Inequality, Fairness, Politics, Taxes and Raising the Minimum Wage .... Government Knows Best is at it Again

Our "public servants" all too often engage in the politics of phony populism and thereby do great harm to those they pretend to help.

The issues of wage inequality, poverty programs and the minimum wage debate currently underway will be another "unintended consequences" example for those who are willing to look past the immediately "seen" and view the long term and clearly foreseeable "unseen" impact of what the government knows best gang decides to do in election year 2014.

My own view is that these government knows best proposals and programs are primarily intended to help the politicians score points.

But you can and should judge for yourself, of course. And while doing so, consider Help the Working Poor, but Share the Burden, which discusses in plain language the inequality and minimum wage political issues of today:

"In a speech last month, President Obama brought renewed attention to economic disparities in the United States. The gap between rich and poor is indeed substantial — much larger than in most developed nations and much larger than it was 40 years ago. So what is the best way to help those struggling at the bottom of the economic ladder?

If we could figure out a way to do it, the most effective solution would be to increase the skills of those low-wage workers. Many studies have shown that the financial return of education is now high by historical standards. Reforming the education system so that more students graduate from high school and college is thus crucial to a more egalitarian prosperity. But upgrading the skills of the labor force is a decades-long project, not a quick fix. And educational reform is easier said than done.

As a result, those who are worried about inequality look for more immediate ways to help workers with limited skills. Before turning to President Obama’s proposal, let’s consider two other possibilities. For lack of better terms, call them Plan A and Plan B:

PLAN A The government subsidizes the incomes of low-wage workers. These subsidies are financed by increasing taxes on middle- and upper-income Americans.

PLAN B The government again subsidizes the incomes of low-wage workers. But under this plan, the subsidies are financed by taxing those companies that hire low-wage workers. . . . 

 

To me, Plan A is distinctly better than Plan B, which suffers from two problems — one involving fairness, and one involving efficacy.

First, fairness: If we decide as a nation that we want to augment the income of low-wage workers, it seems only right that we all share that responsibility. Plan A does that. By contrast, Plan B concentrates the cost of the wage subsidy on a small subset of businesses and their customers. There is no good reason this group has a special obligation to help those in need.

Indeed, one might argue that this group is already doing more than its share. After all, it is providing jobs to the unskilled. Asking it to do even more, while letting everyone else off the hook, seems particularly churlish.

But even putting fairness aside, there is reason to doubt the efficacy of Plan B. Taxing businesses that hire unskilled workers would alter their behavior in ways that would hurt those we are trying to help.

To avoid the tax, businesses would have an incentive to hire fewer of these workers. For example, they would have greater incentive to replace workers with labor-saving machines.

In addition, some of the tax would be passed on to customers in the form of higher prices. These customers, in turn, would have an incentive to spend more of their income elsewhere. Over time, these businesses would shrink, reducing the job opportunities for the unskilled.

All in all, the Plan B tax-and-subsidy plan sounds like a pretty bad idea. Why, you might wonder, did I bring it up? Because it is the one favored by President Obama. He calls it an increase in the minimum wage. . . . 

When proposing to increase the minimum wage, President Obama said that “there’s no solid evidence that a higher minimum wage costs jobs.” In fact, many studies suggest that it does precisely that. Mr. Obama is like a physician who prescribes a medicine based on a few studies that find no side effects while ignoring others that report debilitating effects.       

What is most disappointing about the president’s proposal is that the federal government has the option of using the much better Plan A. It is called the earned-income tax credit. Originally passed into law in 1975 and expanded substantially in the 1990s, the credit is a subsidy to low-wage workers paid by the rest of us, not just by the businesses who hire those workers.

Advocates of a higher minimum wage like to note that the current minimum wage, adjusted for inflation, is low by historical standards. That is true but beside the point. Because the earned-income tax credit has grown over time, the minimum wage is increasingly less relevant. As a nation we have switched from Plan B to the better Plan A. And a good case can be made for eliminating Plan B entirely by repealing the minimum wage. . . . 

If, as a nation, we decide we want to do more to supplement the incomes of low-wage workers, that’s fine. But let’s do it openly, without artifice, and with broad participation."

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Now here's another way to look at the wage inequality and poverty issue from a longer term perspective.

On at least one thing everybody can agree: we need more jobs created and to get those jobs, over the long term we need a higher and more sustainable level of private sector led economic growth.

Now here's my take: government policies need to focus on the real jobs issues facing Americans and stop playing election year politics. (I know what you are thinking --- fat chance of that anytime soon --- and you're right about that.)

 

So in the meantime, here's another truth about dealing effectively with poverty issues in America, as revealed by the contents contained in the following chart:

 

"What are poverty rates among working adults?

The Census Bureau reports poverty rates by work experience for people ages 18 to 64.  In 2012, the overall poverty rate for people ages 18 to 64 was 13.7%. 
 
The poverty rates by work experience for that age group were:

• 2.9% for full-time, year-round workers
• 7.3% for all workers
• 16.6% for those who worked less than full-time year-round
• 33.1% for those who did not work at least 1 week"

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The article from which the above chart was taken, 50 Years Later,  War on Poverty Is a Mixed Bag, puts in better perspective the effectiveness of "government solutions" to our society's wage inequality and related problems of the poor among us. Here's an excerpt:

"Many economists argue that the official poverty rate grossly understates the impact of government programs. The headline poverty rate counts only cash income, not the value of in-kind benefits like food stamps. A fuller accounting suggests the poverty rate has dropped to 16 percent today, from 26 percent in the late 1960s, economists say.

 

But high rates of poverty — measured by both the official government yardstick and the alternatives that many economists prefer — have remained a remarkably persistent feature of American society....

      

Both economic and sociological trends help explain why so many children and adults remain poor, even putting the effects of the recession aside. More parents are raising a child alone, with more infants born out of wedlock. High incarceration rates, especially among black men, keep many families apart. About 30 percent of single mothers live in poverty. . . . 

 

Over the last 30 years, growth has generally failed to translate into income gains for workers — even as the American labor force has become better educated and more skilled. About 40 percent of low-wage workers have attended or completed college, and 80 percent have completed high school.       

 

Economists remain sharply divided on the reasons, with technological change, globalization, the decline of labor unions and the falling value of the minimum wage often cited as major factors. But with real incomes for a vast number of middle-class and low-wage workers in decline, safety-net programs have become more instrumental in keeping families’ heads above water. . . . for working-age households, both conservatives and liberals agree that government transfer programs alone cannot eliminate poverty. . . . the greatest hope for poorer Americans would be a stronger economic recovery that brought the unemployment rate down from its current level of 7 percent and drew more people into the work force. The poverty rate for full-time workers is just 3 percent. For those not working, it is 33 percent."

 

Summing Up

 

More jobs are the answer.

 

Less election year political pandering would help the cause of the poor, too.

 

Politics sucks.

 

So do most government knows best programs and politically inspired election year policies.

 

That's my take.

 

Thanks. Bob.