Saturday, December 14, 2013

Nice Graphic showing the change in beneficiaries for various Federal benefits. The Social Safety Net in action.

Here is a nice resource when teaching US Fiscal Policy and discussing the difference between "Means-Tested" (Gold print) and "Non-Means Tested" (Blue print) programs.  The former (means tested) takes into consideration a recipients income and assets when deciding to grant benefits and the latter (non-means tested) does not.

The data show the change in participation in various government programs from the end of 2008 to 2011.

As you can see the largest percentage increases (gold lines) are in Medicaid, the Federal health insurance program for low income people, "SNAP" which is the food assistance program for low income people, and "SSI" which is a program that covers disabilities of many sorts (physical and/or intellectual).

What you see here is the Social Safety Net in action.  Increases in cash/non-cash benefits as the economy falters and "built in stabilizers" take effect to provide a floor of support for those adversely affected.

Normally, as the economy recovers the demand for these benefits should decrease. This remains to be seen.

Click on image to make larger of go HERE for it at the US Census.
More American Households Rely on Government Benefit Programs infographic image

[Source: U.S. Census Bureau] 

Friday, December 13, 2013

Hayward's Sub Shop is Open for Business!! Now, I just have to see if I can make it with the various Minimum Wage hike scenarios. See the numbers here....

Hayward's Sub Shop is open for business!! However, am I going to make it at the various proposed minimum wage hikes?  Let's see. 

Assume I have 4 part time workers earning $7.25 per hour.  Each works 25 hours per week so I have 100 hours of labor time scheduled.

There are 4.3 weeks in a month.

Total Labor Hours in a month for my employees = 430.

I pay them $7.25 per hour BUT they (at the minimum) cost me $7.73 per hour because I have to pay the employer share of the workers Social Security and Medicare (6.65%).

My total Wage cost at the end of the month is $3,324.00.

Assume a minimum wage of $10.00 instead ($10.67 with SS and Medicare taxes)
$10.67 X 430 Labor Hours = $4,588.00

A difference of $1,264.00 in wage expense for me compared to the current minimum wage.

If the minimum wage were to go to $15.00 per hour plus what I pay in Social Security and Medicare on behalf of the employee, then the total wage rate would be $16.00.

$16.00 X 430 Labor Hours = $6,880.00

A difference of $3,556 in wage expense for me compared to the current minimum wage. 

Let’s say my daily average revenues are $500.00 (100 sandwich combo meals at $5.00 each—trying to compete with Subway!) and I am open 7 days a week.  My monthly revenues are $15,000 ($500.00 X 30 days).  Assume my rent, utilities, interest on the loan I took out to start the business, advertising, taxes and other expenses total $3,000 per month. Assume the cost of the inputs (bread, meat and fixins’, chips, soft drink, cups, etc) to make each combo meal is $1.50 (I am pretty sure this is LOW). I sell 100 combo meals per day or 3,000 per month.  Total cost of inputs to make the meals is $4,500 ($1.50 X 3,000).
My total monthly costs to stay open (not including labor) are $7,500.

So my Net Revenues BEFORE labor costs are $7,500.00 ($15,000 Revenues minus $7,500 costs)

1.       Under a Minimum Wage of $7.25 my labor costs are $3,324.00.  Subtract this from $7,500 = $4,176.00
Multiply this by 12 and I am earning $50,170 per year from my little sandwich shop.

2.       Under a Minimum Wage of $10.00 my labor costs are $4,588.00.  Subtract this from $7,500 = $2,912.00
Multiply this by 12 and I am earning $37,856 per year. That is a 25% DECREASE.

3.       Under a minimum Wage of $15.00 my labor costs are $6,880.00. Subtract this from $7,500 = $610.00
Multiply this by 12 and I am earning $7,300.00 per year. That is an 85% DECREASE.

At what point do I have to consider my “Opportunity Cost” of staying in this business (how much can I earn doing something else)?

It is ok to pressure the Walmarts, McDonalds and Subways of the world to VOLUNTARILY  increase the pay of their workers.  But when you advocate an increase in the minimum wage for ALL workers, please remember the smallish business guy or gal. 

Judge for yourself as to whether we can make it or not.

Oh, and could you help the 4 workers I had to let go find a job. Thanks!!  :
 NOTE: Regarding my numbers.  I am sure my $3,000 in expenses might be a little high BUT my estimate  for the cost of each combo meal is likely low. Also, Social Security and Medicare are not the only additional costs of hiring a worker. The wage rate is also underestimated.  So, it probably evens out or favors expenses on the low side.  In other words, the "profit" is overstated for the most part.

US Defense spending from Soup to Nuts. No, really, from soup to nuts...

