The Case for the Wage Subsidy

Americans across the political spectrum should focus on how best to spend government money already slated to go out the door.

.. The controversial subsidies that New York and Washington offered Amazon to attract its “HQ2” are not some novel approach to economic development. Last year, Wisconsin offered a larger package of incentives to entice electronics supplier Foxconn, assembler of iPhones, to build a $10 billion manufacturing facility in Wisconsin. Annual payroll for 13,000 workers would exceed $700 million, and Wisconsin expected the plant to generate annual state and local tax revenue of $181 million and lead to the creation of 20,000 additional jobs. Critics panned the deal as corporate welfare, to which Governor Scott Walker fired back, “That’s fine, but I think they can go suck lemons.”

.. The value of the subsidy would be set relative to a “target wage” of, say, $15 per hour and would close half the gap between the market wage and the target. A worker would initially receive a subsidy of $3 per hour in this case, equal to approximately $6,000 per year if he worked full-time.

.. This differs from most programs that transfer resources to lower-income households, including the EITC, which phase out as the household’s total income rises; for every additional dollar earned by the household, the worker loses some of the benefits he was receiving. With the direct wage subsidy, the worker receives the same subsidy for every hour worked at a given wage, no matter how much total income he earns. He can take a second job and earn the subsidy for each of those hours. His wife can take a job and earn her own subsidy, too. The value of the subsidy declines only as workers become more productive, earning promotions and raises.
.. First, the wage subsidy is the appropriate mechanism for redistributing gains from the economy’s “winners” to its “losers.” It comes closest to doing this directly, by taking tax revenue drawn from higher earners and inserting it directly into the paychecks of lower earners.
.. Second, the wage subsidy offsets subsidies given to foreign producers and moves the cost to employers for domestic workers closer to parity with what firms pay foreign workers living in sharply different social and economic contexts. The benefit is largest for industries where the work is most labor-intensive and relies on the lowest-cost labor — in other words, the industries under greatest pressure from globalization. But it does this through a neutral structure
..  A community lacking the ability to export (even to the rest of the nation) must rely on government transfer payments to fund the resources it requires from the outside world — the community is literally exporting need. The existing American safety net conditions those transfers on very low incomes — often, no work at all — and channels them primarily toward consumption of health-care services. With a wage subsidy, work, rather than unemployment, draws government support, and that support can flow to a fuller range of productive activities in the community. In this model, a services economy can still thrive disconnected from a tradeable sector — not an ideal arrangement but one far better than today’s.

This invites the question, Isn’t the wage subsidy just another form of redistribution, like all the safety-net programs we already have? Yes and no. Yes, it is redistribution. And yes, high-income taxpayers will finance it. But unlike with government assistance disconnected from work, the value of a productive job through which someone supports her family and contributes to her community is not diluted if it yields a paycheck into which the government has put in more than it takes out. Certainly a society of thriving and perfectly self-sufficient families would be preferable. But America is nowhere near such a reality today, and for some people, it may never happen. If we can at least make redistribution a tool for creating jobs and promoting work, we will be moving the labor market in the right direction and delivering better outcomes for those who need support.

.. They might accept a subsidy as a replacement for existing safety-net programs, but if cutting safety-net spending is on the table, many would prefer to spend that savings on a growth-generating tax cut.
.. What really infuriates Democrats, meanwhile, is the possibility that employers might benefit. Factually speaking, they have a point. If the government offers a $3 subsidy atop a $9-per-hour job, the result will not necessarily be a $12-per-hour job. The employer might instead cut the market wage to $8, to which the government would add $3.50 — half the $7 gap to the target wage of $15 — leaving the worker with $11.50. Both worker and employer are better off than without the subsidy, but the entire benefit is not the worker’s.
.. roughly 75 percent of the financial benefit accrued to workers. In general, employers have to benefit at least somewhat. A central premise of the wage subsidy is to pull more prospective workers into the labor force. Other things held equal, if the supply of workers increases, then employers will be able to offer lower wages — even as, thanks to the subsidy, workers take home more... Remember, the wage subsidy’s goal is not only, or even primarily, to transfer resources into the pockets of low-income households. It is also to connect more workers with employers in permanent jobs. The task requires employers to do the hard work of hiring and training certain employees whom they otherwise would not, and this benefits society greatly.

