure have changed. The changes in the broad contours of demand have changed the reaction of aggregate profits to a change in investment and therefore have changed the cyclical behavior of the ability of business to validate its debts. The changes in the financial structure have increased the proportion of speculative and Ponzi finance in the total financial structure and therefore increased the vulnerability of the financial system to refinancing and debt validating crises.”

“A thorough research study should examine the changing composition of the assets and liabilities of the various sectors and the implications of this changing structure, as well as changes in financing terms, for the cash flows of the various sectors of the economy. The cash flow structure due to liabilities need then be integrated with the cash flow from assets and the various cash flows due to income production. In particular the changing relations between cash receipts and payment obligations and between payment obligations and the margin of safety need be understood.” (page 49)

“The combined effects of big government as a demander of goods and services, as a generator – through its deficits – of business profits and as a provider to financial markets of high-grade default-free liabilities when there is a reversion from private debt means that big government is a three way stabilizer in our economy and that the very process of stabilizing the economy sets the stage for a subsequent bout of accelerating inflation.” (page 56)

“Innovations in financial practices are a feature of our economy, especially when things go well… But each new instrument and expanded use of old instruments increases the amount of financing that is available and which can be used for financing activity and taking positions in inherited assets. Increased availability of finance bids up the prices of assets relative to the prices of current output, and this leads to increases in investment… In our economy it is useful to distinguish between hedge and speculative finance. Hedge finance takes place when the cash flows from operations are expected to be large enough to meet the payment commitments on debts. Speculative finance takes place when the cash flows from operations are not expected to be large enough to meet payment commitments, even though the present value of expected cash receipts is greater than the present value of payment commitments.” (page 66)

“During a period of successful functioning of the economy, private debts and speculative practices are validated.  However, whereas units that engage in hedge finance depend only upon the normal functioning of factor and product markets, unit which engage in speculative finance also depend upon the normal functioning of financial markets. In particular, speculative units must continuously refinance their positions. Higher interest rates will raise their costs of money even as the returns on assets may not increase…

In addition to hedge and speculative finance there is Ponzi finance – a situation in which cash payments commitments on debt are met by increasing the amount of debt outstanding… Ponzi financing units cannot carry on too long. Feedbacks from revealed financial weakness of some units affect the willingness of bankers and business to debt finance a wide variety of organizations… Quite suddenly a panic can develop as pressure to lower debt ratios increases.” (page 67)

Source: Credit Bubble Bulletin, by Doug Noland of Prudent Bear.

Virtual Gold Rush

 Via the Division of Labour, This BussinessWeek article, Innovation in the Age of Mass Collaboration, describes how a conservative mining company discovered gold by opening up its proprietary database on the Internet and offering a prize:

The contestants identified 110 targets on the Red Lake property, more than 80% of which yielded substantial quantities of gold. In fact, since the challenge was initiated, an astounding 8 million ounces of gold have been found—worth well over $3 billion. Not a bad return on a half million dollar investment.

Steve Jobs blames teacher unions

Apple Inc. CEO Steve Jobs lambasted teacher unions Friday, claiming no amount of technology in the classroom would improve public schools until principals could fire bad teachers.

Source: Cafe Hayek

Does change in exchange rates affect international trade?

If yesterday one dollar bought 100 yen, and today one dollar buys 120 yen, each dollar today buys 20 percent more Japanese goods than it bought yesterday.

Source: Cafe Hayek: Hooray for a Strong Dollar

Really! So, presumably, this 20% more japanese products came out of nowhere in a day?

Or did he meant to say that purchasing power has shifted from holders of Japanese Yen to holders of US dollars. But how can we conclude that merely from the fact that exchange ratio between dollars and Yen has changed.

If say, Japanese govt. has printed more Yen. It will simply inflate the prices of all products in Yen. US dollars will also appreciate compared to Yen but (may) not appreciate compared to Japanese products.

So, why would US dollars be able to buy more Japanese products?

If amount of US dollars and Japanese products in the market haven't changed in a day, why would their ratio (prices) change?

Bay Area and House Prices

Burbed.com, is my favorite blog when it comes to housing market. It is witty, sarcastic and informative. This post is just too good to pass!.

If you ask ask most people in the Bay Area “Why did homes get so expensive in the last few years?” you’ll probably here these reasons:

1. It’s not a bubble: They’re not making any more land. It’s special here. (Who knew that land suddenly decreased?)
2. It’s not a bubble: Weather. It’s special here. (Who knew that the weather suddenly got so much better?)
3. It’s not a bubble: Everyone wants to live here. It’s special here. (But why so much so in the last few years?)
4. It’s not a bubble: Web 2.0, Google, The Valley is BACK! Oh, and it’s special here.

The last one is distinctly possible. Google IPOed in 2004, instantly creating thousands of millionaires/billionaires. The job market has picked back up. Traffic is back with a vengeance.

Ok, so maybe that explains these two graphs:

Source: How the Bay Area caused home prices to go up nationally… -- Burbed.com: Your Silicon Valley Home and Mortgage Insanity Blog

Festival of Stocks

I am very happy to announce that I will be hosting the "Festival of Stocks" on February 5th here. Please send in your nominations through comments on this post, by email (ahanwadi-at-gmail.com) or through this form at BlogCarnival. You can nomination your own posts also. I am hosting this carnival for the first time and look forward to receiving great posts!

The current edition of the carnival is being hosted by One Guy's Investments blog.

For the first time or new visitors to my blog, here are a few of my investing/economy related posts:

• Investment Strategy - Outlines my basic investment strategy.
• Buy vs Rent House in the Bay Area - Discusses the buying vs renting house in the overheated Bay Area.
• Book Tag - Discusses my various favorite books, including investment related books.
• Low fee Index funds vs Actively managed Mutual funds - The title says it all.
• Pearls of wisdom from Charlie Munger

"Guru"'s Businessman Hero

Those frustrated to see persistent bashing of business as evil in Bollywood (and Hollywood) movies will welcome the "Guru". I plan to see it as soon as the DVD version is released.

Who would ever have thought that one of the villains of a Bollywood film could be import duty? "Guru," the latest Bollywood blockbuster by the respected director Mani Ratnam, is that rare film -- perhaps Bollywood's first -- in which free markets are lauded as a force for good. Aliens emerging from the Taj Mahal would be less surprising.

"Guru" stars Abhishek Bachchan as Gurukant Desai, a character inspired by Dhirubhai Ambani. Ambani was that rare tycoon who went from rags to riches during the worst years of India's license raj, building Reliance Industries, which today is India's largest private-sector company. In the era in which Ambani flourished, the state strangled private enterprise with licenses, regulations and sundry restrictions. Jawaharlal Nehru's dictum that "Profit is a dirty word" about sums it up.

Source: Bollywood's New Capitalist Hero - WSJ.com