The Value of Increasing the Minimum Wage

One obvious way to increase the value and attractiveness of working is to increase the minimum wage. The federal minimum wage has been $7.25 per hour since 2009 but Congress does not seem interested in increasing it. Individual states, however, can set a higher minimum wage. West Virginia’s minimum is now $8.75, having been increased in stages over several years. Many other states have done the same. Increasing the minimum wage puts more money in the pockets of low-income people who will spend it in the economy, reduces dependence on public benefits and costs taxpayers nothing. This is seriously good policy.

The Benefits

Raising the minimum wage not only benefits those whose wages were below the new minimum, it benefits most all workers in the economy. Let’s take the example of a hypothetical gas station and convenience store operation open 24 hours, similar to Sheetz. Suppose that before an increase in the minimum wage the store employs a total of four stock clerks paid at the federal minimum of $7.25 to stock shelves and clean up. The store also employs five cashiers at $8.50, two assistant managers at $10 and one manager on salary.

Now suppose that state raises the minimum to $9. Obviously, the stock clerks who were receiving the previous minimum wage will get an hourly raise of $1.75. In addition, the cashiers’ prior wage would be below the new minimum so they will also receive at least a $.50 raise.  But, more likely, the employer will want to maintain the spread between the wages of the stock clerks and the cashiers so the latter will receive an even bigger bump – let’s say to $10.25.

Now the assistant managers will also have to receive a bump to keep them better compensated than the cashiers. The salaried manager will have to be paid more than the new total compensation of the assistant managers, which would include higher hourly pay plus overtime, so even salaried employees might benefit. In this way an increased minimum wage ripples through the employee ranks and the larger economy.

Raising the minimum wage thus puts more money into the pockets of low and middle income workers who will actually spend the money rather than save it. The more money in circulation, the greater the wealth-creating effect. This wealth creation is also “revenue-neutral” for governments since the increase in wages is not paid for with tax money. In fact, an increase in the minimum wage creates more taxable income for governments and fewer government costs in the form of Medicaid, food stamps and other forms of public assistance.

A 2016 report by the Economic Policy Institute concluded that an increase in the federal minimum wage would “unambiguously” decrease government spending on public assistance:

Among workers in the bottom three wage deciles, every $1 increase in hourly wages reduces the likelihood of receiving means-tested public assistance by 3.1 percentage points. This means that the number of workers receiving public assistance could be reduced by 1 million people with a wage increase of just $1.17 an hour, on average, among the lowest-paid 30 percent of workers.

The Costs

Business groups are the typical opponents of increasing the minimum wage. The reason, of course, is that wages are a significant component of the cost of operating a business, particularly restaurants. But businesses constantly have to deal with increasing costs of all kinds, including labor costs. Successful businesses develop strategies for dealing with these increasing costs.

Rarely will a business go under because of a rise in the minimum wage and if one does it was probably not a viable, long-term business anyway. And an increase in the minimum wage applies to all employers so there is no one who will have a competitive advantage, unless it is one that operates more efficiently.

Perhaps in recognition that their business reasons for opposing a higher minimum wage are a bit selfish and unconvincing, opponents argue that the workers themselves will suffer from an increase in the minimum wage. According to this argument, if employers are required to pay employees more they will hire fewer employees or will give existing employees fewer work hours.

But this has never made sense to me. Assuming the employer has a constant level of work, employees paid at the minimum, whatever that is, will still be the least expensive way of doing that work. Hiring fewer employees at the bottom would simply mean that existing workers will get more hours, not fewer.

Opponents are fond of pointing to one-off studies that show employment loss as a result of increasing the minimum wage. A study after the recent Seattle wage increase did find some employment loss among the lowest-skilled portion of the workforce. There the minimum wage was raised from $9.47 to $13 in two years. But usually employment loss is found only when there is a large increase in the minimum wage like this. 

Meta-studies allow us to put these one-off studies into perspective. Meta-studies use a set of well-defined statistical techniques to pool the results of a large number of separate studies. A comprehensive meta-study in 2013 revealed that there is no statistically significant employment effect created by moderate increases in the minimum wage. In the last decade, influential studies using restaurant industry data in many U.S. counties and regions have concluded that minimum wage increases have “strong earnings effects and no employment effects.”

This conclusion has an explanation, or rather several explanations. The natural impulse of employers to hire fewer or fire more expensive employees is balanced by several “adjustment channels.” Some of these involve reducing other employment costs, such as reducing work hours, non-wage benefits or training costs. While the empirical evidence is not conclusive, it suggests that employers don’t adjust by cutting hours or other forms of compensation. If an employer has a steady volume of output it must generate, cutting hours is not an option – unnecessary hours would have been cut before. 

Another adjustment channel is simply to increase prices to pass along to consumers the added costs of new wage levels. While some of this does happen, employers do not substantially pass on to consumers the higher costs of employment. Studies have shown that a 10% increase in the minimum wage will result in between a .4% and .7% increase in prices. 

An increase in the minimum wage does not result in the termination of existing employees because the cost of recruiting, hiring and training even low-wage workers is so high that employers would rather retain even higher paid current employees. And a worker who is paid more is less likely voluntarily to leave a job. A 2012 study found “striking evidence” that separations and turnover rates for teens and restaurant workers fall substantially following a minimum wage increase.

Some argue that increasing the minimum wage will hasten the replacement of workers by technology. For many types of work automation is inevitable. This is no argument to underpay workers in the meantime.

Congress does not seem in any shape to increase the federal minimum wage, although the new Democratic majority in the House may take a run at it. Instead, the progress is being made in the states. In early November 2018, voters in two red states approved ballot initiatives raising the minimum wage – to $11 in Arkansas and $12 in Missouri. Perhaps the West Virginia Legislature will see the wisdom of making a similar change. Doing so will cost taxpayers nothing and the benefits to working people and the economy are clear.  

 

Economic Development Depends On Human Capital

I recently attended the yearly Economic Outlook Conference conducted by the WVU College of Business and Economics. The Conference is presented in five regions around the state. This one focused on the Eastern Panhandle. The news was mixed, with positive jobs and income growth in the Panhandle and North Central West Virginia while the state’s coalfields continue to lag in all measures. But the presenters made one powerful point that was probably unexpected in a room full of business men and women. Our economic future depends on the development of our human capital.

