Ever since President Obama’s State of the Union Address back in February calling for raising the federal minimum wage to $9.00 per hour, political pundits and politicians alike have appropriated the idea to serve their political agenda. On PolicyMic alone, there were more than 30 articles written about raising the minimum wage since the State of the Union Address. It seems to be a great political topic because, what’s not to love about more expendable money in the hands of already struggling families? At least, that’s the narrative presented by those who support a “living wage” — the notion that individuals should be provided with the means to afford cost-of-living increases on food, shelter, transportation, and other basic needs. Meanwhile, fiscal conservatives abhor the idea of a minimum wage because they argue that it’s difficult to determine the appropriate labor cost on a regional scale. They decry that a minimum wage disproportionately impacts minorities and increases the price of goods and services. Unfortunately, a major aspect missing from this debate is an acknowledgement of why we're even talking about raising the minimum wage in the first place.
Politicians and pundits need to ask why the cost of living is rising so dramatically that a minimum wage increase would be necessary. The answer is simple: inflation.
Inflation can be succinctly defined as, “a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency.” So, when there’s more money in circulation, the price of goods and services also increases. The Federal Reserve uses Consumer Price Indexes (CPI) as one of the measurements to chart the rate of inflation. As the graph below indicates, CPI has been increasing since the inception of the Federal Reserve in 1913.
So what causes inflation? Another missing element from the minimum-wage debate is how the Federal Reserve affects the cost of living through monetary policy. Monetary policy studies how Federal Reserve policies influence the growth of the money supply and interest rates. The graph below illustrates how the money supply has grown since 1959, with a large uptick at the first round of Quantitative Easing.
It’s important to understand how an elastic monetary policy like Quantitative Easing is driving up the cost of living. Low-income earners are the least likely to directly benefit from Federal Reserve stimulus programs like Quantitative Easing despite the Fed's intentions. According to Mark Spitznagel, “The Fed doesn’t expand the money supply by uniformly dropping cash from helicopters over the hapless masses. Rather, it directs capital transfers to the largest banks… minimizes their borrowing costs, and lowers their reserve requirements. All of these actions result in immediate handouts to the financial elite first, with the hope that they will subsequently unleash this fresh capital onto the unsuspecting markets, raising demand and prices wherever they do.” If this sounds familiar, it’s a lot like the criticisms people use against Reaganomics' “trickle down” effect.
Without addressing the need for monetary policy reform, the cost of living will continue to rise along with inflation. The idea that a “living wage” will put more expendable capital in a person’s hand fails to consider the broader issue of the continuous depreciation of the U.S. dollar. Urging the Federal Reserve to slow the rate of artificial credit and fast cash pumped into the U.S. economy is a solution that will directly benefit low-income earners. After all, without purchasing power, what good is a higher minimum wage?