A central premise of the wage subsidy is to reward employers sufficiently so that they choose to do more. By contrast, just wishing that firms would create more and better jobs when they have no economic incentive to do so is futile; it has zero bearing on what will happen in the actual labor market.

.. Note that this need to create incentives for the employer is no different from what happens in any other effort at assisting low-income households in a market economy. When people use food stamps at the supermarket, the supermarket benefits. When they use housing vouchers to pay the rent, the landlord benefits. Unless the government wishes to produce everything itself, or order market participants to take actions against their own interests, efforts to deliver results that the market will not deliver for low-income households always benefit the businesses that choose to participate in the transactions. Otherwise, they wouldn’t participate!

.. It is a strange consequence of our commitment to individuals as consumers that we unthinkingly pay hundreds of billions of dollars each year to hospitals and universities to provide treatment and education to customers whom they otherwise would turn away but that we shrink from the idea that society might pay anything to an employer to hire someone he otherwise would not.

.. Just as the Republican party’s relative disinterest in the labor market is made apparent by its preference for a tax cut over a wage subsidy, a good distillation of the Democrats’ core attitude toward the labor market emerges from comparing a wage subsidy to their preferred approach: the minimum wage. Raising the minimum wage is the quintessential left-of-center labor-market policy. Unsatisfied with the market outcome, Democrats suggest decreeing a different one. The outcome it professes to deliver is widely desired. It seems “free.” And then it damages, rather than strengthens, the labor market.

.. The minimum wage and the wage subsidy both aim to raise the earnings of low-wage workers, but whereas the wage subsidy asks taxpayers to make up the difference, the minimum wage asks employers to

.. The wage subsidy injects funds from outside the labor market to boost the formation of employment relationships and encourage greater investment in labor-intensive businesses. The minimum wage does the opposite, operating as a tax on low-wage employment that employers have to pay for every low-wage hour they use.

.. The roughly $200 billion price tag for a wage subsidy might require some new tax revenue, but its funding could come largely from the existing safety net, which already dedicates more than $1 trillion annually to low-income households


Crushing it for whom, Mr. Kudlow?

Last week, one of President Trump’s top economic advisers, Larry Kudlow, argued the U.S. economy is “crushing it,” posting boom-like numbers in key areas, all thanks to the leadership of the president.

Evaluating such claims usually begins with assessing whether the president should get credit for an economy he inherited in year eight of a solid expansion. But the fact that Trump is claiming credit for trends that were largely ongoing before he took office is one of the few ways in which he is not much different from former presidents.

.. Who is actually getting ahead in the Trump economy?

.. . In contrast, corporate profits and equity markets truly are crushing it, both on a pre- and especially, given the large business tax cuts, a post-tax basis.

.. There is also no evidence of an investment boom, suggesting the recent, above-trend growth in GDP is Keynes, not Laffer — meaning the deficit spending is providing a temporary boost but will not have lasting, positive impacts for long-term economic growth.

.. Starting with wages, since Trump took office, the real hourly wage for the 82 percent of the workforce that is blue collar in factories and non-managers in services is up half-a-percent, an extra 11 cents per hour.

.. the growth of mid-level pay has picked up a bit, as we’d expect with such low unemployment. But inflation, largely driven by higher energy costs, has also sped up, canceling out any real gains.

.. If energy prices come down and unemployment continues to fall, real wage growth for mid-wage workers will improve. But the magnitude of their gains will likely be nothing close to the administration’s claim that the tax cut would add at least $4,000 to annual earnings within a few years of the legislation.

.. In President Barack Obama’s second term, real annual wage growth for mid-wage workers was about 1 percent, so call that the baseline.

.. Sticking with the tax cut, its proponents main claim was the big corporate cuts would generate more business investment, which would lead to faster productivity growth, which would position us for higher paying jobs. So far, every link in that chain is broken.

.. Business investment is growing, as we’d expect in an economy operating close to full capacity. But its growth rate is not faster now than at various points earlier in the expansion.

.. There has been a modest uptick in investment in structures (such as plants, offices, wells, mine shafts, warehouses) in the first half of 2018, but, as economist Dean Baker has shown, the growth in such investment was due to higher energy prices generating increased investment in mining for oil and natural gas.

.. While mining investment has increased by 36.7 percent over the last year, it rose by 47.3 percent from the second quarter of 2009 to the second quarter of 2010, when the Obama administration was still enforcing environmental laws. In both cases, the key factor was rising world oil prices.

