MINIMUM WAGES
In May of 2007, during the Bush 43 Administration, Congress passed legislation that raised America’s hourly minimum wage in three stages from $5.15 to $7.25 – an increase of 41% in slightly over two years. The stated purpose of minimum-wage requirements is laudable: it’s to give every worker a living wage.

“How nice,” good-hearted readers may respond; “it’s hard enough to get by on $7.25 an hour, but making due with $5.15 is nearly impossible these days.  And imagine trying to feed yourself, much less clothe and shelter yourself, if some fat-cat boss could get away with paying you even less!”  They’re right.  And low-skilled individuals who keep their jobs are decidedly better off with the higher minimum wages.

The problem is the unintended consequences.  Not everyone gets to keep his or her job when the rules change.  Because the government cannot force private enterprises to hire new workers or continue employing existing labor when the cost of doing so goes up, raising the minimum wage prices people with unexceptional skills out of the market.  For all their good intentions, minimum wages accordingly create more unemployment and more poverty for society as a whole.

The third increase in the minimal wage, the one that raised the rate from $6.55 to $7.25, took effect in July of 2009.  The timing was terrible.  In the midst of high and rising unemployment, and halfway through a year where cost-of-living indices actually declined, we made old jobs and new hires even less affordable to companies that were already losing sales and cutting back their workforces.

It’s much harder to get by with $0.00 an hour than with a market-determined wage.  But the consequences for the future may be even worse than the poverty of the present. When the starting wage gets too high, not only do some workers get laid off, but others can’t even join the workforce in the first place.  Their entry-level job skills simply aren’t worth $7.25/hour.  Educating one’s way out of poverty occurs just as much in the office as it does in the classroom.  When people fail to find employment, they don’t just lose wage income today, they also lose the on-the-job training that makes future advancement to better jobs possible – all this on top of the destructive effect unemployment has on existing skills and attitude.

This problem is particularly acute for individuals seeking their first jobs. The Wall Street Journal’s lead editorial on March 5 is entitled “The Lost Wages of Youth” and has some stern and startling unemployment statistics for teenagers in general and teenagers of color in particular. The situation is so bad that the Journal condemns in no uncertain terms going through with last summer’s last step in 2007’s three-stage wage legislation:

To raise the cost of unskilled labor precisely when the jobless rate is heading towards 10% is an act of almost willful economic stupidity.  A Congress that has spent $862 billion to create jobs thus managed to harm tens of thousands of entry-level job seekers.  And it did so in the name of “compassion” and a “living wage.”

The WSJ could have said much more.  Because it’s a national standard, the wage floor is even more destructive for teenagers in parts of the country with low costs of living than the averages indicate for the United States as a whole.  Teenagers living in rural Mississippi, for example, have a much harder time finding employment when the starting wage is $7.25 than their counterparts in Anchorage, Alaska, where the cost of living is so high that the minimum wage may be below market rates and therefore irrelevant.  Mississippi itself suffers even more than loss of employment and associated production.  It also loses some of the competitive advantage it would otherwise gain from lower labor costs.  In a sense, minimum-wage legislation is a subsidy to the pricier states and cities in our nation.

PAYROLL TAXES
The Wall Street Journal also could have, and should have, extended its critique to payroll taxes and the disincentives they add to an already ugly picture of market distortion and unintended consequences.  The omission is surprising for a newspaper of its conservative nature and caliber.  Each of the five taxes has a raison  d’etre, but none of the benefits at this time is worth the associated costs.

All wages up to a ceiling of $106,800 are taxed to “fund” Social Security and Medicare.  The idea is to “smooth” consumption and make people “save” for the days when they’re too old or too sick to work.  But the revenues are not in fact saved, and they aggravate unemployment and poverty issues.

Employers pay half these payroll taxes themselves and withhold the other half from the checks they cut for their employees’ take-home pay.  When markets set wages, it’s highly likely that companies shift some of their payroll-tax burden to their employees by reducing their pre-tax wages.  When workers are paid minimum wage, none of this shifting is possible.  While shifting at first glance seems morally opprobrious, it’s a heckuva lot less heinous than firing.

