Solutions From the World's Last Fundamentalist Progressive Libertarian
It's clear that
somehow we've developed an economy in
Poor people are a problem, and they are not going away just because we ignore them. Most progressive economic talking points focus upon poverty in one way or another. These include a statutory minimum wage and safety-net programs like welfare, food stamps, unemployment compensation, Medicare, Medicaid, and even key features of the ACA. A little further afield, but still closely related, are efforts to provide equal opportunity for women and minorities, and to promote education for all citizens, especially the poor and disadvantaged.
Some of these programs have been successful, and all have done some good for some people. The statutory minimum wage is among the more successful. Even today, an increased minimum wage would benefit the majority of low-wage workers, would provide a boost for the Social Security trust fund, and would even contribute to a more balanced federal budget. So in the absence of more fundamental solutions, I favor an increase in, and future indexing of, the statutory minimum wage. Any program that benefits women, minorities, and the working poor can't be all bad, and would move us ever so slightly toward a less skewed concentration of income in America.
All good and
well, but the fundamentals of the
examine what a free-labor market would look like from a microeconomics
perspective. Take a look at the first
graph. It illustrates the patterns of
supply and demand at different intersections of price and quantity. At a single point, supply and demand
intersect with each other in equilibrium.
This illustrates the assumption that a free-labor market exists in
Solution #1: Stop subsidizing capital
of income and wealth we see around us was not an accident; it was the planned
consequence of public policies promoted by wealth and business from the
beginning. You may have your own list,
but here are examples from mine. Federal
land grants to settlers, ranchers, and railroads over the past 200 years have
favored commercial interests over mostly Native American poor people. Income-tax policy grants subsidies on income
derived from capital investment at the expense of income derived from labor. Federal, state, and local governments have
lent their forces to the direct support of management at the expense of labor
at times of conflict. A private,
for-profit, contract-prison industry has grown up among us at the expense of
taxpayers and citizens. The
Concentrating wealth concentrates power, and that power is exercised by employers to maximize profits. Reducing labor costs is a key goal of profit maximization, and can be achieved in several ways. Paying as little as possible is a valid strategy, of course, especially in a free-labor market. Minimum-wage employers pay a minimum wage because they can, not because they cannot afford to do otherwise. In the absence of free and balanced labor markets, it becomes necessary to apply the progressive remedy of reasonable minimum wages to offset the power of the employer, and to protect those who fall into unemployment when they are laid off. Centuries of subsidies for capital and business have empowered management with enormous resources at the expense of labor.
This principle is
evident in the favorable treatment of investment capital. Capital is obtained through the sale of
equity, through borrowing, or from accumulated profits. Equity capital is subsidized by tax limits on
capital gains and qualified dividends; borrowing is subsidized by monetary
policy and tax policy; and retained earnings are subsidized by an array of
profit-friendly laws and regulation.
Once capital is ready to deploy within the business enterprise, additional
subsidies are available. These include
everything from investment tax credits to accelerated depreciation allowance to
enterprise-zone incentives. In
investment is directed toward one or more of the following goals: (1) to produce something innovative that
didn't exist before; (2) to expand productive capacity; and/or (3) to increase
labor efficiency. Only the first is
likely to generate incremental employment.
Expanding capacity often cannibalizes competitors' operations and is
usually more labor efficient than the operations it replaces. Investments in labor efficiency by their
nature reduce labor demand per unit of output.
Please understand that none of these things is bad; only the financial subsidies
and incentives found in our public policies are bad. And they are very bad, because capital
investment is a substitute for labor employment, which is a true commodity at
the low end, and is not generally subsidized.
This is one of the things that keeps the labor market in
Now take a look at the second graph. This one illustrates the pattern of supply and demand when it has been altered by capital subsidies. Capital investment tends to reduce aggregate labor demand because of the efficiencies introduced by such projects as process automation and capacity scaling. Reduced labor demand affects the equilibrium point by reducing both the price of labor and the quantity in demand. In effect, reduced wages and unemployment are directly caused by capital-investment subsidies. And the simple, obvious, and inescapable solution is to stop subsidizing capital investment!
Solution #2: Stop taxing labor
A look at the federal budget for a typical year shows that 40%-45% is funded by personal-income taxes, another 40%-45% is funded by payroll taxes, and the balance is funded by corporate-income taxes, ad valorem levies, and borrowing. This mix of revenue harms the economy and damages the labor market beyond all recognition.
The miasma of penalties and incentives in the income-tax system is criminal. Many are designed to affect the decisions we make, ranging from marriage and family through buying or renting our home, to political action and charitable donations. To the extent that these provisions influence our decisions, they diminish our personal freedom. And each feature of this cruel system generates its own winners and losers, eroding the efficiencies of free markets, adding friction with each complicating provision. Worse, federal income taxes are lower on income from capital than on income from labor, due to favorable treatment of capital gains, qualified dividends, and even interest on certain classes of investments.
As bad as the income-tax system is, payroll taxes are even worse. In a free market, the supply and demand of a commodity finds its equilibrium at a particular price and quantity, as shown in the first graph. But there's no free market here. Adding a tax to a commodity raises the price to a point along the demand curve that corresponds to a reduced quantity consumed. Labor, especially the undifferentiated low-wage services, is indeed a commodity, and currently costs employers a federally-mandated premium of 13.85% for all lower-wage employees.
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