Political economics

On Tuesday, November 16th the Federal Reserve, under the Chairmanship
of Alan Greenspan, announced another quarter-percentage rate, which
brought the Federal Funds rate back to 5.5 percent, the lending rate of
a year ago. Greenspan has been a champion of using the Federal Reserve’s
power to manipulate interest rates to manage our economy and keep
inflation under control.

Tuesday’s rate hike forces changes in the prime lending rate charged
by banks, thus increasing most interest rates — from corporate
borrowing to mortgage loans. Greenspan believes that increasing the cost
of money slows down spending and dampens the inflationary pressure of a
growing economy and a high priced stock market.

At the other end of Washington, D.C., the U.S. Senate, in a move that
runs counter to Greenspan’s notion of keeping inflation under control,
voted to increase the minimum wage. On a party line roll call vote of 54
Republicans to 44 Democrats the U.S. Senate increased the minimum wage
in three steps to $6.15 per hour by March 1, 2002. No one looking at
the vote, however, should make the assumption that Democrats have had a
change of heart and now oppose raising the minimum wage. On the contrary
they had proposed their own plan, which would have raised the minimum
wage to $6.15 in only 13 months.

While Democrats will try and make raising the minimum wage a year
2000 political issue, in many parts of the country it is a non-issue. In
California most fast food restaurants are already paying well over
minimum wage. According to the manager of the Santa Barbara In-N-Out
hamburger restaurant, In-N-Out pays their employees a dollar an hour
over what their competitors pay. That policy results in a large enough
applicant pool, which allows them to hire enthusiastic, energetic and
motivated people. In fact, he mentioned that in San Francisco, where
unemployment is almost nil, In-N-Out is paying their employees $10 an
hour.

On the other hand a story by Peter Cleary in “Investor’s Business
Daily” describes the plight of Ratcliffe’s, Inc., a family owned
bookstore chain in Oklahoma City. Richard Ratcliffe stated, “I do not
have the luxury of passing on price increases to my customers to offset
a pay raise mandated by Washington politicians.” Thus, thanks to the
folks on the Potomac, Mr. Ratcliffe is looking forward to paying more to
hire employees and paying more to borrow money to buy the books he
sells. That’s what might be called a double financial whammy.

While the U.S. Senate has the power to vote to change the minimum
wage and the Federal Reserve has the power to change interest rates,
hopefully neither would support the wacky policy proposed by Marvin
Goodfriend, a senior vice president at the Federal Reserve Bank of
Richmond. Mr. Goodfriend floated a policy trial balloon in a speech to a
Federal Reserve System conference in Woodstock, Vt., recently. He
proposed that the longer cash stays in circulation the less it should be
worth. What Goodfriend suggested is that all U.S. currency “should
include tracking devices that let the government tax private possession
of dollar bills,” according to
WiredNews.

Goodfriend argues in a 36 page paper that what he calls a “carry tax”
would keep more money in banks thus discouraging hoarding and stopping
black market and criminal activities. In fact he goes on to predict that
this “tax” would help maintain economic stability during “deflationary
periods when interest rates hover near zero.” I don’t know which planet
Goodfriend has been living on, but I don’t remember when interest rates
hovered near zero in the last 60 years.

Although Goodfriend’s proposal has been roundly criticized by members
of Congress and other economic experts, it’s pretty obvious that there
are too many people in government at the federal and local levels who
want to get their hands on our money, make our money worth less, or even
stop us from accessing our own money.

The growing inclination of cities to ban banks from charging
non-customers a fee for the use of their ATM machines was dealt a
serious blow when a federal judge in California granted the banks’
request for a preliminary injunction against the cities of San Francisco
and Santa Monica this week. The case was brought by two banks and the
California Bankers Association after the voters of San Francisco
approved a referendum and the city of Santa Monica passed a local
ordinance to stop banks from collecting a fee when a non-customer uses a
bank’s ATM machine.

With the passage of these ordinances two of the biggest banks in
California, Wells Fargo and Bank America, retaliated and now reject bank
cards from other banks, thereby only allowing their own customers to
withdraw cash from their ATM machines. Although U.S. District Judge
Vaughn Walker ruled that “the ordinances are likely to be invalidated as pre-empted by
federal law,” the banks’ policy will remain in effect until Judge Walker
makes his final ruling.

This issue is being fought in the courts on the basis of whether
local governments can set fees on federally regulated banks. But there
is a far more compelling question to be answered. Can any government
prohibit an industry from charging a fee for a service it provides? In
the cities of San Francisco and Santa Monica, it has become almost
impossible for anyone, tourists and those residents willing to pay a
fee, to withdraw their own money from a convenient ATM machine, unless
they have an account with that bank. What’s next for the cities of San
Francisco and Santa Monica to regulate? If government can set bank fees
to zero, why can’t they set the price of milk, the price of gasoline, or
the price of shoes to zero?

While it appears that the Federal Reserve believes it can fine tune
the economy and keep it growing, many other forces affect economic
stability. Government regulation does not produce innovations such as
the ubiquitous ATM machine; government bans make them less accessible.
Government pricing doesn’t give San Francisco college kids the
opportunity to make $10 an hour flipping burgers; a healthy growing
economy does. A government tax on the value of the money in our wallets
won’t keep our economy stable; it will change the way most Americans
view their money, leading to unexpected financial instability.

Economic cycles come and go. Anything that government does is usually
after the fact and in most instances exacerbates the problem. In all
things economic, there’s no free lunch and when it looks too good to be
true, you can be sure it’s false. Be wary of the government’s promise of
a chicken in every pot. The last time that was on the political menu
Americans suffered a depression that only ended with World War II.