CSAD: A Solid Floor

Take a second and ask yourself what your family’s socioeconomic status is. If you’re like the model American, you answered with something ending in “middle class” and chances are that you assigned yourself this identity without directly referencing your family’s annual household income as it compares to the American public. As David Simas found out during the series of focus groups he conducted as Director of Opinion Research for President Obama’s reelection campaign, Americans don’t define “middle class” based on income. As he said, to paraphrase:

Americans define middle class as the ability to find a decent job, support their family, have the financial security necessary to provide for some leisure time – a vacation once in a while – and send their kids to college with the hope that the next generation will wind up slightly better off.

There’s a little bit more to be taken from this than an explanation for why so many Kenyon students aren’t comfortable saying that they’re “upper-class,” instead opting for the more socially acceptable “upper-middle class.” What this finding really means is that wellbeing is relative: your income may define your economic standing, but it doesn’t define your socioeconomic standing; your ability to participate in society does. While this is no doubt related to income, addressing it through policy requires a different approach.

With this in mind, it would seem that the way we define and attempt to mitigate poverty is woefully inadequate. While prominent voices on the Right highlight the growth of the economic pie as a reason to not worry about poverty – If poor people have TV’s and refrigerators, why are they complaining? – the way the pie is divided up matters immensely when it comes to providing a floor of social wellbeing along with economic wellbeing.

To this end, our public policies should not be merely oriented towards making sure that everyone has enough to eat (which we already have a difficult time achieving); they should seek to improve what has become stagnating upward mobility. Doing so will not only provide for a more equitable social arrangement, it will also improve our nation’s efficiency and productivity. There are a few things that we can and should do to move in this direction (Milton Friedman, prepare to eat your heart out):

Treat welfare as a leg up, not a handout

In 2010, Arizona made significant cuts to a program that provides childcare for single mothers under the auspices of reducing wasteful welfare spending. The result? Those mothers had to stay home and look after their kids instead of going to work, and wound up costing the government more in welfare expenditures as those households were no longer receiving paychecks. Similar effects have been observed in public housing: providing low-cost housing for people who would otherwise be on the street saves the government money in the long run, as reduced rent is a lot cheaper than unpaid emergency room fees associated with homelessness.

Obviously, public assistance payments should go to people who deserve them; that being said, waste within the system is far and away the exception and not the rule. According to a recent report from the Center for Budget and Policy Priorities, over 90 percent of welfare expenditures currently go to seniors, the disabled and households that also receive a paycheck. What’s more, anyone who’s taken the Food Stamp Challenge knows that the payments are far from generous. We’ve gotten pretty good at squeezing waste and fraud out of our welfare system; now it’s time to translate that system to one that promotes opportunity and mobility instead of mere subsistence. Doing so will expand our nation’s talent pool, as lifting citizens out of poverty will increase their educational attainment and ability to participate in society, effectively expanding our nation’s talent pool. Over the long term, this expansion in social equality will mitigate some of the effects of income inequality on its own.

All this is to say that assistance to low or no-income citizens must have more in mind than simply making sure they don’t die. If subsistence is the only goal of welfare programs, the people they “benefit” are effectively bracketed out of society, treading water in poverty as they lack the opportunity to do anything more than survive. Treating public assistance as an investment instead of a stopgap will lead to more people making productive contributions to society and more opportunity for citizens most in need of it. Furthermore, it has the potential to save taxpayers money in the long term, turning welfare checks into paychecks.

Redistribute wealth (yeah, I said it)

The current federal minimum wage of $7.25/hour will earn a full-time employee $15,080 per year, barely higher than the $11,945 poverty threshold for a single-person household and a little over half of the $22,283 poverty threshold for a family of four. Think about that for a second: a full-time minimum wage worker can barely support themselves, and can’t come close to supporting their family, at what is currently considered subsistence level, let alone a level that allows for social participation. In an oft-derided example which came to light last year, McDonald’s attempted to put together a sample budget for their employees, but was unable to make ends meet without factoring in a second job and welfare payments. Even then, expenditures for needs such as heating and health insurance were unrealistically, even comically, low.

While this example made apparent to many liberals, myself included, the need for a minimum wage increase, it should make the same need apparent for conservatives: When the minimum wage does not lift a family out of poverty, the government is forced to pick up the slack through safety net expenditures. During the 2012 campaign, Mitt Romney complained that 47 percent of Americans didn’t pay any federal income taxes; setting aside for the moment that a significant slice of that 47 percent is comprised of seniors and the disabled, most of the rest are people who are working (hard) but don’t make enough money to qualify for the lowest federal tax bracket. If we agree that working full-time should lift a family out of poverty, we have to ask ourselves: would we rather have the market or the government do the lifting?

What’s more, empirical evidence is showing raising the minimum wage from where it currently stands would have positive, not negative effects on overall economic productivity. As Austan Goolsbee, former Chairman of the Council of Economic Advisers and featured guest at the this week’s conference, has noted, raising the minimum wage increases consumer demand, as workers strapped for cash have the money to buy the things that consumers are selling. Think about it: a consumer’s 50 thousandth dollar is likely spent on food or other basic consumption goods, while the same consumer’s 250 thousandth dollar is likely saved; increasing the minimum wage will increase the amount of money that is directly put back into the economy via consumption, creating a multiplier that will increase overall demand.

As with tax rates, the relationship between wages and productivity is parabolic, not linear: tax rates of 0 and 100 percent both produce zero revenue, with the optimal rate being somewhere in between. Much in the same way, while raising the minimum wage to $75/hr would obviously be absurd, we are currently well below a minimum wage that would produce negative economic effects. At their current levels, our country’s low wages create completely avoidable inefficiencies in our market that perpetuate the very inequality they are supposed to mitigate.

Change the incentives for wealth creation

That our country’s current wages leave us with a workforce that can’t afford to buy what producers are selling highlights a larger point: If consumers don’t have enough money to consume things, producers, to an increasing extent, won’t have an incentive to produce things. And this hollowing out of the middle class has exacerbated our nation’s economic shift towards income becoming concentrated in stocks and information. As our very own Professor Jay Corrigan has argued, it takes a lot of people to build a bridge; it only takes one person to build a SnapChat. And if you don’t trade stocks and haven’t gone to code school, two of the chief means of getting ahead in today’s economy are simply not in the cards for you. Furthermore, while I’ll leave a lengthier, more direct discussion of privilege for other writers at other times, finance and information are sectors of our economy which require fundamentally smaller workforces with inherently privileged talent pools to draw from.

Perhaps as distressing is the fact that, as our nation’s educational achievement slips relative to other countries, our best and brightest are being funneled into a market that values the leveraged creation of wealth for wealth’s sake above all other financial endeavors. In an economy that places a low demand on making things and solving problems, our financial sector has become increasingly isolated from the rest of the country, becoming a self-perpetuating machine that creates wealth for itself by moving other people’s money around. Regulating the financial sector, coupled with raising wages and setting a more progressive tax code, would alter the incentives within our economy so that our market placed value on different, arguably more equitable and efficient products.

As it stands, we have an economic system designed to protect and perpetuate the concentration of wealth at the highest income brackets. While this has produced absolute gains throughout the economy, it has produced relative losses, meaning that as standards of living and social participation have increased, many have been left behind despite nominal gains in income. Rectifying this increase in socioeconomic inequality is not only in the interests of those who seek to mitigate the effects of privilege in pursuit of a more egalitarian society, it is also in the interests of those who seek to ensure that the United States maximizes its potential and remains competitive in a global economy. If our economic pie is divided more equally, all – even those at the top – stand to gain.

 

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