Tax Cuts Equal Spending?

[jshore]

*Originally posted by JustAnotherGuy *
**

The rich should benefit most from any tax cuts, they are paying the majority of the revenue that allows the government to slash taxes. They will STILL pay a higher percentage, not to mention a higher dollar cost in taxes than the middle class or the ‘poor’.
**

…And, if current trends continue (or accelerate under Bush’s tax cut!), the wealth inequality in this nation will continue to increase, as it has dramatically over the last ~30 years. To those of you who are arguing on that side of the debate, I have a simple question: How much more unequal do things have to get before you will no longer subscribe to the belief from Billionaires for Bush or Gore (in their case satirical) that “inequality is not increasing fast enough”?!?

By the way, I believe that the percentage of the 43% of the Bush tax cut dollars going to the top 1% even exceeds the percentage of the income tax burden that falls on the rich (which I seem to recall is about 30%, although I am not positive on that figure). And, that doesn’t say anything about the less progressive taxes like social security, Medicare, and sales taxes.

[Caldazar]

I think politicians look at the situation as “it’s the government’s money, but we’ll give you some of it back,” only for the sake of simplicty. They start with a projection of federal income and then decide how the money will be spent. Rather than reducing the expected income when planning a tax cut, they just mark a line “Tax Cut Spending: $xxx” and move on. My guess is that, for purposes of accounting, a tax cut is viewed as just another social program, no different that putting more money into Medicare or Social Security. Just another “social program” to please taxpayers. This carries over to their speeches, giving rise to “funding a tax cut.”

Of course, the reality is not that taxpayers pay the same taxes and then are simply refunded a portion of their money. However, from the standpoint of the federal budget, spending money to fund a tax cut and legislating a tax cut are financially equivalent. I don’t really think that politicians go around thinking “Oh goody, a tax cut; I’m gonna get a bigger refund that I normally do.” At least, I certainly HOPE they don’t think that.

Regarding another topic addressed, that the tax code needs to be simplified, I don’t see how this is feasible. Many of the tax deductions and adjustments are necessary. The income tax code is in fact simply nothing more than “you pay x% rate on y income dollars” with x% varying according to y dollars as given on a tax table. However, the painful process begins when you ask the question “How much income did I truly have? What is my y?”

Okay, I grossed z dollars (after various taxes to social security, etc…). But is my real income z dollars? Well, I made morgage payments, and some of that was interest. The principle part of the morgage payment is real income, since in exchange I’m owning a slightly larger portion of my residence, but how is the interest payment income for me? I don’t possess this money after all is said and done. The bank from which I borrowed the money is making that interest payment as income, not I. Why should I pay income tax on income I did not realize? Gimme the tax deduction, and tax the bank who does actually have the money.

As for deductions for dependents, personal deductions are in place to benefit lower income households. True, a few thousand bucks isn’t enough to live off of, and you certainly can’t raise a child on $2800, but to someone who is in a lower income bracket, it’s better to have $2800 than $2800(1-tax rate). To those in a much higher tax bracket, it’s just one more line to fill out on the stinking 1040, but serves a real purpose for lower-income households.

Adjustments are another thing entirely. They are the government’s way of getting you to do what it believes to be beneficial to society as a whole (well, at least in theory). Save for your future, invest in a 401k, it’s a good thing. That way you won’t be poor when you’re too old to work and the government won’t have to support you. We can then spend the money for other causes to benefit the people further. And hey, I guess for the effort, we could give you a couple bucks as a tax break or something. Don’t invest short term to try to make a quick buck. Invest long term to build the nation’s economy. We’ll make it worth your while.

But that’s why government exists in the first place; to provide services for people that they cannot provide for themselves, whether it be due to cost, self-interest, or what have you (well… yeah, I could pay for part of the road… but you were gonna do it anyway…). Not that it necessarily does a good job of this, but at least it does a better job than millions of people running around with a fistful of dollars, all of them looking out only for themselves.

[JustAnotherGuy]

"I don’t really think that politicians go around thinking “Oh goody, a tax cut; I’m gonna get a bigger refund that I normally do.”

THIS IS NOT A FACT… just heresay, but isn’t Congress exempt from income taxation so that such a dillema will not factor into their decisions?

I agree, other than the part about mortgage principal and interest being income… they are expenses, same as the 401-K you referred to. That is the government’s way of providing an incentive to buy rather than rent. It is a boost to homeowners, real estate professionals, banks, and mortagage brokers. Also, I’m not quite sure where your levels on ‘lower’ and ‘higher’ income tax brackets are, but those personal exemptions don’t start phasing out until your combined income exceeds the $100,000 mark.
jshore wrote:

“…And, if current trends continue (or accelerate under Bush’s tax cut!), the wealth inequality in this nation will continue to increase, as it has dramatically over the last ~30 years. To those of you who are arguing on that side of the debate, I have a simple question: How much more unequal do things have to get before you will no longer subscribe to the belief from Billionaires for Bush or Gore (in their case
satirical) that “inequality is not increasing fast enough”?!?”

This is a bit off the topic, but I just have to redirect.

First, the ‘poor’ today have so many programs available that if they simply use what is out there, they can probably live better than the middle class.

