Skip to comments.U.S. inequality is curable
Posted on 01/06/2014 9:27:56 AM PST by MegaSilver
The Democrat playbook for 2014, we are told, intends to focus on U.S. inequality and to suggest that only redistributive taxation will solve or even alleviate it.
Certainly it's possible to reduce inequality through punitive levels of taxationat the cost of making everybody poorer. I thus thought it worthwhile to disentangle the current causes of U.S. inequality to see how we might alleviate it by raising the incomes of the poor rather than simply depressing those of the rich. With good policies, this could even provide general economic uplift rather than depression, which would happen with redistributive tax.
The policy emphasis in the campaign against inequality looks likely to focus on a campaign to increase the minimum wage from the current $7.50 an hour, set in 2009. Traditionally, economists have been pretty well unanimous that increasing the minimum wage, as distinct from attacking poverty by direct transfers or the Earned Income Tax Credit, is damaging because it tends to increase unemployment among those receiving it. Employers forced to pay a wage higher than the market-clearing level will outsource activities or replace workers with robots. Hence a minimum-wage increase will do little for living standards but much to increase unemployment and reduce job opportunities.
However, of those paid at or below minimum wage in 2011, 51% worked in leisure and hospitality, according to the Bureau of Labor Statistics, while 17% worked in retail and 9% in education and health services. Only 2% worked in manufacturing and 1% in each of agriculture and construction. While one can suspect that agriculture and construction employed armies of low-paid people who weren't recorded on the BLS books because they were illegal immigrants, the fact remains that for legal U.S. residents, more than three quarters of minimum-wage jobs were in sectors that cannot effectively be outsourced overseas and for which automation is both complex and costly.
Thus, a moderate rise in the minimum wage, to no more than $10 an hour or so, would not cause massive job losses to emerging markets. Starbucks has customers in New York; it cannot serve them by relocating its stores to Shanghai. In the very long run, expensive low-skill workers are vulnerable to robotization. In practice, the costs and difficulties of replacing baristas with robots are such that it will only be tried in areas like Silicon Valley and suburban Washington, D.C., where the customers are robot-savvy and low-wage workers are scarce. Even McDonalds, the quintessential low-wage, high-volume food-service company, spends only 28% of its total cost budget on labor (including all its expensive top management) so a moderate rise in the minimum wage is unlikely to destroy its business model.
There are two caveats to this. First, a nationwide minimum wage is far too broad. It does not discriminate between places such as Silicon Valley, where demand for labor is robust and wages high, and modest-sized communities in the Rust Belt, where costs are low and $7.50 per hour is sufficiently high to deter marginal employers from operating. Minimum wages should be set at the state, not the national level. Even within states the differentials in Virginia between the affluent Washington, D.C., suburbs and the coal country, or in New York between Manhattan and Binghamton, are sufficiently large as to make local minimum wages the best way forward.
The second caveat is that ensuring that the demand for jobs cannot flit overseas after an increase in minimum wages is not enough; we also must be sure that the supply of limited-skill workers cannot be artificially increased. $10 an hour is a lot of money in Ecuador; hence the pressure on immigration would be increased by such a 33% rise in the U.S. minimum wage. It is thus essential that low-skill immigration be appropriately restricted (for example, by abolishing the visa lottery) and, more importantly, that the borders be controlled and immigration policy properly enforced to prevent the flood of illegal immigrants that blighted the lives of the domestic low-skilled from 2001-07. "Comprehensive immigration reform" along the lines of the current Senate bill, which would double legal immigration while doing very little to restrict the flow of illegal immigrants, must be resisted à l'outrance. When considering which politicians to support this should be non-negotiable.
Nevertheless, with these two provisos (a differential between high-wage and low-wage areas and provisions to prevent oversupply of cheap labor) a rise in the minimum wage should be seriously considered. It rectifies the very unequal balance in bargaining power between low-skill workers and their employers without driving significant numbers of jobs overseas or eliminating them altogether. Thereby it provides some income uplift to the low-skilled, lessening their claims on the welfare system and reducing inequality. Theoretical free-market economists may loathe the measureand the cheap-labor lobby of the U.S. Chamber of Commerce certainly doesbut in this case they're wrong.
Before readers think this column has gone soft, let me put in a good word for a measure that is hard-hearted but economically efficient: the lapsing of the 99-week limit for claiming unemployment benefits and its reversion to 26 weeks. While there needs to be a safety net to avoid absolute destitution, prolonged unemployment benefits tend to produce prolonged unemployment as workers fail to make the difficult decisions necessary to keep themselves actively engaged in the job market. It's also not an insignificant cost element. At $25 billion-a-year, the saving makes a significant dent in the deficit, which, as I shall explain below, is a crucial element in restoring the living standards of America's modestly qualified.