First the good news. Since late 2016, West Virginia has added 7,000 jobs. Per capita personal income in the state reached $37,900 in 2017, an increase of 3.4% — the second highest growth rate in the nation during the period. West Virginia’s GDP grew strongly in 2017, better than 40 other states. This growth was driven by increased coal production for the export market and by gas pipeline construction.

But the good news has to be put into context. In the period 2011 to late 2016, nationwide employment increased by about 15 million jobs while in the same period West Virginia employment decreased 20,000 jobs, even factoring in the recent increases. While our per capita income has surged, it is still only around 75% of the national average.

West Virginia’s challenges are well-known. Our population is among the oldest in the nation and, accordingly, is among the least healthy. Obesity is a big problem among children and adults. We have been ravaged by the opioid crisis. Adjusting for the effects of our older population, our mortality rate is still the second highest in the nation.

Another worry is that West Virginia’s population declined in 2017, the fifth consecutive annual loss – a cumulative loss of more than 39,500 residents on a population of only 1.8 million. Jefferson, Berkeley and two counties in the North Central area are the only counties forecast to experience growth in the next five years. A declining population means a declining tax base with which to solve the state’s problems.

But the statistic most germane to the discussion in the room was the one on workforce participation. Only 53% of West Virginia’s adult population is either working or looking for work. This is the lowest rate of labor force participation in the nation. Jefferson and Berkeley are the only two counties with a higher labor force participation rate than the national average. Low labor force participation is a significant hurdle for long-run economic prosperity. New businesses will not locate here and existing businesses will be unable to expand without a reservoir of qualified employees.

Why is our workforce participation rate so low? Part of the answer is that an older population naturally works less. But 27% of West Virginia’s prime-age workers (ages 25-54) are non-participants — also the highest among the 50 states. The complete answer is that our workforce is under-educated and under-equipped with job skills, in poor health, and challenged by hurdles to work common to poor and low-wage workers. The solution is to pursue policies that invest in ourselves, particularly our young and prime-age workers.

There are a number of thoughtful proposals for policies that could improve West Virginia’s low level of workforce participation. The West Virginia Center on Budget and Policy has long been active in encouraging these policies. Isabell Sawhill, a distinguished economist, has just published The Forgotten Americans: An Economic Agenda for a Divided Nation. Sawhill proposes a number of measures to increase workforce participation that value working as a source personal fulfillment as well as income.

Among the policy proposals from these sources are:

  • an increase in the West Virginia minimum wage;
  • a state earned income tax credit or worker credit;
  • enhanced child-care assistance;
  • increased funding for education at all levels, from pre-K to post-secondary; and
  • the development of more training programs for jobs that employers want to fill.

In upcoming posts, I hope to explore these policy proposals in more depth.

One of the presenters at the Economic Outlook Conference who seemed in sympathy with the need to develop human capital was Todd Hooker, Deputy Director for Business and Industrial Development at the West Virginia Department of Commerce. Yet he distributed a handout that reveals how difficult it will be to change thinking among business people about economic development.

Hooker’s handout touted “major wins” in economic development that consisted of the Proctor & Gamble and Macy’s projects in Berkeley County, the Gestamp metal stamping plant in South Charleston and the Hino Trucks plant expansion in Wood County. He suggested that these “wins” were produced by the elimination of the business franchise tax in 2015, and the reduction of the corporate income tax rates in 2011. But, of course, these tax measures reduced the government revenue available to fund policies that improve our human capital. Tax cuts for business are just corporate welfare that does not directly improve worker quality or availability.

In addition to informing the attendees, the recent Economic Outlook Conference may have done one other really useful thing. It may have been a step toward revised thinking among the economic elite about the need for government spending that develops the quality of our workforce. Because, after all, the future of our economic development depends on it.

SNAP Benefits, Work Requirements and West Virginia’s Hungry

The Supplemental Nutrition Assistance Program (SNAP) is the centerpiece of the nation’s food security safety net. In FY 2016 SNAP benefits, formerly called food stamps, provided $500 million in nutrition assistance to low income West Virginians. On average, 358,000 West Virginians received benefits each month, roughly 20% of our population. These benefits amount to about $1.29 per meal. Yet our state government seems determined to cut recipients from the SNAP rolls.

Governor Justice recently signed a law making it more difficult for under-employed individuals to receive SNAP benefits.  This new law (HB 4001) was promoted by Republicans in the Legislature using the old “welfare Cadillac” myth about recipients taking advantage of public benefits. HB 4001 will have the effect of reducing the number of SNAP recipients among the vulnerable low-wage population.

Furthermore, the 2018 federal Farm Bill pending in Congress might do much the same. The U.S. House version of the Farm Bill, which would restrict current SNAP eligibility rules, barely squeaked by in the House on a vote of 213-211. House leadership had to rely entirely on Republican votes, the first farm bill in history to pass either chamber with only one party in support. The Senate, which passed its own version, is willing to be more generous than the House. SNAP eligibility is the most contentious issue facing House and Senate conferees.  The harsh House approach was favored by West Virginia Congressman Alex Mooney for the emptiest of reasons.

West Virginia Governor Jim Justice

West Virginia Governor Jim Justice

To receive SNAP benefits an individual can have gross monthly income of no more than $1,307 and a family of four no more than $2,665. These figures are 130% of the federal poverty level. In addition, there are work requirements for eligibility, first imposed in 1996. An able-bodied adult without dependents (ABAWD) can only get SNAP benefits for three months in a three year period unless he or she meets the work requirements. This is called the time limit. An ABAWD must work at least 80 hours per month or participate in a qualifying training activity to avoid the time limit.

Federal law allows states to apply for a waiver of the time limit for ABAWD individuals in areas where it is more difficult to find work than in more prosperous areas of the country.  In West Virginia this has been done broadly on a county by county basis and many counties have routinely received waivers.  The waivers are largely responsible for the broad availability of SNAP benefits in the state. But HB 4001 will put a stop to these waivers. No West Virginia county will be allowed a waiver for any reason after October 1, 2022.

