California's SB3, the Minimum Wage Hike From Hell

California has embarked upon a dangerous experiment. The Democrats who secured total control of the statehouse have been the most productive group of legislators at passing bills in the last 50 years. Most of these bills were passed stealthily to avoid media scrutiny. The last minimum wage hike was rammed through without much media attention. The same with the Sick Leave Law that went into effect in July of 2015. These two new costs, when combined with the federal ACA have increased the cost of labor roughly 35% overnight. None of these assaults on California businesses were sensibly staggered, nor was the business community even consulted.  It’s as if the feeling that exists under the Capital building is a childlike free-for-all to greedily get as much vote-buying, pro-labor legislation in before the window closes. 

And now comes SB3, which is to amend the last minimum wage and take it higher, much much higher, for the entire state. Instead of the minimum wage going to an already predetermined $10/hr in January, it will instead take it to $11/hr and then in 2017 to $13/hr, after which it will be attached to an ongoing CCPI increase, and eventually closer to their arbitrary and subjective, fairy dust idea of a $15/hr 'living wage'. 

There are, of course, many enormously debilitating problems with this. 

1) Interstate arbitrage. 

First, since we are no longer a buy local economy, and increasingly consumers' buying habits are performed online, Amazon, Target, and Wal Mart will move all their distribution centers out of the state to a low-cost state like Arkansas. As the costs for everything in the state begin to soar, California consumers will look outside the state for both discretionary spending as well as non-perishable consumer goods; things like toothpaste, blenders, shower heads etc. Consumers will still shop for fresh groceries within the state, but that's a product of necessity. Most shopping will be moved to take advantage of this arbitrage.

2) Commercial real estate.

Retail will be destroyed. As the arbitrage previously mentioned accelerates when costs inevitably rise, vacancies will increase as businesses close. This will affect malls the most, which already place tremendous costs on retail businesses without all this legislation. Once the wage goes north of $13 to $15, that is nearly a 100% increase in the cost of labor in a mere five years time!  Labor costs being the number one expense on most retail balance sheets, selling prices will have to adjust, accompanied by layoffs, as the existing models become unsustainable and instead businesses find it more profitable to close,  terminate leases, and leave the state. 

3) Renters and the elderly. 

As the cost of goods go up (they already have due to this last wage hike) in Wal Mart and Target and most big box stores, those hurt the most are renters, whose landlords must increase rents in a cascading effect as all asset and commodity cost prices must rise. Only if you are on a fixed rate mortgage will you find relief as your debt will become diminished along with government debt (which is why the legislators want these laws). The elderly on fixed incomes or SSI will also be crushed in the wake of inflation. 

4) Mom and pops.

Small businesses with thin margins that employ a lot of labor will slowly get squeezed as their profits evaporate, even with price hikes. Perversely, as the government causes prices to rise, all that will be left are the big multinational companies that can leverage their out-of-state profits to subsidize their in-state overhead. Mom and pops trapped in the state will eventually go away.

5) Businesses lose the training wage.

Minimum wage hikes are a tax on the productive. Every time the base floor wage is artificially raised, there exists less and less separation between good performers and poor performers. As socialism always does, everyone gets shoved into the middle. Why? Because it’s “fair”. But it’s never fair for the productive people who worked hard and put in their time on a job, giving the company years of loyalty. The new walk-ons unfairly get an undeserved wage that should have gone to the most productive employees and businesses lose the ability to exercise discretion on how they reward excellence. Thus, customer service suffers as the productive employees lose the incentive to even try anymore. It’s no longer worth it, as it is demoralizing to see people without any experience at all earn roughly the same wage as them. The training wage now gone, businesses will have to suffer with poorer and poorer performance. This will lead to incentivizing businesses to either leave the state or automate, and California already has a higher national unemployment rate than the nation as a whole. Not good.

So then we must ask ourselves why. 

Why are the legislators so keen on doing any of this? The answer is unsurprising. The government can get more revenue by increasing payroll taxes. It can also shore up its poorly managed pensions and overall debt shortfalls by robbing from the private sector with higher sales tax receipts. In addition, there is a political populist move of pandering. Very simply, there are more voting units as 'workers' than there are as employers. Legislators will look like heroes even while they are destroying society by liquidating government debts via inflation on the very backs of the people they pretend they are helping. More and more businesses will stay out of the state until this resolves nationally and wages rise more uniformly across state lines, in a less aggressive, less manic natural approach over time. Until then, if SB3 passes, there will be years of pain until equilibrium is reestablished, which may never happen as the state has always been unaffordable.