Social Security payroll tax rates are currently 6.2% for both employer and employee, and Medicare adds another 1.45% to both sides.  The $106,800 ceiling is irrelevant for minimum-wage workers, and there’s no exemption for low incomes.  The result is to increase employers’ hourly-wage cost for each of their lowest-skilled workers to more than $7.80, while reducing take-home pay initially to less than $6.70.

Fortunately, low-paid employees with a certain savvy can file an Earned Income Credit (EIC) form with the IRS and, depending on their income and number of dependents, restore part, if not most, all or even more than all, of their gross earned income.  (Sometimes they can even get more money from the government than was withheld from their paychecks.)  Unfortunately, there’s no such program to reduce taxes on the employers’ side, where heightened labor costs continue to cause layoffs and deter job creation.

Add to this business burden Workmen’s Comp taxes, paid by employers, with rates based on how many previously employed workers have filed for injury claims. Keep going with Federal and State Unemployment Tax Acts (FUTA and SUTA).  FUTA levies another 6.2% employer tax on the first $7000 each employee earned. Although much of this “unemployment insurance funding” can be offset by a refund if paid in a timely fashion, it still remains regressive because of the salary ceilings. And isn’t it ironic in all times, but particularly these, that companies creating  and maintaining employment are also penalized through payroll taxes that make them fund unemployment programs?

Could there be more obvious deterrents to new hires in precarious economic times than the chaotic array of legislation we’ve now discussed?  Actually, yes: continuing to make health insurance a required, regressive, and tax-subsidized perk of employment for businesses over a certain size.  But that’s step three in addressing economic reforms to reduce unemployment, deficits and debt, and the purview of another piece.

CONCLUSION
Minimum-wage legislation is an abomination for society as a whole.  While it benefits some low-skilled workers, it does so at the expense of the even more vulnerable, whose poverty it only deepens.  Minimum wages should be abolished.

Five different payroll taxes add to the damage.  They further discourage employment, and for some workers they also take away sizeable chunks of incomes that are already perilously low.  The good-hearted readers who – at least initially – applauded the concept of the “living wage” as achieved through minimum-wage legislation should now rise up in outrage over policies that take money back from those who keep their jobs but either don’t qualify for full refunds through EIC or don’t know enough to file.  Payroll taxes should be suspended for both sides, at all wage levels, at least while unemployment rates are so high.

The goals for all six of these wage and tax policies are admirable.  But the best of intentions often create the worst of programs.  They do so because of unintended consequences.  They do so because we cannot overturn the laws of economics, we can only work with them.

The best way to help poor people is to help them help themselves.  We should reform formal education so that everyone can read, write, and think.  We should encourage employment not only for the earned income but for the on-the-job education that leads to better jobs.  And we should ease the transition to a living wage.  For those of us who believe in the ability of poor people to make decisions on their own and to learn from their mistakes, the best transitional tool is the negative income tax.  For those of us who prefer to protect them and guide their choices,  vouchers are the way to go.  Minimum wages and payroll taxes are getting in the way for both sides.

The problem that holds back reform is that we must also work with the laws of politics.  Unions, for example, love minimum wages: they keep some nonunion labor competition at bay.  And the majority of politicians in power today – the Democrats — are deeply indebted to unions.  How else to explain the government bailout-takeovers of Chrysler and General Motors?

If there is ever a time when we can overcome the political power of vested interests and eliminate minimum-wage laws and suspend payroll taxes, that time is now. Rates of unemployment that all of us find ethically and economically unacceptable demand solutions, and alternative approaches are not working well. A lot of the “stimulus” programs have yet to be implemented, well over a year into recession.  For those that have, it looks as if each job “saved” has cost six-figure sums of added deficits.  These results are appalling at all times, but particularly when soaring deficits and debt undermine confidence and credit ratings.

Eliminating minimum-wage laws is fast and free.  Suspending payroll taxes is a quicker, more equitable, and arguably much cheaper approach to reducing unemployment than the government spending the Administration has endorsed and pursued so far.  And let’s be clear: EIC has already nullified, reduced or reversed half of the biggest payroll taxes — those associated with Social Security and Medicare — for many with low income.  Let’s give the same break to businesses for all of the payroll taxes they pay.  Suspension would have to be fairly long term to generate results, and it also provides an opening wedge to eliminating these highly regressive taxes altogether.

