Date: Wed, 17 Jul 1996 14:09:06 -0700 (PDT) From: Nathan Newman <newman-AT-garnet.berkeley.edu> Subject: [SOLUTIONS] HOW WELFARE HELPS "THE REST OF US" (fwd) PLEASE REPOST ---------- Forwarded message ---------- Date: Wed, 17 Jul 1996 12:27:13 -0800 From: "R. Anders Schneiderman" <pcomm-AT-ix.netcom.com> To: newman-AT-garnet.berkeley.edu Subject: [SOLUTIONS] HOW WELFARE HELPS "THE REST OF US" =========================================================== SSSSS OOO L U U TTTTT III OOO N N SSSSS S O O L U U T I O O NN N S SSSSS O O L U U T I O O N N N SSSSS S O O L U U T I O O N NN S SSSSS OOO LLLLL UUU T III OOO N N SSSSS =========================================================== SOLUTIONS: Ideas for building a new economy VOL. 1, NUMBER 1 HOW WELFARE HELPS "THE REST OF US" -- Nathan Newman, newman-AT-garnet.berkeley.edu The current debate on welfare is stale, tired and, ultimately, missing the economic point. Let's be clear what welfare is and is not. Welfare is not charity. Welfare is a system of payments made to the poor not to take any job if its pay is so low that it underbids wages for those who have jobs. When linked to other policies like the minimum wage, welfare is (and should be seen as) an economic tool by society to keep wages high. Progressives need to stop appealing just to the compassion of the public in defending welfare and start playing on their self-interest. The economic reality is that decent wages for "the rest of us" depend on having a decent welfare system. Without that welfare system, all wages go down under a flood of workers desperate to take jobs at any wage in order to keep their families from starving. Conservatives try to argue that even if kicking people off welfare causes some erosion in wages, it's cheaper than increasing the taxes needed to pay people on welfare. The obvious response is to point out how small a portion of the federal budget is taken up by programs like AFDC and other payments to the non-working poor. Out of a $1.6 trillion federal budget, only $19 billion goes to AFDC, just over 1% of every federal dollar spent. But that's a defensive argument and progressives have to get off the defense and on the offense. We have to sketch exactly how supporting the welfare system, even expanding it, can be used to reverse the wage erosion workers have faced in the last two decades. Let's start with the minimum wage. Conservatives use the fear of unemployment to oppose it. In the recent debate on the minimum wage, opponents of raising the minimum wage from $4.25 to $5.15 per hour have argued that employers would lay off hundreds of thousands of workers (roughly 1-2% of minimum wage workers in their estimates) if forced to raise wages for the rest. Now, a number of solid economic studies, most recently by economists David Card and Alan Krueger, have shown that modest raises in the minimum wage actually have no effect on employment. But, for the sake of argument, let's ignore those economic studies and target our economic program at those who might buy conservative arguments that 1-2% of minimum wage jobs will be lost if the minimum wage is raised. Even with that assumption, if we create a strong welfare system, everyone, including the taxpayer, gains from the increase in the minimum wage. Follow the math on this and you'll have the strongest argument in countering conservatives attacks on both welfare and the minimum wage. Buying the conservatives' assumptions of 2% unemployment, it means that for every 100 minimum wage workers initially making $4.25 per hour, we will end up with 98 workers making the new minimum wage of $5.15 per hour and 2 workers unemployed. Breaking that down by hour, week and year, for every 100 workers who initially make $4.25 per hour ($170 per 40-hr week, $8840 per year), the total combined wages of all 98 workers who stay employed initially equals: $866,320 per year ($8840 per year x 98 workers). After the raise in the minimum wage to $5.15 per hour ($206 per week, $10,712 per year), total wages will increase to $1,049,776 per year ($10,712 per year x 98 workers). Those 98 workers will see an individual gain of $1872 per year in wages and an com bined gain of $165,776 in wages. If the two newly unemployed people are supported with welfare payments equal to their previous yearly wage of $8840 (much more generous than present welfare systems), the total cost will be $17,680--far less than the $165,776 net gain in wages for the other 98 workers. In fact, that $17,680 is far less than what the federal government would receive in increased income and payroll taxes on those increased wages. So even using the conservatives' own estimates of job loss, the minimum wage with a strong welfare system can be used to increase wages while protecting the incomes of those left unemployed. To translate this into the slightly messier real numbers of the