Push for $15 Minimum Wage is Economic ‘Suppressant,’ Says NIC Keynote Speaker

by Jeff Shaw

By Matt Valley

DALLAS — The theory behind the big push by many local and state governments for a $15 hourly minimum wage is that a sizable pay hike for low-wage workers will boost consumption and reduce employee turnover.

But Richard Fisher, former president and CEO of the Federal Reserve Bank of Dallas, describes the well-intentioned effort as an economic “suppressant.”

Some workers will get displaced as businesses increasingly look for ways to automate systems, according to Fisher, who stepped down from his position with the Federal Reserve Bank of Dallas in March 2015.

“People will search for alternative inputs because the cost of labor is the number one cost affecting a business,” explained Fisher. “We’re a service-sector oriented economy. The manufacturing sector in the United States represents 11 percent of our output. The rest comes from the service sector.”

In short, Fisher said the push for a $15 hourly minimum wage could ultimately “backfire” on low-wage workers as employers leverage technology to replace that group to the degree they can.

Fisher’s comments came during a question-and-answer session following his keynote address on Thursday afternoon, March 10, at the 2016 NIC Spring Investment Forum. The three-day conference, which wraps up March 11 at the Omni Dallas Hotel, has attracted 1,500 professionals from across the seniors housing and skilled nursing industry. The attendance was up 20 percent from last year’s investment forum.

Among the attendees are capital providers, owners, operators and developers. This year’s theme is “Shock to the System: Survive and Thrive in a Rapidly Changing Seniors Housing Health Care Model.”

To illustrate his point about how technology is altering the service sector, Fisher cited the example of Chili’s, which is part of Brinker International Inc., a casual dining restaurant company. About two years ago, Chili’s installed over 45,000 tabletop tablets across more than 800 of its restaurants. Customers can place their orders, play games and even pay their checks from the tabletop tablets.

“You would be amazed at how much efficiency now is driven through their kitchens,” says Fisher, referring to Chili’s. “Or you sit down at the table and you just push an electronic menu and you end up with what you want.”

One of Fisher’s most shocking experiences while at the Fed occurred when he interviewed a CEO of a metal vending company. He learned that one of the company’s machines in Florida accounted for $279 million a year in revenue.

Two people — an engineer and a worker who swept up the metal shavings every night — operated the machine, said Fisher. “I actually asked the question, ‘If they go to $15 an hour minimum wage, what are you going to do?’ He said, ‘I’ll get rid of the guy who is sweeping up the shavings. I have a robot that will do it much cheaper.’”

The federal minimum wage is currently $7.25 per hour, the same it’s been since 2009. But many states already exceed that amount. For example, the minimum wage in California is now $10 per hour.


Sharply Different Point of View

On the same day of Fisher’s speech, economists at the University of California-Berkeley released a study concluding that raising New York State’s minimum wage to $15 would generate a 23.4 percent average wage increase for 3.16 million workers in the state.

The current minimum wage in the Empire State is $9 per hour. Gov. Andrew Cuomo of New York has proposed a minimum wage of $15 in New York City by 2019 and in the balance of the state by mid-2021.

“This improvement in living standards would greatly outweigh the small effect on employment,” the report stated. “And the increase in wages would help reverse decades of wage declines for low-paid workers.”

While a higher minimum wage induces some automation, as well as increased worker productivity and higher prices, it simultaneously increases worker purchasing power, the researchers emphasized.

“In the end, the costs of
 the minimum wage will be borne by turnover reductions, productivity increases and modest price increases.”


Be Wary of Herd Mentality

The U.S. economy is in good shape today, better than he could have envisioned during the depths of the global financial crisis and severe recession, Fisher stated during his speech.

But Fisher sounded a cautionary note. He sees a disconnect between the pricing of financial assets such as stocks and bonds and their underlying value. His worry extends to cap rates on commercial real estate. “Warren Buffett said it best when he talked about the difference between price and value. Price is what you pay, and value is what you get.”

In short, Fisher said investors are paying “very stiff prices” for financial assets that may not be priced at the correct level relative to their underlying value. He advised the seniors housing industry to be “extremely wary.”

Fisher acknowledged the Fed’s role in helping to create this pricing bubble. “We had to save the economy when it imploded. We cut interest rates to zero at the end of 2008,” he explained.

Shortly thereafter, the Federal Reserve also expanded its purchase of U.S. Treasury securities and agency mortgage-backed securities. “By the beginning of 2009, we had doubled our balance sheet to $1.75 trillion. It’s now over $5 trillion,” said Fisher.

Those moves, known as quantitative easing, helped lower interest rates and expand the money supply. The stock market soared for several years as a result, but in the past six months has experienced a high degree of volatility.

“The volatility that we’ve engineered is now quite extreme. There’s a lot of money sloshing around in the hull of the ship of the global economy,” said Fisher. “Through our purchases at the Federal Reserve, we expanded the balance sheet of the Fed dramatically.”

“When you buy something you pay for it,” he continued. “In the case of the Federal Reserve, we bought Treasuries and mortgage-backed securities. We paid the commercial banks, the depository institutions for those instruments. And they put it back on the balance sheets of the 12 federal reserve banks. There is now $2.5 trillion of excess reserves on the balance sheet of the 12 federal reserve banks.”

All that cash in the global economy can be a blessing and a curse, emphasized Fisher. It is precisely at times such as these that Fisher likes to quote Scottish author Charles Mackay, who wrote a book titled “Extraordinary Popular Delusions and the Madness of Crowds.”

“Every age has its peculiar folly: some scheme, project or fantasy into which it plunges, spurred on by the love of gain, the necessity of excitement, or the force of imitation. Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one,” wrote Mackay.

“I tell every young economist and every young investor that comes to my office that’s the only book you need to read,” said Fisher. “It was written in 1841.”

After the Federal Reserve cut interest rates to near zero, flattened the yield curve and lowered the hurdle for discounting fewer cash flows, the herd took over, explained Fisher.

He reiterated that the herd has driven the prices of financial assets to extreme levels. “Therein lies the disconnect, in my view, between the real economy and the financial markets.”

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