Remember That What I Don’t Know Is Much Greater Than What I Know"
Some of you know the name Ray Dalio; one of his videos (only 30 minutes long, and a great introduction to broader understanding of how everything fits together) is on your Extension Resources page on Firefly. You should also know of my fascination with cycles, some short, some long. Mr Dalio has written a piece detailing some of the work he has done to understand cycles. As one of the most sustained and successful hedge funds of all time, his firm relies on such research to understand how to allocate investment funds. For you it means he draws together strands of economic theory and ties them into economic reality, in an attempt to get the "big picture".
"I believe that the times ahead will be radically different from the times we have experienced so far in our lifetimes, though similar to many other times in history."
If you only read the introduction it should help you understand that what we are going through is part of a recurring cycle; that the economics you study is useful if you are looking at detail, but needs to be put into perspective if you really want to understand what would work in today's environment, and what you face as you stretch out into the world of work (and voting for your leaders).
The writing starts here, and how far you read is up to you. If it improves your "Big Picture" understanding, then it will help you put together macroeconomic theory effectively. This could be the part that gets you to an A*. If you have aspirations to achieve an A, but are worried about getting there, just reading the introduction will provide a good pathway to better essays.
There are other resources that touch on similar themes; this is a "condensed" version, and I hope it triggers real curiosity in some of you; if it does, you will then also come to realise how limited is the thinking of some people (in government and in opposition) who purport to understand what is happening. They have never considered the line at the top of this post, which is critical to understanding how limited our own analyses are.
Very topical, in light of today's discussion about China re-balancing away from export-led growth to domestic consumption. Some of this may be too tricky to get initially, and I am happy to clarify items at the start of the next lesson; you just have to make sure the questions you ask are clear, and aren't waffly.
Coronavirus and Merkel's quest for legacy speed up German rebalancing
For years, Germany's huge trade surpluses and its hesitancy to stimulate domestic demand with substantial infrastructure spending have frustrated international organizations and European allies who argue Berlin could do more at home to support growth elsewhere.
Published by
25 Jun 2020
A coronavirus-induced plunge in German exports and a fiscal U-turn by Chancellor Angela Merkel as she seeks to cement her place in history are accelerating a long demanded rebalancing of Europe's largest economy.
For years, Germany's huge trade surpluses and its hesitancy to stimulate domestic demand with substantial infrastructure spending have frustrated international organizations and European allies who argue Berlin could do more at home to support growth elsewhere.
The trade surplus has also been used by U.S. President Donald Trump to underline his America First narrative that Germany was exploiting the United States, the world's largest economy.
But with the coronavirus pandemic disrupting trade across the globe and Merkel turning Germany's traditionally cautious fiscal policy upside down, its current account surplus - a wider measure of international flows - is shrinking fast, according to projections from its central bank and finance ministry.
There are signs that this shift could last. Merkel and Finance Minister Olaf Scholz are willing to suspend the debt brake - constitutionally enshrined rules which significantly curb German stimulus borrowing - again next year, three government officials told Reuters.
The conservative leader and the centre-left vice chancellor are also determined to strengthen the European Union at a time when its cohesion has been rocked by Britain's departure and challenges from the United States and China, the sources said.
After decades of German resistance, Merkel and Scholz are backing an unprecedented 500 billion euros of joint European debt issuance to aid member states worst hit by COVID-19 and tackle growing discrepancies in the bloc.
"Merkel is worried about two things: that a second wave of infections could force authorities to implement another lockdown and that Europe could break apart because of the crisis," said one of the officials who spoke on condition of anonymity.
After 15 years in power and with her chancellorship coming to a self-determined end with the general election next year, Merkel now has room to act more freely and think more about how history will judge her, a second senior official told Reuters.
"With Germany taking over the rotating EU presidency for six months from July, there was always the plan to breathe more life into the pledge of European solidarity," the official said.
"The coronavirus crisis accelerated this and underlined the urgency to act even more boldly now," the official added.
The German central bank expects the pandemic to slash exports by more than 13% in 2020 while imports are only predicted to fall by 7%.