overall US economy, there are 12.3 million workers who make less than the proposed new minimum wage of $5.15 per hour. They make an average of $4.67 per hour, so if 98% of those workers have their wages increased to the new minimum wage, the aggregate increase in wages will be $12 billion yearly. This is far more than any welfare costs that might be needed for income and training funds if any workers are left unemployed. These numbers have all assumed the rather miserly increase in the minimum wage proposed by Clinton. If instead of $5.15 per hour, we increased the minimum wage another dollar to $6.15 per hour (about the inflation-adjusted level back in 1969), we can see even more dramatic effects. There are 20.8 million Americans making less than $6.15 per hour. If all of these workers (with an average wage of $5.10 per hour) had their wages increased to a $6.15 per hour minimum wage, the net increase in wages would be $45.6 billion annually. Even if we assumed a worst-case assumption of 10% of those workers were left unemployed, this would still leave a potential $40 billion for welfare and retraining funds--an amount DOUBLE the entire present AFDC budget. In fact, all these numbers understate the overall gains in wages, since it ignores the effect of the minimum wage on higher wage workers. But the reality is that the mass of workers making a bit more than any new minimum wage are able to demand a wage increase to maintain a "spread" between them and less skilled workers now making what they used to make. So where are these increased wages coming from? Some of it comes >from increased growth due to higher consumer demand, some from increased costs passed onto consumers, but in the end, in highly competitive markets employing minimum wage workers, the largest chunk come out of the profits and executive compensation of corporate stockholders. And there's the reason why both welfare payments and the minimum wage are opposed so vociferously by corporations and their legislative allies. It's no coincidence that conservatives support both eliminating welfare payments and lowering the minimum wage. Moving people from welfare into the workplace drives down wages, and the last thing conservatives (supported massively by low-wage employers) want is to have the government prevent wages from falling. And by keeping welfare payments low or non-existent, they can create fear of unemployment from raising the minimum wage or supporting other policies to raise wages. Of course, there are ways to improve welfare, including providing work instead of income payments, but that work has to be at a living wage that, instead of driving down wages, helps to bolster wages in society while delivering services that the market fails to provide. Look at the debate over Wisconsin's proposed welfare plan, a plan to end welfare for everyone in the state and replace it with work requirements. Where is the headline-grabbing debate over the fact that this flood of new additions to the workforce will be making less than minimum wage and even replacing workers who previously made much higher wages? The enthusiasm for welfare "reform" would chill significantly if people recognized that shredding the safety net also meant shredding their own wages. If the Wisconsin-style plan was extended nationally, the effects would trash wages across the coun try. Even as welfare payments have declined in the last two decades, average hourly wages have dropped by over 10% and wages for less-skilled job have fallen even more. Imagine all four million plus adult recipients of AFDC being dumped in the labor market tomorrow on top of present unemployment, or even gradually over a year or two. The key thing for progressives to argue is that unless the policy is to spend MORE to provide real jobs for all, it's cheaper for working families to pay people not to work than to force them to work at wages that drive down pay for all of us. ============================================================================SOLUTIONS: a twice-monthly electronic newsletter promoting policy ideas for building a progressive economy for the future. Send a "subscribe" message to solutions-AT-garnet.berkeley.edu to automatically receive Solutions twice a month. ABOUT SOLUTIONS: With the Gingrich Congress's assault on everything from social programs to unions, progressives need to begin promoting positive alternatives to address the economic and social problems facing the multi-racial community of working families in the new economy. SOLUTIONS is our modest effort to contribute to this debate. If you have comments or ideas, please feel free to write us at pcomm-AT-ix.netcom.com SOLUTIONS is produced by Nathan Newman and Anders Schneiderman of Progressive Communications. --- from list marxism-AT-lists.village.virginia.edu ---
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