There are, however, two factors more important than minimum-wage legislation or the termination of unemployment compensation if you want to reduce U.S. inequality and get the low-skilled back to decently paid work: fiscal policy and monetary policy, both of which have been terribly distorted in recent years and need to be thoroughly reformed.
Since the turn of the century, the United States has run a balance of payments deficit of $500 billion or more every single year. This is far more than an accounting problem. On the financial side, it de-capitalizes the U.S. economy by this amount every year, building up liabilities to foreigners who may not be willing to roll them over forever. The cartoon image of Americans working for cruel Chinese bosses by 2030 is not entirely fictional; it needs only a few more years of bad management to come true.
More important even than the drain of capital, as far as American workers are concerned, is the persistent shortage of manufacturing jobs, which normally pay much better than low-skill service jobs. If imports persistently exceed exports by $500 billion annually, that's $500 billion of products that would in equilibrium be manufactured in the U. S. but in current conditions are being manufactured overseas. In rough terms, that's around 3-4 million jobs that should exist but don't, keeping the unemployment rate about 2% higher than it should be. This is accomplished mostly by suppressing the labor-participation rate rather than raising reported unemployment, which is kept artificially low by the Bureau of Labor Statistics definition of "participation" so that the long-term unemployed are not counted in the official 7% unemployment rate but are assumed to have left the workforce altogether.
However, since the overall books must balance, the $500 billion annual-payments deficit is a creature of two factors: the current $560 billion (projected for the year to September 2014) budget deficit and the excessively low U.S. savings ratio, which forces U.S. investments to be financed from abroad. Hence, arithmetically, to eliminate the payments deficit and restore U.S. jobs, we must eliminate the budget deficit and increase the savings ratio. That, in turn, requires deep reforms in both fiscal and monetary policy.
Budget deficits have been more than $1 trillion annually since 2009, with the exception of the year immediately past. Some progress has been made on reducing them, but the Ryan-Murray agreement just before Christmas, which increased spending in the short term, shows that even the modest spending cuts in the sequester were too much for many politicians. Studies have shown that budget-balancing attempts that get more than 25% of the money from tax increases are highly damaging to economic growth. Hence, in rough terms, the legislators need to find $420 billion in annual spending cuts, which they can then balance with $140 billion in tax increases.
Finding that level of spending cuts is not economically difficult it is only about 2.6% of GDP -- but it requires political courage. The most egregious spending, on agriculture and "green energy" subsidies, should be eliminated altogether. Further cuts can be made in the defense budget by assuming a foreign policy posture that intervenes much less than in the past decade. "Waste and fraud" is huge and can be cut back (for example, in the food stamps program, the number of recipients has expanded more than the number of unemployed, but also in fraudulent Medicare/Medicaid reimbursements.) Only then should modest cuts be made in entitlement programs, ideally by delaying the eligibility age to reflect higher life expectancies.
Just as the U.S. fiscal position needs to be restored to its historical balance, so does its monetary policy. Interest rates have been negative in real terms (below the inflation rate) since 2008, and for much of the period before then. Thus U.S. savers have been consistently penalized for thrift; every dollar they save is eaten away by even modest inflation and they are compelled to speculate in stocks, gold or Bitcoin in order to break-even in real terms. Conversely, the very rich, who have access to cheap leverage, are artificially subsidized by being able to borrow for free. This has caused a savings deficit that is preventing the baby boomers from properly preparing for retirement and, in many cases, is keeping them artificially in the workforce. Participation rates for the over-55s have increased substantially since 2007, the only age group for which this is true. However, except for the few who make exceptional economic contributions, every geezer clinging desperately to his job prevents a young person from getting one.
Whatever the Keynesian ill-effects of balancing the budget and raising interest rates, they are short-term. It is now more than five years since the crash, well past time for policy to be normalized. By doing so, and at the margin raising the minimum wage, curbing immigration and cutting the length of unemployment benefits, the policy mix will once again be restored to one that provides decent jobs for all except the disabled. And, to agree with the left for one rare moment, this will produce a much healthier society.
Income inequity is not a “problem” to be “cured” if it results from free market transactions. If it does, its Adam Smith 101 — someone getting rich (ie, having much more income than me) because he or she produced something I want. Way too many people have bought into the idea that unequal income is a problem. In its right form, it makes everyone richer.
What bugs me about inequality debate is the lack of distinction between assets and income.
