Subsidize Workers Instead of Business?

Conservatives confuse me, mostly because I tend to think of them in black and white terms. The ability to think in a nuanced manner is directly correlated with one’s familiarity with a subject. The less you know, the more polarized your opinions become (of course, the opposite can be just as crippling).

A blog I regularly read posted a link to an article from the (rabidly) conservative American Enterprise Institute (AEI). The article confronted the issue of automation in manufacturing, how it is displacing the American worker and what to do about the problem of increasing economic inequality in the United States.

Noah Smith, an assistant professor of finance at The State University of New York at Stony Brook states:

“..a better proposal is actually wage subsidies, government wage matching, also called a negative income tax. We would be putting our thumb on the scales between humans and robots to keep humans in work that in a perfectly free market they wouldn’t be doing. When a company offers you wage, the government matching would have already done behind the scenes. Someone comes and offers to pay me $20 an hour, the government is paying $12 of that. I would be making $8 an hour, but I would feel like a person who making $20 an hour. Unlike the Earned Income Tax Credit where you get a check from the government based on how much income you earned, I think people would feel a lot better in term of the framing of it if the government matched their wages instead.”

I could get behind this. I’m not sure that Noah Smith is a conservative, but that AEI didn’t scrap this as re-distributive heresy is kind of startling.

An interview with economist Edmund Phelps, confirms that this idea doesn’t live in a bubble:

“The advantage of work subsidies is that they would bid up the wages of low-wage people, and that same bidding for more low-wage people in the labor market would pull up their employment too. With the minimum wage, of course, the suspicion is that raising it will cut back on the number of low-wage workers that companies feel they can afford.

So government subsidies of workers increases not brings up wages, but also might increase employment. A minimum wage, these guys argue, is a disincentive to employment. If I know I want to hire low wage workers, but know I have to pay $20.00 an hour, I’m less likely to hire from those with the least skills. I’ll want the most bang for my buck. Also, it is argued that a minimum wage distorts wages by giving businesses a floor (which they will inevitably fall to) depressing wages over all. I could speculate that this would be a regional phenomenon.

It turns out that the idea for wage subsidies (or a “negative income tax”) was originally floated by conservative economist Milton Friedman. His ideas inspired the earned income credit, also a wage subsidy for low income workers.

I always thought it interesting that welfare programs are fodder for right wing politicians looking for programs to malign, but that the EIC, a blatant example of wealth redistribution, is barely mentioned. I think I understand why now.

I could get behind worker subsidies like this. It’s far more advantageous to workers than subsidizing the companies themselves, who likely convert those transfers to stock dividends. Like food stamps, worker subsidies would inject money directly into the economies through increased spending by poor families at local establishments, creating jobs

Now I have no idea whether this is a good idea or not. I’m not an economist and don’t claim to be. From the armchair though, I ‘m thinking that rather than prop up oil companies, big agri-business and bottom of the barrel box retailers, we might look to expanding the EIC program to do the poor (and society) a favor. Someone explain to me why this wouldn’t be on the political table?

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About Pete Larson

Assistant Professor of Epidemiology at the Nagasaki University Institute for Tropical Medicine

One response to “Subsidize Workers Instead of Business?”

  1. paragon42 says :

    Because of the lobbyists. Companies like Exxon and the like can afford to keep multiple lobbyists on the payroll at between 250K and 500K per year, EACH. Their job is, literally, to annoy congresspeople (in many ways) until they pass legislation beneficial to the lobbyist’s employers.

    The average American worker can’t afford a lobbyist to look out for him. At that level, we regular Joes are left out in the cold. The concept of subsidizing wages, mortgages, and credit debts is a good one, but (and I don’t want to sound like a conspiracy nut here) corporate greed and political corruption make it near impossible. There are several countries that have recently started subsidizing mortgages for their citizens directly, instead of subsidizing the banks that hold them. The economic benefit from that is orders of magnitude greater than giving the money to a corporation, because a corporation is far less likely to spend the money domestically on things that matter. I can show you the equations, if you like, but they’re pretty involved and open to interpretation.

    Basically, if you boil it down, wage subsidies don’t increase the bottom line for corporate giants and the beloved banks, so they won’t happen. There are literally hundreds of reasons why this is true, but at the end of the day, it can’t change unless we average Joes (and Janes, to be PC) MAKE it happen. I’m an Economist though, not a poli-sci guy, so I don’t know how we’d do that.

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