Why Not A Higher Minimum Wage?

For several decades, the traditional literature on effects of minimum wages has perpetuated the notion that, while higher minimum wages raise the wages of those at the very bottom of the income scale, they also lead to a decline in employment. This is intuitive. Of course, when companies need to pay workers more, they have fewer resources to hire more workers. But this Economist article shows that the logic above might oversimplify the effects of minimum wage legislation.

In the article, the Free Exchange correspondent for the Economist traces the history of the minimum wage and of theory surrounding the provision. New Zealand created the first minimum wage in 1894, and the United States instituted a federal minimum wage in 1938. The US minimum wage is currently less than 40% of median earnings. France’s minimum wage, on the other hand, creates a floor set at 60% of median earnings.

Since the early 1990s, some economists have attempted to challenge the traditional interpretation of minimum wage effects. They argue that the minimum wage can boost earnings and employment simultaneously. While many conservative economists continue to disagree with this notion, even some in this camp now accept that alternative methods of providing a minimum wage (such as the Earned Income Tax Credit in the United States) help achieve these effects.

Certainly, not everyone now contends that the minimum wage benefits outweigh its costs. This article characterizes the current thinking as follows: “Bastions of orthodoxy, such as the OECD, a rich-country think-tank, and the International Monetary Fund, now assert that a moderate minimum wage probably does not do much harm and may do some good.” In other words, the verdict is still out. But there is stronger evidence that minimum wages help reduce wage inequality than there is that they reduce employment, at least to an equal degree.

While the article does not claim that economists have arrived at a new consensus on minimum wage effects, it does reveal that interpretations of the costs and benefits of the provisions have changed in the more than one hundred years since the minimum wage has come about. The ability of a minimum wage to raise earnings not just for those earning the minimum wage, but also those fairly high up the income ladder, is promising. It reveals that the tool could be applied more directly in the future as a means to mitigate income inequality in the marketplace.

The Decline of Equal Opportunity

In a recent Foreign Affairs article, “It’s Hard to Make it in America: How the United States Stopped Being the Land of Opportunity,” Dr. Lane Kenworthy of the University of Arizona attempted to produce an ambitious, comprehensive article on the decline of equal opportunity in the United States. Although the article attempts to cover a subject that cannot be reduced to five pages of text, Kenworthy highlights very compelling pieces of data to show that it actually is getting harder to make it in America.

Kenworthy covers a wide array of subjects in his piece, from changing family structure to educational access to worker compensation. He attributes a significant, although merely qualitative, effect to each of these contributors to declining equal opportunity in the country.

Here are some interesting stats that Kenworthy highlights:

• ·      An American born into a family in the bottom 1/5 of incomes between the mid-1960s and the mid-1980s has roughly a 30% chance of reaching the middle 1/5 or higher in adulthood, whereas an American born into the top 1/5 has an 80% chance of ending up in the middle 1/5 or higher (with perfect equal opportunity, the chances of each of these would be 60%).
• ·      The US is below Australia, Canada, Denmark, Finland, Germany, Norway, Sweden, and the UK in rankings of intergenerational mobility.
• ·      In Norway, Sweden, Denmark and Finland (where public universities are free), the odds that a person whose parents did not complete high school will attend college are between 40 and 60%, compared with just 30% in the US. 

These figures raise serious concerns. In the United States, we often justify inequality or small safety nets on the foundation that here, every person is the decider of his or her own destiny. That is, if they do not like their economic situation, they can change that situation through hard work. But, as Kenworthy’s article (and many other recent articles) highlights, America has been losing its claim to being the “Land of Opportunity” since the 1970s. If we accept this change, this requires either attempting to reverse that trend and working to restore opportunity, or ensuring that those who do not have access to higher education and high-paying jobs have a sufficient safety net to protect them from a situation not of their own choosing.

Fire in Bangladesh Once Again Highlights Safety Concerns in Development

Earlier this term, I wrote a blogpost about a devastating fire in a Pakistani textile factory that killed more than 300 workers. This weekend, more than 100 workers died in a Bangladeshi garment factory. This news highlights disturbing working conditions in developing nations, as well as the ineffectiveness of relying on corporations to independently regulate conditions in suppliers’ factories.

The most devastating piece of information about this recent disaster is that authorities consider many of the deaths to have been preventable. Many deaths resulted from inadequate and, in some areas, nonexistent exits, as well as insufficient access for emergency responders.

Julfikar Ali Manik of The New York Times reports on the tumultuous political context in the factory. He writes, “Tensions have been running high between workers, who have been demanding an increase in minimum wages, and the factory owners and government. A union organizer, Aminul Islam, who campaigned for better working conditions and higher wages, was found tortured and killed outside Dhaka this year.”

