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Posted about 9 years ago

The rising tide lifts all...yachts beached in a sea of low wages.

Why I think Andrew Syrios is wrong about Brandon Turner being wrong about minimum wage!

So, I apologize for the confusing intro! I just watched an episode of Colbert and he has me all fired up to start with something silly. But before I begin, I’d like to say that I am relatively new to BP. Aside from 1 or 2 comments, this is the first time I have ever written anything for the site. It may sound cliché, but I read BP for the articles! Like Andrew, I am proudly a bit of an economics nerd.  But don’t worry, I’ll confine all that gibberish to one paragraph….hopefully.

That said, and to be clear, I don’t think unilaterally increasing the federal minimum wage to $15/hr, especially quickly, is a good idea. That would be far too drastic. Such as is the case with a business, the economy must be driven like a boat and not a sports car. Gradual corrections. Don’t jerk the wheel. I am, however, in favor of a nuanced, measured raising of the minimum wage and indexing it to keep pace with inflation thereafter. I think this as both a real estate investor and as a human being.

As a human being….

I’ve got 13 properties around the metro Detroit area. When the recession hit my father lost his job of 25+ years. He is one of the hardest working people I have ever met. He was a glass man, he replaced glass in cars for around $20/hr when he was let go. Eventually, when the economy started to come around, his former employer called him and told him that he had to come back to work for $9/hr and if he refused they would report him to the unemployment office and he would lose his benefits (true story). I’m not sure if there is legal ground for such a threat. I told my dad to call a lawyer, to which he promptly ignored me. Regardless it was enough to scare him into taking the ‘offer’. He was about 60 years old at the time, and though he was constantly looking for another job, and would have been fine with a good deal less money, he was consistently coming up empty handed. He’s a rather simple minded man with a big work ethic and an even bigger heart. Yes, he could have learned another trade. Yes, he could move to where the economy is better. But ask yourself this, if you were 60 would you want dig up your roots and go elsewhere? Learn a new trade only to begin a new career at retirement age? It’s all too easy to define a stereotype and then attribute certain characteristics to it. Inevitably, when I give an example like this, the ‘master-debater’ I am arguing with will say something like ‘Well, he’s an exception. Everyone else is the problem!’

News flash, there are a lot of exceptions. Perhaps more exceptions than rules, which would make them not exceptions at all…now my head is spinning…

Anyway, for the record my dad retired about 3 years later and now works part-time with me and another local landlord making $12-15/hr because he worth every penny and then some. I use him as case study to make two points. First, not everyone in favor of raising the minimum wage is lazy and entitled. Although my dad earned slightly more that the lowest amount permitted by law when he retired, I know others that are less fortunate but work hard too. Perhaps unintentionally, both Brandon and Andrew alluded to a supposedly nearly universal attitude of lazy entitlement being the case with people on this side of the argument. Sure, some are, but if jobs are lost then I got a hunch the lazy, entitled few would be amongst the first to go and the ‘my dads’ of the world would get a rate of pay more commensurate to their productivity. They lazy, entitled may even be forced to pick up their slack and earn this new rate of pay if they want back in the work force. Secondly, a lot of good, hard working, low wage people are in favor of raising the minimum wage because they feel they are being taken advantage of by a work place environment that favors the haves. If not always agreeing with them, I at least think they at least have a leg to stand on with this argument.

Economically speaking….(the nerdy stuff)

Laissez-faire. For those of you that missed this term because you were actually fornicating in college, I’ll refresh your memory. In econ this term is used to say ‘leave it alone’. It’s the basis for the ‘classical’ economic theory Andrew mentioned. Here a quick rundown of classical economic theory. Markets are most efficient when free and self-correcting. According to classical economic theory equilibrium, that is to say, maximum possible total benefit for the whole, is reached only when markets are allowed to operate uninterrupted. Leave it alone. Everyone pursuing their own best interest will result in maximum benefit. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest” – Adam Smith, the father of classical economic theory.  What Andrew failed to mention is that there is a competing, and just as prevalent, economic theory referred to as Keynesian economics. The short of it is this, sometimes outside forces cause markets fall out of equilibrium. A ‘Keynesian’ would say that when this happens, maximum benefit is often restored by deliberate market interference. For example, would another investor’s financial ability to out-bribe you sometimes interfere with your otherwise ‘highest and best’ real estate offers? Bribery being illegal is interference in an otherwise free market. Are you in favor of this sort of interference? Like with real estate, I think the best economic approach isn’t so restricted by ideology, and rather it’s a measured, nuanced approach that suits the ‘situation on the ground’. Again, small corrective changes. A boat, not sports car.

So, why did I just fill your head with this economic gobbledeegook? (sp)

I copy and pasted the following straight off the internet machine, so you know its true. ‘In 1938, the Fair Labor Standards Act established a federal minimum wage to serve as “a floor below wages,” to reduce poverty and to ensure that economic growth is shared across the workforce.’

