Oren Levin-Waldman Archive

The European deal to bail out Greece should not be cause for celebration, rather it should give us pause. Surely, the consequences would be worse if no bailout, but at what cost. In the typical top down approach, Greece must adopt even more austerity measures in exchange for loans, which only means that it is the typical worker who ultimately takes it on the chin. And yet, bailouts in general, like the U.S.’s rescue of the banks and AIG as well as auto manufacturers several years ago raise some serious questions about the meaning of risk in a market economy.

One of the central tenets of competitive free markets is that investors are entitled to reap the rewards of their investments, and exorbitant ones too, because they assumed risk. Of course, the argument that because they understood that there was a risk means that they have no right to request governmental immunization from risk when those investments go sour is a very compelling one. After all, they can’t have it both ways. Lost in these debates, however, is the risk that workers assume when they simply take a job.

The current wage labor system assumes that workers receive wages, and perhaps other negotiated benefits, in exchange for their labor. Moreover, it is assumed that they are entitled to no more. That their labor contributed to the success — the profitability — of a firm might have a moral point, is generally taken to be no more. Were it not for the efforts of workers, these companies would not be what they have become, their current need for a bailout notwithstanding.

Recently Warren Buffet took to the pages of The Wall Street Journal and suggested that a better way to help the poor would be through the Earned Income Tax Credit (EITC); not an increase in the minimum wage. And yet, this is the same Warren Buffet who argues that tax rates for the wealthy should be increased because it is unfair that he as a multi-billionaire should be paying the same effective tax rates as his secretary. Is this a contradiction?

Arguably the higher taxes that Buffet wants the wealthy to pay could perhaps be used to fund the EITC or its expansion. And yet, this version of progressivism is riddled with the type of hypocrisy that fuels what I referred to a few weeks ago as the New Welfare State-Service Sector Complex.

The EITC, on the books since 1975, has effectively become a negative income tax for those earning around the minimum wage. In 2014, a family with one qualifying child would get a maximum credit of $3,305 while somebody with no qualifying children would get a credit of $496. One with two children the credit received $5,460, and with three children it was $6,143.

A family gets the maximum credit if the earned income is between the minimum wage and some percentage above that. The effect of an EITC for say a single mother with three children earning the federal minimum wage is to have an income of $21,223, of which 28.9 percent is being paid by the government. As one’s income moves up the scale the EITC then begins to phase out. The same single mother with three children would be eligible for an EITC until her income reaches $46,997, and $52, 427 if she were married and filing jointly.

When President Eisenhower left office he admonished the nation about the rising military industrial complex. This was the regime in which vast amounts of public money spent on military projects would flow to major corporations producing the military’s weapons systems and generate billions in corporate profits. Of course, it also created millions of jobs in the private sector and did much to sustain the American middle class.

One might ask the obvious question: why if jobs are created and the middle class is being sustained, is this really a problem? The answer lies in understanding the concept of regime theory and untangling the thorny knot of iron triangles in the legislative process.

A regime is often defined as a set of relationships between private and public actors intended to achieve a public purpose or distribute public goods. With the military industrial complex the nation’s defense is, of course, the public purpose, but private interests also derive benefit. These relationships that constitute the regime also form iron triangles. An iron triangle is a relationship between an interest group, a government agency, and a congressional committee. Each essentially lobbies the other for mutual benefit.

Political scientist Harold Laswell famously defined politics as “who gets what when and how.” This definition was intended to capture the connection between politics and power. Who gets what says something about who has power. When one gets what one wants says something about how important that individual or group is, and just how much power that person or group has. How the power is obtained says something about the individual’s or group’s strength. But this observation isn’t just about the power, but the allocation of resources in an environment where resources are otherwise scarce. In today’s economy, it can refer to the economic pie.