Advocates of safety standards appear as aggravating faultfinders until disaster strikes and exposes the true human cost of disregarding safety measures. Now is the time for strengthening international labor regulations and enforcement measures in order to protect against these disasters. As recent factory disasters have painfully shown, the cost of insufficient regulations and enforcement is the disturbing and unnecessary loss of human life.

For the NYT article on the fire, see: http://www.nytimes.com/2012/11/26/world/asia/bangladesh-fire-kills-more-than-100-and-injures-many.html?_r=0

Consensus on Removing Money from Politics? But Don’t Put it to an Election…

Throughout the election season, I wrote several posts about the danger of money in politics. This was a factor that we talked about briefly early on in this semester, because Martin Wolf writes that the power of money in a democracy is not a serious concern. Sheer volume and concentration of contributions in the 2012 election, however, should give rise to attention if not also grave concern. 

Of course, it’s not surprising to hear a liberal decrying the state of campaign finance – we’re on the losing end of Super-PAC contributions and we vocally opposed the Citizens United decision. However, in the most recent election, Democrats still received considerable sums of cash as a result of the lifting of campaign donation restrictions.

A recent Economist article surmised that the political climate might be open to campaign finance reform moving forward. Republicans, traditionally opponents of regulations in this area, might feel scarred from the recent election, and especially from the ineffectiveness of their donations in that election. There is also longstanding public support for such changes, which did help spur the McCain-Feingold reforms of 2002. With the most influential donors on the losing side of the last presidential election, the hope is that the road might have been cleared for at least some changes to existing law.

This is promising, so long as Democrats are still willing to jump on board with new regulations; however, it is important to remember the enduring impact of Citizens United. Because the Supreme Court struck down Congressional regulations through this case in the name of free political speech, new regulations would require a Constitutional Amendment, which would begin in Congress and then need to be approved by the states. This, of course, would take time and very considerable effort. It might be possible to pass new regulations mandating a higher standard of transparency without going through this process, which some liberal proponents of campaign finance reform refer to as the most likely option.

It is important for the President and Congress to put their feet down moving forward and attempt to pass new campaign finance reform that will limit the power of money, and especially anonymous money, in American elections. 

Hamiltonian Economics: Another Historical Perspective on Approaches to Deficits

Here is a historical perspective that contributes to the current discussion about deficit spending and, unlike many of my posts, this one doesn’t relate to the New Deal. This article by the (now deceased) Harvard business professor, Thomas McCraw, offers a window into debates about taxes and deficits that the country engaged in more than two centuries ago.

During the 1790s, Treasury Secretary Alexander Hamilton faced a deficit that was growing at an alarming rate. At the time, the United States owed significant sums to foreign lenders who had funded the Revolution. Just to put things in perspective, as McCraw’s article points out, the federal government’s debt-to-income ratio at the time was 46 to 1, compared to today’s 6.5 to 1.

Hamilton took a number of important steps moving forward. He refused to use vital resources to pay off existing debts, instead choosing to take out new loans at lower interest rates. This was most likely a good idea. Although McCraw focuses solely on Hamilton, President Andrew Jackson succeeded in paying off the national debt in 1835, but the strategy did not yield terrific results: a government surplus rolled into a land bubble and then a depression. Soon after, the US assumed more debt and has not been debt-free since (for more information on this economic event, see this NPR article).

Most importantly, however, Hamilton created the Bank of the United States, which the author of the article contends was very much in demand. At the turn of the eighteenth century, few banks were available, meaning that those who wished to invest and consume were limited. The creation of this precursor to a central bank served to increase credit. This expanded the tax base and subsequently raised government revenues. Within several decades, the debt-to-income ratio had decreased to 8 to 1.

McCraw contends that Hamilton’s accomplishment is relevant to today’s discussion because Hamilton was able to solve the revenue-debt problem without raising tax rates, but by expanding the tax base, or the “economic pie.” Hamilton understood something that most political leaders would comprehend today: the public is resistant to attempts to change the deficit through tax increases. But they will be less likely to complain if the deficit can be reduced through promoting economic activity.

McCraw’s article is worth a read, as it offers a thought-provoking and relevant historical perspective. However, we should be wary of believing that Hamilton’s solutions will easily work in today’s situation. First of all, the nature of government spending has vastly changed from the time when nearly all debt had been accumulated through one war. Secondly, we have already extended the tax base in the years since Hamilton ran the Treasury, through the establishment and expansion of the federal income tax throughout the twentieth century. What McCraw’s article might be most relevant to (which I would support) is a reform of the current tax code that expands the tax base through the elimination or reduction of many deductions and exclusions for upper-income households.