There is not one but two specters haunting our economy. The first is the output gap, actual GDP is approx. $1 trillion smaller than potential GDP. The second is distribution of income (particularly, between wage share and capital share). As Henry Blodget explains it, “Again, right now in this country, we have the painful juxtaposition of the highest corporate profit margins in history, combined with one of the highest unemployment rates in history. We also have the lowest wages in history as a percent of the economy.”
Our output gap and our income maldistribution reinforce each other. High unemployment means the job market is a buyer’s market while low wages mean there is less consumer demand. The optimistic way of looking at this is tackling one of them would alleviate the other. The pessimistic way is that when Congress and the White House work hard night and day to come up with ways to worsen one of problems, they can’t help but also worsen the other.
Since the path to reducing the output gap is so obvious, I feel like I’m trolling you just spelling it out. The government needs to loosen its fiscal stance. Whether Congress does this by increasing spending or cutting taxes or rebasing each of the 140 billion pennies in circulation to $5, its all the same to me. But you know this already.
The interesting problem is income maldistribution. This can be approached as a fiscal policy issue but its also amenable to non-fiscal economic policy reform. For example, Blodget goes Norma Rae on us and suggests the economy needs more unions. Then there is the politician’s go-to solution to stagnant wages, more education means higher pay. That may be true at the individual level but in aggregate, this is bunk. It gets you a more literate unemployment line, an increased focus on credentials (instead of competence) and a whole lot of jumbo student loans. We’ll let that one bide. A better idea, as many have suggested, is to raise the minimum wage, which since has fallen by a third in real times since its 1968 peak, even as labor productivity as increased by 200%.
The most intriguing minimum wage proposal I’ve seen is, like the plot of a Jason Statham movie, diabolical and cruel in a way that warms my heart. Its called the Universal Living Wage (or “ULW”) and what it would do is pit landlord against employer in a series of city by city political death races. In turn, cities would compete against each other for new employers in a benevolent race to the bottom. The end result would be higher wages and lower housing costs without adding a penny to the federal budget. Let’s go to the tape…
The concept is simple. It is based on the premise that if a person works 40 hours a week, then he/she should be able to afford basic housing. We use two existing Federal guidelines to determine what the Universal Living Wage should be. The first guideline (a HUD standard also used by banking institutions across America) dictates that no more than 30% of a person’s gross monthly income should be spent on housing. The second guideline, the Fair Market Rents (FMRs) are established by HUD throughout the country for each municipality and all other areas. Therefore, the Universal Living Wage will vary per area in accordance with the FMR. FMRs are based on gross rent estimates which include shelter, rent and the cost of utilities except telephone service.
This is so damn clever. Every city (or to be precise, metro area) would have its own unique minimum wage based on its cost of housing. As the ULW is phased in over a number of years, it puts the political leaders in every city on the horns of a dilemma, it either reforms their zoning regulations and other housing policies to make housing affordable for the working poor (such they can afford rent without government subsidy) or they will watch their minimum wage grow like a weed. And that’s the death race part, the minimum wage in any metro area would reflect the relative strength of landlords who want expensive housing versus employers who want cheap workers.
No man is an island and all that, every city will always know what the ULW is in every other city. Cities with a low ULWw will aggressively poach employers from those with a high ULW. Like water seeking its level, this can’t help but raise wages in low cost areas and cut housing costs in high wage areas. To give an example based on 2013 housing costs, lets compare the hourly ULW of metro DC to that of the part of Virginia that’s almost in North Carolina (remember, current minimum wage is $7.25/hr).
Washington-Arlington-Alexandria, DC-VA-MD HUD Metro FMR Area $21.73
Danville, VA MSA $7.71
Anyway, check out the Universal Living Wage website, study it. Embrace it.
ADDENDUM: It occurs to me that noting Blodget’s Norma Rae-like qualities may be a bit obscure to some readers.
“Norma Rae is a 1979 American drama film that tells the story of a factory worker from a small town in North Carolina, who becomes involved in the labor union activities at the textile factory where she works. The film stars Sally Field in the title role…”