Monday, November 21, 2005

Reconciling Growth and the Income Gap

Free marketers like to think that maximizing growth is the tide that lifts all boats, but history has proven otherwise. Over the last several decades as growth has expanded rapidly the gap between rich and poor has widened. Not only has the gap widened, but the boats in the lower waters have not been lifted. Wages at the low end have stagnated in real terms, fringe benefits have disappeared or been reduced, more people are working part time, and most families require two or more breadwinners to make ends meet. If the goals of a society are to ensure that everyone benefits from growth, not just the top half of the income spectrum, some changes must be made in our economic structure.

The first obvious change would be to eliminate taxation on that portion of a family’s income that is required to sustain life and enable work without making choices between such necessities as health care, food, shelter and transportation, that is, a living wage income. The tax reform commission has recommended doing this with a system of tax credits. This would put individuals on an equal footing with businesses which are taxed on their profits, not their revenues.

Eliminating tax inequities alone will probably not be enough to bridge the gap, due to the international drive toward globalization, to reduce labor costs and improve the standard of living of people in undeveloped or developing countries. Globalization to achieve some measure of world wide equity in living standards is a noble goal. But, progress in this direction must not come at the expense of turning all countries into enclaves of peons working for starvation wages with an overclass of professionals, entrepaneurs and managers calling the shots and living in luxury.

The classical struggle between the left and right is between work and welfare. The left sometimes seems to ignore the power of markets to generate the growth that is required to sustain meaningful work and a safety net for the needy. Having a large percentage of the population unemployed and on welfare is not a prescription for long term prosperity. The right, on the hand, seems to subscribe to the theory that as long as government welfare is minimized and growth is sustained everything will come out smelling like a rose. Neither is correct. Both have to learn to compromise and find the best mix of growth incentives and reasonable wages to sustain long term prosperity and a healthy middle class.

One attempt to put a floor under the conditions for work has been the minimum wage. The right has succeeded in keeping the minimum wage lower than a living wage, that is a wage which will pay for all expenses necessary to stay healthy and hold a job, as discussed above as a floor for income taxation. They have done this by making the claim that increasing the minimum wage puts people out of work and on to welfare. But this ignores the fact that people working for less than a living wage have to be subsidized by government welfare in other ways, for example, by earned income credits, food stamps, housing subsidies, Medicaid, etc. Raising the minimum wage to a living wage would eliminate these latter subsidies, while possibly increasing the number of people that become unemployed and enter the full welfare rolls. As far as I have been able to determine, no studies have been done to adequately explain how this tradeoff plays out. There is some wage at which the total cost of both types of welfare is minimized. This needs to be investigated to set the minimum wage where it is most advantageous.

Another approach to keep people off welfare would be to set the minimum wage at the living wage and employ all people displaced from the private labor market, but able to work, in meaningful jobs to maintain national infrastructure. By keeping the labor rate for these infrastructure jobs at the living wage, and not allowing it to increase, any demands for labor in the private sector which could pay a higher wage would be met by shifts from this pool of infrastructure labor. This would eliminate the frustration and worry of being unemployed and unproductive, yet provide opportunity for workers to move into better paying jobs as the demand for labor increased. This movement would be augmented by training and experience acquired in the infrastructure jobs. Anyone not willing to enter the infrastructure job network would be on their own unless they can show they are disabled or otherwise unable to work.

The infrastructure job network would be funded out of progressive taxes on corporations and those making more than the living wage and implemented by private contracts from agencies like the Corp of Engineers or other federal, state or local agencies engaged in maintaining infrastructure.

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