What Economists Say About Wages

Economist help us understand the inner workings of our economy better. They readily discern productive efficiency from wasteful spending. The best economists become public figures because they possess an exclusive knowledge on the economic health of our society. Due to the nature of their work, economists are significant, influential figures in shaping government policy. What do leading economist say about raising the minimum wage and creating a living wage?  

 A Recap of Living Wage Blog Highlights:

·         * Poverty is pervasive in the United States, the richest nation on earth.

·         * People who earn a minimum wage cannot make a basic living.

·        *  Minimum wages have decreased as productivity has increased

·         * People at or below a living wage get higher utility from each dollar they spend.  

·         * Henry Ford knew that workers ultimately create demand.

·         * Human potential can be stunted by poverty.

·         * Raising the minimum wage can stimulate the velocity of money because every dollar is spent.

·         * Tax laws significantly favor the wealthy.

·         * Low wages can be viewed  as a form of corporate welfare

·         * A modest wage increase can actually benefit a local economy

Who is Right?

A National Economic Law Project study released in July 2012 states that 66 percent of low paid workers are employed by corporations with over 100 employees. The 50 largest employers of low paid workers have mostly recovered from the Great Recession. Top executive compensation averaged $9.4 million at these firms. They have returned $174.8 billion to shareholders in dividends and buybacks in the five years preceding 2013.

A U.S. Chamber of Commerce blog articulates a generalized argument against raising the minimum wage for basically four reasons:

1.      A minimum wage increase doesn't really do much to address income inequality

2.      A minimum wage hike hurts small business and takes away valuable job skills training    for those who need it most, the marginally employed and teenagers.

3.       It is unfair to tax one segment, namely businesses, for a societal deficiency that more      appropriately should be shouldered by the entire society.

4.      Taxing business who hire unskilled workers is hurting the very entities willing to hire  those individuals.

The Economist’s Insight

Alan Greenspan
Courtesy of Wikimedia Commons

Alan Greenspan was chairman of the Federal Reserve from 1987 to 2006. Greenspan believes that raising the minimum wage would be detrimental to the work prospects of teenagers. Teenagers need to learn job skills and suffer if they cannot get jobs. To him, raising the minimum wage could in be short sighted. Higher pay would come at the expense of job availability. This lack of job availability would be more pronounced during recessionary times because businesses would be unable to afford these unskilled workers.

Christina D. Romer
Courtesy of Wikimedia Commons

Christina D. Romer is an economist and professor at University of California, Berkeley. She stepped down as Chair of the President’s Council of Economic Advisers, a post she held from January 2009 till September 2010. In a compelling article in the New York Times dated March 2, 2013, she stated that while raising the minimum wage would help low paid workers, there could be job losses.  “And in the end, a job ultimately may be the most valuable thing for a family struggling to escape poverty, “ Romer said. She instead suggested that using the Earned Income Credit (EIC)  “would provide more support for the working poor and would be pro-business at the same time.”

Paul Krugman
Courtesy of Wikimedia Comons

Paul Krugman is a Nobel Prize winning economist and New York Times writer. He is a professor of Economics at Princeton University. He thinks raising the minimum wage is a smart move given the current political climate in Washington. “A minimum wage increase would not require U.S. Government spending,” Krugman writes in a New York Times article dated February 17, 2013. “This would be a plus for a Congress that does not want to spend money. We should raise the minimum wage now.”

Martin Feldstein
Courtesy of USA.gov

Martin Feldstein is a professor of Economics at Harvard University. In an article printed on December 12, 2013, in the Wall Street Journal, Mr. Feldstein states that raising the minimum wage is a crude tool for alleviating poverty. For him a better solution would be a combination or raising job opportunities while simultaneously raising income. He favors the earned income credit as a way to accomplish this goal.

In a Perfect World

Joseph Stiglitz
Courtesy of Wikimedia Commons

Joseph Stiglitz is a Nobel Prize winning professor of economics at Columbia University. His latest book is The Price of Inequality. In 2011 Time magazine listed him among the 100 most influential people in the world. Stiglitz questions Congress's political will to act effectively to address not only the minimum wage issue but the larger question of income inequality.