I am interested in eliminating fraud as much as the next person. But the waiver elimination in HB 4001 isn’t directed at fraud. Instead it is directed at people who are presumed to be lazy and unwilling to work, and who thereby take advantage of federal benefits. In this way HB 4001 creates a moral test of personal responsibility to receive assistance irrespective of need. It isn’t even a matter of saving West Virginia taxpayers money. SNAP benefits are entirely paid for by federal money, and every dollar in these benefits results in $1.80 in total economic activity in the state. So cutting people from SNAP benefits will actually hurt our economy.

Nevertheless, the lead sponsor of HB 4001, Del. Tom Fast (R-Fayette) told the Huntington Herald-Dispatch that the various features of the bill were designed to weed out “those who do not truly need assistance”:

I have consistently heard people just in conversation make complaints of seeing people purchase things with [a SNAP debit card] – luxury-type items – using the cards and then going out and getting in a luxury SUV. It is something I hear not just in my district but in areas all around the state.

This is certainly not what you would call empirical proof on which public policy should be made. Yet our Jefferson County Delegates — all Republican — didn’t seem to be bothered by the lack of proof. Delegates Paul Espinosa, Riley Moore and Jill Upson all voted in favor of HB 4001.

HB 4001 is just one more measure imposed by the conservative “personal responsibility” crowd without inquiring whether there might be some reasons other than lack of responsibility why a SNAP recipient might be unable to work twenty hours per week. Most of these people actually are working, but in jobs with low-pay, inconsistent schedules and unstable futures. The West Virginia Center on Budget and Policy adds that lack of access to transportation, undiagnosed mental illness, a criminal record from a past mistake, or living in an economically devastated part of the state are also plausible explanations. Unfortunately these explanations have also not been empirically validated.

But the Brookings Institution has looked at the question in a serious way in connection with the 2018 federal Farm Bill. Their research found that one in five adults in the ABAWD category switches between working more than 20 hours per week to a different employment status, such as working less than 20 hours per week, seeking employment, or being out of the labor force. For those in the labor force, work-related reasons – not being able to find work, being laid off, or working more than 15 hours for no pay at a family business or farm – were the most frequent explanations. Because only those working more than 20 hours per week every month would be eligible to retain their SNAP benefits, Brookings estimated that nearly 80% of ABAWD individuals would be exposed to potential SNAP benefit loss.

One other study came to a similar conclusion. In May 2016 the Department of Health and Human Resources did an experiment in the nine West Virginia counties with the lowest unemployment rates. The experiment explored what would happen if there were no possible waivers of the time limit — exactly the effect of HB 4001.  In the experiment ABAWD individuals strictly lost SNAP benefits unless they found 80 hours per month of employment or were participating in a work training or community service activity. While 5,417 people were cut from the SNAP rolls in the nine counties, DHHR reported that the experiment did not significantly improve employment figures for the ABAWD group. While the results of this experiment were available to the West Virginia Legislature before it adopted HB 4001, the results came to an inconvenient conclusion and were therefore ignored.

In a separate but predictable outcome during the experiment, demand for meal service at private soup kitchens increased 25% in Cabell, one of the nine pilot counties. This simply demonstrates that even though many of the hungry won’t be assisted by government benefits under HB 4001, they will still be hungry. The burden of feeding them will not disappear but rather will fall to private organizations.

Congressman Alex Mooney

Congressman Alex Mooney

Meanwhile the drama concerning the 2018 Farm Bill continues. The House version would impose increasing periods of disqualification each time an under-employed person failed to meet the work requirements. This feature and others are predicted to result in 400,000 households losing benefits. The Congressional Budget Office estimates that by 2028 the House version would lower the SNAP caseload by about 1.2 million people.  Congressman Alex Mooney, who has probably never experienced real hunger in his life, said that the “conservative” SNAP reform provisions led to his support for the Farm Bill. In a spectacular non sequitur, Mooney said that “because farmers work long hours to produce food for the nation, so should program recipients.” His analysis on this, as on other matters, is about a quarter-inch deep.

It is certainly time that we stopped blaming the poor for their own misfortune. Hunger and food insecurity are not things people voluntarily choose. Moreover, cutting people off SNAP benefits harms the entire state because we would lose millions in federal benefit dollars that circulate in our economy. Regrettably, however, unsophisticated and uncharitable attitudes toward poverty and hunger dominate the majority party in Charleston and in Washington.

Blaming The Victim: West Virginia’s Flirtation With Medicaid Work Requirements

It was my intention when launching this blog to support economic policies in West Virginia that actually spread prosperity to all citizens. The wealthy don’t seem to need help ensuring they get a big plate full at the prosperity table. It is the less fortunate who need help. But in this long Republican winter, avoiding policies that hurt the less fortunate is really a full time job.

Two ideas popular in West Virginia and the nation today fuel this problem. First is the Koch-funded libertarian idea that any expansion of public benefits is a threat to the “liberty” of those who are taxed to pay for it. This is well-documented in Nancy MacLean’s 2017 book Democracy in Chains. Second is the populist notion that people who receive public benefits are somehow lazy and morally at fault for their situation. Both of these factors are on display in the current debate about whether to add work requirements for Medicaid benefits.

Medicaid is a jointly funded federal and state program that helps several categories of low income and disabled people with medical costs. As of 2017, Medicaid provided healthcare coverage to 74 million nationwide (over 23% of the population). Some of the covered categories include children in low-income families, pregnant women, parents of Medicaid-eligible children who meet certain income requirements, and low-income seniors.

Obamacare extended Medicaid eligibility to all U.S. citizens and legal residents with income up to 138% of the federal poverty line, including for the first time adults without dependent children. But as a result of a Supreme Court ruling, states were not required to adopt this expansion in order to receive federal Medicaid funding for previously covered groups. Given its large poor population, West Virginia wisely opted to extend coverage. About 170,000 additional West Virginians became eligible under Medicaid expansion, roughly 9% of the state’s population.

