U.S. inequality is curable

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 taxation—at 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 measure—and the cheap-labor lobby of the U.S. Chamber of Commerce certainly does—but 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-55’s 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.

The truth of income inequality is that it changes not by making the rich poorer, but by increasing the wealth of those who create wealth.

That is, beyond a certain degree of wealth, all wealth is tied up in investments. But there is a choice of investments: either to what amounts to rigged gambling games, that create no wealth except for investors; or to investing in things that create wealth, such as R&D and new businesses.

So the idea is not to increase taxes on the rich, but to increase taxes on the gambling games, not on the wealth creating investments. Create incentives in taxation for the wealthy to get wealthier by helping others to get wealthier.

The problem, however, lies with leftists. They so hate the wealthy that they want to *hurt* them, and not just financially, but physically, if they could. This matters more to them than tax revenues for government, or even income inequality.

As long as such irrational people are in charge, there will be no common sense approach to helping people to help themselves.

In many ways, they are like the approach Palestinians take to Israelis. They do not care if the Israelis are kind and generous to a fault, and even provide them with water and power and food. They have blood in their eyes, and want to hurt and kill Israelis, and they don’t care who is hurt in the process.

One thing I am certain of is that it’s going to cause bosses to resent their employees and maybe cause a lot of hostility that could be avoided. You’re paid according to your talent and skill set, that is all. If I set up a franchise and work hard at marketing and such, I should not have to pay someone who is NOT working as hard as I am the same salary.

sow what about equality of effort?

will those who sleep til 2 pm force me to sleep til 2 pm or will they drag ass out of bed at 5 am and start their day like I do?

Will those who don’t hit the hay til after midnight force me to stay up late or will they hit the rack at 10 pm like I do?

Will those who don’t hang up they clothes force me to leave mine in filthy piles on the flo or will they hang theirs up like I do?

Will those that don’t pay their bills every Saturday like I do force me to refrain from paying or will they pay theirs like I do?

Will those who don’t have dinner on the table for the kids by 6 pm every night force me to ignore dinner time or will they have dinner on the table by 6 pm like I do?

will those who don’t change their oil every 90 days force me to not change mine every 90 days or will they change their oil every 90 days like I do?

will those who don’t go to church every Sunday force me to miss church or will they go to church like I do?

will those who don’t pay their taxes every year like I do force me to blow it off or will they pay?

and so on and so forth and I think the inequality mantra will stop

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.

True. They see S&P500 going up 32% and only the upper two quintiles participate.

We already have forced government deferred assets in the form of Social Security.

Upon retirement the actuarialized value as an asset paying our SS payments is easy to determine.

This debate is usually framed in misleading or even downright wrong terms. "Income equality" is a misstatement of the problem. The problem in this country is NOT that there is a 1% of fabulously wealthy people, or that CEO salaries are too high, or that the minimum-wage is too low; it is that middle-class jobs are disappearing or are being monopolized by two-income families.

It is politically incorrect, but the mass entry of women into the workforce has had the effect of concentrating more middle- and upper-income jobs into the same families. People tend to marry at their own educational level, and now we have well-educated women marrying well-educated men, and often both of them are holding primo jobs. That makes fewer good jobs available for fewer families.

On top of that, we have outsourcing and competition from millions of illegals at the lower end of the job market, therefore depressing wages and increasing unemployment.

“Equality” is a utopian commie dream used as propaganda for the stupid that is impossible to ever achieve. But even the terminally stupid know that promises of equality are merely code speak for a politician’s willingness to steal from one group of people to give to them in the form of some benefit . . . of course, after the politician takes his “juice money” out of the transaction. It amounts to corruption wrapped up as compassion and delivered with a wink and a nod.

Personally, I don’t want to emulate anyone, including someone that has more than me. I just want to be me. My likes and dislikes are not “equal” to others. Even with equal subsistance stipends, if only because some are more frugal and are better managers - smarter if you will, some people will live better and more comfortably than others.

I agree with you. I will go one further. I believe that income inequality is a good thing - strike that - a great thing. Remember when America was called 'the land of opportunity'? That did not mean that if you came here you could sign up for an entitlement. It meant that if you worked hard, came up with a great idea, maybe caught a break somewhere, you could experience 'income inequality' in a big way. It inspired millions to build a great country by trying to better themselves. Unequal incomes and free market are all the incentives you need. I don't know if you have noticed, but no one calls America the 'land of opportunity' any more.

The entire problem with "income inequality" and using punitive government taxation to "solve" the problem can be debunked by simply stating the following:

It doesn't matter how much money the government confiscates from wealthy citizens via punitive taxation, as none of that money will ever make it directly into poor citizens pockets.

That's just fact. The government would never directly "cut a check" to those who they deem "deserve" our wealth. Rather, the government will simply start up another wasteful federal program which they'll claim benefits the poor. That's just more "feel good" government socialim.

The bottom line is "income inequality" is nothing more than the government enriching its own coffers through punitive taxation. There's ZERO intent in actually "helping" the poor.

The "poor" however will be completely bamboozled by the Government rhetoric and simply rejoice in the fact that the "rich" are being punished and made miserable like they are.

The Reagan approach was to build an economy in which the poor were lifted to higher levels (provided they put in a little effort).

The Obama approach is to tear everyone down to poverty (no matter how much effort you put in).

Guess which one works?

I think you need to read your Adam Smith again. Consider these quotes:

"Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people." "Whenever the legislature attempts to regulate the differences between masters and their workmen, its counselors are always the masters. When the regulation, therefore, is in favor of the workmen, it is always just and equitable; but it is sometimes otherwise when in favor of the masters." "All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind." "No society can surely be flourishing and happy, of which the greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged."

Adam Smith was one of the earliest and strongest proponents of Capitalism, but even he knew that excess is destructive to society. If only more of the current Titans of Industry(tm) knew this as well.

The truth of income inequality is that it changes not by making the rich poorer, but by increasing the wealth of those who create wealth.

Precisely.

And this is why, in the great realignment, there will be many vulgar plutocrats whose fortunes disappear. Because, seriously, what have Mark Zuckerberg and Warren Buffet done to improve anyone's standard of living?

Much of the "wealth" the Left wants to tax at the "top" today is fake. It is widely acknowledged among economists that sequestering of the excess liquidity is one of the major reasons why Bernankeism has not yet resulted in spiraling inflation. So the obvious problem is that if we force such largess into the pockets of people who are likely to spend it, releasing it into the real economy, its worthlessness will become immediately apparent.

It is amazing that so many actually think that slogan makes some sort of sense. Much of modern life consists of babbling by stupid people who imagine themselves to be smarter than everyone else. Do any of them ever ask how the one obtained the “means” which is to be taken from him or who is to determine the “needs” of the other or why a “need” constitutes a valid claim while possession of “means” constitutes an obligation? It is truly pathetic.

Very few nuclear families are close enough to function under such a rule, anyone who imagines that an entire nation will come to aught but ruin by trying to follow it is a blithering idiot.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.