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Is Inequality a Cause or an Effect?

Kevin Williamson writes What to Do About Wages in The National Review.


The Left sees inequality as a cause of economic facts, not an effect of them. As EPI sees things, inequality is an independent actor, a motive force in world affairs: It is not only a “determinant” of economic conditions but “by far the most important determinant”; it has, under its own steam, “blocked living standards growth for the vast majority”; and it is “the key driver behind stagnant wages for workers at the bottom.” This is a deeply weird view of how the world actually works: The Left thinks that inequality is not a mere measure of relative incomes or wealth but something that does things in the world, something that acts — and not only acts but acts decisively, determining Americans’ economic prospects. This sort of flatly preposterous analysis is the unfortunate effect of mistaking the map for the territory and the model for the thing modeled, the kind of magical thinking that causes people to believe that Superman could turn back time by reversing the rotation of the Earth.

That leads to the sort of silly writing exemplified above, but it also leads to bad policy ideas. EPI is about as respectable an economic-policy outfit as the Left has to offer, but its preferred policy responses to wage stagnation are basically primitive: raising minimum wages, as though long-term prosperity could be brought about by congressional fiat; passing paid-sick-leave laws; and changing corporate governance and financial regulation in ways that would impede or discourage income growth among corporate managers and financial professionals, who along with the occasional professional athlete and movie star make up the top 1 percent. There is more magical thinking in that, too: There is no big bucket of “national income,” and $100,000 in forgone pay for a CEO or private-equity investors does not mean that there is an extra $100,000 sitting around available to be used as income for somebody else. We talk about the “distribution” of income, but that is a purely statistical idea. There is no distributor of income, and income cannot simply be moved from one pocket to another like wampum.

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Why Tax Cuts are Disproportionate

Kevin Williamson writes Blue Voodoo in National Review.


 The cartoon version of conservative economic thinking — that we should subsidize gazillionaires in order to create work opportunities for yacht painters, monocle polishers, and truffle graters — is fundamentally at odds with the facts. The supply-siders may have wrong economic ideas, but they do not have those wrong economic ideas. President Ronald Reagan, for example, loved to boast of the number of poor and modestly-off Americans his policies had removed from the federal tax rolls entirely. George W. Bush promised that he’d take the poorest fifth of taxpaying U.S. households off the federal tax rolls; Heritage estimates that he succeeded in doing so for about 10 million low-income households.

One of the perverse consequences of conservatives’ success in lowering the federal income-tax burdens of those on the left half of the earnings bell curve is that we have finally arrived at the point where our critics are partly correct: Most conservative plans for tax cuts at this point in history do disproportionately favor the wealthy and the high-income, for the mathematically unavoidable reason that they pay a steeply disproportionate share of federal income taxes, making it very difficult to design a tax-cut plan that does not disproportionately benefit them. It’s hard to cut taxes without cutting them for the taxpayers.


The more progressive the tax system is the more that the economy is dependent on the wealthy and thus subject to the same volatility. Tax cuts will favor the rich if the lower income have paid no taxes.

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How Not to Improve Wages

Kevin Williamson writes What to Do About Wages in The National Review.


There are basically three ways to raise incomes.

The first is through capital investment that raises the value of labor. But capital investment also replaces labor in many instances, and it is just as effective at raising the value of labor in overseas markets. And EPI’s analysts are correct to point out that in the United States wage growth has lagged behind productivity growth, suggesting that deeper investment may not be enough to really move Americans’ wages forward.

The second way to raise the value of labor is through education and the cultivation of skills. Here, EPI’s analysis seems to me grievously mistaken, emphasizing, as it does, that a four-year college degree has relatively little effect on many workers’ prospects: “The gap between wages near the top of the wage distribution and the middle (and, for that matter, between the very top and the top) has grown much faster since 1995 than has the wage gap between those with a four-year college degree and those with a high school degree. This suggests that rising demands for this credential cannot fully explain the growth in inequality.” What it really suggests is that a four-year degree is not a credential at all, and that markets are much better at sorting than are college-admissions committees and the teaching assistants who are entrusted with the grading. After a generation of complete and utter domination of the higher-education system by the Left, many four-year degrees are nearly meaningless, as are many advanced degrees. The evidence suggests that return on in-demand skills in fields such as technology and finance is very high.