Some of us, make assets a proirity; real estate, equity and bonds. We save and defer to accumulate. Of course, including these items will distort the wealth quintile distribution charts being shown to us lately.
Then there is the corresponding income from assets. This needs to be stripped as well for comparison. Suppose I spend a lifetime of acquiring apartment buildings, living below my means. Then I reap the net rental income. This is a lifestyle choice, not a confering of wealth based on birth. Why is this in the equality comparison?
So the inequality charts should be based on income from employment (not benefits). We already know that the tax inequality pretty much is adjusted to take income from the upper quintile and give it to the lower.
What is the beef then?
Our financial reporters are smart enough to understand this. Over on Business Intelligence, for example they fail to normalize inequality for assets.
I have a feeling that this is the much anticipated punishment of savers movement. See Cyprus last year.
Yes it is simple~!
Take from each according to his means, and give to each according to his needs.
Now where have I heard that before...?
.. DEmocRats to seek a fairer equaler path this year.. lol .. to address..
U.S. inequality and to suggest that only redistributive taxation will solve or even alleviate it.
Didn’t we have a revolution thingy over taxes a long long time ago? .. and that had nothing to do with redistribution, it was all about taxation. It was called survival back then, freeing us from oppressors who knew better what we should have left in our pot at the end of the workday.
considering the leftist elites of today, it almost seems like regime rule by media decree these days, now that is what truly taxes so many of us, even as we breathe in the BS of the Progre$$ives.
With Big Government Liberal Doctrine there will always be Makers and Takers!
So what is the other 72% of it's cost spent on? Does this genius think those suppliers won't also be effected by the minimum wage hike?
No market change happens in a vacuum, whatever is changed changes everything.
The main problem with this (as Thomas Sowell eloquently points out in his books) is that liberals take a snapshot in time and call the disparity between groups “income inequality”
What liberals (and others as well) don’t take into account is that people are constantly transiting in and out of different income levels. Someone who is in the low income level this year would hopefully move up as they gain job skills.
Conservatives don’t expect someone flipping burgers at McDonalds to work there for life and support a family, and we expect them to move up and out over time.
Liberals believe people should be able to flip burgers their whole life, make as much as a surgeon and support their families on it.
Rolling Stone Magazine?
My beef with “income inequality” is even more basic.
Personal “income” is an outcome - of one’s working to maximize your value to an employer and one’s effort in supporting yourself.
Arguing for “income equality”, therefore, is arguing that everyone should make the same amount regardless of their effort to better themselves. It is communism, plain and simple.
America was founded on equal opportunity - not equal results.
With the huge numbers on welfare and getting food stamps and other programs in the country, we have more of a work inequality then an income inequality.
People that are not doing a damn thing are expecting to have the same as those that do work.
Leftists are insane. They are promoting amnesty, which will depress income and all kinds of other things that will turn us into a 3rd world country while talking about “inequality”
I think the ultimate objective is to tax wealth (that is, assets) because so far the government has only been able to get at wealth through death taxes.
This, in fact, has been suggested by various left-wing world economic groups: a 10% tax across the board on the wealth of everybody who has over a certain (rather modest) amount.
This will fatten the bank accounts of governments worldwide and, in our case, give Obama and his family and all the other bureaucrats lots of fun in the sun on Hawaii. Don’t forget, it’s all about feeding the government and those chosen by the political power to get into the sacred halls of government. The supposed “victims of income inequality,” on the other hand, are not going to see a dime of it.
Communism is wrong... ALWAYS AND FOREVER... and this article is a waste of time and effort.
My point exactly... communism is evil and wrong... always has been... always will be. It leaves death and destruction in every path that it takes.
Are we talking about inequality of possessions? Is everybody supposed to have exactly the same amount of stuff at the same time?
Are we talking about inequality of character and integrity?
Exactly what is the "inequality" that can be "cured?"
George Hussein Onyango Obama,
Senator Barack Obama's long lost
brother was tracked down living in
a hut on the outskirts of Nairobi
“Arguing for income equality, therefore, is arguing that everyone should make the same amount regardless of their effort to better themselves. It is communism, plain and simple.”
Im not an expert in communism but I dont think all workers receive the same wages. Even in the USSR more highly educated and trained were paid more and received greater benefits. This whole income inequality BS is just a ruse to fleece the “rich” to give more money to RAT supporters. If they really wanted to reduce inequality they would focus on the poor/absent job skills and education of the lowest classes of the multigenerational welfare addicts.
Raising the minimum wage simply does not reduce inequality. It merely increases the minimum level of labor productivity for which an employee is able to legally contract with an employer. Work harder, biotches!