Moneybeat - Treasury bonds, and the minimum wage

MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: Financial analyst and advisor David Bahnsen joins us now from New York City. David, good morning.

DAVID BAHNSEN, GUEST: Well, good morning, Nick. Good to be with you.

EICHER: I want to begin with a story that maybe will strike the listener as overly technical. But in some of the financial press, I read this story as evidence of inflation may be firing back up and that is the story of the rise in treasury bond yields.  

Again, can be pretty technical when you say, let’s talk about treasury bond yields, but it’s about what some are saying that it means.

Specifically, the yield on a 10-year Treasury Bond in the space of a few weeks shot up 50 basis points—that is, half a percentage point. Ten-year Treasurys had been around one percent and they’d hit 1-and-one-half percent last week before falling back a bit before the weekend.

Can you explain this in very simple terms—when we encounter this story—what has happened and what in our current economic context does it mean?

BAHNSEN: It’s interesting. I don’t think the story of what happened in bond yields this week needs to be overly technical. I think it’s actually a really simple story and I hope the way I’ll explain it right now for listeners will be thought of as simple. 

There’s a lot of hay being made of the fact that a few months ago the 10-year bond yield, the amount of money you would get to loan the government your money for 10 years was 1 percent and this week it hit a whopping 1.5 percent. And so a lot of people said, “Oh, see, look, it means inflation’s coming back.” But I want people to stop and think about that: If you really believed inflation was coming back three, four, five, six percent inflation, would you loan your money to the government at one and a half percent either? 

I mean, one and a half and one are the same thing in the context of four, five, or six percent inflation. And what I mean by “same thing” is they both say there’s no inflation. 

They both say there’s no fear of inflation. 

The issue here is really important. One year ago, before the pandemic had broken out—and now we’re getting to the point where the pandemic was actually breaking out a year ago—but just a tiny bit more than one year ago, the 10-year bond yield was the exact same as it is now. 

So I think that’s the story. We had a deflationary environment a year ago and we have a deflationary environment now. And in between we had a really deflationary environment that now has reflated back to the same deflationary place it was one year ago. 

So, I do think it created a lot of volatility in the stock market this week and I do think that it’s a healthy thing to see bond yields going up a little bit because investors should be demanding a little more yield to loan their money for such a long period of time. But, ultimately, besides short term market volatility, I think it actually is telling the same story, not a different story, which is that investors right now, borrowers, lenders, are not concerned about inflationary pressures in this economy, Nick.

EICHER: Let’s also touch on the Covid relief bill—the $1.9 trillion bill—this weekend it passed the House and it’s on its way to the Senate. 

We are getting an education on the rules of the Senate, by the way, in this 50-50 Senate where one vote makes literally all the difference. 

And so we’re learning the difference between “budget reconciliation” and regular order where budget-based bills need only a simple majority vote—50-plus-one—instead of regular order, needing 60 votes to end debate and bring a final vote. That’s what we mean when we hear about a Senate filibuster. It’s a way to kill a bill with a minority and it’s the Senate’s unique way of ensuring bipartisanship.

So in the Senate, this Covid package will proceed under budget reconciliation and there’s a bit of intrigue around that, but otherwise any surprises to you?

BAHNSEN: No, there’s no surprises. 

And what you probably are referring to by intrigue is that at the Senate level, the minimum wage piece is going to have to be taken out. They are determined to get this thing through on budget reconciliation. And so the budget reconciliation bill allows it to be filibuster proof, but the Senate parliamentarian rightly ruled and predictably ruled this last week that the minimum wage legislation does not belong in a budget reconciliation bill. 

So, therefore, they’ll take that part out. But more or less, I think the rest of it’s going to stay in. I think that the moderate Democrat senators are content to have gotten some of these things out like minimum wage. And, other than that, I don’t think they’re going to have much push back. So, maybe $1.8 trillion, but it’s something very close to the $1.9 [trillion] is going to be the bill and it will be passed in short order.

EICHER: Yes, the intrigue I meant was on the topic of minimum wage and I’d like for you to spend a little time on this before we go. It’s not likely to happen this go-’round. But the topic is on the table. What is a living wage? Why isn’t it good for the government to set a higher wage that rewards people who work 40 hours a week? Help us to understand the minimum wage debate.

BAHNSEN: So, there’s two different subjects going on here. Number one is the efficacy and economic wisdom of minimum wage laws to begin with. And one is the federal input, the concept of federal legislation around price-setting in the labor market. 

First, I just want to put my cards on the table that I do hold to the Milton Friedman school of thought here that minimum wage laws are a negative for the wage earner. 

And I believe that primarily what we’re faced with now is a conversation that our whole society seems willing to have, including those who agree with me on this issue, that this is a debate about ability to make a living wage. When, in fact, what this ought to be is a discussion about teenage employment. 

I don’t believe that most minimum wage jobs are held by people who are trying to put food on the table. And the reason I don’t believe that is because no one believes it. It’s particularly offensive in light of new data that’s come out that shows exactly what the age demographics are of people in these different wage tiers. I support teenage employment because I think it builds character. I think it builds work ethic. I think it builds skills. 

I just don’t understand why we’re not discussing it that way. The minimum wage law is a war on teenage employment. Period. And if we think that’s a good thing, we don’t want teenagers having jobs, they can sit around playing video games more and so forth, then we’ll deal with the social cost of it. But I think it’s preposterous.

But, instead, we debate on different levels and I think it is entirely ineffective. Now, it is accurate that I do not believe that government intervention into any price control is a good idea. And wages are a price control. So, I don’t think the government should set the price of books. I think the housing crisis gave us a pretty good look at how it works out when the government intervenes heavily into housing as social policy. And I don’t believe that we should be setting an hourly wage for employees.

However, the second front becomes the bigger issue. 

I could disagree with the state of Mississippi or the state of New York setting their own minimum wage, but I absolutely agree that they have the right to do it. What I don’t agree is a federal legislation that makes Mississippi and New York set their minimum wage at the same level. If you are claiming that the idea is to anywhere you have the minimum wage bring people out of poverty. First of all, $15/hour doesn’t do it. Second of all, what that means to bring someone out of poverty is going to be different in Manhattan than it is in Mississippi. And anyone who denies that is lying. They’re not being intellectually honest. And I think that’s a far more important thing in this discussion is for us to reload our understanding of basic economics where price mandates become inefficient in the economy and then to reload our understanding of federalism. This is not the jurisdiction of the federal government to intervene into what individual states choose to do and not do.

EICHER: David Bahnsen, financial analyst and advisor, joining us every week here on The World and Everything in It. David, I hope you have a great week this week. Thanks so much.

BAHNSEN: Thanks so much, Nick.

(AP Photo/J. Scott Applewhite) Activists appeal for a $15 minimum wage near the Capitol in Washington, Thursday, Feb. 25, 2021. 

WORLD Radio transcripts are created on a rush deadline. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of WORLD Radio programming is the audio record.