From Mother Jones:  See more on defense spending at the link.

How is the Federal Budget like a loaf of bread? You got your Texas Toast and your breadcrumbs. Which one will fill you up faster? Congress seems to think it is the breadcrumbs....

A nice quick reference visual that gives you an idea of of the relationship between Mandatory ("Non-Discretionary") and Discretionary ("Non-Mandatory") spending in the US Federal budget.

To use a baked good analogy, a loaf of bread, mandatory spending items are thickly cut slices of bread. Think Texas Toast (the BIG circles)! Non-mandatory spending item are either (1) thin slices, like crostini's (medium sized circles), or (2) even smaller pieces, like breadcrumbs used for Thanksgiving stuffing (the small circles).

In budget negotiations politicians are trying to make a political meal out of the breadcrumbs (cutting the small-ish things) and think it will nourish the Federal budget body and make it healthy.

The real "bread", if you will, is in the Texas Toast. However, it is neglected, left to mold, and get crusty.

Oh, well, whichever side YOU butter your bread I hope you find this graphic warm and toasty.

Source: Mother Jones

Tuesday, December 10, 2013

Has the minimum wage lost purchasing power over the last 30 years? Well, Yes and No. Read here why the ambivalence.

Lots of debate about how the current minimum wage of $7.25 has not kept pace inflation over the past 30 years or so and it how it has hurt the working poor with families.

This graph (the BLUE LINE) below shows the yearly income of person working 2,000 hours in a year and earning a minimum wage of $7.25.  That would be a gross total of $14,500.  Going from Right to Left on the BLUE line is that $14,500 adjusted for inflation.  Example: Go back to 1976 (the left most tip of the blue line).  Take the $18,300 annual income and divide by 2,000 hours worked.  You get a wage of $9.15. This means for a minimum wage worker TODAY to have the SAME purchasing power as a minimum wage worker in 1976 he/she would have to earn $9.15 per hour.  This is what it means when people refer to the minimum wage not keeping up with inflation.

Source: NY TIMES
Tax Policy Center
However, wages are not the only source of "income" for low wage working families.  There is a Federal tax credit available to the "working poor" call the Earned Income Tax Credit ("EITC").  Basically it a "reverse tax" and the recipient is entitled to receive this in cash.

A household that has one wage earner making just the minimum wage AND has 2 dependent children is eligible for a cash tax credit of $5,320 (source HERE).

The RED line in the graph above shows the early salary of a minimum wage worker PLUS the dollar value of the EITC in any given year since 1976.

So, in 2013  if we include the EITC as income/compensation along with the $14,500 in wage income we get a gross total of $19,872 for those 2,000 hours worked.  That is an effective hourly wage rate of $9.94.

Now look at the same graph below with the dotted line I inserted.  While the the nominal minimum wage has lost purchasing power due to inflation, the difference in the erosion has been compensated for, in large part, by the increase in EITC payments.

So, if we include the EITC as a form of compensation to the working poor we get different take on whether or not the working poor are worse off compared to yesteryear.

My take is the working poor are not better off or worse off when you look at it like this.  However, if the increasing use of tax money is used to make up the difference in lost purchasing power for the working poor, then we seriously have to look at the minimum wage and the function it serves.

This serves as ANOTHER subsidy for employers, especially the LARGE ONES who pay the minimum. Think about that.  There has to be a better way.

Whatcha' think????

Addendum:  I estimated this wage earner would be eligible for about $400.00 per month in SNAP (food assistance/Food Stamps).  On a yearly basis that would be a cash value of $4,800.00.  Using the 2,000 hours worked in a year, that would work out to $2.40 per hour we would have to add to the $9.94.

So total hourly wage with EITC and SNAP benefits would be $12.34.

In effect, taxpayers at the minimum are subsidizing minimum wage paying companies to the tune of $5.09 in order to lift people out of poverty.  Pretty sure I could come up with additional transfer payments that would increase that subsidy.

Corn farmers are challenging the underlying theory of the market they operate in. Don't they understand basic microeconomics?

Well, yes, the average framer probably does and likely much more than even the best micro-economist.

Some farmers have provided a nice, real life scenario that gives me an opportunity to illustrate a basic economics concept: Supply and Demand.

The Wall Street Journal has a article on a how one of the determinants that shift a market supply curve, "Producer Expectations", is playing out down on the farm.

