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Policymakers Again Using Wrong Tool for the Job


Throughout 2013, I spent a good portion of my time here on No Nonsense Economics bashing far rightwing views that grossly exaggerated both the danger of the Federal deficit and the positive economic value of tax cuts. I maintained that these overblown arguments were distractions from the true problems affecting the U.S. economy. Thankfully, as we begin 2014, cooler heads in the Republican Party appear to have moved away from their more radical edge, and allowed a budget to be enacted for 2014 that delivered a huge dose of relief to the economic outlook for the year. The very real momentum starting to build in growth will now have a much higher likelihood of being maintained.

But true to form, just as rationality has started to present itself on one side of the political aisle, it is suddenly departing from the other. I’m referring to a recent push by the left to combat rising wealth and income inequality using a variety of policy pushes. Unfortunately, the policies being championed are the wrong tools for the job. Not only will they not address the true, underlying issues, they could potentially have negative impacts elsewhere in the economy. Sound familiar?

It’s not that growing wealth and income inequality isn’t an important issue—it is, and something that causes me a lot of worry. As a result of tax policies, loopholes, and special insider perks, a small number of already wealthy Americans are seeing their fortunes improve dramatically while a huge number of other Americans are being left out of the recovery and falling even further behind. We’re seeing a new concentration of wealth in the hands of a few families that is reminiscent of third world nations, and not one based on equality of opportunity and meritocracy. Something needs to be done to change this trend—but not what is being proposed.

Take for example the push to yet again extend unemployment benefits for the 1.3 million people who saw their already-extended benefits end last week. Unemployment benefits were always meant to be used for short-term disruptions in employment, caused by either a local (layoffs from distressed businesses) or macro (recessionary) disruption in the employment flow. They were never meant to be a tool for social policy and are not funded sufficiently for such efforts. But it seems as if that is exactly what is happening.

The initial benefit extensions made sense—this was a nasty business cycle we went through. But it has now been nearly five years since the end of the recession; unemployment is steadily falling and payroll job growth is on the rise. The cycle is behind us. And yes, there are still many long-term unemployed people, but the question is whether this group is truly unemployed? By now, it seems that most are either unemployable for some personal reason (this means they are not technically part of the labor force and their unemployment needs to be dealt with in another way) or are simply riding the system for all it’s worth.

At President’ Obama’s press conference last week calling for another extension of benefits, the White House rolled out a member of the long-term unemployed to make a statement and ‘personalize’ the issue. It drives me crazy when politicians and the media do this. While of course there are individual circumstances where people need special help, we should not be pushing or explaining legislation on the basis of carefully chosen anecdotes, but rather on a true economic analysis of the overall situation.

This time, in an ironic twist they decided to choose a member of the long-term unemployed named Katherine Hackett who was formerly a worker in the Health Care industry. Seriously? This was the one sector of the economy that never saw a downturn in employment—ever. How can anyone legitimately claim to be displaced by a recession that never even had an impact on the industry from which they were laid off? Sadly, this example represents in my eyes the misuse of the system rather than a legitimate reason to extend current benefits.

This isn’t to say that those who are truly unemployable shouldn’t be helped. They should be. But they should be in programs designed to help them—social security disability, welfare programs, food stamps, and job retraining. They should not be in a program funded by premiums that employers pay to help workers in the midst of a short-term employment disruption not of their own making.  The seemingly endless series of current benefit extensions have put programs across the nation billions of dollars in the red—deficits that will have to be made up for through higher premiums on employers in the future.

President Obama is also pushing for an increase in the national minimum wage to combat income inequality. Really?

For the record, I support an increase. While minimum wages have a modest negative impact on an economy, it would be a worthwhile tradeoff to give the lowest skilled workers a better chance to get ahead. And yes, the impact is at best modest. I was recently in Australia where the minimum wage is currently $19 per hour—yet their labor markets are functioning just fine, small businesses are fine, and unemployment isn’t all that high. Ultimately, the ability to fire bad workers is far more important for employers than base levels of pay.

Still, although raising the minimum wage may give low-skilled workers a slight boost, it will not tackle the growing wealth and income inequality facing the nation, as argued by the President and the left. Raising the minimum wage will raise prices modestly for goods and services. This is an impact on all people, but the proportionate impact is highest on lower paid workers. In short, it's a regressive tax to make the economy slightly less regressive. That isn’t a cure for inequality.

The inequality problem we face is the mounting accumulation of income, and even more dramatically, of wealth, by the top 1% of the U.S.  population. Changes in tax policies enacted over the last two decades are responsible for this problem. The rapid accumulation is having a dramatic impact on many parts of the economy, most importantly in the political system where the unwinding of traditional controls on campaign spending by some individuals has given a few families an outsized impact on legislative agendas at both the state and Federal levels.

Evidence suggests that high wealth inequality has a long-term negative impact on economic growth—largely because the most fortunate reward themselves with advantageous perks through the political process at the expense of efficiency. It can also lead to long-term political instability by relegating a large portion of the population to the ranks of a permanent underclass, people who are simply frozen out of the path to success.

The real fix to such potential long term problems is to get rid of the outrageous tax loopholes that are exploited by the very wealthiest among us. Loopholes that allow a person as rich as Mitt Romney to pay a fraction of the tax rate that most higher income Americans currently pay. Admittedly this seems unlikely in the current political environment—but pretending the minimum wage is a true policy fix is ridiculous, and distracts from the real solution.

Sigh. Happy New Year!


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