Categories
Economics Society

[1282] Of questioning the morality of minimum wage

I had supper with two friends not too long ago. The gamut of our conversation topics ran wide but I have no doubt that the crux was on morality of free market and minimum wage policy in particular. A friend expressed how such philosophy fails to provide warmth to the struggling people whom work day and night to provide for themselves and perhaps, others. He pointed to the opposition to minimum wage and how free market supporters are insensitive to the hardship the needy face as proof. He presented his point so passionately that it pained me to disagree with him. Yet, I must disagree and went on to illustrate how such insensitivity within a larger picture is really a morally superior and caring position to take.

Scarcity is a real issue and minimum wage supporters unfortunately do not grasp the idea well. If scarcity is a tale belonging to the lands of the fairies, then we would be living in the land of the fairies. Sadly, this is the real world with harsh reality of constraints. Within the issue of minimum wage, the policy imposes more constraints than necessary on the economy, turning a harsh world even harsher from a big picture.

Perhaps I am stating the obvious but minimum wage policy increases wages of the already employed. Of course, the employed have to have wages below the floor if they are to benefit from the policy. Here, the key word is employed. The policy benefits limited fraction within the society and like many other things, it is fueled by self-interest when it is fought by those that tend to benefit from it. Or to put it more bluntly, plain old greed. Those that support such policy because they think it is a compassionate thing to do however simply fail to understand the economics behind the policy, or seems to limit their consideration to limited section of the society.

The story of minimum wage does not end where supporters of such policy would like it to be. When one is playing a game of domino, one really has to be careful on which pieces one would like to touch.

Once the employed, at least the ones that riped the fruits, received their pay hike, of course they would be happy. The same cannot be said for business owners and unemployed others. And trust me, most of business owners are not multimillionaires; a majority of them are simply trying to make a living too. Higher salaries increase cost for the affected employers. Money does not grow on trees and so, with greater wages to be paid, employers cannot afford to hire more people.

Please do not get me wrong. It is not always wrong to pay individuals with high wages. If a person is capable, the person deserves every one bit of it. It is productivity that determines wages. A policy that pays somebody extra for something trivial, something that too many people could do better or cheaper than him is a bad policy and this most of the times includes minimum wage policy.

And where does this lead?

One of the direct results is the less employment opportunities. The impoverished that require jobs are denied of opportunities because of a policy that benefits a certain section of the society at the expense of another group.[1]

For those those that believe opposition to minimum wage is governed by cold rationale, do kindly explain to me this: what about the unemployed? Are the unemployed expendable?

How does opposition to minimum is colder than a policy that robs many from employment opportunities while the beneficiaries of the policy enjoy higher wages that do not reflect productivity?

Where is the morality of minimum wages when it keeps the improvised from gaining employment? Where is the morality of such policy when it denies decent people from employment opportunities?

For those that fight for minimum wages and stand to benefit from it, this is where selfishness, instead of sharing the bench with supporters of free market, is the minimum wages proponents’ best friend.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] Note — minimum wage policy may increase employment under specific conditions but we usually face the typical model where minimum wage imposed above equilibrium leads to increased unemployment. Under a monopsony model, I would to a certain extent support minimum wage to correct imperfection in the market.

Categories
Liberty

[1281] Of o’er land of the free

O say, can you see, by the dawn’s early light,
What so proudly we hailed at the twilight’s last gleaming,
Whose broad stripes and bright stars, through the perilous fight
O’er the ramparts we watched, were so gallantly streaming?
And the rockets’ red glare, the bombs bursting in air
Gave proof through the night that our flag was still there;

O say, does that star-spangled banner yet wave
O’er the land of the free and the home of the brave?

— The Star-Spangled Banner.

Categories
Economics History & heritage

[1280] Of the European Exchange Rate Mechanism, the Asian Financial Crisis and the unholy trinity

Almost 30 years ago, the European Exchange Rate Mechanism (ERM) was established to promote monetary stability among 12 members of the European Commission (EC). All participating states agreed to limit the variability of respective currency to 2.25% band on either side of a central rate. Later members were allowed to have their exchange rate to gyrate within a 6.00% band from a central rate. The ERM was a tool to converge the monetary policy of the 12 states and eventually, the adoption of a monetary union. Between 1992 and 1993, the ERM suffered a crisis that in a way, is similar to the Asian Financial Crisis that began exactly a decade ago.

