The Minimum Wage Debate - A New Way Forward

March 18, 2014:  Jim Schneider

The minimum wage debate has raged on for decades. Like most of the perennial battles between the political left and right, the two parties invariably fail to consider policies that would benefit all Americans. Instead, they have divided the nation into various factions and only promote policies that support their factions at the expense of their rivals. A political system that is based on compromise, like ours, fails under these tactics and leaves our economy to languish in the uncertainly and neglect wrought from political gridlock. We need a new approach. We need a strategy that is designed to unite us, not divide us. ---- But how could we possibly do that in this political climate?

For starters, we need leaders that recognize the critical importance of unifying our nation. We need leaders that are able to convince the American people and both parties that our Federal Government should adopt a single, overarching economic objective that would guide the development of our nation’s economic policies. But could the hodgepodge of America’s diverse interests ever agree to a common economic objective? Yes, if that objective spoke to every American like this one.

Continuously improve the standard of living of all Americans.

That’s it. That’s as complicated as our national objective needs to be. A standard of living can be defined and measured. It can be compared over time and between groups and across locations. It would be easily understood, actively supported and would lead to broader participation in the political process. An objective would persuade policy makers to couch their proposals in terms of the objective and prioritize them accordingly. The voters would gain a gauge for comparing actual results against the plan and measuring the contributions of their elected leaders.

An objective would make it harder for the parties to demonize the motives of the other party. When voters no longer believe someone is the devil, they may be more likely to consider that person’s point of view. The political discussion might then switch from castigating opponents to how best to achieve objectives. Yes, the debates would certainly rage on; but instead of discussing the emotionally charged and economically less significant, we just might begin to delve into solutions that address our most pressing economic problems. So how would a national economic objective help our minimum wage debate?

Well, if the nation were to agree to a national objective then we could get about the business of debating the economic strategies that would best reach that objective. I contend that our government should first concentrate on two major policy arenas.

1. Jobs
2. Safety Net

Jobs:

The most effective way for individuals to improve their standard of living - as well as increase their sense of worth and well being is through a job. The most effective way for our economy to grow and generate jobs is through a vibrant private sector that offers goods and services that people want at prices they can afford with enough profit to warrant their continuation. The goal of our Federal Job Policy should therefore be: 

To enact policies that allow the private sector to maximize the quantity, quality and sustainability of U.S. based, profit funded, private sector jobs.

Repeated Keynesian approaches by the Republicans to reduce taxes or by the Democrats to increase spending have not and will not have the long-term desired effects to jump-start our economy. The theory behind a Keynesian stimulus is that a short-term cash/demand infusion will prime the private sector economic pump. But if the pump is broken, the infusion will have no more effect on stimulating our economy than would a jockey going to the whip in order to stimulate a race horse with a broken leg. The only remedy is to fix the leg first. Therefore, the best strategy for fixing our economic race horse is to:

Eliminate the obstacles that inhibit the hiring of US based private-sector employees.

The main obstacles inhibiting demand for US based jobs include:

• The employer funded Safety Net Programs including healthcare and retirement
• The business costs to comply with federal and state regulations
• A perverse tax system that causes sub-optimized economic decisions
• Uncertainty over future regulations is inhibiting business start-ups and expansions
• An absence of a supply-increasing and price-stabilizing national energy policy
• An absence of a commerce-facilitating infrastructure-improvement plan
• An inconsistent supply of short-term debt for small businesses to finance operations
• A mismatch between labor skills needed and labor skills available.

There are certainly other job expansion impediments but a concerted effort to minimize these obstacles would produce an immediate, dramatic and sustainable improvement in the US labor market.

Safety Net:

America needs a safety net for the simple reason that no one has yet devised a way for a regulated free-market capitalist system to adequately ensure a minimum standard of living for all her citizens all the time. But if we want to achieve our national objective we must stop forcing our employers to pay for our safety net because doing so makes US based jobs less competitive in a global economy. We therefore must adopt an alternative safety net funding mechanism. --- But what should that be?

First, we should categorize all federal expenditures into safety net costs and everything else. By so doing, minimum wage would clearly fall under the safety net category and by definition should NOT be paid for by our employers. --- That would really change the minimum wage debate - for the better.

To pay for our safety net, I suggest a national retail sales tax appropriately called the Safety Net Tax (SNT). The SNT would include a rebate to all US citizens for taxes paid up to the poverty level. The first programs transferred to the SNT would include Social Security and Medicare eliminating the need for the Payroll Tax. Advantages of the SNT over the Payroll Tax include:

• US based labor costs would decline which would increase demand for US based labor
• The SNT Rebate would make the SNT more progressive than the Payroll Tax and help the poor
• Payroll Taxes are hidden in prices and passed along to customers. The SNT would reduce the prices of US goods and services and show the cost of government on every receipt.

Once the SNT was established, and the minimum wage was considered part of the safety net then minimum wage discussions would focus on how much the SNT would need to increase in order to pay for a particular minimum wage increase. Ethereal debates over price increases and job decreases would be replaced with Americans discussing their desire to pay a definitive SNT rate increases.

With $17.4 trillion in debt, $63 trillion in unfunded liabilities and over $2 trillion of job burden costs already foisted annually on our employers, the minimum wage is but a fly on an elephant’s back. But nonetheless the topic helps to illustrate the economic anchor we have chained to our collective neck. The $17.4 trillion national debt would be best solved by following through with our job policy goal and strategy. The $63 trillion in unfunded liabilities would be best resolved by replacing pay-as-you-go funding with prefunding at birth for the next and all subsequent senior entitlement generations. The $2 trillion in job burden costs would be resolved by implementing the Safety Net Tax.