For a man who admires speed, pledges fiscal sobriety, and talks the populist line as much as President Obama now does, the obstacles to these suggested reform are political, not economic. Each government program, whether it be taxing, spending or regulating, creates its own protective constituency. If our President can bring to Washington the change we once believed in, we can emerge from recession in better – stronger, more equitable – shape than ever before.  The time to act, Mr. President, is now.

Government deficits and debt have reached alarming levels today, and the unfunded liabilities of tomorrow are even more staggering.  The key to attaining fiscal sobriety is entitlement reform, and Social Security is as good a place to start as any.

Established in 1935, in the midst of the Great Depression, Social Security was FDR’s strong response to the difficulties experienced by the elderly, who saw most of their nest eggs disappear with Black Tuesday’s precipitous 12% drop in the stock market and continued declines for more than a decade thereafter.  Already retired from work, what could they do to restore their savings, the assets on which they’d counted to fund their golden years?  Nothing besides hoping for economic recovery.  So FDR thought the Government should help, and it did.

The program was, and remains, one based on “contributory financing”.  Payroll taxes force today’s workers to “save” some of their earned income, with the promise that when they reach the age of 62 they become eligible for monthly checks from the Government.  It’s a laudable goal, to insure that some wages be set aside for those days, and years, when retirement ends earned income and retirees must live off their savings.  But three major factors have rendered the American Social Security System untenable.

First, the Government hasn’t put this forced saving into a savings account for citizens. Rather, the program is run on a “pay as you go” basis.  One reason, itself not unreasonable, is that benefits started flowing so soon after participants started earning credits that current workers have basically been supporting current retirees rather than saving through the Government for their own futures.  The first beneficiary of the program, for example, was Cleveland motorman Ernest Ackerman, from whose paycheck 5 cents was withheld the first day Social Security was up and going, and who retired the next day with a lump-sum payment of 17 cents from the program.

Second, expanding Social Security benefits has worsened the real balance sheet.  In 1939, the program include survivor benefits for spouses and dependent children, and in 1956 it added disability benefits recognizing that wages were lost by injury as well as by aging.  These additions increased program outlays more than the tax base and rates that would fund them.

Third, changes in demographics also altered the balance between future benefits and revenues.   In 1935, no one forecast the Baby Boomer dynamic, an enormous bulge in the population due to unusually high births from 1946 to 1964.  This cohort vastly outnumbers the group working to support them. Additionally, life expectancy and therefore benefit claims have risen significantly from the early days of the program.  In 1930, life expectancy was only 58 for men and 62 for women.  At first glance, then, the program looks rather sinister.  Was FDR going to force people to save for a future they’d never reach?  No.  The figures reflect appalling rates of infant mortality.  By 1940, 53.9% of men and 60.6% of women who reached the age of 21 lived until 65, the original starting point for benefits eligibility.  Those men and women who reached 65 could be expected to live an additional 12.7 and 14.7 years, respectively.  By 2005, these numbers had increased to 17.2 and 20.

The unfortunate result of these three factors is an estimated unfounded liability for Social Security of  $17.5 trillion, swelling the already disheartening official national debt figure of $12.3 trillion by 142%. The good news is that reforming Social Security is not rocket science, although it does require strong political will.   Here are 5 reform steps that could put Social Security on the road to solvency.

1.We should raise the age of eligibility for Social Security benefits. Doing so violates expectations, but so does altering regulations and tax codes, something our Government does quite often. 65 may not be the new 55, but irritating and expensive as it may be, healthcare can now promise us a high probability of longer and healthier lives.  We can and should work longer to reduce the unfounded liabilities of a program designed to help people who cannot or should not work due to truly advanced age or disability.

To give people some time to adjust to the new rules, a schedule should be announced as soon as possible, and it should phase in the increases.  Advance notice reduces “fairness” concerns, but no change can truly eliminate them.

2. We should make all Social Security benefits part of taxable income. We’ve already started in this direction; let’s keep going.

