Tuesday, February 19, 2013

The Minimum Wage And The Credit Rating


It may not seem like it but the considerations associated with the setting of the minimum wage for an industrial nation are closely related to those associated with the setting of the credit rating for any nation. The way things are done now is that both the minimum wage and the credit rating are determined by glorified accountants called economists who employ methods that were devised decades ago when the economies of nations were different, and so was the international setup in which they operated.

What we need now to make a more meaningful determination of those matters are economic scientists who will employ methods that take into account realities heretofore neglected by the economic accountants. What the economic scientists will recognize is that a national economy is not the static picture which is reflected by a balance sheet but a living entity that is continually evolving in lockstep with the demography of the nation.

The difference between what the accountants see and what the scientists will see arises from the fact that scientists have a greater appreciation for the concept of time. Whereas the accountants normally decide on something that will probably not be there when the time will come to implement their decision, the scientists will tend to see the moving parts of the economy, and work to determine their position at the time when, for example, a debt will come due.

In the old days when a handful of nations were industrialized and the rest of the world was not – thus considered backward – an accounting economist would look at the balance sheet of a few representative enterprises and determine from them what the minimum wage ought to be. As well, he would look at the balance sheet of a national economy and determine a credit level for it. As to the backward countries, they lived and perished by the volatile value of the commodities they sold, and they existed at the mercy of the industrial nations which sought to acquire their commodities by hook or by crook. No minimum wage was determined for these countries and no credit rating was applied to them.

But the world has changed in that the new industrial revolutions – which are happening all the time and everywhere on the planet – are moving ten times as fast as the original Industrial Revolution. This is true in the sense that what took the first industrial nations ten generations to accomplish is now being accomplished in a single generation by the emerging industrial economies. Of course, science and technology are still evolving, and so are the industries of the first industrial nations. However, the newly industrializing ones are catching up not only to what they missed in the past, but are keeping abreast of the new developments, and in some cases leapfrogging ahead of the old industrial nations.

Even if we miss all the details pertaining to this subject, what comes out clearly is that every method employed in the past to assess an economic condition or to measure its impact, must have been voided by the realities of the world in which we now live. The one thing we can be certain about is that a ton of tomatoes produced in a highly industrialized farm will have to command a price that is different from a ton of similar tomatoes produced by a farming family laboring in an economy that may now be industrializing but is still backward. And this is the reality that both farmers will have to face when trying to access the same international market.

In time, a new dynamic will have been created and will fundamentally alter the relationship between the industrial economy and the one that is emerging. For one thing, if the farming family in the backward economy can produce enough tomatoes to satisfy the needs of its own community and that of the industrial economy, the mechanized farms of the latter will stand a good chance to go bankrupt. This will happen if and when the industrialized farmer will lose the ability to pay for the equipment, the fuel and the fertilizer he needs to continue farming. This reality will ripple through the rest of the economy with dire consequences which is the reason why the industrial nations subsidize their farmers.

But how can this happen if it takes 5 farmers or more in the backward economy to produce as much as one farmer in the industrial economy? The answer is that the person on the mechanized farm would have as many as 4 or 5 other people working away from the farm to produce the equipment, the fuel and the fertilizer that the person on the farm uses to be able to farm. And because he must pay for all that, he has to charge more for his tomatoes than the backward farmer.

When those two show up in the same marketplace to sell their products, a new situation will begin to unfold. The industrialized farmer will find himself selling less and less of his, while the other farmer will sell more and more of his. As long as the backward farmer has enough land, water and people to increase his production, he will supply his market in full and take an increasingly bigger share of the other market. But if he runs out of any of those, and he is compelled to resort to the methods of his industrialized counterpart, he will have to raise the price of his products. He will continue to do so till he matches the price of the other farmer who, if lucky, may still be in business. If unlucky, he would have gone out of business ceding the entire market to his counterpart.

It may take a generation or two for that scenario to fully unfold. In the meantime, several upheavals will have beset both economies on their way to that finale. To see how this may happen, we must broaden our view from thinking in terms of two competing farms to thinking in terms of two competing nations. One will be fully industrialized; the other will be at the start of its industrial journey, and still relying on farming, mining, some local crafts and perhaps tourism as well.