Second, what is wrong with inequality? Communism, ‘equality’ at it’s perverted, highest point, doesn’t work. This country, though not purely capitalist, is based upon capitalism. This is a country where the richest person in the world was created from nothing. This is the land of opportunity.

I’m not saying every poor person is there by choice, but the opportunities certainly exist. The only people to blame are their parents for not installing the proper values on them as children. You can say that the parents didn’t have those values and couldn’t convey them to their own children in poor communities and I would agree with you there. So what should we do, continue to GIVE them stuff just because they are breathing, or cut it back and help to teach them the values of work over welfare?

The rich got there because someone rolled up their sleeves and busted their butt. I wasn’t born rich, I’m not rich now, I’ll probably never make the 1%, but I’d like to. And if someone else doesn’t have the drive or ambition to do the same, I say too bad.

Some people are perfectly happy as ‘lower’ class. They work their 40 hour week, drink their beer, watch t.v., go bowling. If someone else is out working 80 hour weeks to get ahead, why shouldn’t they get ahead? That is commitment, drive. If you make everything ‘equal’ you kill that drive, you kill the American spirit that made us the only superpower in the world.

How does it impact anyone else’s life if someone else brings in $1,000,000 a year? It doesn’t influence mine. The minimum wage has increased at a pace that by far surpasses inflation over the last decade. There are more tax incentives and government programs available to the poor than ever before.

Why would anyone want to punish the rich for the lack of ambition by the poor?

You said, and I don’t know the numbers either, but let’s assume the top 1% pay 30% of the taxes. If the entire Bush tax cut were passed to the wealthiest 1%, and it isn’t, they would still be paying 25% of the taxes. That is one percent of the population paying over a quarter of the taxes. That leaves alot of single parents and poor paying no taxes at all while benefitting the most from government programs.

[kesagiri]

Obviously, his across-the-board cut is nothing of the kind, since the above will have to be paid for by somebody.

Not necessarily. This only holds if there is a revenue requirement. Without such a requirement (i.e. revenue can be decreased) then it is possible to have an across the board tax cut.

Also, it is possible to reduce taxes and get an increase in tax revenue. This is what is more popularly known as the Laffer Curve. While you might be dismissive of this notion such a curve does exist and the effects that supply side economist talk about could indeed happen. The problem is knowing the shape of the curve. It is also possible that a tax cut could decrease revenue.

Meanwhile, Gore is proposing a bunch of targetted tax cuts.

Actually according to picmr those are tax expenditures not tax cuts. This is precisely the type of sloppy rhetoric that I am complaining about. Please pick one or the other and stick to it.

We may even wind up in the same position as we did with Reagan, whose extravagances we’re still paying for…exactly the kind of compromise we hammered out back in '86 and that has since been stomped on to the point of being unrecognizable. As for new programs or new spending: shelve 'em 'til the debt is gone.

How come I get the feeling there is a contradiction here?

[pantom]

Meanwhile, Gore is proposing a bunch of targetted tax cuts. These are far more obviously tax expenditures, and someone will have to pay for them.

If you’re going to quote me, at least make it a little clear what I was trying to say. That was a deliberately nasty trick you pulled there. If you wish to engage in nothing more than a series of ad hominem attacks, go do it to someone else. I won’t take it.

[kesagiri]

Aww crap. Pantom, sorry missed that in my quick post. Sorry.

[kesagiri]

However, there were no ad hominem attacks. To make an ad hominem attack I’d have to something like the following.

Don’t believe pantom because he is a boob.

Now, that is and ad hominem attack. Questioning your assertions and pointing out problems with some of your statements isn’t.

[jshore]

*Originally posted by JustAnotherGuy *

First, the ‘poor’ today have so many programs available that if they simply use what is out there, they can probably live better than the middle class.

Do you actually have any evidence to support this ludicruous statement or do you just say it because it sounds provocative?

Second, what is wrong with inequality? Communism, ‘equality’ at it’s perverted, highest point, doesn’t work. This country, though not purely capitalist, is based upon capitalism. This is a country where the richest person in the world was created from nothing. This is the land of opportunity.

Well, I am not exactly sure I know Bill Gates’ family background, but my guess is that he wasn’t a poor minority person growing up in The Projects, going to majority-poverty schools where kids bring so many problems to class that it is very difficult for much real learning to get done. As for the communism argument, look, what we are arguing about is a matter of direction. Of course, the extreme of everyone having equal amounts of stuff is ridiculous…But we ain’t anywhere close to that and in fact we are a lot further from that now than we were 30 or so years ago! The problems with extreme inequality are many: (1) It is not even good for the well-off in the sense that one can walk down a street in the bad part of town in Copenhagen, Denmark and even Vancouver, Canada and not feel like you are taking your life into your hands. Extreme poverty breeds high crime, drug use, high teenage birth rates… (2) Some of us feel that it is ludicruous that the most powerful and, by some measures, richest country in the world has areas where conditions are as bad as they are in the Third World while others have such obscene amounts of wealth that it is hard to comprehend. (3) There are other rich countries in the world (Denmark, Sweden, …) that have a much more progressive tax system and more highly-developed welfare state and are doing very well and seem to have a lot fewer of some of the social problems we face (high crime, infant mortality, homelessness,…)

The rich got there because someone rolled up their sleeves and busted their butt. I wasn’t born rich, I’m not rich now, I’ll probably never make the 1%, but I’d like to. And if someone else doesn’t have the drive or ambition to do the same, I say too bad.