     He zeros in and cites government dysfunction due to political corruption as the real problem. “While there may be underlying economic forces at play,” he writes, “politics have shaped the market, and shaped it in ways that advantage the top at the expense of the rest.” He believes that concentration of political power in the hands of the rich is damaging our economy as the affluent seek to protect their wealth by institutionalizing their own advantage.

    In a perfect world, some combination of a minimum wage increase would happen but not so excessively as to diminish job prospects. Jobs, even low paying ones, play an essential role in the development of valuable job skills. This alone makes them essential.

     Ideally, functional government would address the problem of its citizen to meet a minimum standard of living without demonizing those people as freeloaders as Mitt Romney stated at private political fundraising dinner in the 2012 presidential race..

    The earned income credit is a well-targeted tool that can bring low-wage workers to a base income that could complement a modest minimum-wage increase without diminishing job prospects. Yet if Stiglitz  is right, we may no longer have a Congress that is acting for the good of all its citizens but rather a privileged few.

Why Tax Cuts Should Be Skewed to the Poor

What’s the point?

     Two Reasons for tax cuts: 

          1) as a means of dispersing a government surplus 

          2) as a means of stimulating the economy.

Courtesy of Royalty Free Stock Images

     Tax cuts can stimulate the economy by injecting money into the system. The idea is that people who have money in their pockets will more likely spend. Spending money increases the velocity of money generating demand for goods and services. Increased demand means business have opportunities to make profits. And so begins the virtuous business cycle.

What’s Fair

     Strong arguments can be made  to reduce taxes on the rich. The rich by far pay the majority of taxes.  Yet, we see evidence that most of the benefits of tax deductions already go to the rich. The rich also keep a far bigger share of earnings after taxes which allows for wealth accumulation. Odds are good that some of the tax savings for the rich will go in the bank. Banking kills the velocity of money, a nap-time, nothing gets generated while is held in an account.

     Strong argument can be made for tax reduction on the middle class too. They have less total income to meet their needs and wants.  Also, they are economically less secure than the rich. Good reasons to favor a tax cut for the middle class. Yet precisely because of their economic vulnerability, this group will tend to take some of their tax cut and put it towards savings. The threat of losing a job looms largest during economic recessions. Uncertainty is a powerful motivator for of many in the middle class to set aside some of a tax cut as a rainy day fund.

Courtesy of Royalty Free Clipart
Illustration by Ron Leishm 

What Works

     The strongest argument rests with the poor, those at or below the living wage. If the purpose of tax cut is to stimulate demand, this is the group to do it because they have the highest marginal utility rates. They are most likely to spend a tax cut immediately because their needs are great and constant. By spending these tax cuts they will have an immediate effect on economic demand, kick starting the virtuous business cycle which makes profits possible.

     They also are the group who benefit the most because having extra money substantially improves their quality of life. This is the group with the greatest potential to spend if they have the means to. 

May Day is International Worker's Day

Haymarket Square Riot

     It happened in Chicago. Violence punctuated by a bomb in Haymarket Square sparked a movement that went viral in 1886 spreading around the world. The reverberations are still heard today. Sound preposterous? It is true.

A Movement Comes of Age

Haymarket Square Bombing, courtesy of Wikimedia Commons

     May Day, also known as International Worker’s Day, is a celebrated around the world, It is akin to the U.S. Labor Day celebrations held in September. It is a holiday set aside to honor the worker's role in building society and civilization.  May Day became synonymous with worker's rights after the Second International recognized it as day to commemoration of the Haymarket Square Riot in 1889. Previously, May 1, 1886, had been set for the recognition of the eight-hour work day by the Federation of Organized Trades and Labor Unions.

Big Shoulders and More

    Chicago, also known as the city of big shoulders, was a bustling, hustling place in 1886. At the time it was becoming an economic juggernaut, hovering at the edges of the rapidly changing western frontier. No other city in the United States could match the manufacturing muscle that Chicago possessed. It was a magnet for business in part because of one tragic event. Nor could any city compare with its transportation system. Chicago had become the central hub of the of the railroad industry.

Chicago Fire of 1871, courtesy of Blogspot Public Domain Clipart

       The Great Chicago Fire of 1871 made available vast swaths of open land for development. Opportunities in the west of the Mississippi River were emerging. Huge businesses arose out of the ashes. With business came the need for railroads. There was plenty of space to develop an even better transportation infrastructure.