3. Cost of Living Adjustments (COLAs) should operate in both directions. Raising real Social Security benefits by keeping nominal payments constant in last year’s period of falling prices was appalling even before each senior received an extra $250 through Obama’s special handout. COLAs were designed to protect beneficiaries from inflation, not reward them for deflation.  The cumulative effect of this asymmetry aggravates the inequity and fiscal irresponsibility of this approach to changing price levels.

4. We should modify the way Social Security is funded. One quick possibility is continuing to raise the Social Security ceiling for taxable earned income. Another is to raise the rate at which this income is taxed.  A third is to introduce progressive rates for this payroll taxation.

5. We should radically change the way Social Security is funded. Our current context of battling high levels of both unemployment and debt highlights just how unattractive payroll taxes really are. They raise revenue by making employment more expensive for employers and less attractive for employees. No tax is worse in its employment consequences than the payroll tax. None.

But even when we exit the recession, Americans should remain uncomfortably aware that Social Security’s payroll taxes are regressive.  Poorer people tend to enter the workforce early, while the more advantaged are still getting advanced degrees.  The less advantaged not only start paying for their benefits early, they also are likely to stop receiving these benefits early, because of lower life expectancies (a problem mitigated but not eliminated by survivor rights).  Further, almost all of the income of the working class will be taxed to raise revenue for today’s Social Security recipients because it’s almost entirely wage income below the tax ceiling of $106,800.  Meantime, the upper classes will be taxed on only some of their wages and none of their interest and dividends. Surely, there’s a better way to run this program.

The third column in this series on Government Debt will accordingly explore different approaches to providing socially secured incomes for people who have left the workforce because of age or disability.  The suggestions are radical, and they should be.  Social Security finances are on a terrifying trajectory.  The program had laudable objectives in 1935, and they remain worthy today.  In the 74 ½ years since FDR signed the Social Security Act, however, the old means to these ends are no longer the best means to these ends.

The content and tone of this speech were not, however, designed to relax.  The intent was rather to go populist, go angry, and “pivot” policy attention away from Massachusetts and to the Midwest and the Main Street issue of jobs  — or lack thereof.  Orator Obama went into warrior mode almost immediately.  And there he stayed.

Combatants included the usual villains — Big Banks, Insurance and Pharma.  Nothing new here.  But Obama also took some folksy potshots at Washington, even though it’s arguably his and his party’s Washington now.

“The single hardest thing” about being president, our President said, “is not getting out to see the people…Nothing beats a day when I can make an escape, I can break out.”  This, off script, from our Commander-in-Chief, who by expanding our presence in Afghanistan also multiplies American casualties there.  How did military families hear these lines?

“There’re some nice people in Washington, but it can drive you crazy.”   D.C.’s now worried about his future, he noted wryly. They discuss it.  Imagine that, if you can — “that’s what they do.”  But Obama isn’t driven by the polls – “The way to boost your polls is not to do anything.” Instead, he’s chosen to do a lot, for the folks of America.   These jokes about the Beltway, delivered in a tone ironically mild, got some chuckles in Elyria, but how will they play in D.C.?

Although his “White House to Main Street Tour” had been scheduled well before the bluest of blue states filled the seat of the hardest of hard-core advocates of healthcare reform, Obama used some of his time in Elyria to beard the lion. He addressed Massachusetts’ apparent referendum on Democrats in general and healthcare reform in particular with the surprising and substantial victory of Republican Brown over Democrat Coakley.

Many of Obama’s advisers, we learned, had urged the new president not to take action on the difficult matter of healthcare reform.  After all, as he put it, seven presidents and seven Congresses before him had taken on this challenge, and none had succeeded.  Further, as he said his advisers noted, he already had too much on his plate, what with the inherited problems of “two wars” and a “raging economic storm that was wreaking devastation…everywhere”.

Nonetheless, Obama took the hard path: he went to bat for the people. So far, in his own mind, his work has been delayed but not defeated. He has been laboring under no “illusion” that the task would be easy, but he ”did not serve as president to avoid these challenges.”  “I’ve got to admit, we had a little bit of a buzz saw this week,” Obama said, deftly combining two “bit”’s. “I mean, it’s just an ugly process. You’re running headlong into special interests, and armies of lobbyists, and partisan politics that’s aimed at exploiting fears instead of getting things done. And then you’ve got ads that are scaring the bejesus out of everybody. And the longer it take, the uglier it looks.”   Obama neglected to mention that some of those ads were from Big Pharma, supporting his healthcare reform in exchange for his supporting their drug prices.  Nor did he mention the expensive side-deals with AARP, Social Security recipients, AMA and ’til-then recalcitrant but crafty members of Congress.  Talk about “ugly”!  At least the attempted deal with Big Insurance aborted.