Farmers Hoard Corn as Prices Drop
"...Faced with the lowest corn prices in more than three years, many U.S. farmers are stashing away their grain in a bet on a rebound. 
The strategy is sending ripples through the corn belt—affecting everyone from grain buyers to storage-bin makers—and tempering the price declines in the $27 billion corn-futures market. 
By hoarding freshly harvested supplies, farmers are forcing livestock producers, ethanol companies and food makers to pay a premium over futures in some areas to secure corn, helping to buoy prices during what is expected to be a record U.S. harvest, traders and analysts say..." Wall Street Journal
 Let's go to the graphs!!

Here is the Market for Corn at some equilibrium at Pe and Qe-- Point "A"

 As the article suggests, farmers are with-holding corn and storing it in the belief that they will be able to receive a higher market price some time in the near future.  So, at the current market equilibrium price of "Pe" the Quantity Supplied of Corn is going to be LESS than it was before.  Assume this is at "Qs1" or Point "B".  The market now is in disequilibrium.

 What is true at "Pe" and "Qs1" is also going to be true at every other Price and Quantity Supplied combination along Supply Curve "Supply*".  This will shift the market supply curve to the LEFT, indicating a DECREASE in SUPPLY.

With the decrease in supply the market price is going to increase. When the market price increases then the Quantity Supplied increases (Law of Supply)  and the market moves ALONG the new Supply curve from Point "B" to Point "C". The Quantity Demanded decreases (Law of Demand) and the market moves along the same Demand curve from Point "A" to Point "C".  The market will reach a new equilibrium at the higher price of "P1" and a lower market quantity of "Q1" at Point "C".

For farmers to accomplish this for any extended period of time it will require massive cooperation because farmers, for the most part, operate in what is term a "Perfectly Competitive Market". This means that there are MANY individual producers producing an identical product and they have very little pricing power over what they can sell their corn for.

Good Luck to them!!

Monday, December 9, 2013

The cultural trend for males to sprout facial stubble might look good but it hurts the economy in ways we don't think about. See here how...

We hurt the economy in ways we don't even think about:
The fashionability of facial hair is bad news for the razor industry.
The male shaving sector has slowed down in both the US and Europe this year, and that’s at least in part due to the rising popularity of stubbleaccording to a recent report from Euromonitor. A move away from a culture of everyday shaving and towards one in which men embrace an artfully trimmed permanent two-day shadow—or, indeed, a full beard—has pinched some of the industry’s largest players.
Energizer Holdings, which owns both Schick and Edge, is among those feeling the stubble effect. The company has cited shrinking razor and blade sales in several of its earnings calls this year. “The weakness in some of the Personal Care categories in the US… are kind of unprecedented,” CEO Ward Klein said last month. “And I’m really talking about razors and blades in particular,” he added.
From Quartz 

Razors and shaving cream are complements in economic terms.  Two separate and distinct goods but their fates are pretty much tied together, at least in the male grooming category. Less shaving overall, less need for both of these products, at the margin and then some possibly.

Interesting how a cultural trend can have an affect that appears to be unseen but is certainly felt by those employed in the industries.

Sunday, December 8, 2013

Americans gotta consume...No, really, Americans GOTTA consume. See here how much...

Retail and Food sales are a nice indicator of the health of the economy.  It shows the level of spending primarily by consumers with money they earned, saved, borrowed, or received from other private or public transfers.

Below is a long term graph of expenditures in this category---the BLUE line. The blue line includes the sale of gasoline. The creator of the graph (Calculated Risk) factors out spending on gasoline, a single good, to show how everything sold in the retail sector is faring in sales---the RED line.  So, the red line is all other retail and food spending that goes on in the economy sans the dollar value of gasoline.

With apologies to a real economist at Calculated Risk, I used his graph and marked it up to illustrate an interesting point, in my opinion.

I inserted a straight dotted line along the expanse of the BLUE total retail and food sales line. Just connected the current data point with the point at the start, January 1992.  Amazing...a straight line that for 21 years hugs the sales trend and only deviates from what we know now are traumatic economic events.

There is a small divergence above the trend line in 2000-01, a larger one in magnitude starting in 2005 then the "crash" where the bottom fell out and sales were way below the trend line in 2008.  BUT we are now back along the trend line!  Good news, right??

Remember, the blue line includes gasoline sales.  Now look at the long term trend without gasoline sales. That will be the RED Line.  Again, the dotted line I inserted is the SAME one as before but shifted down exactly parallel.

Notice how it hugs the red retail/food sales ex. gasoline (Red Line) very tightly up to 2008. The bottom falls out BUT there is a persistent gap between sales and the trend line.

In this last graph I estimate there is roughly a $30 billion dollar deficit between current spending and the established longer term trend. This $30B IN ADDITION to spending on gasoline!

Where is that spending going to come from?  Gotta create some jobs so people can go to the mall, buy some stuff and grab some lunch.  Just like the old days...before the recession...
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