"This together creates downward pressure on the trade surplus and with it the current account surplus," Bundesbank chief economist Jens Ulbrich told Reuters.
The central bank expects the latter surplus to fall below 5% of economic output this year from above 7% in 2019. This would be the lowest level since 2005 and sharply down from a peak of 8.6% reached in 2015.
"With the recovery of the global economy, the balance will increase again by 2022, but without reaching the levels of previous years," Ulbrich said.
The European Commission, International Monetary Fund (IMF) and Organization of Economic Co-operation and Development (OECD) all expect the surplus to shrink too, though to a smaller extent.
They are also unsure if the German rebalancing will last beyond the pandemic.
"Whether the effect is temporary will depend in part on the rebound in global demand for capital goods. The Chinese economy is shifting towards a more consumption-led growth model, which will reduce the demand for German exports more permanently," Andrew Barker, head of the Germany desk at the OECD Economics Department, told Reuters.
Germany's large stimulus package, financed with record new borrowing of 218.5 billion euros this year, is having a clear effect this year, but the future budget path is not certain.
Nora Hesse, a Berlin-based economic advisor to the European Commission, said German savings were likely to remain high due to its ageing population while public and private sector investment were still subdued.
"That's why the European Commission continues to recommend Germany increase its investment in the green and digital transformation of its economy, in training and education, research and innovation, as well as in housing," Hesse said.
Shekhar Aiyar, the IMF's mission chief for Germany, cautioned that a drop in the current account surplus might be temporary and recommended Berlin continue its growth-oriented fiscal policy beyond the current crisis.
The IMF sees the surplus remaining above 6 percent of GDP in the medium term, supported by growing investment income flows from large net foreign assets, Aiyar said.
As striking as German fiscal efforts to tackle the coronavirus crisis have been, Berlin will remain under pressure from international bodies and its euro zone neighbours to stay the course.
"Germany's surplus in recent years borders on mercantilism and has been a blight on the world economy," Harvard University economist Dani Rodrik told Reuters, but he added that Berlin's fiscal response to the crisis was impressive.
"Especially during the pandemic, Germany should not be a contributor to recession in the rest of the world."
(Reporting by Michael Nienaber and Rene Wagner; Editing by Toby Chopra)
Copyright (2020) Thomson Reuters. This article was written by Michael Nienaber and Rene Wagner from Reuters and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.
This article only looks at the downside of the furlough scheme, so is not the full and final judgement on its value; it can be used to illustrate how carefully any subsidy scheme needs to be planned if it is not to be exploited in an unintended way; treat the headline as designed to preach to the converted:
UK's erupting fraud scandal confirms furlough was a nonsensical mistake
It has proved unfair, distorting and regressive; we need to replace it now
We should not be surprised by a report yesterday that one in every three workers put on the government’s furlough scheme has fraudulently been asked to work when the payments are only supposed to be made to employees unable to work at all during the coronavirus crisis.
The Coronavirus Job Retention Scheme (CJRS), hastily introduced in March by Chancellor Rishi Sunak, is riddled with flaws, of which the potential for fraud was only one.
The CJRS is expected to cost taxpayers over £60 billion by the time it ends in October. So, it is right to question whether this huge sum could have been spent differently to help people more efficiently and equitably. Of course, if you throw money around, some people will benefit, and it will be popular with those who do. That does not mean it is a good policy.
What are the drawbacks? First, the scheme is subsidising employees who would or could have been covered by their firm anyhow or were not at risk of redundancy. This is what economists call the “deadweight” effect of subsidy schemes and all the evidence is that for the CJRS it is huge – perhaps up to half of all those on furlough.
Moreover, it is already clear that many of those put on furlough will lose their jobs when the scheme comes to an end. So the scheme has merely postponed the evil day, at vast cost.
Second, the scheme actively discourages work, which is an economic nonsense. It pays 80pc of a person’s wage or salary up to £2,500, if and only if the worker does not do any work. So many firms that could have gone on operating at reduced capacity will have found it pays them to claim a furlough subsidy for workers to do nothing. When the dust settles, the scheme may be found to be partially responsible for the unprecedented collapse of the economy this year.