On January 11, 2018, the landscape changed. The Director of the federal Centers for Medicare and Medicaid Services (CMS) issued a letter to all state Medicaid directors inviting them to apply for a waiver that would allow states to require participation in work and other community engagement as a condition for Medicaid eligibility. The policy change is described as “designed to assist states in their efforts to improve Medicaid enrollee health and well-being through incentivizing work and community engagement.” Yes, you read that right. These bureaucrats are asserting that work will make you healthy. They cite studies that link unemployment with depression. Of course, they have it totally backwards – being healthy will enable you to work.

I am inclined to think that CMS’ explanation is a cynical effort to avoid the legal challenges to Medicaid work requirements that have already begun. In the first place, approving work requirement waivers is an about-face – several states attempted this in the past but were denied. They were denied because work requirements for eligibility are contrary to Medicaid’s stated purpose to provide comprehensive healthcare coverage for people below state income thresholds. Administrative agencies cannot lawfully rewrite a statute through adding eligibility requirements that advance other goals (limiting benefits to the “deserving poor”) that are contrary to the purpose of the law. CMS operatives know this, which explains their absurd effort to link work requirements with health.

At the urging of Republican legislators, West Virginia’s Department of Health and Human Resources is now considering work requirements for Medicaid recipients. According to Jeremiah Samples, Deputy Secretary of DHHR, this effort would focus on “able-bodied” people:

We’re trying to empower folks to get out of the system. At the end of the day, the best thing we can do at DHHR for our able-bodied population is to get them into the workforce, without question.

Truth be told, any such requirements would expel recipients from the system, not “empower” them to leave. This is a stick not a carrot. For Medicaid expansion states like West Virginia, any work requirements will have the (intended) effect of reducing the recipient population irrespective of whether those removed remain below the state income threshold.

How would this happen? According to Mr. Samples, the DHHR is reviewing how other states plan to add work requirements. Kentucky’s waiver was the first to be approved by CMS. The Kentucky plan calls for reporting by the recipient every 30 days to verify that he or she is working or involved in some other activity approved by the authorities. Kentucky will disenroll recipients from Medicaid for up to six months if they fail to report changes in income or work status.  Beyond the sheer hassle to the recipient and the possibility of inadvertent noncompliance, this would be yet another layer of red tape and opportunity for error. It would be a system the sole purpose for which is to snag and remove Medicaid recipients who do not repeatedly, month after month, prove their eligibility and worthiness. An aide to Kentucky Governor Blevins says that he expects 95,000 recipients to be removed from Medicaid benefits within five years.

Getting people off benefit rolls and onto employment rolls is a great idea. But West Virginia can’t do this by denying people healthcare. There are several reasons why an “able-bodied” person might be in need of Medicaid that have nothing to do with laziness. A shortage of jobs is one. Being between jobs for over 30 days is another. A mismatch between job requirements and a worker’s skill might be another. Opioid dependency might be involved. In an excellent editorial published on January 25, 2018, The Charleston Gazette put it this way:

How does interruption in coverage improve anything? Or is it just an exercise for the righteous . . . to feel better about themselves? ‘Must work for your healthcare,’ might be a great policy in the perfect imaginary world where ideologists live, but it fails to acknowledge the real circumstances of life in most of West Virginia, both town and country. No doubt that is by design. If people who never liked the Medicaid expansion can dress up their ‘solutions’ as getting tough on the poor and lazy, it sells better than if it is more accurately described as kicking the most vulnerable West Virginia workers, or potential workers.

Eighteen states declined to accept Medicaid expansion funds despite the needs of their populations. This group includes every state in the old Confederacy except Arkansas and Louisiana. But one unintended consequence of the present willingness of CMS to approve Medicaid work requirements is that several of these non-expansion states are now considering participation in the expansion. This may have the ultimate effect of increasing the Medicaid rolls nationwide. But it is a development that will not help expansion states like West Virginia.

The Rich Benefit Bigly From Trump’s Tax Reform

The Tax Cuts and Jobs Act (TCJA) has added mightily to the already serious income and wealth inequality in America. Yet our state’s Republican representatives in Congress seem oblivious that most people in this state are poor relative to the rest of the country. They have boasted about what amounts to the crumbs on the table that middle and lower income West Virginians gain from this Act. For example, Rep. Alex Mooney, who represents much of the Panhandle in Congress, announced that he voted for “tax cuts for all West Virginians.” Always obsequious when it comes to the White House, Mooney said “President Donald Trump has been a true leader on delivering tax relief for all Americans and I am looking forward to continuing to work with him to create more jobs and to keep our economy growing.” There is no other way to put it — this emphasis on the illusory benefits enjoyed by the broad middle of our society is just willfully deceptive. The true winners under the TCJA are the rich, who will benefit at the expense of the rest of us.

Even the frequently touted tax reductions for lower and middle income taxpayers are not intended to be permanent. These will decline over the next eight years and ultimately expire. Sen. Shelley Moore Capito argued in the December 27, 2017, Spirit of Jefferson that the new law doubles the standard deduction to $24,000 for couples. But she failed to mention that this increase also expires in 2025. Furthermore, she didn’t even try to defend some of the law’s permanent features, which benefit the wealthy. These are the $1.5 trillion tax cuts for corporations, which will do nothing but increase the value of corporate stock in the hands of the wealthy, and the repeal of the Affordable Care Act’s individual mandate. The repeal of the mandate will generate $53 billion in annual savings by 2027, paying for about one-third (about 4.7 percentage points) of the bill’s 14-percentage-point permanent cut in the corporate rate. But it will leave millions more uninsured and raise premium rates for many others.

Here are three additional key ways in which the TCJA benefits the rich at the expense of the rest of us:

Distributing Tax Cuts Disproportionately to the Rich. The Tax Policy Center, a joint effort by the Brookings Institution and the Urban Institute, put it this way: “In general, higher income households receive larger average tax cuts as a percentage of after-tax income, with the largest cuts as a share of income going to taxpayers in the 95th to 99th percentiles of the income distribution.” This result will clearly play out in West Virginia.

