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What We Read Today 10 September 2015

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries (and sometimes longer ones) of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

This feature is published every day late afternoon New York time. For early morning review of headlines see "The Early Bird" published every day in the early am at GEI News (membership not required for access to "The Early Bird".).

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Today we have an extended discussion of articles on New York's proposed increase to $15 minimum wage for fast food workers.


Articles about events, conflicts and disease around the world

Global

  • Exodus (The Economist)  This article frames the discussion in a global perspective and compares this mass migration to others in the past.  Both the economic stresses and opportunities are outlined.
  • Global food prices fall at fastest rate in seven years (BBC News)  Last month saw a 5.2% fall in global food prices, the biggest drop in seven years, according to the UN.  Its Food and Agriculture Organization (FAO) saw monthly falls in all major commodities, from milk and vegetables to oils, sugar and cereals.  Food producers are being hit by slowing demand in China and a Russian embargo on Western products.  The European Commission is to release €500m ($557m) to help Europe's farmers. 

U.S.

  • Iran Nuclear Accord Survives U.S. Senate Test in Win for Obama (Bloomberg Politics)  The Iran nuclear agreement survived a key test in the U.S. Senate Thursday as Democrats blocked a Republican effort to scuttle the accord.  Democrats kept Republicans’ disapproval resolution from advancing in a 58-42 procedural vote, with 60 required.  The Senate will hold further votes on the Iran pact to give Democrats a chance to “change their mind next week, hopefully after they hear from their constituents”, said second-ranking Republican John Cornyn of Texas. The Senate’s agenda “will be all-Iran next week”, he said.
  • N.Y. Will Be First State With $15 Minimum for Fast-Food Workers (Bloomberg)  New York Governor Andrew Cuomo announced Thursday that his labor commissioner had approved a recommendation that the wage floor be raised to $15 by 2018 in New York City and by 2021 in the rest of the state for more than 150,000 workers at large chain restaurants.  Cuomo also said that he’ll push for the $15 minimum to be expanded to all industries, a move that would require legislative approval. The plan heralds “a new economic contract with America,” the Democratic governor said.  See next article.
  • Common Food & Labor Cost Percentages (Houston Chronical)  Fast food restaurants typically spend about 25% of revenue on labor.  That means that the increase in minimum wage from the current $8.75 an hour to $15 would increase the average food cost to the customer of a fast food restaurant by about 20%.  Included in the increase is the preservation of a 6% operating margin on gross revenues.  That means a $5.00 order today will cost $6.00 three years from now if the other 75% of expenses are unchanged.
  • Higher Fast-Food Wages: Higher Fast-Food Prices (The Heritage Foundation)   This analysis concluded that for every 1% increase in price a fast food restaurant would lose up to 1% in revenue.  (The data quoted from many sources averaged to -0.94% revenue change - with nearly identical median.  But the range of data from various studies referenced was from -0.13% to -1.88% so there is little consensus).  Econintersect:  Before reaching the conclusion that a 20% increase in prices would produce a nearly 20% drop in volume, one must recognize the great uncertainty when extrapolating a change determined over a small interval to a large interval - errors in the initial estimate are multiplied.  So, even if you accept the average ratio near 1%, if there is an uncertainty of +/-0.2% in the 1% then the uncertainty in a change of 20% is +/-4%, and uncertainty of +/- 0.5% for 1% change yields +/- 10% uncertainty in volume decline for a 20% price increase.  Bottom line:  We would suggest that we won't know the impact of a $15 minimum wage until a year or two afetr it is implemented.  Caution:  An important point made in the Heritage article is that as sales decline other fixed expenses do not decline in general which reduces the small margin and creates a collapse spiral for the business.  If sales decline then fixed expenses become a larger portion of revenue and variable expenses must be reduced to survive.
  • It’s officially impossible to afford NYC rents on the minimum wage (Daily News)  A study found there is not one Big Apple neighborhood where a worker earning the state minimum can afford the median rent.  In fact, a New Yorker would need to make at least $38.80 an hour — or more than four times the $8.75 minimum wage — to afford the city’s median asking rent of $2,690, if the worker is shouldering the rent alone, according to the real estate website StreetEasy.
  • False Start (The Economist)  The Economist argues that there should not be rate hike until there is some level of inflation to support it.  "For months Fed statements have declared that inflation will soon return to 2%. There is little harm in waiting to be sure."  Econintersect:  If The Economist had chosen to paraphrase the reported words of a colonial commander at the Battle of Bunker Hill ("Don't shoot until you can see the whites of their eyes") they might have concluded that at this point the enemy is so distant that it cannot be observed if they even have eyes.