Don’t get me wrong, I’m a capitalist. I’ve been an entrepreneur since I was 18. I am FAR from a socialist. In fact, I’ve basically never had a real job, although I’ve worked my ass of and that’s why. I’ve self funded my own businesses and real estate.  I invest in real estate to make money and expect reward for my troubles.  There needs to be a substantial differentiation among wages and/or profits to encourage work and innovation, I believe this to my core.  But, there is a large and obvious financial incentive for business and industry to suppress wages.  Simply, it increases their profits.  You hear a lot of whining about how bad the economy is these days, so profits must be low right now…?  Where is the DOW at these days?  Consistent record highs you say?  Such is the environment right now that employers have the power and mid-lower level employees, again speaking generally, have the economic business environment working against them.  The IT age and autonomation, combined with the recession and globalization, have left the American worker in a rather desperate position.  Do we really want to encourage mid and lower level US labor to race to a floorless bottom?  No doubt, there are people whom would accept a $2-3/hr job.  Think a waitress whom earns no tips because she happened to be scheduled on a day that no one came in.  Should that job exist?  If your wife were that waitress and she sold her evening for $8 instead of spending it with you, would you say ‘laissez-faire’ with a smile?  I suppose if you aren’t terribly fond of your wife you may, but that’s beyond the scope of this post.  ‘Germany, Sweden and Finland have no minimum wage’ you say.  To the best of my knowledge, neither does the Congo.  Although I’ve been to Helsinki (nice place) I’m not sure of the exact labor policies they have in place.  Regardless, are they not within the ‘European social welfare state’?  With alternate fair labor laws in place, it’s easy to see how a minimum wage would be less necessary.  I’ll admit my ignorance of the relevant specifics for those other countries, but I will say that their minimum wage laws don’t take place in a vacuum, so its more complex than simply saying ‘they do it, so we should to!’  If I’m wrong about these countries feel free to call me on it, I love to learn!  Here, in America, good middle wage jobs simply aren't available to the masses to the extent they used to be.  Using a barely to non-livable wage as national policy in an effort to incentivize workers to seek jobs that aren’t there seems like using Lotrimin to cure the common cold. However effective it may be at curing Jock Itch, that doesn’t seem to be the problem.

As tax payers, is it even in our best interest to have wages as low as they are or lower?  Or, rather, should we force companies, like Walmart to choose an obvious target, to absorb the real cost of their labor and stop subsidizing their payrolls with our tax dollars?  I’d lose money when I buy a potato (supposed inflation) but save money on my taxes.

I’m reading your mind and its saying, ‘but Ron, what about inflation?! The cost of everything will skyrocket!’. Again, nuanced and measured is all I am in favor of. We are in a period of long term, low inflation. There is little worry of that changing in the short term. So little, in fact, that monetary policy was left loose far longer than most expected and interest rates are still kept nearly as low as possible. Plus, with a modest raise in minimum wage, little would change short term with prices. Businesses earnings are impressive as of late. Much of the cost could simply be absorbed. And if prices did rise, it wouldn’t happen in an instant. Consumers would feel better off for a while first. Inflation is cause by both supply and demand based forces. Even if employers had to raise some prices (supply side), we are still a far ways away from consumers consuming so strongly that the resulting competitive market demand for good and services would put upward pressure on prices (demand side). And with consumer spending being some 70+ percent of GDP, I think there is slack to be taken up. Ok, no more gibberish! But, for us real estate folks inflation isn’t always bad….

As a real estate investor….

In their posts, both Brandon and Andrew alluded to the idea of inflation induced debt destruction. That is to say, as prices rise the cost of a fixed amount of debt becomes relatively more affordable. If you are a real estate investor that leverages your properties at favorable, or even decent, terms than this is a big win for you. Plus Andrew was right, if inflation did happen in any substantial way then rents would rise as well. Sure, some costs may jump on board, but as landlords the vast majority of people that we hire are paid well above minimum wage. So costs may rise for us, but it’s unlikely our labor costs would, and as you know this line item is significant. Inflation aside, if your tenant is the first one to lose his job at a cash-strapped company then I’d wager he’s probably a mediocre tenant anyway. Many of your remaining tenants would have a few more dollars to pay rent with and maybe, just maybe, the good tenant with a predatory employer that was stuck in the dilapidated apartment building down the street (owned by the other guy in town) can now afford your place! Let that other guy have your tenant that got fired in exchange, then in a few months you can reposition his place. $$$. (did that last sentence really need a period??) And later, when the old tenant gets his act together and earns one of these new, higher paying jobs, maybe you can rent to him again. Every economic change brings about winners and losers. But me, personally, I would see raising the minimum wage gradually and indexing it for inflation as a net gain for real estate investors.

I’m 30 years old. Maybe I will be much wealthier when I’m older. Perhaps that would change my view. Maybe I would become more jaded, less empathetic and colder with time, telling folks like my father that they get what they deserve because Keynes was dead wrong and classical economic theory is the way to go. ‘Laissez-faire’ I might say. But I hope not…. I’d hate to end up stuck with a bunch or rich friends on a beached yacht in a sea of low wages.

I'm eager to hear what you all have to say but have mercy people, this is my first real post!


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