Better Than Raising the Minimum Wage

The Earned Income Tax Credit (EITC) probably the best poverty-fighting program ever attempted in the US. For the most part Buffett is right in what he writes.


> The poor are most definitely not poor because the rich are rich

Some of the policies that make the rich rich also make the poor poor. But mostly it just looks bad that the very rich are SO very rich.


> In a world where only primitive machinery and animals were available to aid farmers,
> the difference in productivity between the most talented among them and those with
> ordinary skills was modest

Good point. Although there were ways to get rich back then, those ways were lower in number and lower in power.


> It is simply a consequence of an economic engine that constantly requires more high-order
> talents while reducing the need for commodity-like tasks.

But not not so many more high-order talents that they fully compensate for the fewer commodity-like tasks. In the past, automation created more jobs than it displaced. Not anymore. There will be more jobs requiring high-order talents. I will call those rare-skill jobs. The number of rare-skill jobs gained will be less than the number of common-skill jobs lost.


> You could supply me with the world's best instruction, and I could endlessly strive to
> improve my skills. But, alas, on the gridiron or basketball court I would never command
> even a minimum wage. The brutal truth is that an advanced economic system, whether it
> be geared to physical or mental skills, will leave a great many people behind.

Buffett is right. Training is overrated. Helpful. But overrated. Most people not already performing high-skill jobs you cannot convert into people who are able to perform high-skill jobs. Not at even to perform at a low standard for enticing employers to create more high-skill jobs.  Say to perform at the 20th percentile of people already performing high-skill jobs.

But imagine that you COULD turn a large percentage of common-skill workers into rare-skill workers. While we are imagining, let us imagine big. Imagine that you could turn every displaced common-skill worker into a rare-skill worker. And not a rare-skill worker at the 20th percentile. A rare-skill worker at the 80th percentile. Well, today's  80th percentile. A rare-skill worker is starting to look not so rare. But no matter. We are dragging everybody up!

Let me expand Buffet's sports analogy. Let's say that all NBA players from the player just below the 20th percentile to the worst player in the league (a Sixer?) magically get raised to the level of the player currently at the 20th percentile. And if that is not enough, the same magic can create more players exactly that good. Infinitely more players.

The level of play among the existing 30 teams would improve. Adam Silver would love it. But would the NBA expand? I do not think so. The NBA would expand on pretty much the same schedule it would under existing conditions. When the NBA did expand, the expansion teams would be better with the worst new players at today's 20th percentile. But the NBA with a mill for making 20th percentile players would not expand much faster than it will without that mill. Fan demand for NBA basketball is limited, no matter how talented the players.

Demand in a real economy is much more elastic than demand for a sports league with 30 organizations, 1 form of entertainment, and supporting products and services which are utterly dependent on the 1 form of entertainment. A real economy has many more organizations and many more products and services. But there are still limits to demand in a real economy. Even across many products and services. Would the economy expand if all displaced common-skill workers became 20th percentile workers? Yes. Enough to notice? Yes. Enough to sop up all the displaced common-skill workers? I do not think so.

Buffet explains why economy leaves many people behind. But only partly. Buffet explains the part related to the supply of workers. There are not enough rare-skill workers. Buffet does not explain the part related to the demand for workers. There are not enough good paying jobs for all the displaced workers, even if all the displaced workers acquired legitimate rare skills.

Buffett's omission of half of the explanation makes his explanation less satisfying. But it does not make his prescription less appropriate. I am not in love with the idea of a large percentage of the workforce being forever subsidized. But I do not have a better solution. Unlike Welfare, the EITC is only a partial subsidy. And the worker has some incentive to reduce the EITC subsidy. If the worker earns extra money from working, the EITC rules will reduce his subsidy. But not by as much as the extra money. The worker can earn more money if

        1) He can find more money in the workforce

        2) He is willing to work for about 80% of the raise


> The better answer is a major and carefully crafted expansion of the Earned Income Tax Credit
> ...
> The existing EITC needs much improvement
> ...
> Dollar amounts should be increased, particularly for those earning the least

All true. The major point that Buffett does not address is the unsuitability of the current EITC for people without children. EITC provides very little subsidy for people without children. Or people who support children that they cannot claim as dependents. Or people with dependent adult children. Or people with dependent parents. The current EITC is basically a Welfare program for children. But there is nothing conceptual to prevent it from being extended. Just current legislation.