The rich also got where they are by learning how to “play the game” well…to take full advantage of the rules (check out TomPaine.com for how Cheney did this in the last 10 years!!!)…and as such they have an obligation to the society that has allowed them to prosper so. Taxing them at a higher rate than they are taxed now (or at least not lowering their taxes, as Bush wants to do!), will still leave them with plenty of reward for their hard work. [I, by the way, am not in the top 1% either…But I am in about the top 10% or 15%…and I don’t feel I need to have my taxes cut, thank you very much.]

If you make everything ‘equal’ you kill that drive, you kill the American spirit that made us the only superpower in the world.

Yes, if you made everything perfectly equal then you certainly will. Since noone is talking about doing anything remotely…remotely…close to that, I don’t think that we are in any danger at the moment on erring in that direction. It is all a matter of balance. Clearly, you subscribe to the belief that inequality isn’t increasing fast enough at the moment. I don’t.

The minimum wage has increased at a pace that by far surpasses inflation over the last decade.

Your statement on the last decade may be technically correct because of the increase in '97. However, here is the scoop over a longer period of time (care of the Coalition on Human Needs):

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In real (inflation-adjusted) terms, the minimum wage reached its peak in 1968, when it was worth $6.92 in 1998 dollars. Its value eroded somewhat in the 1970s, despite several increases, because of rapidly accelerating inflation. It deteriorated significantly in the 1980s, when no increases were enacted during the Reagan years.

Increases during the 1990s have improved the situation. The latest, enacted in 1996 and fully phased in on September 1, 1997, raised the minimum wage from $4.25 to $5.15 per hour. Its real value, however, is far less than it was in 1968 and is still far below what many consider a living wage. Moreover, because the minimum wage is not indexed for inflation, much of the value of recent increases has already been lost.

Why would anyone want to punish the rich for the lack of ambition by the poor?

I can hear the violins coming in here as a rich person drives off into the sunset in his ‘99 Lamburgini because he couldn’t afford to buy a new one this year. I mean, give me a freakin’ break. And, by the way, not all rich people think it would be punishment…some of them actually have a conscience on this issue…Check out http://www.responsiblewealth.org . I’ll also give you an approximate quote from ~early 20th century from Filene, the Boston retailer: “I don’t mind if the people take half the money I make away from me…After all, I took it all from them.” Boy, sometimes I really yearn for the days when there was a consensus that the rich owed something to society rather than that society ought to be so freaking grateful to them.

** So, in the end, I will ask my question to those on your side of the debate again: How much more unequal do things have to get before you no longer believe that “inequality is not increasing fast enough”?**

[pantom]

kesagiri: agreed. Statement retracted.

[kesagiri]

But we ain’t anywhere close to that and in fact we are a lot further from that now than we were 30 or so years ago!

Interesting…30 years ago…say, isn’t that about the time we started many of these welfare programs to “end poverty.” What was it Johnson called it? Oh yeah a ‘War on Poverty.’ Well I guess we can concede defeat then, is that what you are saying?

Don’t forget that welfare programs can also have perverse incentives such as inducing one to substitute more leisure for labor.

The problems with extreme inequality are many: (1) It is not even good for the well-off in the sense that one can walk down a street in the bad part of town in Copenhagen, Denmark and even Vancouver, Canada and not feel like you are taking your life into your hands. Extreme poverty breeds high crime, drug use, high teenage birth rates…

Got any evidence for this. I know it sounds plausible, but sometimes those incredibly intuitive answers…well they sometimes turn out to be wrong.

Also, you don’t think that the break down of the family unit has anything to do with this, do you? I suppose the break down in the family unit (i.e. higher rate of divorce is caused by poverty) right? You did know that single mothers and their children comprise one of the largest segments of the poor?

There are other rich countries in the world (Denmark, Sweden, …) that have a much more progressive tax system and more highly-developed welfare state and are doing very well and seem to have a lot fewer of some of the social problems we face (high crime, infant mortality, homelessness,…)

Well it is all well and good for you to think that socialism is better, but even the Swedes are rethinking it, at least the degree. Last I heard they were cutting back on many of their welfare programs because it was becoming tough to pay for them. As I said, you enact lots of welfare programs, expect people to start working a lot less.

The rich also got where they are by learning how to “play the game” well…to take full advantage of the rules (check out TomPaine.com for how Cheney did this in the last 10 years!!!)…and as such they have an obligation to the society that has allowed them to prosper so.

What? I find this rather disturbing. Society allowed them to prosper? You make it sound as if ‘Society’ is something tangible, some thing or entity that thinks and makes decisions. Hmmm, I think I will let Bob Smith prosper, but not Roger Jones.

Clearly, you subscribe to the belief that inequality isn’t increasing fast enough at the moment.