.. It takes time to plan investments, so it is too soon to conclude the tax cuts have not made a difference. But none of the surveys of companies’ investment plans show any plans to ratchet up capital spending

.. What is clear is firms are using their tax windfalls to boost share prices through buybacks, which, along with strong corporate profits, are fueling a historical bull market for stocks.

.. instead of borrowing $2 trillion to finance the regressive tax cut, Congress could have put more money in the pockets of working Americans and made investments for our economic future.

.. First, we should have expanded the Earned Income Tax Credit to compensate for decades of stagnant wage growth. The Brown-Khanna plan, calling for a $1.4 trillion EITC expansion, would have provided working families making up to $75,000 with up to $8,000 more in take home pay.

.. the best way to raise pay for ordinary Americans is to do so directly as opposed to pretending it will come through the largesse of executives and shareholders.

.. Second, we should have put billions to expand the National Science Foundation’s Advanced Technological Education program, linking employers to technical schools to develop credentials that respond to the needs of our cutting-edge industries.

.. Third, we should have provided hiring incentives for anchor companies to create jobs in places left behind such as Paintsville, Ky., or Flint, Mich. If a company is willing to hire in places where people do not have enough access to high-wage jobs, then they should get support for doing so.

.. Fourth, we should have invested in bringing high speed Internet to every corner of America. Providing fiber broadband to every corner of the United States is the modern equivalent of rural electrification.

.. Larry Kudlow’s right: The Trump administration is crushing it for its donor base, which is in turn handsomely rewarding them.

.. But it has done nothing for the forgotten Americans and nothing to make sure America is a winner in the 21st century. We do not need more sugar highs for those already doing well. We need to give lasting pay raises to those struggling to pay the bills and then focus on the forward-looking investments that will finally reconnect GDP growth to broadly shared prosperity.


The conservative movement—and, with it, the GOP—is in disarray. Specifically, the movement’s “fusionist” alliance between traditionalists and libertarians appears, at long last, to be falling apart.

.. Libertarian disaffection should come as no surprise. Despite the GOP’s rhetorical commitment to limited government, the actual record of unified Republican rule in Washington has been an unmitigated disaster from a libertarian perspective: runaway federal spending at a clip unmatched since Lyndon Johnson; the creation of a massive new prescription-drug entitlement with hardly any thought as to how to pay for it; expansion of federal control over education through the No Child Left Behind Act; a big run-up in farm subsidies; extremist assertions of executive power under cover of fighting terrorism; and, to top it all off, an atrociously bungled war in Iraq.

This woeful record cannot simply be blamed on politicians failing to live up to their conservative principles. Conservatism itself has changed markedly in recent years, forsaking the old fusionist synthesis in favor of a new and altogether unattractive species of populism.

.. The old formulation defined conservatism as the desire to protect traditional values from the intrusion of big government; the new one seeks to promote traditional values through the intrusion of big government.

.. Just look at the causes that have been generating the real energy in the conservative movement of late: building walls to keep out immigrants, amending the Constitution to keep gays from marrying, and imposing sectarian beliefs on medical researchers and families struggling with end-of-life decisions.

.. the conservative embrace of a right-wing Leviathan has left libertarian-minded intellectuals feeling left out in the cold.

.. New York Post columnist Ryan Sager bemoaned the rise of big-government conservatism and warned that excessive pandering to evangelicals would rupture the movement.

.. Andrew Sullivan denounced the right’s fundamentalist turn in The Conservative Soul: How We Lost It, How to Get It Back.

.. 13 percent of the population, or 28 million voting-age Americans, can be fairly classified as libertarian-leaning.

.. Back in 2000, this group voted overwhelmingly for Bush, supporting him over Al Gore by a 72-20 margin.

.. Markos Moulitsas of Daily Kos fame caused something of a stir by proposing the term “Libertarian Democrat” to describe his favored breed of progressive.

.. Governor Brian Schweitzer of Montana, fellow Montanan Tester, and Virginia Senator-elect Jim Webb—have sounded some libertarian themes by being simultaneously pro-choice and pro-gun rights.

.. if Democrats hope to continue appealing to libertarian-leaning voters, they are going to have to up their game. They need to ask themselves: Are we content with being a brief rebound fling for jilted libertarians, or do we want to form a lasting relationship? Let me make a case for the second option.