In a political system where scarce resources are to be distributed, various groups will compete to determine who gets what, how much they get, and under what circumstances they get it. This usually means that if one group derives benefits, others bear costs. Laswell’s formulation certainly tells us much about the nature of American politics. And yet, we learn more when qualified by later political scientist Theodore Lowi’s identification of three types of politics: regulation, distribution, and redistribution.

Over the last three decades along with the various structural changes that have taken place in the economy, we can say that the face of the low-wage labor market has also changed. It used to be that the low-wage labor market characterized by unskilled labor as perhaps reflected by the percentage of high-school dropouts was extremely high. Three decades later, however, we find that increasingly the ranks of the low-wage labor market are filled with high school graduates, some college graduates and professional graduates.

Historically, we tended to define the low-wage market as those earning the minimum wage. At the same time, the minimum wage tended to be pegged at around 50% of average annual hourly earnings. A fair definition of the low-wage labor market, then, would be those earning between the statutory minimum wage and 50 percent of average annual earnings, or those we can say earn the effective minimum wage.

The standard minimum wage model that predicts that increases in the minimum wage will result in lower employment rests on the assumption that workers are nothing more than factors of production. As factors of production, they are simply inanimate objects that are easily interchangeable, either with other similar inanimate objects or more technologically advanced ones. So even if an increase in the minimum wage were to result in a substitution of machinery for labor, it is still a substitution of one type of inanimate object for another.

That low wages may result in workers living in poverty cannot be a consideration because the value-free assumptions underpinning the model cannot see workers as people who really may have needs. But aside from the obvious subsistence needs that we all have, there is the issue of wages sufficient to develop capabilities. A minimum wage that enables workers to live above poverty is one that enables them to develop their capabilities.

In his blockbuster book Capital in the Twenty-First Century Thomas Piketty observes that the history of the distribution of wealth has always been deeply political and cannot be reduced to so-called neutral economic mechanisms. But much of this has been obscured by the economic discipline’s “childish passion for mathematics,” an obsession that has only served to create the appearance of being scientific, without having to answer the far more complex question posed by the real world in which we live. The same critique, however, applies to the minimum wage debate.

When it comes to the minimum wage debate, the question that we as a society should be asking is why has there been a tendency to defer to the neoclassical economics model that holds that increases in the minimum wage will lower employment. We know that there are other models that predict otherwise. The efficiency wage model holds that increasing the minimum wage will lead to greater productivity and efficiency. The macroeconomic model holds that higher wages increase purchasing power which over time will lead to economic growth. And yet, the neoclassical model has become the reigning orthodoxy. Why?

The conventional explanation for growing wage inequality is often referred to as the skills-biased towards technical change theory. This holds that with globalization and increased capital mobility, the economy has changed from industrial production to a post-industrial service based economy. The former did not need a greatly skilled workforce, but the latter, being technologically more advanced, did require much greater skill.

In recent years, however, an alternative explanation has emerged which focuses on deliberate policy choices that were made, which effectively resulted in a deterioration of institutions. This explanation focuses on changes to the tax code that effectively transferred wealth and income from the bottom and the middle to the top, legislative attempts to pass right-to-work laws making unionizing more difficult, packing the National Labor Relations Board with pro-business and anti-labor people, and willful neglect of the minimum wage.

When it comes to the minimum wage, some things just never change. As it has in the past, the proposal to raise the minimum wage divides along partisan lines with Democrats supporting it and Republicans opposing it. Again, Senate Republicans demonstrated that they never miss an opportunity to miss an opportunity when they blocked a vote on the measure through filibuster. It is ironic that the party that accuses the Democrats of sabotaging economic performance through heavy-handed regulation and confiscatory taxation would block the only measure that truly benefits the middle class.

Market Purists are steadfast in their belief that increasing the minimum wage will lead to lower employment. The standard textbook model holds that as workers lower their wage demands, employers will demand more of their services. A wage floor only prevents workers from accepting lower wages in exchange for opportunities to work. Therefore, fewer workers will be hired, with the result being lower employment. But opponents of minimum wage increases are only citing half of the model.