Third is the potential for fraud, which, like deadweight costs, was a Treasury concern from the start. The thousands of reports of fraud received by HMRC may be the tip of the iceberg, since it will pay employers and workers to keep quiet.
Fourth, the CJRS distorts the labour market. Labour needs to move from sectors and firms where demand is falling to where it is rising, perhaps where there is an urgent need such as in the NHS. The scheme inhibits that. If you are paid £2,000 a month to do nothing, why would you move to a job paying less?
Fifth, the scheme is regressive and unfair. It excludes a lot of people who do not qualify, including many who need help most. And it gives most to those who are already paid most, so high-paid workers receive five times as much as those in the precariat, even supposing the latter qualify for the scheme, which many do not.
It is even more unfair to those who lose their jobs who, if lucky, receive a pittance. For low-paid workers, on the edge of unsustainable debt, losing 20pc of their income can lead to destitution, as growing queues for food banks testify.
Instead of treating some employees generously and millions of others meanly, the government should introduce an emergency basic income for everyone, which would be a far better and fairer way of easing coronavirus hardship.
Guy Standing is author of Battling Eight Giants: Basic Income Now, published by Bloomsbury in March.
An article that shows how multinationals have to embrace wider values than just profit maximisation. This is for background reading, just to show what I meant when talking about this:
Unilever vows to invest €1bn in green projects
Unilever said its €1bn 'Climate & Nature Fund' would be used to fund projects ranging from landscape restoration and carbon capture to wildlife protection and water preservation.
Alan Jope, Unilever’s chief executive, said that while the world was rightly focused on the devastating coronavirus outbreak and serious issues of inequality raised by the Black Lives Matter protests, the climate emergency should not be overlooked. “We can’t let ourselves forget that the climate crisis is still a threat to all of us,” he said.
The consumer goods giant, which owns more than 400 brands including Marmite, Dove, Comfort and Sure, said that in response to the “scale and urgency of the climate crisis”, it was also setting a target of net-zero emissions from all its products by 2039.
The company has already promised to reduce the mountain of plastic rubbish that its products generate, but Jope said it was just as important to look at the “impact they have on the planet at the start of their life” – in the sourcing of materials, as well as in their manufacture and transport.
Unilever said its €1bn “Climate & Nature Fund” would be used to fund projects ranging from landscape restoration and carbon capture to wildlife protection and water preservation. It also pledges to have a “deforestation-free” supply chain within three years, and to harness emerging digital technologies – such as satellite monitoring and geolocation tracking – to increase traceability and transparency.
Jope has warned that the company would sell off brands that could not meet its own sustainability targets. It was no longer enough for consumer goods companies to sell washing powders that made shirts whiter or shampoos that make hair shinier, because consumers wanted brands that had a “purpose” too, he said.
Last week, the FTSE 100-listed company announced that it had picked London as its home in an about-face on the company’s 2018 decision to opt for Rotterdam, which was abandoned after a revolt by British shareholders. If investors back the plan, it will bring an end to the company’s complex dual structure, a hangover from Unilever’s formation through the merger of a Dutch margarine producer and a British soapmaker 91 years ago.
This article was written by Zoe Wood from The Guardian and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.
Photo: David Potter/Construction Photography/Avalon/Getty Images
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Unless we act now to kickstart the construction industry, we may never be able to build enough homes
History shows housebuilding is hit harder by recessions than other industries, and the recovery is shallower
The housing industry is crucial to the UK - it needs 'Help to Build' if it's ever to recover from Covid
In recent months, those in Government have been besieged by pleas for help. Industry after industry is queueing up for assistance, or outright rescue.
On the face of it, the housebuilding industry would seem to be one of the lucky ones. The Government made sure to single out construction as an area that should keep working. Housing viewings were among the first wave of lockdown exemptions – leading to the grim joke that the only way to see your parents was to offer to buy their house.
Today, the builders are back at work. The crisis seems to be easing. But as a new Centre for Policy Studies paper shows, this is not the case at all.