Tax Benefits

Doubling the Estate Tax Exemption. The TCJA doubles the exemption from tax on estates valued from $11 million per couple to $22 million per couple. Doubling the exemption reduces the share of estates facing tax from 0.2 percent to 0.07 percent, leaving only 1,800 taxable estates nationwide. It is hard to understand why this tax change was so important — unless satisfying rich donors is considered. The estate tax rate is only 17%, far less than on ordinary income for this group of taxpayers. Still the tax exemption will be worth on average $4.4 million to those upper-end estates who will now be exempt. To put this in perspective, $4.4 million is about what it would cost to give 1,100 Pell grants to low income students.

Creating a Tax Break for “Pass-Through” Income. Although the corporate tax rate is reduced by 14 points, this benefit mainly applies to large corporations.  Many small corporations and limited liability entities account for business income by passing it through to the individual owner. Trust me on this, most of these business owners are not among the struggling taxpayers in this country. The corporate tax rate doesn’t apply to passed-through business income. Instead, the individual tax rate for that taxpayer would apply. It was not enough that the individual tax rates will be reduced, the TCJA also creates a special new tax benefit for pass-through business income. The final TCJA allows small business owners to deduct 20% of their passed-through business income.

I get it that current Republican ideology is interested in directing policy benefits to those in society they call the “makers,” while being far less concerned about everyone else whom they label the “takers.” The TCJA is a perfect example of how this works, even though Republican politicians continue to argue falsely that the beneficiaries of this law are the middle class. To some extent, the horse is out of the barn — this bad tax law passed warts and all. But we cannot let this go. At every opportunity in the run-up to the 2018 mid-term elections and then on to 2020, we need to keep this issue at the front of the debate.

Government by the Rich, for the Rich

The much maligned Tax Cuts and Jobs Act (TCJA) is regarded by most Americans as a naked effort by the Republican Party to reward its key donors, among them the wealthiest of Americans. Public polling has consistently been negative for this “reform” legislation. The law’s modest temporary tax relief for the middle class is just window dressing. The public has simply disregarded this window dressing and correctly assessed the stink from what has been served up to them.

The TCJA is an enormously complex law, with poorly understood provisions the effect of which won’t be known until well after the law takes effect. Since the tax code has a profound effect on the behavior of individuals and businesses, and hasn’t been revised since 1986, a major revision should be thoroughly debated in the light of day. But to do that would have permitted the TCJA’s ugly flaws to be exposed and for opposition to solidify. So in adopting the TCJA Republicans jettisoned any pretense of democracy.

There were no public hearings. Some of the law’s provisions were added at the very last minute. The Congressional Budget Office had no time to evaluate the Republicans’ flimsy claim that increased business activity spurred by the tax cuts would raise substantial new tax revenues. The Bill was available for review roughly three days before the final Senate vote. The Democrats, who were not opposed to revisions to the corporate tax structure and might have made reasonable suggestions, were shut out of the process. This is how the Republicans govern.

One wonders why a massive tax cut was so important for Republicans in the first place, particularly in the face of negative public polling. The Trump Administration is riding the wave of economic recovery that began well before Trump took office. National unemployment is hovering around 4%, generally regarded as full employment. Corporations are already sitting on $2.3 trillion in cash reserves. They do not need massive tax cuts to free up cash for investment. The answer is that big donors are furious about not receiving the big tax cuts that were promised when the Republicans repealed Obamacare, which they failed to do.

Nobel-prize winning economist Paul Krugman has argued in the New York Times:

A large part of the answer [for why a huge tax cut was so important] is that many Republicans now see themselves and/or their party in such dire straits that they’re no longer even trying to improve their future electoral position; instead, it’s all about grabbing as much for their big donors while they still can. Freedom’s just another word for nothing left to lose; in the GOP’s case, that means the freedom to be the party of, by, and for oligarchs they always wanted to be.

Krugman can be intemperate at times, but he seems to be on to something. At all the key forks in the policy road, the Republicans have rewarded themselves and their rich friends. The TCJA represents a huge redistribution of wealth from the poor and middle class to those in the upper income brackets who hardly need it.

By far the largest impact of the TCJA will be the reduction of corporate tax rates. These reductions will themselves be responsible for nearly $1.5 trillion in reduced tax revenues. The Republican argument is that corporations will use this new cash to increase business capital investment, hire new workers and raise wages. But there is nothing in the TCJA that requires a business to use the tax cuts in this way. Many businesses have said they will use the money for non-productive uses like increased dividends and share repurchases. These uses only serve to increase the value of the corporation’s stock in the hands of those who own it.

Who benefits when the value of corporate stock goes up? Only 52% of the American public owns any stock whatever, even in retirement accounts, and those owners surely won’t be found in the bottom half in wealth and income. President Trump is fond of bragging about how the stock market is breaking records. Can’t you just hear the Champagne corks popping in all the nation’s homeless shelters?

In my next post, I will detail how the rich will directly benefit from the TCJA at the expense of the rest of us. Certainly, this statute ought to be one of the first things on the agenda of any new Democratic majority in Congress to reverse. In fact, instead of just undoing this bad law, the TCRA may unleash the Democrats to make substantial changes to the tax code to benefit affirmatively those whom the Republicans have, for now, shut out.

Moral Politics

Recently, the Charleston Gazette published an editorial that I have not been able to quit thinking about. The editorial was entitled Morality, Irony and the Fate of America. It pointed out that the current Republican agenda is to take healthcare away from 20 million Americans, 170,000 of them West Virginians, and direct that money to the rich in tax cuts. It noted further that the proposed Trump tax cuts would cut one-fourth of the SNAP benefits for low-income families, undermining nutrition for 100,000 West Virginians. All with the same result of benefitting the rich. And “various other programs that keep the wolves from the door, that give people breathing space to improve their own circumstances, are at risk in the ongoing conflict.” According to the Gazette, this is not just wrong as a matter of policy. It is immoral.

