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Support vs. Penalize

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Support vs. Penalize

The looming battle for the soul of economic policy September 13, 2018
Economy, finance, and budgets
Politics and law

Silicon Valley’s boosters believe that the tech industry’s constant innovation epitomizes what government should do, too. The region’s rising star in Congress, Democratic representative Ro Khanna, attracted widespread attention last year for his big idea, an “ambitious proposal” to spend more than $1 trillion over the next decade on expanding the Earned Income Tax Credit (EITC), which subsidizes low-income work.

Alongside this plan, Khanna has now joined with Senator Bernie Sanders to introduce the “Stop BEZOS Act,” which would impose a tax on corporations, equal to the full value of government benefits received by their workers. The idea here is that, in Sanders’s words, “we do not believe that taxpayers should have to expend huge sums of money subsidizing profitable corporations.” Khanna adds, “massive corporations are only draining our economy by vastly underpaying workers.”

Khanna’s two proposals—providing a government benefit to low-wage workers and punishing employers whose workers receive government benefits—represent contradictory poles in the national debate over how to strengthen a labor market whose lower end has seen stagnating wages for decades. In the first view, employers play a constructive and irreplaceable role by connecting less-skilled workers with productive work. Low-wage jobs are by no means ideal, but the low wage reflects the job’s economic value, not a corporate plot to extract outsize profits. The jobs represent for some people their best opportunity to participate in the economy, and for many more the crucial first step onto an economic ladder that can lead higher. Either way, jobs are important to society, and we want them to be available.

Khanna’s first proposal, a larger subsidy to low-wage workers, emerges logically from this view. If we want employers to offer these jobs and workers to take them, we should subsidize them. Not only does such a subsidy encourage the offering and taking of more such jobs; it also boosts workers’ take-home pay, helps their families, and is preferable to keeping unemployed people on the dole. Call this the “Support” view.

In the second view, employers take advantage of the social safety net’s existence to reduce wages, counting on taxpayers to make up the difference through government programs. If their employees weren’t receiving food stamps, housing vouchers, and tax credits, employers would have to pay higher salaries. Khanna’s second proposal—making employers cover the cost of benefits claimed by workers—emerges from this perspective. If employers are penalized for having employees who receive food stamps, they’ll give raises until the food stamps are unnecessary. Call this the “Penalize” view.

The Penalize and Support views are contradictory. The “Stop BEZOS” acronym stands for “Stop Bad Employers by Zeroing Out Subsidies,” but an additional trillion dollars in EITC subsidies to low-income workers is the opposite of zeroing out subsidies. As a matter of economics and common sense, the first view is correct and the second foolhardy. Penalizing employers for hiring benefit recipients is not a formula for higher wages, but will instead discourage employers from hiring benefit recipients in the first place. No one is happy that some employees of large corporations also rely on public support, but the most likely alternative to those jobs is not higher wages or better jobs for those people; it is fewer jobs. Without low-wage employment, the burden on taxpayers would rise, not fall. Still, the Penalize view remains foundational to the Democratic platform and its conception of employers as the sworn enemies of workers, instead of their economic partners.

The minimum-wage debate is best understood through this lens. Insofar as a higher minimum wage succeeds in boosting the pay of low-wage workers (rather than just replacing them with more productive workers), it operates as a fee imposed on low-wage employers and paid to their employees. If a job pays $9 per hour and society wishes that it paid $12 per hour, ordering the employer to pay $12 is one way to make up the difference—and the one historically preferred by Democrats. The Stop BEZOS Act fits comfortably in that tradition.

Republicans have historically responded by rejecting the premise that government should concern itself with whether a job pays $9 or $12 per hour, or that public policy can do anything about it. But that is starting to change, as some conservatives take notice of the economy’s failure to foster a labor market in which all workers can support strong families and communities. Fortunately, those policymakers are embracing the Support view, and recognizing that if society wants higher wages, then society must contribute to that end. If higher wages for low-skilled workers are a priority for us, then we ought to bear the cost, not employers.

As the Right joins the Left in recognizing the need to address the labor market’s shortcomings, the fight will evolve from whether to do something toward what to do. Expect this “Support vs. Penalize” battle to move from within Ro Khanna’s head to the forefront of our national debate—and pray that the coherent side wins.

Photo: Tasos Katopodis/Getty Images

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