Industry data, obtained by the CPS and confirmed via conversations up and down the supply chain, shows that builders are indeed hard at work – finishing off existing projects. But the number of foundations being dug has collapsed – one estimate is that it is currently at a sixth of the pre-crisis level.
What is happening in construction, in other words, looks very much like the start of a “W-shaped” recession – a plunge, a brief tick up as half-built homes or incomplete projects are finished, and then another fall.
This would be disastrous not only in terms of employment – the Home Builders Federation estimates that every extra home built creates roughly three jobs – but it would make Britain’s housing crisis even worse. In the wake of the 2008-9 crisis, it took six full years for the market to recover to the same level as before. And this is not a one-off: it is baked into the structure of the industry.
This is the crucial insight behind our new paper Help to Build, written by Alex Morton, the CPS’s Head of Policy and David Cameron’s former housing adviser. Housebuilding is not like other industries. The impact of recessions is sharper, and the recovery is shallower.
There are all manner of reasons for this, but the most obvious is that in a recession, people become nervous about buying new houses, and so transactions and house prices both fall.
In a normal market, this wouldn’t be as much of a problem. Prices would fall to the point where demand picked up, then rise further as demand increased. People still want houses, after all, and we certainly don’t have enough of them.
But that’s not how housing works. Builders only build when a sale is guaranteed, or as close to guaranteed as possible. If people aren’t buying, they’ll stop building.
Moreover, as house prices fall, so do land prices. Builders, having already paid for their land, need to make their money back. Instead of selling at a loss, they will – if they can afford it – hunker down and wait for the storm to pass (or rather, switch to getting planning permissions on cheaper pieces of land, or to renegotiate their newly unprofitable deals with councils).
This isn’t just a theory: it’s exactly what happened in the last two recessions. The financial shock hit. The big builders completed their existing projects, then sat tight. Many SME housebuilders, who didn’t have the same capital reserves or borrowing power, went to the wall. The supply chain was devastated. This led to further consolidation in the industry, which increased the power of the big housebuilders and slowed development by tilting the industry towards fewer, bigger sites, which are slower to build out.
And this trend is self-reinforcing. The housebuilding industry is, thanks to bitter experience, set up for exactly this kind of boom and bust cycle. Just one in five of the workers on most large construction sites actually work for the housebuilder, enabling them to scale down activity rapidly when the downturn hits, while leaving contractors out of luck.
As Alex’s paper shows, this means not only that we are not reaching our housebuilding targets – but that we may never will. Every time the downturn comes, the recovery is a little bit slower and the trough a little bit lower. If we let economic nature take its course, we would need an extraordinary period of uninterrupted growth to make up the lost output before the next crisis hits.
This is why we are suggesting an emergency stimulus package: Help to Build. The concept is simple. Each housebuilder would be given a grant – the report suggests up to £25,000 per property, or an average of £20,000, or a set percentage of the new home’s value – that it could use in whatever way it viewed best guaranteed supply. That might well take the form of an incentive to the buyer: help with a deposit, say, or an offer to buy their house via part-exchange if they are having trouble forming a housing chain.
Crucially, this grant would be tied to continuing supply across the board – not just used to make extra profits on the few profitable houses that were going to be built and sold already. Builders would have to commit to maintaining a respectable fraction of their pre-crash output levels, this year and next, or forfeit the money. And these homes could not be buy-to-let – they would only be for homeowners or affordable rent.
This scheme would be cheap: at the £20,000 average suggested, it would support the construction of 150,000 homes – enough to keep the industry and the supply chain going – for £3 billion. It is also inherently self-limiting: in the longer term, such subsidies would simply feed into inflated land prices. But in the short term, it could be crucial. The money doesn’t even have to come from central government: they could let councils borrow and then reclaim the cash over the years to come.
The housing crisis is one of Britain’s most acute economic and social problems. That’s why fixing it has been a focus of much of the CPS’s work in recent years – and an issue we will return to in the coming months. But without Help to Build, or a similar stimulus package, that task will become almost impossible.