Uhm, I don’t think this is what he is saying. At best I think he is questioning your dubious assertion that something bad will happen if inequality continues to grow. While, there is most likely a point at which some negative consequences would occur, it is debatable if we are even close to that point. Do you have any figures on current inequality and its comparison to previous levels? Statements like, inequality is higher now than it has been in the last 30 years are junk statements. They are designed to invoke an emotional response and do not explain what is the problem with such a state. It is a sound bite and nothing more.

Regarding the minimum wage.

It causes unemployment. It results in mostly teenage unemployment which in many cases is crucial for some people to start building a work history early that will lead to better paying jobs later. Also, the people who tend to hold minimum wage jobs are mostly teenagers. It is not like teenagers need cost of living adjustments as most of their costs of living are paid by mom and dad.

Frankly this is a policy that we could probably do without.

[pantom]

---

We may even wind up in the same position as we did with Reagan, whose extravagances we’re still paying for…exactly the kind of compromise we hammered out back in '86 and that has since been stomped on to the point of being unrecognizable. As for new programs or new spending: shelve 'em 'til the debt is gone.

How come I get the feeling there is a contradiction here?

There isn’t any. The contradiction you’re seeing, I think, is based on the assumption that I support Gore’s proposals. In actual reality, I think they’re far worse than Bush’s proposals, and if all we had to vote on was whether or not Gore’s or Bush’s tax proposals were better, I’d vote for Bush.
Also, the '86 plan was only partially a Reagan production. Little known fact: Bill Bradley, former Democratic senator from New Jersey, first proposed something very close to what got enacted in '86. I make a clear distinction between the '81 tax cut, which was too stupid for words, and the '86 bill, which was a gem, in my opinion.

[jshore]

*Originally posted by kesagiri *

Got any evidence for this. I know it sounds plausible, but sometimes those incredibly intuitive answers…well they sometimes turn out to be wrong.

Geez…Are you going to make me give cites for the law of gravity too? Fair enough though; if I get the chance, I will try later to look into what is known on this.

I suppose the break down in the family unit (i.e. higher rate of divorce is caused by poverty) right?

Yes…not the only cause, but probably a major one. I can try to look for stats on this too.

Well it is all well and good for you to think that socialism is better, but even the Swedes are rethinking it, at least the degree. Last I heard they were cutting back on many of their welfare programs because it was becoming tough to pay for them. As I said, you enact lots of welfare programs, expect people to start working a lot less.

I agree that the issue of designing programs that encourage people to work hard and such is an issue that is important to consider. But, first, I at least am trying to get agreement from you that there is a problem (with the current distribution of wealth). And, I don’t even seem to be getting that. Then we can argue about how to solve the problem, which admittedly might be the harder question.

By the way, I agree that no governmental system is perfect and there are pressures on all of them. Yes, Sweden may be trying to cut their budgets. When I lived in Canada, they were worried about rising health care cost in their single-payer system. This doesn’t mean we can’t learn anything from these countries (and that the vast majority of Canadians weren’t proud of their system…and thought that the U.S. not to have gone this way). If you demand perfection from someone else before you are willing to consider their way of doing things, you ain’t ever going to change what you do. No place is paradise on earth, but some countries have gotten a better handle on some problems that we haven’t and we ought to look at what they are doing. [By the way, I think it is an exageration to call Sweden “socialist”; I was there this summer, admittedly for only a short time…longer time in Denmark…and private enterprise seemed to be doing just fine in both countries from the looks of things.]

What? I find this rather disturbing. Society allowed them to prosper? You make it sound as if ‘Society’ is something tangible, some thing or entity that thinks and makes decisions. Hmmm, I think I will let Bob Smith prosper, but not Roger Jones.

Well, I didn’t mean you to take it quite so literally. My point is best made by an analogy with my own field of physics. Sometimes, you can learn some things about materials by assuming the “independent electron approximation” which means you treat the electrons as independent particles that interact. However, in strongly interacting systems, that breaks down and it is impossible to think of things in terms of individual electrons. Perhaps our economic society is not so strongly interacting that it makes no sense to consider it as interacting individuals, but I think the interactions are strong enough that if you discount the effect of the interactions, you arrive at perverse ideas like everyone having a God-given right to every dime that they earn. Those who become wealthy in our society do so by using many of the things set up by our society. Do you think the roads and entire infrastructure just magically come into being, and that corporate law was not handled down by some omniscient diety?

Uhm, I don’t think this is what he is saying. At best I think he is questioning your dubious assertion that something bad will happen if inequality continues to grow. While, there is most likely a point at which some negative consequences would occur, it is debatable if we are even close to that point.

Wow, we must be living on two different planets! It is debatable that we are close to that point?!? Well, I guess that was exactly the question I was trying to get those of you on the other side of this debate to answer…How much inequality could there be before you thought it might be getting a bit extreme? Maybe when 1% of the population owns 90% of the wealth that would be too much? I’d really like to know!

Do you have any figures on current inequality and its comparison to previous levels? Statements like, inequality is higher now than it has been in the last 30 years are junk statements. They are designed to invoke an emotional response and do not explain what is the problem with such a state. It is a sound bite and nothing more.

Well, I’ve seen figures floating around lots of places. One I remember that I can’t seem to track down is that the top 10% own 73% of the wealth…and that back sometime in the 70s it was more like 45%. (Those figures are from my memory so I can’t swear to the exact ones.) Some other figures, such as the fact that the richest 1% have more wealth than the bottom 95%, and that since the 1970s the share of the wealth of the top 1% has doubled can be found at http://www.ufenet.org/press/shifting_fortunes_report.html. Happy reading!