Better Than Raising the Minimum Wage

Help Americans who need it with a major, carefully crafted expansion of the Earned Income Tax Credit.

By Warren Buffett
May 21, 2015

The Wall Street Journal


The American Dream promises that a combination of education, hard work and good behavior can move any citizen from humble beginnings to at least reasonable success. And for many, that promise has been fulfilled. At the extreme, we have the Forbes 400, most of whom did not come from privileged backgrounds.

Recently, however, the economic rewards flowing to people with specialized talents have grown dramatically faster than those going to equally decent men and women possessing more commonplace skills. In 1982, the first year the Forbes 400 was compiled, those listed had a combined net worth of $93 billion. Today, the 400 possess $2.3 trillion, up 2,400% in slightly more than three decades, a period in which the median household income rose only about 180%.

Meanwhile, a huge number of their fellow citizens have been living the American Nightmare -- behaving well and working hard but barely getting by. In 1982, 15% of Americans were living below the poverty level; in 2013 the proportion was nearly the same, a dismaying 14.5%. In recent decades, our country's rising tide has not lifted the boats of the poor.

No conspiracy lies behind this depressing fact: The poor are most definitely not poor because the rich are rich. Nor are the rich undeserving. Most of them have contributed brilliant innovations or managerial expertise to America's well-being. We all live far better because of Henry Ford, Steve Jobs, Sam Walton and the like.

Instead, this widening gap is an inevitable consequence of an advanced market-based economy. Think back to the agrarian America of only 200 years ago. Most jobs could then be ably performed by most people. In a world where only primitive machinery and animals were available to aid farmers, the difference in productivity between the most talented among them and those with ordinary skills was modest.

Many other jobs of that time could also be carried out by almost any willing worker. True, some laborers would outdo others in intelligence or hustle, but the market value of their output would not differ much from that of the less talented.

Visualize an overlay graphic that positioned the job requirements of that day atop the skills of the early American labor force. Those two elements of employment would have lined up reasonably well. Not today. A comparable overlay would leave much of the labor force unmatched to the universe of attractive jobs.

That mismatch is neither the fault of the market system nor the fault of the disadvantaged individuals. It is simply a consequence of an economic engine that constantly requires more high-order talents while reducing the need for commodity-like tasks.

The remedy usually proposed for this mismatch is education. Indeed, a top-notch school system available to all is hugely important. But even with the finest educational system in the world, a significant portion of the population will continue, in a nation of great abundance, to earn no more than a bare subsistence.

To see why that is true, imagine we lived in a sports-based economy. In such a marketplace, I would be a flop. You could supply me with the world's best instruction, and I could endlessly strive to improve my skills. But, alas, on the gridiron or basketball court I would never command even a minimum wage. The brutal truth is that an advanced economic system, whether it be geared to physical or mental skills, will leave a great many people behind.

In my mind, the country's economic policies should have two main objectives. First, we should wish, in our rich society, for every person who is willing to work to receive income that will provide him or her a decent lifestyle. Second, any plan to do that should not distort our market system, the key element required for growth and prosperity.

That second goal crumbles in the face of any plan to sizably increase the minimum wage. I may wish to have all jobs pay at least $15 an hour. But that minimum would almost certainly reduce employment in a major way, crushing many workers possessing only basic skills. Smaller increases, though obviously welcome, will still leave many hardworking Americans mired in poverty.

The better answer is a major and carefully crafted expansion of the Earned Income Tax Credit (EITC), which currently goes to millions of low-income workers. Payments to eligible workers diminish as their earnings increase. But there is no disincentive effect: A gain in wages always produces a gain in overall income. The process is simple: You file a tax return, and the government sends you a check.

In essence, the EITC rewards work and provides an incentive for workers to improve their skills. Equally important, it does not distort market forces, thereby maximizing employment.

The existing EITC needs much improvement. Fraud is a big problem; penalties for it should be stiffened. There should be widespread publicity that workers can receive free and convenient filing help. An annual payment is now the rule; monthly installments would make more sense, since they would discourage people from taking out loans while waiting for their refunds to come through. Dollar amounts should be increased, particularly for those earning the least.

There is no perfect system, and some people, of course, are unable or unwilling to work. But the goal of the EITC -- a livable income for everyone who works -- is both appropriate and achievable for a great and prosperous nation. Let;s replace the American Nightmare with an American Promise: America will deliver a decent life for anyone willing to work.


http://www.wsj.com/articles/better-than-raising-the-minimum-wage-1432249927
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