Ludwig von Mises was the founder of the Austrian school of economic theory. To understand this article, first know that Austrian economics is one of the most free market-led theories, and second, the Austrian view is that as interest rates are the price of money, markets (i.e. supply and demand) should determine interest rates. There are some absolute gems in this piece:
Central Bankers Gone Wild: It's a New Era at the Fed
Editor's Note: We keep hearing from the Fed's defenders that the current spate of new stimulus and bailouts from the central bank are really not a big deal and are all very prudent and moderate. I asked Senior Fellow Bob Murphy to provide some much needed perspective.
Ryan McMaken: We’re in a very odd situation right now in terms of evaluating the state of the economy. We can see that there is rising unemployment, and there is likely to be a wave of missed mortgage and rent payments. Is this all just due to the government-mandated “shutdowns” or are there deeper economic issues here?
Robert P. Murphy: In economics there are no controlled experiments, so partisans on a policy dispute can both continue to claim that the evidence is on their side. That’s why Keynesians and Austrians still disagree about the “lessons” of the 1930s, or whether the Obama stimulus package created or destroyed jobs.
During the present economic crisis, I am firmly in the camp that it was not due merely to the coronavirus or even to the (counterproductive) coercive lockdowns that various governments instituted, ostensibly as a public health response. I agree with Jeff Deist, who argued back in April that “The supposed greatest economy in US history actually was a walking sick man, made comfortable with painkillers, and looking far better than he felt—yet ultimately fragile and infirm. The coronavirus pandemic simply exposed the underlying sickness of the US economy. If anything, the crash was overdue.”
What evidence can we marshal to support such a perspective? Well, I have been far from flawless in my economic prognostications, but back in October 2007 I did write an article for Mises.org, worrying that the US could be in store for the worst recession in twenty-five years—this was almost a full year before the actual crash in the fall of 2008. And in that article I wasn’t throwing darts at a GDP chart; instead I used Austrian business cycle theory to gauge the extent of Fed distortions in the financial system.
Now, if I then made a good prediction in real time based on Austrian theory and Greenspan’s artificially low interest rates, that gives me confidence that the Fed’s post-2008 rounds of QE (quantitative easing) and seven full years of virtually zero percent interest rates quite clearly drove the booming stock market under Obama, yet set us up for a much bigger crash.
RM: As the crisis grew during March, the Fed lowered the target rate from 1.75 to 0.25 percent in a two-week period. That’s a big drop. What was the Fed trying to do when it did this, and can it achieve its goals?
RPM: I think regular Americans would be shocked if they realized just how crude the basic models are that guide central banking policy. I’m simplifying somewhat, but the official rationale was that a weak/panicked economy needs more spending in order to maintain employment, and the way you goose spending is to lower interest rates. There’s also the notion that the markets want reassurance that the Fed is waiting to help, and so by taking a “bold” move quickly, the Fed could possibly nip a self-fulfilling prophecy in the bud.
Having said all of that, it’s possible that behind the scenes the real reason the Fed did what it did was that certain powerful players were caught with their pants down, and they needed cheap loans to salvage their positions.
I don’t think this was a wise move, and no, it won’t (in the long run) help the financial sector or the broader economy. In the Austrian view, interest rates aren’t merely a gas pedal/brake for spending; they help coordinate long-term plans made by consumers and businesses. So if the Fed pushes interest rates below the correct market level corresponding to genuine saving decisions and the state of the economy, then it will foster an unsustainable structure of production. This was Ludwig von Mises's theory of the business cycle, which has yet to be appreciated by most other free market economists—let alone the Keynesians.
RM: Many commentators on the Fed’s stimulus packages have claimed that it’s not really that big a deal because the Fed is only exchanging liquidity for collateral, and Fed stimulus is mostly just loans that will be paid back anyway. So is this just much ado about nothing?
RPM: Back when the Fed’s “extraordinary” injections of liquidity started, I argued that this nonchalance was wrong. Look, if the Fed wrote me a check for my Nissan Sentra for $100,000, then on the moment of sale my car would have a “market value” of $100,000 and the Fed would just be adding equal amounts to its assets and liabilities. Yet that clearly would bail me out, even though it would appear to be a mere “asset swap” rather than a transfer payment.
