Monday, October 6, 2014

Gloom Boom Doom - October 2014 Report

Thomas Sowell recently penned an article entitled, Mob Rule Economics in which he takes a critical view of higher minimum wages. Sowell writes that,
“While we talk about democracy and equal rights, we seem increasingly to let both private and government decisions be determined by mob rule. There is nothing democratic about mob rule. It means that some people's votes are to be overruled by other people's disruptions, harassments and threats. The latest examples are the mobs in the streets in cities across the country, demanding that employers pay a minimum wage of $15 an hour, or else that the government makes them do so by law. Some of the more gullible observers think the issue is whether what some people are making now is ‘a living wage.’ This misconstrues the whole point of hiring someone to do work. Those who are being hired are paid for the value of the work they do.”

In general, I believe that people instinctively want to work, and I am also convinced that people who work are happier than people who have no jobs. However, I also see every day people who would be perfectly fit to work – in some cases with special skills – that actually prefer not working and instead opt out to receive some benefits from the government.

High unemployment and a declining labor force participation rate in the Western world has numerous causes including affluence, changing attitudes from “personal responsibility” to “entitlements,” and especially because of the government’s generosity. It is evident that with increasing Government transfer payments, a decline in salaries and wages as a percentage of the economy and a contraction in the civilian labor force participation rate occurred.

Over the last few years, a heated debate has raged about the causes of a structural decline in the rate of economic growth in the advanced economies of the West and Japan. For us investors this discussion is important in terms of the future movement of interest rates, which I think could stay low for US Treasuries for quite some time.