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
In economically polarized societies, this dynamic breaks down. The very wealthy don’t employ everybody, because the marginal consumption value of a new hire falls below the insurance value of retaining wealth.
.. Idle unemployment is a problem in societies that are highly productive but very unequal. Here basic goods (food, clothing) can be produced efficiently by the wealthy via capital-intensive production processes. The poor do not employ one another, because the necessities they require are produced and sold so cheaply by the rich.
.. The rich produce and “get richer”, but often they don’t much feel richer. They feel like they are running in place, competing desperately to provide all the world’s goods and services in order to match their neighbors’ hoard of financial claims. However many claims they collectively earn, individually they remain locked in a zero-sum competition among peers that leaves most of them forever insecure.
.. In relatively equal, technologically advanced societies, people create plenty of demand for one another’s services. But when productivity and inequality are combined, we get a highly productive elite that cannot provide adequate employment, and a mass of people who preserve more value by remaining idle and cutting consumption than by attempting low-productivity work. (See “rentism” in Peter Frase’s amazing Four Futures.)
.. We had a kind of Wile E. Coyote moment in 2008, when, collectively, we could no longer deny that much of the debt the “middle class” was generating to fund purchases was, um, iffy. So long as the middle class could borrow, the “masses” could simultaneously pay high-productivity insiders for efficiently produced core goods and pay one another for yoga classes. If you didn’t look at incomes or balance sheets, but only at consumption, we appeared to have a growing middle class economy.
.. As polities, we have to trade-off extra consumption by the poor against a loss of insurance for the rich.
.. If we want to maximize total output, we have to compress the wealth distribution. If inequality continues to grow (and we don’t reinvent some means of fudging unpayable claims), both real output and employment will continue to fall as the poor can serve one another only inefficiently, and the rich won’t deploy their capital to efficiently produce for nothing
.. Why did World War II, one of the most destructive events in the history of world, engender an era of near-full employment and broad-based prosperity, both in the US where capital and infrastructure were mostly preserved, and in Europe where resources were obliterated?
.. I think an underrated factor is the degree to which the war “reset” the inequalities that had developed over prior decades. Suddenly nearly everyone was poor in much of Europe. In the US, income inequality declined during the war. Military pay and the GI Bill and rationing and war bonds helped shore up the broad public’s balance sheet, reducing indebtedness and overall wealth dispersion.
.. The financial effect of the war, in terms of the distribution of claims in the US, was not very different from what would occur under Keen’s jubilee.
.. Although in a narrow sense, the very wealthy lost some insurance against zero-sum scarcities, the post-war boom made such scarcities less likely. It’s not clear, on net (in the US), that even the very wealthy were “losers”. A priori, it would have been difficult to persuade wealthy people that a loss of relative advantage would be made up after the war by a gain in absolute circumstance for everyone. There is no guarantee, if we tried the jubilee without the gigantic war, that a rising tide would lift even shrinking yachts. But it might very well.
In recent decades, the label “progressive” has been resurrected to replace “liberal,” a once vaunted term so successfully maligned by Republicans that it fell out of use. Both etymologically and ideologically, the switch to “progressive” carries historical freight that augurs poorly for Democrats and for the nation’s polarized politics.
.. Historical progressivism is an ideology whose American avatars, like Woodrow Wilson, saw progress as the inevitable outcome of human affairs.
.. The basic premise of liberal politics, by contrast, is the capacity of government to do good, especially in ameliorating economic ills. Nothing structurally impedes compromise between conservatives, who hold that the accumulated wisdom of tradition is a better guide than the hypercharged rationality of the present, and liberals, because both philosophies exist on a spectrum.
.. A liberal can believe that government can do more good or less, and one can debate how much to conserve. But progressivism is inherently hostile to moderation because progress is an unmitigated good. There cannot be too much of it. Like conservative fundamentalism, progressivism contributes to the polarization and paralysis of government because it makes compromise, which entails accepting less progress, not merely inadvisable but irrational.
