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John Lindauer
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Economics PhD, Business School Dean, University Chancellor, Books and articles on macroeconomics, economic development, unemployment, and taxation. Legislator on ways and means committee, Regulatory commissioner, CEO Newspaper and radio station chain, CEO of Internet company. Investor, Operates... More
  • 2014: A Higher Minimum Wage Means Opportunities And Dangers For Investors 0 comments
    Jan 6, 2014 6:07 AM | about stocks: QSR, MCD, SBUX

    It appears the Democrats are going to make a real push for a significantly higher minimum wage. If it happens it will be a real opportunity for informed investors and an absolute disaster for those who accept the common knowledge both parties are almost certain to purvey.

    There is absolutely no question but what a higher minimum wage will have an adverse effect of the profits of companies such as Burger King (BKW), McDonalds (NYSE:MCD), and Starbucks (NASDAQ:SBUX). And economists who oppose a higher minimum wage are absolutely right that there will be layoffs and fewer hires and that the profits of those who employ minimum wage workers will suffer because of their higher costs. Moreover, if the prices of the items the low-wage employers produce go up, the general level of prices in the economy will rise - a classic cost-push inflation.

    But there are other sides to the minimum wage story investors need to consider. One is that today many minimum wage employees receive various forms of government-funded aid such as Food Stamps and Rent Subsidies. Those that keep their jobs and earn more as a result of a minimum wage increase will tend to lose their eligibility. So government spending, and thus government deficits, will tend to decline by many billions of dollars.

    It is also likely that a significantly higher minimum wage will cause millions of people to begin looking for work again. It is a sad reality that the various welfare and assistance programs discourage people from working because they often provide more income than a minimum wage job generates, particularly for single parents who have to cover child care expenses. It is also likely that the arrival of millions of additional workers will put downward pressure on wages above the new minimum wage levels and tend to offset their inflationary impact.

    Adding the additional people who will become willing to work to our labor force will increase our country's potential GNP. But, since our market system really does work, the big impact of a higher minimum wage will come when our low wage employers begin to substitute capital in the form of new equipment and technologies for the now higher priced labor - when McDonalds, for example, introduces automatic burger flippers so it won't have to hire so many employees. In other words, if the minimum wage increases there will tend to be a great wave of capital being substituted for labor in the production process. That's how free enterprise moves an economy ahead. And when it happens the sales of certain equipment and technologies will soar and so will the profits and stocks of their producers. The bigger the wage increase the more capital will be substituted for labor.

    In essence, if the minimum wage increases substantially, millions of workers will join or rejoin the labor force. These additional workers and the new capital and technology the higher minimum wage causes to be introduced will cause our economy's production capacity to significantly increase. HOWEVER - whether that capacity is actually used, or not, so that our per capita GNP increases will depend on whether the revenues of our private and public employers increase so they are motivated to hire more people and produce more goods and services. Whether one likes it or not, that's the way our system operates.

    So there we are: If the Federal Reserve continues to ignore the liquidity needs of the real economy, the additional production capacity resulting from the higher minimum wage will not be used and an increase in the minimum wage will mean even fewer jobs. On the other hand, if and when the Fed finally begins flowing sufficient amounts of newly created money and credit into the real economy we can look forward to one of the greatest profit and production booms in history with the government revenues from applying today's tax rates to a bigger tax base resulting in budgetary surpluses - and since it is the real economy of jobs and production that ultimately underpins the financial markets, such a boom in profits and production will tend to yield one of our greatest bull markets in history,

    Do we need a higher minimum wage for the economy to advance and generate significantly higher profits and budget surpluses? No - today, with or without an increase in the minimum wage the United States is ready for a huge bull market, potentially the greatest in our history, because of the unprecedented underutilization of our production capacity and labor force. Whether we get it or not depends on the behavior of the Federal Reserve. If you are an investor who is not professionally trained in economics, you might want to read the "General Theories of Inflation, Unemployment, and Government Deficits" or something similar. Understanding how our economy operates in the real world and which policies will work, and which will not, will help you jump into the market when the time is ripe - and stay home when it is not.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: QSR, MCD, SBUX
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