Using morality as the basis for political argument has a rich history in America and elsewhere. But this is dangerous territory because each of us has a personal view of morality fashioned by family, religion, education and personal experience. When it comes to morality we are not all using the same language. As but one example, opponents of abortion use one version of morality to fuel their opposition. Freedom of choice proponents use a different version to argue for the opposite outcome. Still it seems worthwhile to discuss whether there is a moral politics and, if so, what it is. So, with no expertise in political philosophy or thinking about morality, I now venture there.

The first question is the legitimate role of government. This, of course, is a hot topic these days. Beginning from the conservative view of its proper role, government should only do the things that to be effective must be done collectively. In this category would be things like national defense, large infrastructure projects, and the tax collection system that funds both. Since government has a legal monopoly on force, then also among the things government should do is make laws for common safety and security, enforce the laws through policing and corrections, and resolve disputes through the court system.

Are social welfare programs that create a floor beneath the less fortunate among these things? Here we are talking about highly popular programs like Social Security, Medicare, SNAP benefits, unemployment compensation and disability benefits. If social welfare programs are to be undertaken at all, then it is easy to conclude that these programs are also among the things government should do.

Only government can mount social welfare programs on the scale that would be effective. Most social welfare programs operate on insurance principles that spread the risk of catastrophic outcomes and their cost throughout the whole population instead of forcing the individual victim to bear the full weight. This has to be organized collectively. There may be some among us who would say that churches and private charities could do this work but this is a pipe dream. Private charity is important but it would be quickly overwhelmed without collective government action.

Well then, does government have an obligation to devise and implement social welfare programs – to support the needy and less fortunate among its citizens? Libertarians and other followers of the “objectivist” philosophy of Ayn Rand would say no. They believe that the individual prospers by being selfish, asking for no help from others and giving none.

This objectivist view is inconsistent with the Judeo-Christian philosophy of action and with the teachings of every organized religion. Religious leaders whose business it is to consider moral issues consistently say that helping others in need is a moral imperative. A recent letter to the editor of the Gazette from the Executive Director of the West Virginia Council of Churches urged our Congressional representatives to maintain their support for SNAP benefits on religious grounds.

Then there is the fact that every modern government recognizes this imperative, those in Western Europe more than others. Social welfare programs became more common as the phenomenon of empathy spread in society. But mere empathy withers in the face of the high cost of acting on it. As New York Times columnist David Brooks has argued, those we recognize as having a strong moral compass have sense of obligation to some religious, military, social or philosophic code. They would feel a sense of shame or guilt if they didn’t live up to the code. Whatever the source of this moral sense, when it comes to social welfare most people have it. It would be difficult to find a political leader in any country, except perhaps our own, willing to deny that government has a moral obligation to build some sort of support system for those in need.

Without anything to back this up other than a visceral feel, I believe that our sense of moral imperative, and therefore the legitimacy of government social welfare programs, is highest when dealing with basic needs. Wide swaths of society can rally around programs that eliminate or reduce hunger, but far fewer around programs that, say, provide recreational opportunities. In the high legitimacy category I would also put minimizing pain and disease, homelessness, the infirmities of old age, and responding to natural disasters. But certainly there can be a lot of debate around what we are morally compelled to do.

Unlike the debate about abortion, there is no countervailing moral argument behind the current Republican opposition to Medicaid and SNAP benefits. Medicaid expansion, and even the basic idea of Medicaid itself, has been threatened in the fever to repeal Obamacare. How, or if, we manage health insurance for those able to afford it is a different question entirely from whether we provide it for those who can’t. The fact that Congressional Republicans have wrapped the two issues together in the repeal effort demonstrates that the argument to undermine Medicaid cannot stand on its own.

When Paul Ryan, Mitch McConnell and their surrogates offer any reason behind their hostility to Medicaid and SNAP benefits it is a fiscal, not a moral reason. They say we must cut back on these benefits because they are growing at a rate that is unsustainable over the long run. I don’t pretend to know whether this is true but it seems unlikely we couldn’t find some adjustments to make them sustainable. What is perfectly obvious is that the people who receive these benefits are in need now — today. The moral imperative for government to act should not yield in favor of some cool assessment of future bookkeeping. Doing what should be done may not be easy, but that is often the nature of moral choices.

 

 

Imagining A Fair Distribution of Wealth and Income

Many have said that wealth and income inequality is the most serious long-term problem facing our country. So I invite you to play this thought game. Imagine that you are in a position to decide how wealth should be distributed and, further, that you can decide what rules will apply to the distribution of future income. Your objective is to devise the fairest system that will allow our economy to prosper and best ensure the long-term stability of our democracy.

Three general approaches to this game come to mind. First, there is the “Candide” approach in which we would conclude that this is the best of all possible worlds and that the wealth and income distribution we now have is superior to any other. A second approach might be called the utopian socialist approach where all wealth and income would be distributed equally among everyone. A third approach might be to devise some system, either moral or economic or both, that values the contribution made to society by each person and then distributes wealth and income accordingly.

Despite the huffing and puffing of conservatives (I can hear them now) redistribution of wealth and income is not a radical idea. We already do it regularly. Almost any taxation system imaginable takes wealth from one class of person and spends it in ways that benefit another class. This is especially true of the progressive income tax, which taxes the wealthy more heavily and spends on programs that either benefit everyone equally (national parks) or benefit only the poor (food stamps). Our Social Security and Medicare programs are well-loved income transfer devices. Even public schools have a redistributive effect – property owners pay tax that is spent educating the children of some parents who own little or no property. So in our game let us not be afraid to imagine that we can shuffle the deck.

Most of us will reject the Candide approach because it would be manifestly unfair, unstable and will lead to disaster. Anyone with a pulse has heard the statistics about how unequally distributed American wealth and income have become. Take this example: the six heirs to the Wal-Mart fortune command wealth of $69.7 billion, which is equivalent to the wealth of the entire bottom 30% of U.S. society. This inequality is getting worse. Some scholars like Thomas Picketty have advanced a theory for why this is happening.

