Sunday, May 31, 2015

A Billionaire's Thoughts on the Minimum Wage

In the words of Warren Buffett, in an article he wrote for The Wall Street Journal, America's widening wealth gap is not a result of the rich being incredibly rich, but an "inevitable consequence of the of an advanced market-based economy", explaining that America's "economic engine" constantly "requires more high-order talents while reducing the need for commodity-like tasks". This basically means that highly educated workers are in demand and uneducated workers are not. One unfortunate result of this is nearly 15 percent of the U.S. population below the poverty line. Buffett says that the solution to this problem is not education however. Though quality schools should be available to all, in reality there is a limited number of positions for tech geniuses like Steve Jobs or economic experts like Buffett himself. Education is a much more complex, and longer term solution to the wealth gap than what Buffett believes should be done: "a carefully crafted expansion of the Earned Income Tax Credit (EITC)".

The current EITC is a not doing enough. It is a refundable federal income tax credit for people of  middle to lower income that averages just below $3,000 a year per family. Three thousand dollars a year is little money compared to the amount that nearly doubling the minimum wage (to $15 an hour as some groups propose), however, the problem with doubling the minimum wage is that almost all companies would have to reduce employment, crushing many of the workers possessing only basic skills, as Buffett puts it. Some would be happy with there $15 an hour, but many would be unemployed entirely. Buffett proposes that minimum wage workers get more back from the government in the form of an EITC, saying that this provides an "incentive for workers to improve their skills" (because, unlike welfare programs, this requires a source of income) and more importantly, "does not distort market forces, thereby maximizing employment".

It sounds great. The government gives people more money, and with business left unaffected, everybody has a job and the economy can grow unhindered. It sounds too great. The glaring question is: where will the money come from and what will suffer because of it? It is how politicians can respond to this question that will determine whether or not an expansion of the current EITC can be successful. Ideally, the result of a successful expansion will be so beneficial to the economy that no government programs will be negatively impacted. Government money lost due to EITC will be made up for with money saved on other welfare programs. And as Buffett put it: "America will deliver a decent life for anyone willing to work".

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