Each nation will have its own currency. To make matters simple, let us say that the industrial nation uses the Dollar which will buy a pound of local tomatoes. And let us say that the backward nation uses the Kwaillar which will also buy a pound of local tomatoes. At the start of their interaction, the inhabitants of both nations will realize that the industrial economy has a great deal of goods and services that the other does not have. For example, it has the car which sells for 10,000 Dollars as well as appliances and a variety of other gadgets; and it has the facelift which sells for 100 Dollars as well as a few other services.

At first, the people of the industrial nation will buy from the other a few pounds of tomatoes, other produce, some natural resources and the local crafts; and they will travel there as tourists. To pay for this, they will convert their Dollars into Kwaillars at the rate of one Dollar for one Kwaillar. In the meantime, the people of the backward nation will want to buy a few small things from the advanced nation, and will use the Dollars they earned to pay for them. They will not as yet buy a facelift or a car because they could not sell enough of what they produce to pay for such luxuries. And depending on the supply-demand situation for both currencies, the exchange rate between them will fluctuate in a narrow band because the two-way trade will at first be more or less balanced.

In time, a handful of people in the backward economy will have accumulated enough Kwaillars to want to buy big items such as appliances, cars, facelifts even medical care from the advanced economy. To do this, they will convert the Kwaillars they hold into Dollars. They will buy the Dollar in large quantities and send it soaring which will devalue the Kwaillar. This will make the goods and services they produce sell cheaply in the advanced nation. In turn, this very idea will make the business people in the advanced nation decide to move their plants and other facilities to the developing one so as to produce cheaply and sell at a high price in their home country.

This new condition will continue to prevail till the backward nation becomes as advanced as the other. In the meantime, the upheavals that the two nations will experience will seem unsolvable. The politicians will adopt small solutions to solve small problems but will throw their hands up in the air when it comes to solving the big problems because the politicians will have realized that the real solutions lie somewhere else.

The most destructive upheaval affecting the emerging economies is the gap that opens between the rich and the poor; a gap that happens because a lucky few will find themselves interacting with the advanced economies, and paid wages and salaries of that level. At the same time, the remaining masses of the population will find themselves toiling as hard as ever, and paid at the level of the backward economy. The inequity will create a great deal of pain among the masses, and the government will want to alleviate it. To do so, it will subsidize the poor through one program or another.

After a while, the government will find itself crafting a budgetary deficit that will keep increasing year after year. This will prompt the accounting economists at the credit rating agencies to lower the rating on that nation. This will compound the problem because it will make borrowing even costlier for the government. And while this is happening in the backward economies, the advanced economies will have developed a problem of their own. They will have created in their midst a permanent underclass of young citizens who cannot land a first job because they cannot produce enough each hour to cover for the minimum wage that the antiquated law forces the employer to pay them.

So then, what solution is there to the problem of the credit rating? And what solution is there to the problem of the minimum wage? The answer to the first question is simple: it is for everyone to get together in a world forum and decide to ignore the credit rating agencies. The argument for this is easy to make: The emerging economies have young populations that will be in a position to pay back the money borrowed now, especially if some of it is used to build the infrastructure they will use when they take over the nation. The static balance sheet that the accounting economists look at may not shine, but the economic scientists who look into the future will see that the economy will be in a different place when payment on the borrowed money will come due.

As to the second question, we answer it by first defining the term regular job. This done, we say that anyone doing a regular job must be paid at least the minimum wage especially if the job requires that a certain level of physical exertion be expended such as it is with material handlers and construction workers.

There can also be a category called apprentice where the minimum wage will be lower but cannot be maintained for more than a year. After that, the employee will graduate to receive the minimum wage.

And there can be a category to encourage the employment of those who would otherwise be unemployable not because of a physical disability but for another reason – having gone to jail, for example. It will be possible to pay these people at the apprentice level for more than a year if they do not show progress.

The government may also contribute to what the employer will pay these people. This will give it the right to send an inspector once in a while to make sure that things are done correctly, and that no one is abusing the system.

Thus, the problem facing the advanced economies, and the one facing the emerging economies – both of which exist as a result of their interaction – do have solutions that can be implemented with some ease. But the will to solve them must be there which is not always the case.