California has embarked upon a dangerous experiment. The Democrats who secured total control of the statehouse have been the most productive group of legislators at passing bills in the last 50 years. Most of these bills were passed stealthily to avoid media scrutiny. The last minimum wage hike was rammed through without much media attention. The same with the Sick Leave Law that went into effect in July of 2015. These two new costs, when combined with the federal ACA have increased the cost of labor roughly 35% overnight. None of these assaults on California businesses were sensibly staggered, nor was the business community even consulted.  It’s as if the feeling that exists under the Capital building is a childlike free-for-all to greedily get as much vote-buying, pro-labor legislation in before the window closes. 

And now comes SB3, which is to amend the last minimum wage and take it higher, much much higher, for the entire state. Instead of the minimum wage going to an already predetermined $10/hr in January, it will instead take it to $11/hr and then in 2017 to $13/hr, after which it will be attached to an ongoing CCPI increase, and eventually closer to their arbitrary and subjective, fairy dust idea of a $15/hr 'living wage'. 

There are, of course, many enormously debilitating problems with this. 

1) Interstate arbitrage. 

First, since we are no longer a buy local economy, and increasingly consumers' buying habits are performed online, Amazon, Target, and Wal Mart will move all their distribution centers out of the state to a low-cost state like Arkansas. As the costs for everything in the state begin to soar, California consumers will look outside the state for both discretionary spending as well as non-perishable consumer goods; things like toothpaste, blenders, shower heads etc. Consumers will still shop for fresh groceries within the state, but that's a product of necessity. Most shopping will be moved to take advantage of this arbitrage.

2) Commercial real estate.

Retail will be destroyed. As the arbitrage previously mentioned accelerates when costs inevitably rise, vacancies will increase as businesses close. This will affect malls the most, which already place tremendous costs on retail businesses without all this legislation. Once the wage goes north of $13 to $15, that is nearly a 100% increase in the cost of labor in a mere five years time!  Labor costs being the number one expense on most retail balance sheets, selling prices will have to adjust, accompanied by layoffs, as the existing models become unsustainable and instead businesses find it more profitable to close,  terminate leases, and leave the state. 

3) Renters and the elderly. 

As the cost of goods go up (they already have due to this last wage hike) in Wal Mart and Target and most big box stores, those hurt the most are renters, whose landlords must increase rents in a cascading effect as all asset and commodity cost prices must rise. Only if you are on a fixed rate mortgage will you find relief as your debt will become diminished along with government debt (which is why the legislators want these laws). The elderly on fixed incomes or SSI will also be crushed in the wake of inflation. 

4) Mom and pops.

Small businesses with thin margins that employ a lot of labor will slowly get squeezed as their profits evaporate, even with price hikes. Perversely, as the government causes prices to rise, all that will be left are the big multinational companies that can leverage their out-of-state profits to subsidize their in-state overhead. Mom and pops trapped in the state will eventually go away.

5) Businesses lose the training wage.

Minimum wage hikes are a tax on the productive. Every time the base floor wage is artificially raised, there exists less and less separation between good performers and poor performers. As socialism always does, everyone gets shoved into the middle. Why? Because it’s “fair”. But it’s never fair for the productive people who worked hard and put in their time on a job, giving the company years of loyalty. The new walk-ons unfairly get an undeserved wage that should have gone to the most productive employees and businesses lose the ability to exercise discretion on how they reward excellence. Thus, customer service suffers as the productive employees lose the incentive to even try anymore. It’s no longer worth it, as it is demoralizing to see people without any experience at all earn roughly the same wage as them. The training wage now gone, businesses will have to suffer with poorer and poorer performance. This will lead to incentivizing businesses to either leave the state or automate, and California already has a higher national unemployment rate than the nation as a whole. Not good.

So then we must ask ourselves why. 

Why are the legislators so keen on doing any of this? The answer is unsurprising. The government can get more revenue by increasing payroll taxes. It can also shore up its poorly managed pensions and overall debt shortfalls by robbing from the private sector with higher sales tax receipts. In addition, there is a political populist move of pandering. Very simply, there are more voting units as 'workers' than there are as employers. Legislators will look like heroes even while they are destroying society by liquidating government debts via inflation on the very backs of the people they pretend they are helping. More and more businesses will stay out of the state until this resolves nationally and wages rise more uniformly across state lines, in a less aggressive, less manic natural approach over time. Until then, if SB3 passes, there will be years of pain until equilibrium is reestablished, which may never happen as the state has always been unaffordable.