In his 2013 book Capital in the Twenty-First Century, Picketty summarizes mountains of data by offering a simple maxim: over time income from capital grows faster than income from wages and salaries. Let’s say you start with an inherited nest egg. Your interest, dividends and capital gains make you better off today than the average Joe who works for a living. Picketty says that by normal operation of the economy you will be even better off than Joe next year, and then better the next, and so on. Add to this the fact that the wealthy have political power to protect their favored position and are shameless in exercising that power.

Wealth and income inequality is not just an abstract numbers game – it is a life and death matter. Take, for example, infant mortality and life expectancy. Out of 34 industrialized nations, life expectancy for newborn girls in America ranks 29th. While American babies born to white, college-educated mothers survive at normal levels, what drags our statistics down is the high mortality rate of infants born to non-white, unmarried, poor women. Infant mortality is not the only threat to life created by skewed wealth distribution in this country. Recent studies have shown an increase in “deaths of desperation” among middle-aged, uneducated whites.

If our social conscience is somehow blind to all this, consider the following wake-up call. Every society that has allowed itself to become seriously unequal has suffered a catastrophic redistribution of wealth and income. Some of this was the result of plague-related population decreases. But more often than not, it was the result of war or violent revolution. Those are the findings of a new book The Great Leveler, by Walter Scheidel:

Violent shocks were of paramount importance in disrupting the established order, in compressing the distribution of income and wealth, in narrowing the gap between rich and poor. Throughout recorded history, the most powerful leveling invariably resulted from the most powerful shocks . . . mass mobilization warfare, transformative revolution, state failure and lethal pandemics.

So if the best solution isn’t to leave things as they are, is it instead a utopian equality of wealth and income? There has never been such a system, except on a scale too small to be a reliable guide. The communist expropriation of wealth in the Soviet Union followed by forced collectivization didn’t work out so well. A complete redistribution of income in America, even in a thought game, is hard to imagine.

Putting aside that it would be politically impossible, a completely equal distribution of wealth and income would itself be unstable. Most people don’t see complete equality of wealth as necessary or even desirable. Recent research has shown that people are less concerned with inequality of wealth and income than with the negative consequences of that inequality and the unfairness of how the inequality developed. In other words, most people are willing to tolerate a modest level of inequality if it has not been unfairly achieved.

If we reject the two extreme approaches, we must imagine a wealth and income distribution based on social and economic values. But it must be a sustainable system that produces economic prosperity. At a minimum, such a redistribution would involve a shift of wealth and income from the super-wealthy to everyone else. We know how to do this – an effective progressive income tax with high marginal rates, a corporate income tax with no loopholes and an estate tax that prevents the inheritance of obscene fortunes. Such a regime would produce more money to put in the hands of people who will spend it rather than save it, increasing demand for the products and services offered by businesses and spurring growth.

But how would we make fair distinctions among the recipients of the new tax revenues? One idea now in vogue leap-frogs that problem by providing a universal basic income. Alaska does this now with its oil wealth, distributing around $2,000 per year to every man, woman and child in the state. In his 2006 book In Our Hands: A Plan to End the Welfare State, the conservative intellectual Charles Murray proposes a $10,000 payment per year to every citizen beginning at age 21, funded by the complete dismantling of welfare programs that grant benefits to some but not all citizens. The key would be to distribute a like amount to everyone that would raise the floor of income but not be so large as to create a disincentive to work. Universal basic income is an idea we will be hearing more about.

Finally, should we readjust the wealth and income benefits of people who contribute to society through public service but who are now underpaid? In this group would be teachers, police, fire fighters, country doctors and others. We could achieve this through tax credits. We do something similar to this now by forgiving the loan debt of people who enter public service careers. Why not get serious about it and through favorable tax treatment raise the income and status of these professions so they attract the best?

In this article I have suggested some action we should probably avoid and some we might pursue. Now the game is up to you. What would you do?

 

 

How We Talk About Economic Growth

In the last few years of the Obama administration, The Wall Street Journal relentlessly criticized the administration’s failure to achieve sufficient economic growth. That newspaper complained that Obama’s over-regulated economy was to blame for a GDP growth rate of 2.1% — tepid compared to recoveries in the past.

The Journal is, of course, the voice of business people who often favor the conservative agenda of low taxes and lower regulation. But the Journal was on to something. The need for economic growth is hugely important and one thing both conservative business people and progressives should be able to agree on.

Progressives can rally behind strong economic growth because material prosperity improves the quality of life and opportunity for everyone. Unfortunately, as with so many other things, conservatives and progressives are each mired in their own rhetoric. Every issue seems to have its predictable arguments. A proposal for raising the minimum wage will inevitably be met with the argument that employers will have to cut jobs. A proposed international trade deal will be opposed by arguments that globalization harms the little guy.

But neither side talks about the social and political benefits that accrue to a country with a steadily growing economy. These non-economic benefits must be counted along with the hard financial and environmental factors when we evaluate any serious policy question. Doing so may actually tip the scale in favor of some policies that will promote growth versus the predictable counter arguments.

In his 2005 book The Moral Consequences of Economic Growth, Benjamin Friedman catalogues the social and political benefits of growth: openness, tolerance of different ethnicities and points of view, philanthropy, and a satisfaction with the democratic process, if not always its results. A stagnating economy, on the other hand, leads to rising intolerance and incivility, defensiveness, eroding generosity, rigidity of institutions, and a disrespect for the democratic process.

The mechanism for this effect is psychological. Economic growth, or the lack of it, drives a person’s perception of whether he is getting ahead or falling behind. There are two benchmarks for this. One is a person’s current economic situation compared to his past situation. The other is a person’s current economic situation versus the current situation of other people. These two benchmarks can be substitutes for each other. In a steadily growing economy, a person’s satisfaction with being better off than he was in the past can mitigate his impulse to be better off than his neighbors.

On the other hand, when an economy stagnates and a person is not better off than he was in the past, his need to be better off than his neighbor (or people of color, or immigrants) intensifies. His view of the economic pie becomes zero sum – his situation can only improve if someone else’s declines. If someone else seems to be getting ahead, he assumes it must be at his expense. Both the positive effects of a growing economy and the negative ones of a stagnating economy are magnified when people consider the opportunities available for their children.

