The Fiscal Faucet

What does a common kitchen appliance have to do with the Founding Fathers and U.S. fiscal policy? Assistant Opinion Editor Patrick Healy explains.

Uncle Sam's Faucet - Unsplash

Patrick Healy, Asst. Opinion Editor

Joe Biden has pledged to raise the federal minimum wage (MW) to $15/hour and it could make or break his signature stimulus plan. It’s the lynchpin of his long-term economic policy. Luckily, he has two-thirds of the American people and a rising tide of states behind it. For instance, Florida voted for former President Donald Trump, who is against raising the MW, while simultaneously passing a state $15 MW. Though Republican politicians are firmly against it, a majority of low-income Republicans support it. 

The minimum wage is one of the biggest governmental interventions in the economy, and probably the one that affects the most number of people. We have women and trade unions to thank for it. In early twentieth-century America, women sweatshop workers fought for and attained state legislation to create a minimum wage. 

The Supreme Court spent two decades striking down minimum wage laws until FDR twisted the Court’s arm during the New Deal Era. The federal minimum wage has increased fairly linearly since its inception in 1938, but has stalled at $7.25 after 2009. 

So if it’s increased linearly, what’s all the hubbub over doubling it? Well, for one, the inflation-adjusted MW has decreased, meaning it’s less in 2021 dollars than it used to be. Second, worker productivity and economic output haven’t increased linearly — they’ve increased exponentially. If the MW grew at the same rate as the economy since 1968, when the minimum wage began to stagnate and the economy took off, it would be $20 (Economic Policy Institute). 

Everybody’s seen the charts and numbers showing CEOs making 300 times the median worker. I think most people want to see the median worker’s wages go up. The difference is that Republicans think that the fate of workers and their corporate employers rise together, whereas Democrats tend to view the economy as a zero-sum game where a corporation’s gain is workers’ loss. Supply-side economists and politicians argue against minimum wages, saying they inhibit employers, kill jobs, and generally pose a threat to the workings of the free market. 

Do opponents of the $15 MW oppose the $7.25 MW too? I don’t think most do. They’re fine with, even benefit from, the current floor, but are made uncomfortable by a $15 MW. But by accepting the $7.25 MW, they implicitly accept the loss of millions of jobs that would exist if there were no MW. If they’re okay with that trade-off, then why oppose a further MW hike? 

The MW is a faucet. We can turn it left to trade jobs for increased wages or right to do the opposite. $7.25 is not the optimal position of the faucet — it can still be exploited to squeeze out more utility. 

The goal of fiscal policy in general, but particularly the minimum wage, should be to reduce poverty. I think the difference in quality of life between a millionaire and a billionaire is smaller than that between $15,000 and $30,000 earners. Making a billionaire into a millionaire doesn’t detract much from their happiness, but that money could lift thousands out of poverty.

The $15 MW wouldn’t seize the billionaire’s assets and distribute them, but my point is that the burden of the new MW would fall on people for whom each additional dollar provides little value. 

A Congressional Budget Office study gauges that, on average, the $15 MW would increase the incomes of families below the poverty threshold ($26,330 for a family of four) by 5.2%. For families with an income one to three times the threshold ($26,330-$78,990), that number is 3.5%. By comparison, the second wealthiest bracket ($78,990-$157,980) would drop -.1%. Families with more than $157,980? -.3%. 

The CBO report estimates the $15 option would, in its median projection, cut 1.3 million jobs but raise the wages of 17–27.3 million workers. In total, despite the 1.3 million lost jobs, 1.3 million people would be lifted out of poverty. 

As for inflation, the CBO does not expect that raising the MW to $15 by 2025 would increase inflation. Besides, if a low inflation rate exists because millions of people are unable to purchase the goods they need, that’s not a good thing. 

I’m no fan of federalism, but the varying state minimum wages have been instructive real-life test cases. The experimental group (states that have increased the federally mandated $7.25) haven’t experienced much more inflation than the control group (states that haven’t raised the federal level) when adjusted for other factors like population, size, etc. Perhaps most tellingly, more and more states are opting to raise it, while none that have raised it have opted to lower it back down. 

Increasing the MW isn’t the no-brainer that, say, cutting the military budget is. It’d cost jobs. It’d decrease business profit. The argument for the $15 MW lies in the belief that the happiness of the tens of millions whose wages are increased or even doubled outweighs the one to two million lost jobs. Maybe it’s not the government’s job to make that choice. But by choosing not to raise the MW, we are actively choosing the alternative — leaving 1.3 million people still needlessly mired in poverty. 

We’re all familiar with utilitarianism, the idea that we should do the most good for the most amount of people. It’s the famous “intentionally kill one person or let the train run over five” trolley problem. It’s part of why we give political power to the majority. I’m not well-versed in the philosophy and ethics of utilitarianism, but one of my takeaways is that a benefit to any person is equal to a benefit to any other person: a detriment to one person can be justified if two people each receive a benefit equal to the first person’s detriment. 

The Declaration of Independence is clear about the purpose of government: to protect life, liberty and the pursuit of happiness. The pursuit of happiness isn’t just about property, and it wasn’t a reference to simple pleasure; the pursuit of happiness is the opportunity to enjoy life and liberty. Poverty crushes the pursuit of happiness, so it’s the burden of government to decrease poverty. Whatever way we turn the minimum wage faucet, it better produce the maximum amount of happiness. 

As many college students are aware, New York State has been raising its MW about $.70 every January 1 and is on pace to hit $15 by 2025. The United States as a whole can do the same. However, how fast we raise it matters; a report from the W. E. Upjohn Institute suggests that smaller increases might allow businesses more time to plan and cause less disruption to the economy and prices. It’s therefore urgent that we pass it as soon as possible to give as much time as possible for the transition. 

A bill might look like this: starting on January 1, 2022, the federal MW is increased $1.55 until it reaches $15 in 2027. Crucially, it must then be indexed to inflation, meaning it increases roughly 1-3% each year (so about $.40 cents at first). Without inflation-indexing, the problem is just kicked down the road. 

The minimum wage is no panacea for poverty. What is? Fox News headlines citing only the worst outcomes are disingenuous. Economists support the $15 MW. More importantly, Americans do. Some people will be worse off. More people will be better off. There’s philosophy — utilitarian and American — and practicality — polls, projections, and the success of past raises — behind it. 

Whatever conservatives’ reservations about the role of the government in the economy, there are two realities facing them: one imposed by the Founding Fathers, obliging the government to aid citizens in the pursuit of happiness, and one of politics, with much of their own base for it. Backed by philosophy, popularity, and the past, President Biden and Congress have a clear mandate to pass a $15 MW. 

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