Regarding the minimum wage.

It causes unemployment. It results in mostly teenage unemployment which in many cases is crucial for some people to start building a work history early that will lead to better paying jobs later. Also, the people who tend to hold minimum wage jobs are mostly teenagers. It is not like teenagers need cost of living adjustments as most of their costs of living are paid by mom and dad.

I am not sure I believe that “most” of the jobs at minimum wage (or near enough that their wage rate would have to go up if the minimum wage was hiked up by like $1) are held by teenagers. Also, I believe it has been shown (and is surely plausible) that raising the minimum wage tends to boost wages even going a bit further up the scale. While it is clearly true that raising the minimum wage too much could cause a significant rise in unemployment, it is quite doubtful that it would occur for a modest rise from current levels. There were dire warnings about unemployment before the last hike in the minimum wage and since then the employment rate has remained low…In fact, it has fallen to historically low levels. (I think the rate last month…or a couple months ago…was the lowest in something like 30 or more years.)

[kesagiri]

Your statements about the minimum wage are false. Most of the people who hold those jobs are teenagers. I shall try to find some data on this.

The effect it has on the number of jobs is pretty much considered an empirical fact now.

As for measures of inequality, perhaps you should read up on those measures as many of them tend to have strange qualities. For example, if you look at the variance of the distribution of wealth, a doubling of all incomes will lead to one concluding there has been a quadrupling of inequality. kind of weird if all incomes double for inequality to increase…don’t you think?

As for the problems associated with inequality, the question is as you say, how much is too much? However, merely asking the question or stating that the current level of inequality is too much does not make it so.

[jshore]

*Originally posted by kesagiri *
Your statements about the minimum wage are false. Most of the people who hold those jobs are teenagers. I shall try to find some data on this.

Since my statement was ‘I am not sure I believe that “most” of the jobs at minimum wage (or near enough that their wage rate would have to go up if the minimum wage was hiked up by like $1) are held by teenagers,’ I don’t think its truth or falseness can really be in question. I was just saying that it sounded suspect to me and implicitly asking for you to back it up…If you can, great.

The effect it has on the number of jobs is pretty much considered an empirical fact now.

Well, I remember reading an article not too far back that questioned the “conventional wisdom” on this, arguing that to a certain point the minimum wage could be raised with rather little employment loss. I won’t argue that there isn’t any tradeoff between the minimum wage rate and the number of jobs…The question is what the trade-off is so one can make an informed policy decision. Many of the numbers quoted come from sources who have, shall we say, a vested interest in keeping the wage rate low. It would be interesting to try to compare the predictions made before the 1997(?) hike to the actual reality of what happened.

As for measures of inequality, perhaps you should read up on those measures as many of them tend to have strange qualities. For example, if you look at the variance of the distribution of wealth, a doubling of all incomes will lead to one concluding there has been a quadrupling of inequality. kind of weird if all incomes double for inequality to increase…don’t you think?

Your statement about the variance is true enough…But I didn’t quote anything about that and in fact I don’t think I have ever even seen such numbers quoted. The statements I gave were in terms of percentages of people holding what percentage of the wealth. There are also some figures in the URL I gave about median (as opposed to average) incomes. The median is interesting to look at because unlike the average, it is not skewed by the rising fortunes of those on the very high end. [At the Fortune 500 company where I work, the former CEO was an applied mathematician and the applied mathematicians in my group used to have some fun with the fact that they could tell prospective hires about the fantastic “average salary” for applied mathematicians at the company…Of course, the median salary was quite a bit lower!]

As for the problems associated with inequality, the question is as you say, how much is too much? However, merely asking the question or stating that the current level of inequality is too much does not make it so.

Absolutely…One can talk about some of the negative effects of this distribution, even for those on the high end of the scale (unless they enjoy living in their gated communities with private security guards). But, in the end, it does come down to values. Which is why I am so curious to explore the values of those of you who, faced with the statistics, still don’t think the current inequality is too much…I am on a quest to understand the values of others in this regard (not so much for any noble reason than idle curiosity).

[jshore]

“Look on the web first, then post…Look on the web first, then post”…I’ll have to try to remember that!!!

It looks like my statement questioning whether most minimum wage workers are teenagers was not “false” in more ways than the one I previously argued! Here is a quote from a report on the web entitled “The Impact of the Minimum Wage”:

Most minimum wage workers are adults (71%), age 20 and up.[2]

By the way, their footnote [2] notes that they define minimum wage worker in the way I mentioned I was also thinking about it…as someone who is earning within $1 of minimum wage and would thus be directly affected by the proposed $1 increase in the minimum wage.