The third way to increase the value of labor gets us right back where we started: bigger markets. Workers in fields that have benefited from more efficient international trade have thrived in many cases — but many have not. The so-called race to the bottom in wages is largely a myth — Audi is not going to move from Ingolstadt to Port-au-Prince — but globalization puts pressure on many U.S. workers’ wages, inevitably.

The problem facing conservatives, at least politically, is that the Left’s empty promises about the effects of minimum-wage hikes and the like strike many workers as more plausible than our story about tax and regulatory reform. And the real outcomes of the policies preferred by conservatives are uncertain, too. There are things we can and should do: Don’t have the developed world’s highest corporate income tax rate and its only non-territorial tax system. Don’t have a cumbrous and unpredictable regulatory apparatus that imposes more in compliance costs than U.S. firms pay in business taxes. Don’t entrust the education system to a self-serving cartel of bureaucrats that doesn’t get the job done. Don’t treat people who might be very prosperous welders and mechanics like losers because they don’t have an MFA from Third-Rate State. Don’t traffic in the superstition that wages at the bottom would somehow magically improve if wages at the top didn’t. Don’t structure your social-welfare system in a way that discourages work and eventual self-sufficiency.

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A Tax on Workers

Mark Perry suggests an enlightening way to view the minimum wage in his blog Carpe Diem:
Instead of $10.10 per hour, think of the proposed minimum wage as a $5,700 annual tax per full-time unskilled worker

Suppose that instead of discussing an increase in the minimum wage by debating whether or how much an increase from $7.25 per hour to $10.10 would affect employment, future hiring, hours worked, etc. we thought about that increase in the minimum wage as a tax on employers hiring unskilled workers as follows:

Increasing the minimum wage from $7.25 to $10.10 per hour would be a $2.85 “unskilled labor tax” per hour on employers, which would be an “unskilled labor tax” of $114 per week and$5,700 per year per full-time minimum wage worker.

When thinking of a minimum wage hike as a $5,700 annual tax per unskilled worker (and $6,170 with additional payroll taxes, see below), is there any doubt that an “unskilled labor tax” that high wouldn’t result in predictable changes in employer behavior that would have adverse effects on workers with no or few skills? Is there any doubt that a rational employer would have to take steps to minimize the impact on his or her business of an annual tax of almost $6,000 per worker? Typical strategies to offset some of the tax might include reducing the number of current employees, reducing future hiring, reducing the number of hours employees are allowed to work, substituting skilled workers for unskilled workers, investing in automation, reducing non-monetary fringe benefits, etc.

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Flushed Down the Keynesian Drain


from Scott Grannis in his blog The Calafia Beach Pundit, What happened to all the profits?


Here’s the failure in a nutshell: The government can’t stimulate the economy by borrowing from Peter and sending a check to Paul, because that doesn’t create any new demand—it’s like taking a bucket of water from one end of the pool and pouring it into the other end; the level of the water doesn’t change. And the government can’t stimulate the economy by spending more, because the government is notoriously inefficient (not to mention the fraud, waste, and incompetence that surround most major public initiatives); the private sector is far more likely to spend its money wisely and productively than the government is. Growth only happens when an economy produces more from a given amount of resources—when productivity rises. And productivity only rises when people work more, smarter, and more efficiently, and that takes hard work and risk. You can’t just dial up productivity, you have to work for it. We can’t “spend our way to prosperity,” as the late and great Jude Wanniski told us.

The past six years in effect have been a laboratory experiment to determine whether Keynesian economic theory is valid. The result? Keynesian economic theory is (or should be) officially dead. It doesn’t work. Government can’t boost the economy by borrowing or spending more money. Politicians will be unhappy to hear this, of course, since they would prefer that we think they can dispense growth and prosperity on demand. Those who insist in perpetrating this myth should be voted out of office.

Here’s my interpretation of what really happened in a nutshell: the private sector generated $8.9 trillion of profits in the past six years, and the federal government borrowed 83% of those profits to fund a massive increase in transfer payments, income redistribution, bailouts, subsidies, and a modest increase in infrastructure spending (as I noted here, only 8% of the 2009 American Recovery and Reinvestment Act went to transportation and infrastructure). Update: we recently learned that $5 billion was spent by the USDA on “questionable or unsupported costs.”

What happened to all the profits? Almost all of the most incredible surge in profits in modern times was squandered by our government, flushed down the Keynesian drain.


And that, my friends, is how you can report record corporate profits and still have a shitty economy.