.. the prevailing ideological categories are intellectually exhausted. Conservatism has risen to power only to become squalid and corrupt, a Nixonian mélange of pandering to populist prejudices and distributing patronage to well-off cronies and Red Team constituencies.

.. Liberalism, meanwhile, has never recovered from its fall from grace in the mid-’60s.

.. Conservative fusionism, the defining ideology of the American right for a half-century, was premised on the idea that libertarian policies and traditional values are complementary goods.

.. But an honest survey of the past half-century shows a much better match between libertarian means and progressive ends.

.. many of the great libertarian breakthroughs of the era—the fall of Jim Crow, the end of censorship, the legalization of abortion, the liberalization of divorce laws, the increased protection of the rights of the accused, the reopening of immigration—were championed by the political left.

.. capitalism’s relentless dynamism and wealth-creation—the institutional safeguarding of which lies at the heart of libertarian concerns—have been pushing U.S. society in a decidedly progressive direction.

.. The civil rights movement was made possible by the mechanization of agriculture, which pushed blacks off the farm and out of the South

.. Likewise, feminism was encouraged by the mechanization of housework.

Greater sexual openness, as well as heightened interest in the natural environment, are among the luxury goods that mass affluence has purchased.

.. secularization and the general decline in reverence for authority, as rising education levels (prompted by the economy’s growing demand for knowledge workers) have promoted increasing independence of mind.

.. Yet progressives remain stubbornly resistant to embracing capitalism, their great natural ally.

.. Knee-jerk antipathy to markets and the creative destruction they bring continues to be widespread, and bitter denunciations of the unfairness of the system, mixed with nostalgia for the good old days of the Big Government/Big Labor/Big Business triumvirate, too often substitute for clear thinking about realistic policy options.

.. the rival ideologies of left and right are both pining for the ’50s. The only difference is that

  • liberals want to work there, while
  • conservatives want to go home there.

.. Both generally support a more open immigration policy. Both reject the religious right’s homophobia and blastocystophilia. Both are open to rethinking the country’s draconian drug policies. Both seek to protect the United States from terrorism without gratuitous encroachments on civil liberties or extensions of executive power. And underlying all these policy positions is a shared philosophical commitment to individual autonomy as a core political value.

.. their conceptions differ as to the chief threats to that autonomy.

  • Libertarians worry primarily about constraints imposed by government, while
  • liberals worry most about constraints imposed by birth and the play of economic forces.

.. At the same time, some of the resulting wealth-creation would be used to improve safety-net policies that help those at the bottom and ameliorate the hardships inflicted by economic change.

.. Progressive organizations like Oxfam and the Environmental Working Group have already joined with free-market groups in pushing for ag-policy reform.

.. the current subsidy programs act as a regressive tax on low-income families here at home while depressing prices for exporters in poor countries abroad—and, to top it off, the lion’s share of the loot goes to big agribusiness, not family farmers.

.. the president of Cato and the executive director of the Sierra Club have come out together in favor of a zero-subsidy energy policy.

.. cut taxes on savings and investment, cut payroll taxes on labor, and make up the shortfall with increased taxation of consumption. Go ahead, tax the rich, but don’t do it when they’re being productive. Tax them instead when they’re splurging—by capping the deductibility of home-mortgage interest and tax incentives for purchasing health insurance. And tax everybody’s energy consumption.

.. Gore has proposed a straight-up swap of payroll taxes for carbon taxes

.. Greg Mankiw has been pushing for an increase in the gasoline tax.

.. libertarians’ core commitments to personal responsibility and economy in government run headlong into progressives’ core commitments to social insurance and an adequate safety net.

.. Spending on Medicare, Medicaid, and Social Security is now projected to increase from about 9 percent of GDP today to approximately 15 percent by 2030.

.. We can fund the Earned Income Tax Credit and other programs for the poor; we can fund unemployment insurance and other programs for people dislocated by capitalism’s creative destruction; we can fund public pensions for the indigent elderly; we can fund public health care for the poor and those faced with catastrophic expenses. What we cannot do is continue to fund universal entitlement programs that slosh money from one section of the middle class (people of working age) to another (the elderly)—not when most Americans are fully capable of saving for their own retirement needs.

.. Instead, we need to move from the current pay-as-you-go approach to a system in which private savings would provide primary funding for the costs of old age.