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Getting the Minimum Wage Just Right

Workers need a break. Few are happy with our economy, and for good reason. Today we lack an economy that is “just right.” Such a “just right” economy arguably existed – at least for white men – in the decades after World War II, when business and labor shared in the economy’s productivity gains. This created a virtuous circle of increasing profits, wages and available tax revenues for investment in infrastructure that fueled even more prosperity. That Goldilocks economy came to an end in the 1970s. Massive costs resulting from the beginnings of de-industrialization, global competition, America’s long wars in Indochina and the oil crisis of the 1970s created an economy that was “too hot.” Cascading oil price increases of 1,000 percent that decade, plus wage demands from labor exceeding the underlying economy’s ability to support them, resulted in “stagflation”: slowing growth and inflation.

That untenable set of affairs was addressed by policies designed to cool demand for commodities and restrain wage growth. Both were achieved in the 1980s, and stagflation was halted. Unfortunately, the real (not speculative asset bubble) economy of production has never been taken out of the “refrigerator” that was used to cool it. In fact, rather than removing it so that we could return to a “just right” temperature, it was transferred to the freezer, where the economy became “too cold.”

It’s time to take the economy out of the freezer and return it to a temperature that is “just right.” The first step is to recognize the serious imbalances in our economy. Chief among them is to get inequality “just right.” Too much of it, and we risk a return to the terrible inequality of 19th century Europe and 20th century Latin America that drove most of our ancestors to emigrate to the United States. Too much IT equality, IT and people seek to emigrate to find opportunities reflective of their talents, as they did escaping Stalinist regimes.

Where are we today? Roughly in the US economy of the 1920s that produced the imbalances leading to the Great Depression of 1929. By the late 1920s, worker wages fell well below productivity. This mismatch meant that there were insufficient wages to buy what the economy could produce, thus people had to use credit or rush into speculative markets to “earn” cash. We know how that movie ended …

What would make the economy “just right?” The first step is to get wages in balance with productivity. As much as we would like to believe markets do this on their own, the evidence is clear they don’t. If you want to see how this operates with little regulation, see Latin America or sub-Saharan Africa.

The best way to get inequality right is to increase the minimum wage. We have had massive productivity gains the past half-century. Given this, perhaps we could at least set the wage clock back to roughly 1968. The minimum wage that year (inflation adjusted) was nearly $11 an hour. As Senator Elizabeth Warren of Massachusetts pointed out, if you also adjust for productivity gains, the minimum wage today would be over $20 an hour. Such a dramatic increase in the minimum wage would be too much of an economic shock, so a simple return to the 1968 inflation adjusted minimum wage of nearly $11 an hour would be a good place to immediately begin.

One should remember that the United States once had the world’s highest minimum wage, but today it is among the lowest for rich nations. Most rich developed countries now set their minimum wage between $10 to $16 an hour (or have such high rates of unionization that organized labor sets wage rates). An $11 minimum wage would at least return us to the minimum-wage levels of rich nations – albeit still at the low end of the scale. From there we could then annually index the minimum wage to inflation, as Mitt Romney suggested in a moment of clarity and humanity. We should not stop there. We should also then upward adjust the minimum wage annually to the level of productivity increase that is over the inflation rate (this could be rescinded in years where the economy is overheated). These increases would ripple up throughout the wage profile, benefiting all workers.

There is also the social dimension to the issue. Our present wage and inequality profile leans toward historic Latin American norms. While there is much to admire in Latin American culture, their high levels of inequality contributing to gated communities for the rich, shantytowns for its poor, and high crime rates resulting from a lack of social inclusion, are not ones we should emulate.

The alternative? Reward work. By returning to minimum-wage levels closer to US historic rates and to our rich nation peers, we can signal to young people that hard work is valued. You may not get rich from it, but you will at least not live in squalor if you engage it. Getting this social dimension “just right” might help us move in the direction of post WWII crime rates, which were a fraction of those presently. Work should be taken seriously. Unfortunately, today’s minimum wage, set at roughly one-third of the 1968 inflation – and productivity-adjusted level does not signal that work is respected or valued.

How to get to the Goldilocks economy? The first step would be to pass the proposed minimum wage scale with automatic annual increases as enumerated above. Of course, some will protest. We will hear that this will make us “uncompetitive” and “be expensive.” Let’s start with competitiveness. The proposed minimum wage provision would hold all to the same wage standard; thus, nobody will be disadvantaged. Next: the cost to the economy. Some will assert that the proposed minimum-wage increase is a “liberal” measure. Increasingly, however, it is being seen as just plain good economics regardless of political leanings. For example, Republican activist, Ron Unz, the former California GOP primary gubernatorial candidate and Silicon Valley millionaire, is lobbying for a big minimum-wage hike. He argues that low wages are in fact expensive. Unz maintains the low minimum wage results in higher student debt, as students who once earned more money (inflation adjusted) now must borrow more. Moreover, low-paid workers supporting families must get public subsidies in the form of Food Stamps, Medicaid, Earned Income Tax Credits, housing and other supports. These, in fact, are taxpayer subsidies to businesses that don’t even pay a 1968 inflation-adjusted wage in the 21st century. By raising wages, we can remove subsidies from the taxpayers’ balance sheet. Some will simply say, “cut the subsidies,” but that brings us back to costs connected to higher crime and social dislocation. Better to just raise wages to rich country norms. Doing so will help us get us back to a Goldilocks economy that is “just right,” and in many ways, cheaper to run.

We should stop fighting the last war of wage suppression that was used to deal with the 1970s economic crisis resulting from too much economic demand. Our current economy looks far more like that of the insufficient economic demand of the 1930s in structure than like that of the 1970s. Thus, our current austerity and wage suppression tactics to fight it resembles a veritable Maginot Line strategy to protect our economy.  In fact, we require a totally different set of policies to get the economy “just right.” The minimum wage proposal outlined above would be good economics and hopefully one that might even attract a few iconoclastic conservatives in helping us build a Goldilocks economy.

Truthout.org. Reprinted with permission. The original can be found here.

JEFFREY SOMMERS is an associate professor and Senior Fellow of the Institute of World Affairs at the University of Wisconsin-Milwaukee. He is also visiting faculty at the Stockholm School of Economics in Riga.  He is co-editor of the forthcoming book The Contradictions of Austerity. In addition to CounterPunch he also publishes in The Financial Times, The Guardian, TruthOut and routinely appears as an expert on global television.  He can be reached at: Jeffrey.sommers@fulbrightmail.org

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Jeffrey Sommers  is a proud Dairy Stater and Visiting Professor at the Stockholm School of Economics in Riga His book on the Baltics (with Charles Woolfson), is The Contradictions of Austerity: The Socio-economic Costs of the Neoliberal Baltic Model

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