Must reads: To start, there were a pair of poignant long-form stories this week from the New York Times ("Invisible Child" which profiles one homeless kid in the city) and the Washington Post ("Waiting for the 8th," which looks at one family's struggle with living with food stamp cuts). This week, Demos has a new policy brief on ending unnecessary credit checks for employment so that people whose credit is damaged because of unavoidable circumstances are not shut out of jobs. You might want to check out this Marketplace series on philanthropy. The World Economic Forum also has new report out on how to do impact investing.
[Editor's Note: The next newsletter will be sent after the New Year. Therefore, this edition will be a bit longer than normal.]
We start with this cartoon from the Indianapolis Star's Gary Varvel:
Jared Bernstein and Dean Baker at the Center for Economic and Policy Research have a new book on the value of full employment, which contends that "in an era of historically high wage and income inequality, many in the workforce depend on full employment labor markets, and the bargaining power it provides, to secure a fair share of the economy’s growth." Over at the Wonkblog, Ezra Klein looks at the lost political power of U.S. workers:
[I]f the Federal Reserve panicked over its failure to achieve full employment as it does about slight rises in inflation, we’d be living in a very different economy. Public discourse about the deficit, of course, is another obvious example of elite preferences overwhelming broader interests. The political system is far more concerned about the threat of higher taxes later than joblessness now. Similarly, the prevailing language about the nation's strong dollar policy, which is good for American owners and bad for American workers, is even more loaded: A policy that prizes exporting American goods is called “weak.”
In the Harvard Business Review, Peter Cappelli discusses why it's not okay for major companies to pay less than subsistence wages:
No doubt the reason low-wage companies continue to pay low wages is because there are plenty of workers willing to take jobs at those wages, and the need to pay more to avoid the risk of being unionized is largely gone. But “can” and “ought” are not the same thing. Nothing about the minimum wage implies that it is morally ok as long as you pay at least that much. It simply says that the government will prosecute you if try to pay less than that level... One of the things that I find surprising is how many companies that pay poverty-level wages or thereabouts to their employees spend a good deal of effort to be good corporate citizens in other areas. They try to make their operations “green,” lessening their impact on the environment, some even sponsor anti-poverty programs in Africa, and so forth. They just don’t seem very interested in the poverty among their own workforces.
In the Weekly Standard, the Bush Institute's Ike Brannon continues the conservative meme against raising the minimum wage in favor of some other policy:
Liberals push for a higher minimum wage in part because a targeted alternative to helping poor working parents—such as tweaking the Earned Income Tax Credit—would cost the government money. But a minimum wage costs the economy plenty, albeit in a less overt way, in the form of fewer jobs for unskilled, inexperienced young workers. Opposing the minimum wage doesn’t mean an indifference to the plight of the working poor: It’s evidence of a recognition that government cannot simply legislate away this particular problem. If we want to help the working poor we need to help them become more productive and create more jobs and not pretend that merely mandating higher wages for all costlessly solves the problem.
Brannon cites this research from the American Action Forum, which contends the average family income for a minimum wage earner is roughly $75,000 per year. The slicing and dicing of who is a minimum wage worker has almost become a national past-time. For instance, Heritage's James Sherk contends the majority are young people who haven't left school yet, and that the majority of people below the poverty line did not work at all. The Atlantic's Jordan Weissmann offers up this in rebuttal:
The vast majority of these workers aren't teenagers. And among minimum wagers older than 25, Heritage notes that the average household income is $42,000 a year. Is that poverty? Not unless you're a single parent with eight children. But is it rich? Of course not. In fact, it's still well below the median household income of $51,000. We'll get more into who exactly would reap the rewards of a minimum wage increase later in the FAQ. But here's what you should remember for now: The beneficiaries wouldn't all be impoverished adults, but they wouldn't all be 17-year-olds saving up for the next "Call of Duty" sequel, either.
Meanwhile, the Economic Policy Institute argued the idea that for many families minimum wage work is not supplemental as Heritage's analysis contends:
Low- and minimum-wage workers are often dismissed as “secondary earners,” implying that the income earned by these workers is primarily discretionary income, unessential to their family’s well-being. This is patently false: The workers who would be affected by increasing the minimum wage to $10.10 earn, on average, 50 percent of their family’s total income.
In the Huffington Post, conservative Douglas Holtz-Eakin argues for more social safety nets because he contends a minimum wage hike would be a redistribution from job seekers to job holders in high income households. On the other side, Kevin Drum at Mother Jones argues that even with the earned income tax credit accounted for the current minimum wage buys less than it did in the 1960s.