This report also discusses the argument about rising the minimum wage affecting employment rates (ad nauseum!!!), as well as many other issues. Check it out at http://www.epinet.org/briefingpapers/min_%20wage_bp.html

[kesagiri]

** Well, I remember reading an article not too far back that questioned the “conventional wisdom” on this, arguing that to a certain point the minimum wage could be raised with rather little employment loss.**

jshore,

First, one article is not sufficient. I remember that article, the academic one and not the popular media articles. Much was made about it by those advocating increasing the minimum wage. However, there are several caveats I have to mention. First, a single paper is not sufficient to base such a wide spread policy on. Second, the results have not been duplicated AFAIK. Third, it is possible to increase the minimum wage and actually have no impact on employment. In this case the market clearing wage is already above the minimum wage so raising it to the market clearing wage would have no impact. However, once you went above this level you would see a decrease in the level of employment.

Many of the numbers quoted come from sources who have, shall we say, a vested interest in keeping the wage rate low.

You mean like labor economists working at Universities or something like that…or perhaps the Bureau of Labor Statistics? See, if we were to talk about a price floor for a generic good you’d probably sit there and say, okay not problem I agree with you. But as soon it becomes the sacred cow of the ‘liberal left’ the situation changes. If you accept the basic notions of the laws of supply and demand then the effects of the minimum wage are pretty obvious. The only real question that remains is, will the increase in welfare for those not driven out of the market (by the actions of government and those favoring the minimum wage) greater than the welfare loss of those who are driven out. Since politicians never look at this issue, the question is pretty much irrelevant. People and politicians advocate this policy to make themselves feel better, at least that is my opinion.

**
It would be interesting to try to compare the predictions made before the 1997(?) hike to the actual
reality of what happened.**

I don’t know what the effect was, but I am sure if you looked you could find some working papers that are on the web that look at this question. Try searching on the terms “minimum wage”, unemployment, 1997, etc. Also, you might try looking for websites by labor economists and seeing if any of them have written anything on it. There is also the Bureau of Labor Statistics. They often will look at things like this, you can try their website as well.

**
The statements I gave were in terms of percentages of people holding what percentage of the wealth. There are also some figures in the URL I gave about median (as opposed to average) incomes.**

This is true, most likely the numbers you were quoting were Gini Coefficients or something like that. There are problems with most measures of inequality and few are perfect. My comment on the variance was just an example of some of these problems. However, quoting numbers like they are “The Truth ™” is questionable. You should know that empirical research is as much art as science.

** Which is why I am so curious to explore the values of those of you who, faced with the statistics, still don’t think the current inequality is too much…**

Careful here. You should know that just throwing out statistics isn’t that helpful. You should also have a good story [i.e. theory] to tell with them as well. I shouldn’t be reminding you that correlation does not prove causation. Think of the issue of the break down of the family structure. You claim that the increase in poverty was the cause. I am skeptical of this. Why? Because I know that one of the biggest and fastest growing groups of the poverty stricken are single mothers. So which came first? Poverty or break down of the family unit? You still have to tell me your ‘story’ (theory) of this causal connection. Mine is quite simple. There was a break down in the family structure leading to an increase in households headed by single mothers which lead to a dramatic increase in poverty. Right now I like my story better than yours, mainly because I haven’t seen yours, but I am curious.

[kesagiri]

jshore,

I find that article disingenuous at best. There is an obvious reason as to why the unemployment effects of increasing the minimum wage would be less noticable. Sheesh, those guys love telling half-truths.

Consider this, if everyone who was working at the types of jobs that are considered “minimum wage jobs” and say the median wage is $2.00 above the current minimum wage, what would happen if the current minimum wage was raised by $1.50? Well I bet not much would happen to unemployment. Look at figure one, in real terms the minimum wage is falling, thus it is not unreasonable to at least suspect that the market clearing wage is higher than the minimum wage.

I consider it crappy reporting to not note this possibility. Those two yahoos are telling only half of the story and are further distorting it to make it seem like raising the minimum wage is a painless way to offset decreases in welfare spending. I shouldn’t have to point out that generally it is true that there is no such thing as a free lunch.

[jshore]

kesagiri,

I think you are giving the authors of this article a bum wrap. I must admit that I am not completely following your argument here…partly because I don’t know exactly what this term “market clearing wage” means. (It also sounds to me a bit like an idealized concept…My guess is that, like some sharp transitions that occur in simple “mean field” models in physics, the reality will be that such a wage will be “fuzzed out” in the real world, so that it won’t be a sharp boundary.)

But, also I get the impression you are moving the bar here. I mean, you are claiming that the reason the minimum wage could be raised back in 1997 with so little effect on employment is that that wage is so low (even historically, in real terms)? Well, yes, isn’t that exactly the point that I and they are making? Note that the beginning of their article says that they are mainly addressing the current policy debate about raising the minimum wage by a dollar.

I admit that maybe their article could have been more complete if they tried to estimate how high it could go before the affects on employment start to become more significant. [As I noted above, I am very skeptical that it is a very sharp boundary…I think it would have to be more gradual.] But, that probably is a hard question to answer, especially considering that we have never tried raising it enough to find out empirically! And, I don’t think raises of greater than $1 in the minimum wage are even anywhere on the “radar screen” at the moment. (There are people talking about a “living wage” of $8-something an hour, but I hardly think this has made it into the mainstream of national political discourse.)

