David Brooks: Mangling Economic Theory to Justify Poverty-Level Wages

July 25, 2015 – There are two contradictory justifications corporations, and their mouthpieces, use to argue against the minimum wage.

The first is Inflation Theory, which says that any increase in the wages paid to the lowest-income workers is immediately counter-acted by a society-wide increase in prices.  New York Times columnist David Brooks, in The Minimum Wage Muddle, explains Inflation Theory this way:

“The costs of raising the wage are passed onto consumers in the form of higher prices. Minimum-wage workers often work at places that disproportionately serve people down the income scale. So raising the minimum wage is like a regressive consumption tax paid for by the poor to subsidize the wages of workers who are often middle class.”

If that sounds somewhat nonsensical, it is. Inflation Theory is flawed because inflation is relative—it does not matter if the price of an apple goes from 50 cents to a dollar so long as everything else doubles in price, including wages. And it is blatantly misleading to characterize minimum wage workers as “middle class”; if they are a head of household or supporting a family, they are living in poverty.

But while inflation is neither inherently good nor bad, inflation benefits debtors and hurts creditors.

Inflation has a two-fold benefit to the working poor who carry significant debt (mortgage, student loans, credit cards).  First, workers earn more money. The lowest income earners (minimum wage), receive the biggest benefit, but those making just-above minimum wage will also see a rise in wages.  Second, they can more easily pay back outstanding debts. This is the principle reason right-wing economists use Inflation Theory less is that there are clear winners (low-income workers, especially those with debt) and clear losers (the wealthy).

Which brings us to the Job Loss Theory. Job Loss Theory, unlike Inflation Theory, has the advantage of at least purporting to be supportive of low-income workers. Job Loss Theory holds that if the price of hiring workers goes up, firms will hire less workers.

As David Brooks explains Job Loss Theory:

“You can’t intervene in the market without unintended consequences. And here’s a haunting fact that seems to make sense: Raising the minimum wage will produce winners among job holders from all backgrounds, but it will disproportionately punish those with the lowest skills, who are least likely to be able to justify higher employment costs.”

Although Job Loss Theory is superficially supportive of low-income workers, the breakdown in the logic results from treating human beings as commodities. If Job Loss Theory were true, then the minimum wage would result in a sustained high unemployment. But no one—no economist, dare I say not even David Brooks—has the audacity to try to link, over time, the real minimum wage to unemployment.

We’ve highlighted David Brooks’ column for two reasons:  1) the shocking arrogance of a political commenter writing things like “here’s a haunting fact that seems to make sense” and 2) the use of both Inflation Theory and Job Theory to justify keeping low income workers in poverty.

Of course, David Brooks mangled economic theory left out the fact that any full-time minimum wage employee working full-time in any State in the U.S. feeding a family of four is living in poverty. And that’s under the ridiculous Department of Health and Human Services Guidelines that say that a family of four can live on less than $25,000.

What Recovery? Economic Growth is Anemic

In our previous article – Progressive Taxation: Not on Hillary’s Agenda – we touched on the laundry list of proposals the Democratic front-runner was offering to help fix the economy. Many were good ideas – others like implying it is OK to tax millionaires and secretaries at the same effective rate – not so much.  We don’t need a laundry list of great ideas – we need a basic acknowledgment that something is fundamentally wrong – and that it needs to be fixed.

EconGrowthByDecadeVer1What’s wrong is that the rate of economic growth is this country has been slowing over time to the point where it is barely keeping up with population growth. As shown in the above graph, from an average growth rate of more than 4% in the 1950’s and 1960’s, the rate of growth slowed in the decades from 1970 until 2000 to just over 3%, then slowed again to an average of under 2% since 2000.

The big issues of our day – lack of good jobs, stagnating wages and income inequity all stem in part from the fact that our economy is not keeping pace. How does the U.S. compare to other countries? What are some of reasons behind stagnating growth? And how do we fix our broken economy? These are some of the issues we will be discussing in upcoming editions of The Democratic View.

Progressive Taxation: Not on Hillary’s Agenda

Hillary Clinton’s economic policy speech this past Monday at the New School of New York was a laundry list of progressive proposals– like raising the minimum wage, strengthening worker protections, social security and health care and investing more in infrastructure and early childhood education. See a video of her speech c-span.org.

HillaryClintonEconomicSpeech

Photo credit: http://blogs.newschool.edu/news/2015/07/hillary-clinton-economic-vision/

It was a speech, however, that was long on great ideas but short on specifics –for example how will she raise the revenue needed to implement all the initiatives she’s outlined.

It is one thing to talk about “tax reform” and another to detail specific revenue raising proposals.

Mrs. Clinton did talk about closing corporate loopholes and eliminating the special treatment of “carried interest” on profits paid out to executives and fund managers.

But these might best be described as nibbling at the edges of tax reform. When it came to broad-based reforms of the kind needed to pay for her many initiatives, Mrs. Clinton came up woefully short:

“… those at the top have to pay their fair share. That’s why I support the Buffett Rule, which makes sure that millionaires don’t pay lower rates than their secretaries. “

It’s a sad commentary that the best the Democratic front runner can muster is to say that millionaires should not pay lower rates than their secretaries.

Whatever happened to the concept of progressive taxation?

Have we forgotten a core Democratic principle – that people who earn more and benefit more from our economy should pay a higher effective tax rate?

Apparently we have, since virtually no one took Mrs. Clinton to task for effectively saying it is OK to tax millionaires and secretaries at the same rate.