The Pew Research Center had these charts this week on U.S. wealth inequality:
It’s now widely accepted that rising household debt helped set the stage for our economic crisis; this debt surge coincided with rising inequality, and the two are probably related (although the case isn’t ironclad). After the crisis struck, the continuing shift of income away from the middle class toward a small elite was a drag on consumer demand, so that inequality is linked to both the economic crisis and the weakness of the recovery that followed.
In my view, however, the really crucial role of inequality in economic calamity has been political.
In the years before the crisis, there was a remarkable bipartisan consensus in Washington in favor of financial deregulation — a consensus justified by neither theory nor history. When crisis struck, there was a rush to rescue the banks. But as soon as that was done, a new consensus emerged, one that involved turning away from job creation and focusing on the alleged threat from budget deficits.
The National Review's Kevin Williamson offered these thoughts in rebuttal, contending the issue really isn't inequality:
The problem is declining or stagnant wages for those Americans who are not thriving in the 21st-century economy. Cannier politicians will note that while they may respond to cheap rhetoric about the new robber barons, Americans are by and large much more concerned about their own paychecks and bank balances than they are those of other people. Republicans would be foolish to adopt the rhetoric of inequality and its implicit class-war thinking, but they would be much more foolish to ignore the underlying economic reality that gives teeth to that critique: Things are not good for the American middle class, and things are bad for the poor. There are signs that economic mobility is in decline, especially at the extremes, and the general environment of economic pessimism, so alien to Americans, is not entirely unjustified.
Meanwhile the Manhattan Institute's Scott Winship says it isn't inequality but labor's share of the economic pie that now has to be divvied between male and female workers:
[P]erhaps all the wage-productivity gap is signaling is the death of a patriarchal regime in which male workers were overpaid relative to their productivity because we were intent on keeping women in the home. For decades earlier in the twentieth century, men actively fought to shelter themselves from female competition—pushing for a minimum wage for women in order to limit the extent to which female workers could pull the union wage down to a market-clearing one, demanding that union contracts require women workers to be let go if they got married, promoting the famous five-dollar-day in Ford factories (only for men).* Don’t get me wrong, the erosion of this regime has been a kick in the gut for less-skilled men, and we have done too little to help them adjust. It has been a boon for married women though, whose labor force participation rose steadily for decades from the 1940s (before men’s wages started stagnating) through the 1990s. The problem is not a general one of the rich appropriating the workers’ pay. Instead, it is possible that top earners and shareholders would have had something like 1929- or 2013-sized incomes during the Golden Age of the American economy—except that they, too, bought into the male breadwinner family-wage regime even at the expense of their own financial self-interest.
This piece in the Fiscal Times from former Reagan official Bruce Bartlett looks at the utility of social safety nets and the economic and political order they provide. Is quantitative easing a subsidy for the rich? Check out this piece from CNBC's Robert Frank.
Your editor has been thinking on two holiday classics, not for their religious connotations, but because they reflect on values of wealth and poverty. Charles Dickens and Frank Capra were the poverty warriors of their time, but "A Christmas Carol" (best versions 1951 and 1984) and "It's a Wonderful Life" should be watched with today's discourse and circumstances in mind. Capra's film could be called "A Tail of Two Bankers." Check out this analysis from Penn State's Marie Reilly, who in a 2007 blog post, calls the Bailey Building and Loan "the unsung star of the film":
The connection between savings and loans and the emerging consumer middle class was more than skin deep. As a regulatory matter, savings and loans were "of the people" in a way that banks were not. Depositors controlled the investment strategy deployed by savings and loan management. In contrast, equity investors, usually with no connection to the deposit community (e.g., Mr. Potter), controlled the management of banks. The course of George Bailey's wonderful life, to his great frustration, tracks the fate of the Bailey Building and Loan. Throughout the film, George is the archetypal investor. He saves. He reinvests dividends. He takes the long view while the others around him mock him and snap up short term gains.
In Business Week, Roben Farzad asks since when did America forget the savings & loan crisis of the 1980s, and discusses the contraction in the number of banks:
Before subprime, “S&L” was the mother of all too-big-to-fail meltdowns: More than 1,000 banks with total assets of over $500 billion fell, costing the taxpayer upwards of $150 billion. The ordeal exacerbated an already-bad recession (PDF). Not something a nation forgets about overnight. But we nevertheless did forget some time, I figure, between Ace of Base and Netscape. And so Wall Street was allowed to risk its way into 2008’s mega-taxpayer-backed disaster, via Bear Stearns, Lehman Brothers, AIG, et al. Never again after that, though, right?