If, by “no free lunch” you mean that we can’t just raise the minimum wage to, say, $12 per hour and expect not to get a substantial increase in unemployment, hey, I’m with you on that. However, if you mean that we can’t afford to raise the minimum wage by $1 (or maybe even somewhat more) without getting an increase in unemployment that largely offsets the gains, then I am (and the authors of the study are) trying to argue against this. [By the way, a more concise “fact sheet” on the minimum wage, which also explains why it might be that the minimum wage can be increased with very little job loss can be found at
http://www.epinet.org/Issueguides/minwage/minwagefacts.html]

As for your “wishful thinking” theory, I admit that there may be a bit of that involved. But, I am willing to venture that “wishful thinking” will generally lead to better science than “blatant self-interest” which is what tends to color the other side of the debate…I.e., you just have to wonder why groups of business owners (like the Chamber of Commerce) suddenly get all concerned for low-wage workers when it comes time to talk about the minimum wage. I thought they had the interests of others foremost in their minds? It certainly is convenient how what is in their own self-interest also turns out to be, in their estimation, in the best interest of the low-wage workers!!

As for your suggestion to look at the Bureau of Labor Statistics, I think I will try to do that sometime. However, if I am going to keep my own job, I have to limit the time I spend on these things!

By the way, I agree with your point about empirical research and having to be cautious with statistics. But, at some point, unless you do all the research yourself, you do have to take some numbers quoted by others on a certain amount of faith. My strategy is, at the very least, to try to understand as much as I can about what the number means that I quote. (A lot of the confusion comes when people don’t explain what their statistic is exactly…which is why Bush and Gore can make seemingly contradictory claims on whether Bush’s tax cut significantly helps low income people.)

Finally, if you want my theory in brief on the povery / family-structure issue, I actually think it is hard to say precisely that one is cause and the other is effect because it seems like it is likely to be a sort of vicious cycle. For example, poverty tends to breed hopelessness and such which encourages teenage girls to have kids of their own (usually without reliable fathers in the picture) which in turn leads to further poverty for these families. I would be interested if you could show that a significant fraction of those in poverty are people from reasonably well-off families who lead single-parent families and become poor! It would certainly lend more support for your theory.

[kesagiri]

But, also I get the impression you are moving the bar here. I mean, you are claiming that the reason the minimum wage could be raised back in 1997 with so little effect on employment is that that wage is so low (even historically, in real terms)? Well, yes, isn’t that exactly the point that I and they are making? Note that the beginning of their article says that they are mainly addressing the current policy debate about raising the minimum wage by a dollar.

No, the point is that the wage that clears the market (supply equals demand) was most likely higher than the minimum wage in most labor markets. Suppose you have a minimum wage of $2.00 and don’t increase it for 20 years. Don’t you think that the inflation adjusted wage that equates supply with demand would increase? I would. If this is indeed the case then it possible to increase the minimum wage and see no effect on employment. Also, you’d see little in the way of welfare gains.

I admit that maybe their article could have been more complete if they tried to estimate how high it could go before the affects on employment start to become more significant. [As I noted above, I am very skeptical that it is a very sharp boundary…I think it would have to be more gradual.] But, that probably is a hard question to answer, especially considering that we have never tried raising it enough to find out empirically!

I have a bit of a problem with this. I hate it when people think of political policy as an experiment. This kind of thinking can lead to very bad outcomes.

If, by “no free lunch” you mean that we can’t just raise the minimum wage to, say, $12 per hour and expect not to get a substantial increase in unemployment, hey, I’m with you on that.

Isn’t it in physics that the saying is ‘for every action there is an equal an opposite re-action’? It is similar in economics. When you enact a policy it is methodologically stupid not to expect some sort of reaction. This idea was epitomized in the Lucas Critique of macro-econometric models. That is, if the government does something people are going to respond to it in a way that is best for them. Thus, ignoring these types of secondary can lead to bad outcomes. The classic example is the inflation-unemployment trade off. The old wisdom was that if you increased the inflation rate (printed more money) you’d get a decrease in unemployment. The reasoning went like this. An increase in the inflation rate means that on average prices are rising. When firms see this, they will increase output. Since wages are in essence a price, people’s income will also rise, hence new spending. Overall, an increase in economic activity and a decrease in unemployment, woohoo! Now, what is the problem? Can you see it? The increase in inflation can be thought of as an increase in all prices. That is if all prices (including wages) increase by 20% (.2) then firms should not be increasing output. Why, well while the price of the output has increased so has the price of the inputs. In short, there is no benefit to increasing output, in fact there is only a cost. Similarly for a person. If prices double and I double your income, you are no better off. The old wisdom worked for a while, until people figured it out. Then the trade off between inflation and unemployment disappeared. When did this happen…the early 70’s. You know that time when that new word came out, Stagflation. See everybody was puzzled, it was supposed to be impossible to have high inflation and high unemployment.

By the way, one of the guys who pointed out this problem…was Milton Friedman.

For example, poverty tends to breed hopelessness and such which encourages teenage girls to have kids of their own…

Danger Will Robinson. Careful here. I think teenage mothers is a relatively new phenomena and could be a result of the break down of the family structure.

