A New Sound in the Echo Chamber

I’m happy to report that Andrew Samwick, Dartmouth professor and proprietor of Vox Baby, has agreed to periodically post here at Angry Bear. Prof. Samwick’s research focuses on finance, pensions, and Social Security, and his knowlege and interests range beyond those topics.

Also, as some readers may already know from visiting his blog, or divined from the title of this post, he’s also a Republican (be polite!). I respect his opinion and trust his numbers, even when I disagree with his conclusions. I think we’ll all benefit from encountering differing views, reasoning, and conclusions from time to time. Ideally, this will turn out to be a more erudite and interactive version of Point-Counterpoint (AB, you ignorant #$%$!).

So without further ado, I present the first installment of our new “View From The Right” feature, on the timely subject of raising the minimum wage. (Here’s a quick response: we need a minimum wage in spite of, and in addition to, the EITC in large part because the former is viewed by the public as money earned whereas the latter is seen as a handout. This is related to but different from the point below about the EITC showing up as an expense on the federal budget.)



Minimum Wage Hikes

by Andrew Samwick

Congress is considering a hike in the minimum wage from $5.15 to $7.25 over three years, but only if it is tied to other legislation that reduces taxes:

WASHINGTON (AP) — Republican leaders are willing to allow the first minimum wage increase in a decade but only if it’s coupled with a cut in inheritance taxes on multimillion-dollar estates, congressional aides said Friday.

A package GOP leaders planned to bring to a vote Friday or Saturday in the House also would renew several popular tax breaks, including a research and development credit for businesses, and deductions for college tuition and state sales taxes, said a spokesman for House Majority Leader John Boehner, R-Ohio.

Greg Mankiw, Angry Bear, and Dean Baker all have worthwhile posts on the issue. I’ll take them in reverse order.

Dean argues that when the minimum wage is reported at two different points in time, it should be adjusted for inflation.

This means that when an article tells readers that a bill in Congress will raise the minimum wage to $7.15 an hour in 2007, from 5.15 an hour at present, it would be helpful to tell readers that this is equal to approximately $5.32 in 1997 dollars, the year the last minimum wage hike took full effect. This means that minimum wage workers would get about a 3.0 percent increase in real wages from 1997 to 2007, if this bill was approved.

I’ll agree and go one step further: if someone can convince me that we should have a minimum wage law, then the further argument that it should be indexed to inflation would be an easy one for me to accept. That’s a big if, though, to which I’ll return in a moment.

PGL of Angry Bear is upset about the coupling of tax breaks for higher income households with the vote on the minimum wage:

Secondly, these “tax cuts’ are nothing more than tax shifts. Someone at some point will have to pay down all these deferred tax liabilities.

The Democratic response is to call for “an up or down vote” (as much as I hate to quote Bill Frist) on the minimum wage proposal. There is absolutely no excuse for the continued fiscal irresponsibility of this Republican led Federal government – regardless of one’s view on the minimum wage controversy.

I’ll agree with him in spirit but not entirely. I am repeatedly disappointed with the failure to balance the on-budget account over the business cycle. Spending (in my view) needs to be cut dramatically, and if there is no political will to do so, then revenues certainly should not be cut.

But there is another element here that’s worth considering. Greg Mankiw notes, and I fully agree, that even if the minimum wage doesn’t substantially reduce low-wage employment, it is a poorly targeted policy to alleviate poverty:

What the facts show is that the minimum wage is poorly targeted as an anti-poverty program. Moreover, while the evidence is controversial, some studies find significant long-term adverse effects. As a result, most economists prefer more efficient and better targeted anti-poverty tools, such as the EITC, which has grown significantly over the past few decades.

If you want to make sure that household heads are above poverty, then make a program directly for them and them alone. That’s the EITC. Compared to the minimum wage, the EITC allows us to condition on total hours worked and family status in redistributing income. By all means, argue for its expansion if you want to help low-income heads of household. (And, if you are Dean Baker, include its impact in your comparisons of after-tax income over time.)

Basically, I won’t support an increase in the minimum wage until I hear the explanation of why we need a minimum wage if we have an EITC.

One interesting note that I heard while in Washington a few years ago was that Congress used to prefer the minimum wage hike to the EITC because the minimum wage didn’t specifically cost the government any revenue in its budget forecasts but the EITC did. The story continues that one change that was implemented in the way the minimum wage legislation was discussed is that it would likely be coupled with tax reductions that softened its impact on small businesses. At the time, I thought this was enlightened policy making–there was now no budgetary reason to favor the minimum wage hike over something like the EITC.

It’s disappointing here to see that the tax reductions being proposed here really don’t have anything to do with small business per se, so the word “enlightened” certainly doesn’t apply. If this minimum wage hike goes through, it should be coupled with tax reductions for small businesses, and those tax reductions should be “paid for” in the budget by reductions in spending elsewhere in the budget.

Andrew Samwick