President Obama was back in full force as “Campaigner Obama” in Elyria. Once again, he was identifying with the people against insular D.C. He even “shared a burger” with the mayor.  Three times he addressed his audience casually and familiarly as “folks”, while the Beltway “folks” in the transcript became the cooler and distinctly other “they” in the delivery. Two days after Elyria, The Cleveland Plain Dealer noted that our president “wore no tie, dropped his “g’s” the way Ivy-educated politicians so often do to seem earthy and insisted that everything he does ‘is not about me. This is about you’.”   Hello, Ohio!  How good to escape here!

Here, and across the nation, the issue is jobs. Unemployment increased in 43 states and the District of Columbia last month.  In Delaware, Florida, North and South Dakota, rates of unemployment hit record highs.  New Jersey’s unemployment hasn’t been this bad for 33 years; New York’s for 26 years.   The problem is even worse than these data.   More than 600,000 Americans left the labor force in December, so they’re not included in the unemployment statistics.  They quit searching.  They’re people too discouraged and weary even to try to find new jobs.

Obama didn’t cite these particular statistics; nor did he address population growth in D.C., where job prospects  have been less dreary and sometimes downright cheery.   He did say, “All I think about is how we are going to create jobs.”  Getting the banks lending again, he recognized as necessary. “We had to stabilize the big banks, which, given their role in creating this mess, was a tough pill to swallow. I knew it would be unpopular – and rightly so. But I also knew that we had to do it.”

It was, apparently, a populist move to bail out the banks. Some would argue, however, that the effect of this stimulus spending was offset by fears of the additional costs of cap-and-trade legislation, not to mention future tax increases mandated by all the new government spending programs.  These prospects deter business from hiring new workers.

No fewer than 20 times in a speech 27 minutes long did Obama deploy “fight” – in both noun and verb forms.  Over and over again, he promised he’ll “never stop fighting” – often qualified by “So long as I’m President” or its equivalent.  Would that he had actually started fighting for some of these principles  – “to cut waste and abuse in Washington; to eliminate what we don’t need – to pay for what we do; to rein in exploding deficits we’ve been accumulating for too long… to open up government.”  Oh really?

Obama continued, “That’s why we put in place the toughest ethics laws and toughest transparency rules of any administration in history.”  We did?  Did we enforce them?  Getting lists of everyone who visits the White House is not enough.  How about time to read those thousands of pages in proposed bills?  How about the promised CSPAN coverage of healthcare-reform negotiations?

“The White House is a wonderful place to work. You live above the store…But the truth is,” Obama confessed, “being President is also a little confining.”  The truth itself is also a little confining for our President, but only a little.

The 300 or so protesters gathered outside Lorain County Community College picked “Can you hear us now?” as their collective chant.  Obama says it’s all about us and not about him, but it’s not clear he hears what we’re saying, and hoping, and fearing.  So far, we’re hearing much of the same rhetoric we heard two years ago.  Actions speak louder, much louder, than words.  And there’s been a disconnect between the two.

There was a time when Barack Obama liked to liken himself to Abraham Lincoln.  He also liked to reference Doris Kearns Goodwin’s Team of Rivals, subtitled “The Political Genius of Abraham Lincoln”, and he looked as if he was building such a team himself. Bipartisanship seems long gone in Washington, but Lincoln remains famous for his story-telling and a sense of humor that tweaks perspective.

Here’s one story Obama should take to heart.  “How many legs will a sheep have if you call the tail a leg?” Lincoln asked some White House visitors with a cause.  “Five!” they replied.  “You are mistaken,” he said, “for calling a tail a leg don’t make it so.”

Obama ended his speech with a bouquet to the American people, praising our “fundamental character”.  He should recognize that we distinguish between words and actions, between tails and legs.  Please, Mr. President, less soaring – and angry – rhetoric and more plain dealing.  Please.