This gets back to the statistical numbers game. Throwing out a number like, 25% of all those in poverty are in single parent (usually female headed) households. Isn’t all that useful to me. What I would like to see is the story (or theory if like) that the people interested in this stuff have. How did these people get there? Were the originally married? What are the numbers like over time (i.e. is there some panel data on this), etc. I am willing to take their results on some faith, but without the background story the number itself is pretty meaningless, IMO, and doesn’t tell us what the heck we are to do to help these people, or if there is anything to help reduce this problem.

You see this in the current campaign. Both candidates through out stats, expecting a gasp of horror I am sure, with the idea of showing how either they are better or the other guy worse. For example, Gore’s attacks on Bush’s environmental record. For Christ’s sake we are talking about Texas. Any governor there would probably have a bad environmental record, even Al Gore. Also, the numbers that are tossed out don’t do any kind of comparison, or look at what measures Bush has taken to try to mitigate the problem. Maybe Bush put in place some policies that did some good, maybe he didn’t. There is very little substance in this campaign (which is par for the course when looking back over the last 30 or more years).

[jshore]

[QUOTE]
*Originally posted by kesagiri *

No, the point is that the wage that clears the market (supply equals demand) was most likely higher than the minimum wage in most labor markets. Suppose you have a minimum wage of $2.00 and don’t increase it for 20 years. Don’t you think that the inflation adjusted wage that equates supply with demand would increase? I would. If this is indeed the case then it possible to increase the minimum wage and see no effect on employment. Also, you’d see little in the way of welfare gains.

Boy, now you have me really confused! Correct me if I’m wrong, but if the market is performing as it should and the market clearing wage is above the minimum wage in most labor markets, doesn’t that mean that the wages paid themselves would be above the minimum wage? So, are you basically just arguing that the number of people being paid within $1 of the minimum wage before the '97 hike was very small (and very small compared to now…since that is what is relevant in the current policy debate)? This ought to be a fact we can easily verify one way or the other…There are pretty reliable statistics on this sort of stuff, aren’t there?

I have a bit of a problem with this. I hate it when people think of political policy as an experiment. This kind of thinking can lead to very bad outcomes.

I was more noting the fact that we don’t have the empirical evidence than suggesting that we ought to conduct any grand experiment. However, having said that, I do think that if one is always going to err on the conservative side (in more ways than one) in raising the wage then that is not necessarily a good thing either…and is sort of an experiment in its own right: “How much inequality can we have in our society before all hell breaks loose?”

Isn’t it in physics that the saying is ‘for every action there is an equal an opposite re-action’? It is similar in economics. When you enact a policy it is methodologically stupid not to expect some sort of reaction.

Well, as an aside, I recently read an article that argued that this wording of Newton’s Third Law is really somewhat misleading and leads to lots of confusion in intro physics classes. Really, the statement should be that if a body A exerts a force on a body B, then body B exerts a force equal in magnitude and opposite in direction on body A (not as pithy but more accurate). But, anyway, I understand your basic point and the fact that you gave it in response to my statement that I agree that a drastic rise in the minimum wage will have a substantial effect on the unemployment rate means that we are in general agreement on this, no? I think the argument of the authors of the article on this point (for the case of a more modest increase in the minimum wage), as summarized in that fact sheet I gave the URL to in my last post, is:

New economic models that look specifically at low-wage labor markets help explain why there is little evidence of job loss associated with minimum wage increases. This model recognizes that employers may able to absorb some of the costs of a wage increase through higher productivity, lower recruiting and training costs, decreased absenteeism, and increased worker morale.

This gets back to the statistical numbers game. Throwing out a number like, 25% of all those in poverty are in single parent (usually female headed) households. Isn’t all that useful to me. What I would like to see is the story (or theory if like) that the people interested in this stuff have. How did these people get there? Were the originally married? What are the numbers like over time (i.e. is there some panel data on this), etc. I am willing to take their results on some faith, but without the background story the number itself is pretty meaningless, IMO, and doesn’t tell us what the heck we are to do to help these people, or if there is anything to help reduce this problem.

Well, I think a lot of these studies have been done…It is a matter of researching what is out there.

You see this in the current campaign. Both candidates through out stats, expecting a gasp of horror I am sure, with the idea of showing how either they are better or the other guy worse. For example, Gore’s attacks on Bush’s environmental record. For Christ’s sake we are talking about Texas. Any governor there would probably have a bad environmental record, even Al Gore. Also, the numbers that are tossed out don’t do any kind of comparison, or look at what measures Bush has taken to try to mitigate the problem. Maybe Bush put in place some policies that did some good, maybe he didn’t. There is very little substance in this campaign (which is par for the course when looking back over the last 30 or more years).

I’m pretty much with you on this, with some important caveats. I myself have tended to discount numbers about where Texas ranks in various things because I agree that much of this is inherited from before Bush got into office and there is only so much a governor can do. However, I think one can argue that Bush looks very bad on the environment on the basis of what he has done and who he has appointed and his general philosophy (as revealed by what he says about polluting industries, global warming, etc.) Also, if you inherit a particularly bad situation, you are all the more to be held responsible to really turn things around. I mean for a state that is very progressive on the environment, there may be little room for tightening up the laws more…But, for a state like Texas for God’s sake, one doesn’t have to be a genius to figure out what direction to point the ship-of-state in! Unfortunately, from all I have heard about Bush on this point, he is farther from a genius than one apparently has to be!