In 1989, an EC committee laid out a plan to realize the European Monetary Union (EMU). The EMU would have an European central bank to manage a unified monetary policy for the EC. This ultimate convergence of a myriad of independent monetary policies would abolish all national currencies and eventually create an EC-wide currency.

Before the EMU could be established, all 12 members of the EC (namely, Germany, France, United Kingdom, the Netherlands, Belgium, Italy, Spain, Denmark, Portugal, Ireland, Luxembourg and Greece) had to approve the plan. In 1992, the Danish people almost rejected the EMU in a referendum while opinion poll in France was unconvincing. This brought the EMU into question, hurting confidence in the EMU and the ERM.

Currency speculators started to short sell various European currencies, betting for currencies devaluation. Regardless whether it was a self-fulfilled prophecy or a natural outcome, massive devaluation occurred and that forced many countries to drop out of the ERM band. Many fought but all lost. The British pound was one of them. The Malaysian central bank, the Bank Negara tried to defend the pound but it proved to be a USD4 billion futile adventure. In my opinion however, none other fought more valiantly mad than Sweden.

In effort to stop devaluation of the krona dead on its track as well as to teach the speculators a lesson, the Sveriges Riksbank, the central bank of Sweden, raised interest rate up to an astronomical 500%. This shocked a lot of people, including the speculators. The crazy monetary policy worked for awhile until the economy started to so a sign of stress. With a long run rate like that, not too many economy would survive long and so Sweden relented, quit the battle and forced to float the krona.

The story repeated itself in other European countries. The central banks of Portugal and Italy initially tried to defend their currencies only later to admit defeat. About five years later, similar story struck Southeast Asia.

On July 2 1997, after sustained pressure of devaluation, the Bank of Thailand gave up the battle to defend the baht. As history has recorded, the baht lost more than half of its value, from 26 baht to a US dollar in late June 1992 to 55 baht per US dollar in January 1993.

A professor of mine told my class that in late 1997, he did not understand what was going on but he did watch everything slipped away. He continued by saying nobody knew what exactly caused the crisis. But ten years after Camdessus looked on Suharto, we might have learned a thing or two from the crisis.

For me, it offers a real life example of the unholy trinity. The unholy trinity is the desire to have a pegged currency, free flow of capital and independence in monetary policy. One can only have two of them, not all three. When there is a violation of the rule, trouble looms.

In case of Sweden, the Sveriges Riksbank wanted all three. Under intense pressure and eager to move forward, the peg had to go. For Malaysia, in order to move on, free flow of capital had to go. Or rather, was chosen to be expendable. The Southeast Asian country imposed capital control in at the peak of the crisis and pegged its currency to the US dollar in 1998.

Of course, that is not the only lesson that could be learned from the era of irrational exuberance. But if the next currency crisis strikes, would anybody remember the lessons learned in the past?

Categories
Activism Environment Photography

[1279] Of the tapir to hike the Klang Gate

It is two hours to Monday and I am already suffering from Monday blue. I browsed through my album and this tapir lightened things up a bit for me.

Some rights reserved. By Mohd Hafiz Noor Shams

The Path Finders of the Malaysian Nature Society is organizing a day hike to Bukit Tabur at the Klang Gate some time in the coming September. I am responsible to organize the trip and so, currently, I am looking at September 8, the last Saturday before the Ramadan begins.

At the same time, I am hoping for a haze-free day. Kuala Lumpur last Friday was shrouded with haze and that worries me.

In the meantime, I need to do some recon (interestingly, some people call it recce) work in the area and am planning to do it on July 21 and that is a Saturday. Anybody want to join me for a day hike in July?

Categories
Activism Environment Photography

[1278] Of visiting Kota Damansara Community Forest Park

I finally visited the Kota Damansara Community Forest Park yesterday. The Malaysian Nature Society was organizing an environmental program for girl guide brigades from several schools around Kuala Lumpur and Society needed hands. I helped out and in doing so, I fulfilled a promise that I made to myself not too long ago.

When I first saw it, I was impressed. Whether it is a large pond or a small lake, the view is marvelous in the morning with slight mist in the air, with dead tree trunks coming out from the bottom of water bowl. Only the sky was uncooperative by being cloudy but with only a little hint of turquoise.

Some rights reserved. By Mohd Hafiz Noor Shams.

Closer inspection however brought me disgust. Trash was everywhere. Instead of being protected as the oldest forest reserve in Malaysia, at the moment, it is a mini-dump yard.