Hillary Clinton, for example, called herself “a progressive who likes to get things done” — the implication is that progress is the fundamental goal and that its opponents are atavists.
.. Unlike liberalism, progressivism is intrinsically opposed to conservation. It renders adhering to tradition unreasonable rather than seeing it, as the liberal can, as a source of wisdom.
The British philosopher Roger Scruton calls this a “culture of repudiation” of home and history alike.
The critic of progress is not merely wrong but a fool. Progressivism’s critics have long experienced this as a passive-aggressive form of re-education.
.. Because progress is an unadulterated good, it supersedes the rights of its opponents. This is evident in progressive indifference to the rights of those who oppose progressive policies in areas like sexual liberation.
.. The ideology of progress tends to regard the traditions that have customarily bound communities and which mattered to Trump voters alarmed by the rapid transformation of society, as a fatuous rejection of progress.
.. Trump supporters’ denunciation of “political correctness” is just as often a reaction to progressive condescension as it is to identity politics.
.. Where liberalism seeks to ameliorate economic ills, progressivism’s goal is to eradicate them.
.. Moynihan recognized this difference between Franklin Roosevelt’s New Deal, which he always supported — as exemplified by his opposition to Clinton-era welfare reform — and Lyndon Johnson’s Great Society, which he sympathetically criticized.
.. The Great Society partook more of a progressive effort to remake society by eradicating poverty’s causes. The result, Moynihan wrote, was the diversion of resources from welfare and jobs to “community action” programs that financed political activism.
.. Conservatism holds that accumulated tradition is a likelier source of wisdom than the cleverest individual at any one moment. It fears the tyranny of theory that cannot tolerate dissent.
.. Liberalism defends constitutionalism. One of the finest traditions of 20th-century liberalism was the Cold War liberal
.. progressivism, by its very definition, makes progress into an ideology. The appropriate label for those who do not believe in the ideology of progress but who do believe in government’s capacity to do good is “liberal.”
Yet you go to trade war with the capital you have, not the capital you’re eventually going to want – and stocks are claims on the capital we have now, not the capital we’ll need if America goes all in on Trumponomics.
Or to put it another way, a trade war would produce a lot of stranded assets.
.. The costs of protectionism, according to conventional economic theory, are not that tariffs caused the Great Depression, or anything like that. They come, instead, from moving your economy away from things you’re relatively good at to things you aren’t.
American workers could sew clothes together, instead of importing apparel from Bangladesh; in fact, we’d surely produce more pajamas per person-hour than the Bangladeshis do. But our productivity advantage is much bigger in other things, so there’s an efficiency gain – for both economies – in having us concentrate on the things we do best.
.. So, what would a trade war do? Suppose the US were to impose a 30 percent tariff across the board, with other countries retaliating in kind so that there’s no improvement in the U.S. terms of trade (more technical stuff I don’t want to get into.) How much would this reduce trade? It depends on the elasticity of import demand; a reasonable number seems to be around 4. This would mean a fall in imports from 15 percent of GDP to around 5 percent – a 10-point reduction. And that in turn means a reduction in US real income of around 1.5 percent.
.. even a trade war that drastically rolled back globalization wouldn’t impose costs on the economy comparable to the kinds of movement we’ve seen in stock prices.
But the costs to the economy as a whole might not be a good indicator of the costs to existing corporate assets.
.. Meanwhile, the factories that do exist were built to serve globalized production – and many of them would be marginalized, maybe even made worthless, by tariffs that broke up those global value chains. That is, they would become stranded assets. Call it the anti-China shock.
.. Of course, it wouldn’t just be factories left stranded by a trade war. A lot of people would be stranded too. The point of the famous “China shock” paper by Autor et al wasn’t that rapid trade growth made America as a whole poorer, it was that rapid changes in the location of production displaced a significant number of workers, creating personal hardship and hurting their communities. The irony is that an anti-China shock would do exactly the same thing. And I, at least, care more about the impact on workers than the impact on capital.