     Work opportunities were plentiful in Chicago. Yet work conditions were often atrocious as later depicted by Upton Sinclair in his famous book The Jungle in 1906 about the Chicago Stockyards. Worker abuse was rampant.

Courtesy of Royalty Free Stock Images

 It was the Bomb

    

     On May 4, 1886, four anarchists exploded a dynamite bomb on the second day of worker's rights rally. Police the previous day, had harassed workers striking for an 8-hour day at the McCormickHarvesting Machine Company. Policeman sided with the local business men, not considering the workers demands legitimate. There is still controversy as to who the bomber was.

  Revolutionary Times

     At the time, workers rights were being hotly debated in the United States and all across Europe too. The Industrial Revolution which advanced rapidly after the Civil War was maturing. The days of unimpeded growth and wealth accumulation became hotly debated. It was the dawn of the Gilded Age. Concurrently, the Second International in Paris decided to recognize the Haymarket Square Riot as representative of worker's rights struggle. They designated May 1 as a day to commemorate the incident.

     An outgrowth of the Haymarket Square Riots decades later was the formation of the American Federation of Labor (AFL) one of the most powerful union forces in the United States in the twentieth century.

Binary code,
courtesy of Royalty  Free Stock Images

     

    Today, the Technology Revolution is changing all aspects of our civilization. It is causing great disruption within business as old profit models breakdown and jobs evaporate. We face similar conditions of wealth . This is the new frontier in which the living wage is claiming legitimacy.

How the Tax Code Helps Those Who Need the Least Help

Courtesy of Pixabay

Death and Taxes

     Benjamin Franklin in 1789 wrote, “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.“

     Interesting and powerful words to read from one of our most revered founding fathers. They are powerful because taxes, in  Franklin  words, affect all of us one way or another. Taxes are indeed ubiquitous.

     Taxes are fees imposed on the right to earn income. A tax deduction or favorable tax treatment is music to most citizens’ ears because it specifies income that is minimally taxed.

·                  According to the National Priorities Project, America's top earners will get an average tax cut of $66,384 in 2011 while the bottom 20 percent will realize an average tax savings of about $107.

     Seth Hanlon, director of fiscal reform for the Center for American Progress, says that while all tax breaks are well-intended, the "upside-down" nature of some miss their target

Courtesy of Fotolia

Some Tax Regulations Effects

·       Mortgage Interest  Deduction

     A  study, by rhe Wharton School at the University of Pennsylvania, on the deductions for mortgage interest for households with incomes between $40,000 and $75,000 averages just $523, while households with incomes above $250,000 enjoy an average a write-off of $5,459 or more than 10 times as much.

·         Capital Gains Tax Rates

     Long-term capital gains tax rates for investments owned greater than one year are currently 10 to 15 percent, favorable rates when compared to earned income or ordinary wage rates which range from 10 percent to 39.6 percent depending on the amount earned. Only citizens who have money to invest beyond basic living needs can benefit from these favorable rates. The favorable capital gains rates are expected to cost the Internal Revenue Service $38.8 billion in fiscal 2012 according to the Office of Budget and Management.

·           Step up in Basis

     Usually when property is sold for more than the purchase price, the difference is taxed except when a person dies. When a citizen dies that difference between buy and sell price is reset to a price the property would fetch had it been sold at the time of death.  A Stepped-up basis benefits the wealthy the most because they hold the most property. The cost the Internal Revenue Service was $61.5 billion in 2012 according to the Office of Management and Budget.

·         Tax-deferred Retirement Savings Accounts

     Retirement accounts are special accounts like IRAs, 401ks, and profit-sharing plans designed to help people save for retirement. Only people who have extra money can save money for retirement. In 2011, American saved $145 billion in taxes from this deduction. Of that, the Tax Policy Center estimated the top 20 percent of earners received 80 percent of the benefits whereas the bottom 60 percent received only 7%. It’s safe to say those living at poverty level had no benefit because they had no money to save towards retirement.

·         Charitable Deduction

     Taxpayers who give to qualified nonprofits are allowed to deduct their donation against current income. For taxpayers, the value of the deduction increases with a person’s income. For example, someone in the lowest 10% tax bracket receives a $100 deduction for a $1,000 donation. Whereas someone in the 39.6 percent tax bracket receives a $396 deduction for the same amount. In 2011, this deduction was estimated to cost Uncle Sam $53.7 billion according to the United States budget.