Germany

  • Migrant crisis: Germany says EU quota plan not enough (BBC News)  EU plans for member states to accept 160,000 new asylum seekers are only a first step in solving the migrant crisis, Germany's vice-chancellor says.  Sigmar Gabriel said 450,000 people had arrived in Germany so far this year, with 37,000 in the first eight days of September.  Tens of thousands, mainly Syrians, have pushed north in recent weeks.  Serbian TV says a record 5,000 migrants have arrived at the border with Hungary in the past 24 hours.

Russia

Japan

  • Japan floods: City of Joso hit by 'unprecedented' rain (BBC News)  Widespread flooding and landslides in north-east Japan have forced more than 90,000 people to abandon their homes. The city of Joso, north of the capital, Tokyo, was hit by a wall of water after the Kinugawa River burst its banks. Helicopter rescue teams have been plucking people from rooftops.  The rains come a day after a tropical storm brought winds of up to 125km/h (78mph) to central Aichi prefecture.  The chief forecaster at the Japan Meteorological Agency (JMA), Takuya Deshimaru, said that the rainfall was "unprecedented" for that part of Japan.

Trickle-Down Economics Must Die, Long Live Grow-Up Economics (Scott Santens, Medium)  For over thirty years we’ve treated something as fact which is actually false. Economists we trusted to know better, didn’t, and so people have suffered and continue to suffer. This pernicious economic myth is the idea that a rising yacht lifts all tides, or as more popularly described, “trickle-down economics.”  Income inequality is a significant factor in slowing growth, according to the IMF:

income.distribution.GDP.growth


If You Own a Pitchfork, You Will Grab It When You See This Chart (Jukia Lurie, Mother Jones)  In 2014, Wall Street's bonus pool was roughly double the combined earnings of all Americans working full-time jobs at minimum wage.  Read the article for all the caveats.

wall.street.bonus.vs.min.wage

Other Economics and Business Items of Note and Miscellanea

  • New Species in Human Lineage Is Found in a South African Cave  (The New York Times, MSN News)  Over 1.550 fossilized bones belonging to at least 15 individuals are the subject of a report after two years of research by more than 60 scientists.  Discovered in a South Africa cave in 2013, the fossils are believed to be the remains of an early human relative that lived up to about 2.8 million years ago.  The age of the fossils has not been determined but geologists have estimated the age of the cave to be 2.8 million years or less.  This prehuman species was about five feet tall and weighed about 100 pounds.  It had a small brain, about 1/3 the size of a modern human, curved fingers indicating being adept at climbing and legs and feet "virtually indistinguishable from those of modern humans", indicating the species was well suited for long distance, upright walking.  For more detail, including more about skepticism regarding the interpretation of the researchers, see Mysterious New Human Species Emerges from Heap of Fossils (Scientific American).
  • National Geographic titles to be absorbed by Murdoch media empire (RT)  Hat tip to Doomstead Diner via Twitter.  National Geographic’s media assets, run by a nonprofit founded in 1888, will become a profit-generating arm of 21st Century Fox. Critics worry that the partnership will harm scientific research and the magazine’s editorial integrity.  Fox will own 73% of the new media entity with National Gepgraphic retaining 27%.
  • S&P Smacks Down a Big Argument for Active Management (ThinkAdvisor)  Even funds focused on inefficient sectors like small-cap and emerging markets fail to consistently outperform their passive counterparts.  For example, over the past three, five and 10 years ended June 30, 2015, less than 27% of actively managed small-cap funds outperformed their benchmarks. The longer the time period, the lower the percentage of outperformance.

fed.funds.sp.profits


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