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An Economic Policy Quagmire—And How It Can Be Avoided

Monday, January 8, 2007

Increasing the minimum wage would be bad policy and bad politics. Why is the White House ready to acquiesce?

One of the chief legislative goals for the new Democrat-controlled Congress is to pass legislation authorizing an increase in the minimum wage. The Bush Administration and congressional Republicans have indicated that they would be prepared to let a minimum wage increase pass in exchange for other economic goals, like an extension to tax cuts.

This may sound like a reasonable compromise to make, but it isn’t. Not only is the minimum wage bad policy, but the Bush Administration is not likely to get much in return for its gift to Democrats. Given its past reluctance to veto unwanted spending, a veto threat from this White House would carry little weight.

Minimum WageEven when the Administration possessed greater political strength than it does now, it failed to wield its veto pen and prevent passage of budget-busting legislation like, say, the pork-barrel shenanigans that dissipated disaster relief after Hurricane Katrina. The Administration failed to prevent passage of the bloated and wasteful federal highway bill in 2005. And as the American Enterprise Institute’s Veronique de Rugy points out, during his first term, when he enjoyed exceedingly high approval ratings, George W. Bush increased total discretionary spending by a whopping 35.1%. To put this in perspective, President Bush has outdone fellow Texan President Lyndon Johnson, who with his Great Society programs, managed to increase discretionary spending by a total of 33.4%.

The minimum wage is nothing more than a subsidy to unskilled workers, paid by the rest of us. It protects some low-skilled workers from those who are willing to work for even less—denying jobs to those most eager to have them.

The minimum wage attracts a lot of sympathy because its intentions are good. But intentions matter less than results—and if one concentrates on the definition and results of the minimum wage, the policy becomes far less attractive. We already have a more sensible alternative on the books—the Earned Income Tax Credit, through which the taxes paid by low-income workers can be cut or eliminated and which, among other things, “lifts substantially more children out of poverty than any other government program or category of programs.” Harvard professor Greg Mankiw argues:

In watching this debate [over the minimum wage] unfold, I am moving toward the view that the issue is more symbolic than substantive. [Judge Richard] Posner asks, “why are the Democrats pushing to increase the minimum wage rather than to make EITC more generous?” Here is my answer: Many voters don't know what the EITC is, whereas the minimum wage is easy to understand. As [economics professor Gary] Becker points out, “Most knowledgeable supporters of a higher minimum wage do not believe it is an effective way to reduce the poverty rate.” True, but few voters are so knowledgeable. As a result, the minimum wage is an easily explained issue that says “We Democrats care about poor people, unlike those Republicans.”

Here is a question that I would ask any politician: If you could set your ideal policy to help the poor, wouldn't you prefer to expand the EITC and abolish the minimum wage? Any politician that fails to answer “yes” is either misinformed or engaging in demagoguery.

In this environment, negotiations over the details of a minimum wage law will likely go very badly for the Bush Administration and congressional Republicans. Indeed, it is safe to say that the Administration and its congressional allies will be taken to the cleaners in any talks. Better then to refuse to accommodate congressional Democrats who want to assuage their consciences with ineffective legislation. The Bush Administration and congressional Republicans should respond to calls to increase the minimum wage not with promises to negotiate one but rather with calls to increase the EITC instead. In doing so, the Administration and its allies would do more to help alleviate the conditions of the working poor than they would even under the best of circumstances through the flawed minimum wage program.


Image credit: Flickr user Drown

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