  Conclusions

     Tax deductions overwhelming benefit those who make higher incomes. This translates into the higher income earners being able to keep a higher proportion of their income compounding  their wealth substantially over time pushing an ever-wider gap between rich and poor.

Wal-Mart Offers More Than Everyday Low Prices

Courtesy of the Democratic staff of the
U.S. Committee on Education and the Workforce

   
      An update of a 2004 report “Everyday Low Wages: The Hidden Price, We All Pay for Wal-Mart,” prepared by the Democratic staff of the U.S. House Committee on Education and the Workforce revealed some interesting statistics:

• Wal-Mart is the largest private employer in the United States.

• A Wal-Mart sales associate is paid on average hourly wage of $8.81 per hour.  Wal-Mart’s Sam’s Club workers earn $10.30 per hour on average.

•  A 300-person Wal-Mart Superstore in Wisconsin was estimated to cost taxpayers approximately $5,815 per employee in state-supported safety net social services .

• Between 2007 and 2010, while American median family wealth fell by 38.8 percent, six members of the Walton family, heirs of the founder of the chain, saw their fortunes increase from 73.8 billion to 89.5 billion.

• The wealth of these six Waltons equals the combined wealth of 48.8 million families at the bottom of the country’s wealth distribution. Said another way, their wealth equaled the combined wealth of 41.5 percent of all American families.

     We can safely assume that the needs and most of the wants of these six members of the Walton family are provided for. Wal-Mart workers helped ensure that fortunate outcome together with the U.S. taxpayers who paid for the programs that helped meet some of the needs of those low-paid Wal-Mart workers that was unmet because they made less than a living wage.

Do the Rich Create Jobs

Harnessing Power

     It is a messy democratic process we have. Political parties want to be in power. Party members can derive strength and power by unifying behind common messages and themes in hopes of attracting like-minded followers. Party leaders test different messages seeing which ones resonate with the most voters to gain their votes and help their candidates get elected. Office holders have authority which translates into power.

Courtesy of iStock

The Message

     A common message reiterated many times throughout the Great Recession by the Republican Party in their pursuit of power has been the notion that raising taxes on the rich would kill job creation. For them, it is an unshakable belief that people with money invest in businesses to make more money. Jobs are the fortunate byproduct of the process. Following this reasoning further, it is the rich who are responsible for creating jobs and we as voters should be grateful. This message rests on the idea that if the rich build the business, the consumer will come.

Real Job Creators

     However, in an article with Bloomberg News, Nick Hanauer, a successful entrepreneur, venture capitalist and author, disagrees. He argues this Republican message has the investment process backwards. According to Hanauer, businesses are started and new workers hired when consumer demand is present.  For Hanauer, raising taxes on the rich makes much more sense. He sees it is as a way of rewarding the true job creators, those middle-class consumers who create demand first out of which investment opportunities for the wealthy emerge to make more money. 

A Hierarchy of Needs

A Question

     What motivates people? Can human interaction be as simply as a random collection of reward-conditioned responses waiting for another opportunity?

An Answer

     In 1943, Abraham Maslow was curious and tried to answer what motivates people. His answer resulted in a theory about human needs which came to be known as Maslow’s Hierarchy of Needs. His theory is a set of propositions that explains why human beings act in predictable patterns. These patterns are designed to lead to feelings of human fulfillment.

Courtesy of Fotolia

The Theory

     The basis of his theory rests on these notions:

1.     A human need is essential. It must be fulfilled because the survival of the species depends on it.  

2.     Human needs are prioritized. One set of needs would have to be fulfilled for the next set of needs to become a priority.

3.     The longer a human need is denied, the greater the energy expended  to acquire it.

4.     A person must fulfill a lower need before progressing on to the next need.

5.      Few people will satisfy all needs in a lifetime yet every person will pursue fulfilling these needs throughout their lives.

An Outcome

     What Maselow’s theory attempts to explain is the arc of every person’s life. People who make a minimum wage that is not a living wage are unable to take care of their first set of needs: food, clothing and shelter.

     Energy is continually expended on securing the basics. Human potential is, in essence, thwarted. As a result, their potential is left unrealized. Unrealized human potential means the human condition as a whole is impoverished. Some would say our present economy is just a symptom of this condition.