Put it this way: If the Fed’s injections of “liquidity” don’t really help the fat cats in the financial sector, then we can just cancel them and won’t affect anybody, right?
RM: We seem to now be in a time of unprecedented fiscal and monetary stimulus. In the past, there seemed to be some political and legal limits on what could be done in this regard. Why do you think there are now almost no limits on what the Fed and Congress can get away with in terms of spending and bailouts?
RPM: In an essay I wrote for a collection edited by David Howden and Joe Salerno, I argued that Ben Bernanke was “the FDR of central bankers.” What I meant was the Bernanke took the economic crisis and used it as an opportunity to fundamentally expand what Americans perceived as the proper role of the Federal Reserve. It wasn’t merely that Bernanke doubled the holdings of the Fed in mere months, but that the type of assets the Fed bought or lent against was greatly expanded.
To appreciate just how dubious these moves were, realize that the Fed back in 2008 created “Maiden Lane” LLCs, which were intermediate companies that would get loans from the Fed, then go out and buy mortgage-backed securities (MBS). Since the Fed didn’t have the statutory authority to buy MBS, they could say, “We’re not buying these forbidden assets, we’re just lending money to Maiden Lane LLC. We have the ability to lend money to whichever institution we want. Now if Maiden Lane LLC takes the money and goes and buys some mortgage-backed securities, that’s their business…” So, to reiterate, it’s not just that Bernanke’s Fed did things that were bad policies. They were also arguably illegal.
We see a similar phenomenon with Jay Powell and the coronavirus panic. When people are scared they let the authorities get away with all sorts of nonsense. The Fed got rid of reserve requirements in the last section of an addendum to the main press release of a surprise Sunday night meeting, and barely anybody even covered it.
Likewise with fiscal policy. Apparently the folks who brought us the Obama stimulus package were afraid of having its price tag exceed $1 trillion, but that’s obviously not stopping anybody now. The American people have been so desensitized to these gigantic numbers that nothing is shocking. But for what it’s worth, the CBO (Congressional Budget Office) itself is now saying that federal debt held by the public—as a share of the economy—will break 101 percent by October.
I think the only thing that will reinstill a sense of discipline is if there is a tangible and immediate reaction to these crazy policies. If a Fed announcement of more asset purchases causes the dollar to fall 20 percent against other currencies, or if the projection of another $1 trillion deficit causes Treasury rates to spike, then maybe Americans will stop looking to Washington as a magic source of financing.
In 2015, the boss of a card payments company in Seattle introduced a $70,000 minimum salary for all of his 120 staff - and personally took a pay cut of $1m. Five years later he's still on the minimum salary, and says the gamble has paid off.
Dan Price was hiking with his friend Valerie in the Cascade mountains that loom majestically over Seattle, when he had an uncomfortable revelation.
As they walked, she told him that her life was in chaos, that her landlord had put her monthly rent up by $200 and she was struggling to pay her bills.
It made Price angry. Valerie, who he had once dated, had served for 11 years in the military, doing two tours in Iraq, and was now working 50 hours a week in two jobs to make ends meet.
"She is somebody for whom service, honour and hard work just defines who she is as a person," he says.
Even though she was earning around $40,000 a year, in Seattle that wasn't enough to afford a decent home. He was angry that the world had become such an unequal place. And suddenly it struck him that he was part of the problem.
At 31, Price was a millionaire. His company, Gravity Payments, which he set up in his teens, had about 2,000 customers and an estimated worth of millions of dollars. Though he was earning $1.1m a year, Valerie brought home to him that a lot of his staff must be struggling - and he decided to change that.
Raised in deeply Christian, rural Idaho, Dan Price is upbeat and positive, generous in his praise of others and impeccably polite, but he has become a crusader against inequality in the US.
"People are starving or being laid off or being taken advantage of, so that somebody can have a penthouse at the top of a tower in New York with gold chairs.
"We're glorifying greed all the time as a society, in our culture. And, you know, the Forbes list is the worst example - 'Bill Gates has passed Jeff Bezos as the richest man.' Who cares!?"