This is not some pop social theory. American history provides many examples to confirm its accuracy. Between 1880 and 1895, real income per capita grew by only .7% per annum. In the same period Jim Crow laws, segregation in every aspect of life and appalling violence became the norm in the South. In rural America populism led to nativism, ethnic intolerance and open religious bigotry. In the West, riots protested the use of Chinese labor for railroad construction and immigration laws were tightened.

Contrast this with the post-WW II expansion. With the exception of several brief but painless recessions in the Eisenhower years, Americans enjoyed uninterrupted economic growth from the end of the war to 1973. Over the prolonged period from 1948 to 1970 real income growth per capita averaged 2.4% per annum. Home ownership became a realistic possibility for most Americans and white collar jobs opened to many. It is no coincidence that during this period political and economic democracy was extended to non-whites. Brown v. Board of Education mandated school desegregation and a decade later the Civil Rights Act of 1964 outlawed discrimination in employment, public accommodations and housing.

While none of the foregoing changes – good or bad – happened overnight, political change is possible when only a small number of voters change their minds. The recent shift in public sentiment about gay marriage comes to mind. Likewise, a stagnating economy need only influence a small segment of the populace to produce unfortunate results. Many political analysts have said that fewer than 20,000 economically frustrated voters in Michigan and Wisconsin elected the incompetent Donald Trump with his agenda of anti-Muslim animus and disregard for environmental and social justice.

Economic growth is a good thing. It strengthens not only our material prosperity but it permits the kind of positive social and political behavior we all want to see in our country. This is not to say that bad policies – ones that would irreparably harm the environment, for example – should be adopted simply because they are said to promote growth. What it does mean is that we should evaluate our economic policy choices by also considering the indirect non-economic benefits of growth. In the end, this may lead progressives to be less instinctively critical of pro-growth policies and bring the left and the right together toward a common economic agenda.

Eliminating the Income Tax and Creating a New Consumption Tax: Bad Law and Worse Policy

Mischief is well on its way to becoming law in West Virginia. The Republican-controlled Senate Select Committee on Tax Reform is about to propose to the full Senate the passage of SB 335, which would phase out the state income tax and transform the current 6% sales tax into a broader 8% consumption tax. The conceptual basis for the proposed law is that the state provides the marketplace in which sales can take place so that vendors and purchasers who engage in transactions should be required to pay for the privilege of using that marketplace. If that silliness weren’t enough, the Bill’s legislative findings provide the following gem of a non sequitur. “The Legislature further finds that, in the free market system, the best judge of a purchaser’s ability to pay, for the purchase of the goods and services, is the purchaser, and, thus a broad-based consumption tax is firmly based on that principle of sound and fair taxation.” There is nothing sound or fair about this revolutionary change in West Virginia’s tax structure and it should be stopped in its tracks.

The fiscal soundness of SB 335 will be addressed in the next post on this site, upcoming promptly. But it is on the question of fairness where SB 335 fails us badly. Consider the point in the legislative findings that the purchaser is in the best position to know whether he has the ability to pay for a purchase. That may be true in the abstract, but completely misses the point when it comes to a consumption tax. There are many of our fellow citizens who are poor and spend only on the necessities of life – food, clothing, shelter, and the like. For them these purchases are not optional. They are not in a position to ponder whether “ability to pay” might lead them to decline such a purchase. For consumption by low-income citizens there is no magical marketplace of free choice like that existing in the dream world of some legislators.

Contrast this with the choices available to the financially comfortable. The purchaser of school clothes for kids in a well-to-do family has many options and certainly could choose to purchase less expensive clothing. But really, the ability to pay for a purchase is not the question for these consumers. It is their willingness to pay for the purchase plus the tax. And suppose the well-to-do purchaser decides not to make a purchase because of the tax. That would only hurt state tax revenues and thereby the operation of state government. The ideological foolishness of a consumption tax is quite apparent from this. The logical effect of making every business transaction 2% more expensive will be to make those transactions smaller in amount, less frequent, or avoided altogether. One can imagine many purchases being made across the border in states with a lower consumption tax.

One thing is certain – enacting SB 335 will shift a greater tax burden onto West Virginia’s poor and working class and away from wealthier taxpayers. Low income taxpayers, including seniors dependent on social security, are not currently subject to high income tax rates and do not pay much in total income taxes. Higher income taxpayers pay considerably more income tax. Contrast a consumption tax, which doesn’t concern itself with how wealthy you are, only how much you spend and on what things. As mentioned, SB 335 proposes to raise the state consumption tax from 6% to 8%. If it passes, the total tax paid by the low income taxpayer will rise slightly because of the additional 2% tax on his purchases, while the wealthy taxpayer will get a nice overall tax reduction. This is because the additional 2% sales tax paid by the wealthy taxpayer on her purchases is far less than the income tax she would avoid.

Sen. Robert Karnes (R-Upshur, 11), the same legislator who chairs the Senate Select Committee on Tax Reform, has sponsored two bills that are apparently intended to blunt criticism of the fairness of SB 335. One, SB 377, calls for a payment of up to $200 to be made by the state to low income senior citizens who file a yearly claim to receive it. The actual amount of the payment would be based on a declining percentage of the taxpayer’s income above the federal poverty level. SB 378 would create a similar payment, called an “earned income credit,” for low income workers. This is a misnomer because there would be no West Virginia income tax against which to credit it.

The inadequacy of these two sops is obvious. First they do nothing for the low-income unemployed who have no earned income to report. This omission is consistent with the view of many conservatives that if you are poor and unemployed it must be your fault. Second, these “credits” bear no relationship to the amount of additional consumption tax low-income individuals will be forced to pay. For example, a person earning $20,000 who is forced to spend it all to survive will pay an additional consumption tax of 2% on all purchases — a total of $400 in additional tax. Neither of the proposed “credits” could ever be more than $200. Finally, they require the taxpayer to file an additional tax document and wait for approval of the once per year payment. This does nothing to help him make ends meet on a day to day basis.

Even if such a major change to our tax system could solve our budget problems (more on that later), how can it be called fair when it benefits the rich and further burdens the low income residents of the state?