Jeffrey Crowe of Northwest Venture Partners says peer-to-peer lending may be the next iteration of the savings and loan model, where "borrowers and lenders that transcend physical constraints like the geographic boundaries of a Bedford Falls." Meanwhile a couple of years ago the Get Rich Slowly blog offered up some thinking on George Bailey's social capital. The National Journal has this piece on new ways to help low-income people establish good credit. Dickens also has some insights to offer us, such as this piece from Virginia Tech's Max Stephenson Jr. earlier this year on the Dickensian views of many Americans:
[L]ike many in Victorian times, many in the United States and elsewhere today see the poor collectively as of a single sort and character. Roughly a quarter of Americans, 24%, and the largest percentage of those responding to an NBC-Wall Street Journal poll in June 2013, suggest that “too much welfare preventing initiative” was “most responsible for the continuing problem of poverty in the U.S.” Likewise, many Britons in the Victorian period blamed the poor for their condition and imagined their situation was born of weak character or sloth or both. Those with this view imagine people experiencing poverty to be grasping connivers more than willing to “depend” on the kindness of those providing aid to them while making no genuine effort to support themselves and their families. Thus, one can provide “too much” sustenance to assist the poor under this assumption. On this view, the appropriate response to poverty is to deny any assistance to those in need as it will only foster their “dependence” on such support and sap any effort they might otherwise exert to help themselves.
Over at the New Republic, Steven Poole links the idea of workhouses to today's "cult of productivity":
In 1770, an anonymous essay on trade and commerce was published in London. (It is now usually attributed to a “J Cunningham”.) In it, the author proposes that orphans, “bastards and other accidental poor children” ought to be made to labour in workhouses for 12 hours a day from the age of four. (He allows that two of these hours might be devoted to learning to read.) This will have the happy effect, the author argues, of creating a new generation “trained up to constant labour” and thus increasing the general industry of the population, so that future labourers will be happy to earn in six days a week what they currently make in four or five. Cunningham’s proposed workhouses are also conceived to house (or, rather, imprison) adult vagrants and other so-far-incorrigible poor people. Existing workhouses are too luxurious, he complains: “Such house must be made an house of terror”. Only terror will make the inmates properly productive; the solution is “the placing of the poor in such a situation that loss of liberty, hunger, thirst ... should be the immediate consequences of idleness and debauchery”.
Meanwhile the OECD discusses how far we have come on the poverty fighting road:
Well into the 19th century, poverty was widely seen as inevitable: Economists estimate that in 1820 around 84 percent of the earth's population lived in absolute poverty, or on the equivalent what we now call "a dollar a day" (it's actually $1.25). Poverty was also seen as useful: "Everyone but an idiot knows that the lower classes must be kept poor or they will never be industrious," the English writer and traveler Arthur Young wrote in 1771... In two centuries, we've gone from a world where "all countries were sick and poor and life expectancy was below 40," in the words of Hans Rosling, to one where a significant number of countries are rich and where the Millennium Development Goal of halving absolute poverty was met "five years ahead of the 2015 deadline." Few now would argue against poverty eradication. But as the work of Amartya Sen has shown, narrow measures only tell part of the story: Poverty is not simply a lack of wealth but can also represent a lack of access to things like healthcare, decent education and economic opportunity. We associate these problems mostly with developing countries, but they are also issues in the wealthy world, where there are concerns about signs of a gradual rise in relative poverty. Relative poverty is typically calculated as the number of people living below a "poverty line".
Over at Salon, Berkeley's Robert Reich offers new thinking on whether giving to elite institutions that largely cater to the wealthy should be consider charity. Meanwhile Slate offers up a piece on the Chicago's Linda Taylor, the woman that instigated the term "welfare queen". The Motley Fool's Brian Stoffel says some of the best investments in 2014 may be found by picking companies with happy workers. This story in Crain's by Matthew Flamm examines the impact of the JOBS Act on the ability of "mom and pop" shops to attract investors. You might also be interested in this Information Week slide that looks at ten jobs that may be destined to be replaced by robots. You might want to check out this report from Impact Economy on creating sustainable apparel value chains. Following the New York snow storm, tech company Uber's "price surging" strategy weighed into the people versus efficient economics debate, which Megan McArdle rounds up over at Bloomberg.