Image copyrightGRAVITY
Before 1995 the poorest half of the population of the United States earned a greater share of national wealth than the richest 1%, he points out. But that year the tables turned - the top 1% earned more than the bottom 50%. And the gap is continuing to widen.
In 1965, CEOs in the US earned 20 times more than the average worker but by 2015 it had risen to 300 times (in the UK, the bosses of FTSE 100 companies now earn 117 times the salary of their average worker).
Breathing in the crisp mountain air as he hiked with Valerie, Price had an idea. He had read a study by the Nobel prize-winning economists Daniel Kahneman and Angus Deaton, looking at how much money an American needs to be happy. He immediately promised Valerie he would significantly raise the minimum salary at Gravity.
After crunching the numbers, he arrived at the figure of $70,000. He realised that he would not only have to slash his salary, but also mortgage his two houses and give up his stocks and savings. He gathered his staff together and gave them the news.
He'd expected scenes of celebration, but at first the announcement floated down upon the room in something of an anti-climax, Price says. He had to repeat himself before the enormity of what was happening landed.
Five years later, Dan laughs about the fact that he missed a key point in the Princeton professors' research. The amount they estimated people need to be happy was $75,000.
Still, a third of those working at the company would have their salaries doubled immediately.
Since then, Gravity has transformed.
The headcount has doubled and the value of payments that the company processes has gone from $3.8bn a year to $10.2bn.
But there are other metrics that Price is more proud of.
"Before the $70,000 minimum wage, we were having between zero and two babies born per year amongst the team," he says.
"And since the announcement - and it's been only about four-and-a-half years - we've had more than 40 babies."
Image copyrightGRAVITYImage captionDan Price with his mother
More than 10% of the company have been able to buy their own home, in one of the US's most expensive cities for renters. Before the figure was less than 1%.
"There was a little bit of concern amongst pontificators out there that people would squander any gains that they would have. And we've really seen the opposite," Price says.
The amount of money that employees are voluntarily putting into their own pension funds has more than doubled and 70% of employees say they've paid off debt.
But Price did get a lot of flak. Along with hundreds of letters of support, and magazine covers labelling him "America's best boss", many of Gravity's own customers wrote handwritten letters objecting to what they saw as a political statement.
At the time, Seattle was debating an increase to the minimum wage to $15, making it the highest in the US at the time. Small business owners were fighting it, claiming they would go out of business.
The right-wing radio pundit, Rush Limbaugh, whom Price had listened to every day in his childhood, called him a communist.
"I hope this company is a case study in MBA programmes on how socialism does not work, because it's going to fail," he said.
Two senior Gravity employees also resigned in protest. They weren't happy that the salaries of junior staff had jumped overnight, and argued that it would make them lazy, and the company uncompetitive.
This hasn't happened.
Image copyrightGRAVITYImage captionRosita Barlow
Rosita Barlow, director of sales at Gravity, says that since salaries were raised junior colleagues have been pulling more weight.
"When money is not at the forefront of your mind when you're doing your job, it allows you to be more passionate about what motivates you," she says.
Senior staff have found their workload reduced. They're under less pressure and can do things like take all of the holiday leave to which they are entitled.
Price tells the story about one staff member who works in Gravity's call centre.
"He was commuting over an hour and a half a day," he says. "He was worried that during his commute he was going to blow out a tyre and not have enough money to fix that tyre. He was stressing about it every day."
When his salary was raised to $70,000 this man moved closer to the office, now he spends more money on his health, he exercises every day and eats more healthily.
"We had another gentleman on a similar team and he literally lost more than 50lb (22kg)," he says. Others report spending more time with their families or helping their parents pay off debt.
"We saw, every day, the effects of giving somebody freedom," Price says.
He thinks it is why Gravity is making more money than ever.
Raising salaries didn't change people's motivation - he says staff were already motivated to work hard - but it increased what he calls their capability.
"You're not thinking I have to go to work because I have to make money," Rosita Barlow agrees. "Now it's become focused on 'How do I do good work?'"
UK's erupting fraud scandal confirms furlough was a nonsensical mistake
It has proved unfair, distorting and regressive; we need to replace it now