Monetary Realism

Understanding The Modern Monetary System…

Dealing with stagnant wages the Jason Statham way

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…”


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20 Responses

  1. Fed Up says

    “The first is the output gap, actual GDP is approx. $1 trillion smaller than potential GDP.”

    Aren’t you assuming real AD is unlimited? What if it is not unlimited?

  2. winterspeak says

    We might find a lot of people ending up on welfare then. If you look at countries with high minimum wages, you see more self service and automation, you don’t see fast food workers living middle-class lives.

    And there’s a corrosive moral effect to living on welfare. I think it’s better for society that, if we’re in a $16 ULW world, the $15 individual works instead of being on welfare. So I like the tax credit idea, but most corporations don’t pay tax so why not just a straight wage subsidy?

    More importantly, why not pursue macro policies that support the goal of full employment anyway?
    – Curtail immigration, and actively enforce current laws
    – Boost fiscal spending to support AD when it is low
    – Import restrictions

    Don’t see any of these happening anytime soon.

    • beowulf says

      I agree with most of what you say, especially about immigration and import controls.

      Corporations do pay payroll taxes (and withhold employee taxes). When I mean welfare, I’m inclusive of wage subsidies, like the hire a vet tax credit, which could be targeted to those who are employable at, say $15/hr but not $16/hr. A high minimum wage with targeted employment subsidies (for those who unable to find unsubsidized work) would be better than our current system of low minimum wage and broad wage subsidies.

    • Tom Hickey says

      What about the argument that higher real wages spur innovation to increase productivity?

      In an ideal world, all “work” would be done by machines in the broad sense, and everyone would be able to enjoy leisure. If we look at human history, the great advances were made by people of leisure aka “rentiers” since they were the only ones that had the resources to do so. Everyone else was on the treadmill of subsistence.

      “We should do away with the absolutely specious notion that everybody has to earn a living. It is a fact today that one in ten thousand of us can make a technological breakthrough capable of supporting all the rest. The youth of today are absolutely right in recognizing this nonsense of earning a living. We keep inventing jobs because of this false idea that everybody has to be employed at some kind of drudgery because, according to Malthusian Darwinian theory he must justify his right to exist. So we have inspectors of inspectors and people making instruments for inspectors to inspect inspectors. The true business of people should be to go back to school and think about whatever it was they were thinking about before somebody came along and told them they had to earn a living.} — Richard Buckminster Fuller (h/t Unlearning Economics)

      The problem is neither production or consumption, nor availability of resources, but distribution. The question is not so much can we get there as it is how do we get there. This is what Fuller’s World Game is about.

  3. beowulf says

    The links are to Universal Living Wage, which is both a proposal and an affordable housing nonprofit. I was remiss not to point out the man who came up with the idea, Austin housing activist Richard Troxell. I just dropped Troxell a line inviting him to comment here if he wished.

    And yes I did tell him the die was cast and he was now stuck with Jason Statham as the face of the Universal Living Wage. :o)
    What’s happening with those sausages Charlie?

  4. winterspeak says

    Cool, so what happens to those individuals whose marginal product is below the ULW in their area?

    • beowulf says

      THAT is who the welfare spending should be reserved for. Australia does it right, they have a AU$16/hr minimum wage (US$14.35). A full time worker making that much in the US would earn too much to qualify for food stamps, Medicaid or Section 8 housing in most states. The lower the minimum wage the more welfare spending goes to the working poor (as opposed to those who are can’t find work or are physically or mentally incapable of working) . For low skill, otherwise unemployable workers, they could find a job even with a high minimum wage with something like the tax credit given to employers who hire veterans ($9600 a year, equivalent to $4.80/hr).

      Great story in The Week today on what minimum wage should be. As is his habit, Jamie Galbraith is the voice of reason.

      “The median wage in construction is only $10,” Galbraith says. “That means that the conditions of construction work has deteriorated a lot and depends on fly-by-night contracts that depend on undocumented labor.
      “If you raise the minimum wage, you put pressure on those employers, and eventually firms will emerge that have trained, stable workforces staffed with documented workers. That’s part of the objective.”

  5. beowulf says

    “So what’s the matter with Atlanta? A new study suggests that the city may just be too spread out, so that job opportunities are literally out of reach for people stranded in the wrong neighborhoods. Sprawl may be killing Horatio Alger.”

    That’s good stuff, but remember a lot of the sprawl is caused by people who want to get out of the city (whether because of schools, crime, taxes, racial animus, whatever) to move to neighboring suburban towns. One more exit and you might be dealing with a different city government. I live in Atlanta and they’ve definitely taken it to an extreme here. What we’ve discussing above is based on Census Metropolitan Statistical Areas, not city limits. Atlanta’s HUD rent index is for the “Atlanta-Sandy Springs-Marietta, GA HUD Metro FMR Area”, doesn’t incentivize sprawl because as long as you remain in a particular metro area, it’d be the same ULW in every city and county, so one more exit is pretty much like the last exit.

  6. stone says
  7. stone says

    You say that employers would move to areas where wages were low. I’m not so sure. If you were say selling groceries in a high wage and high rent area then much of your costs would be just the same as in the next city that was a low wage, low rent, zone. You would pay just as much for fuel, the goods you were selling on, vehicles etc etc. Wages would only be one aspect of a much larger cost structure. BUT you would have customers who were able to pay a big chunk more because they were receiving higher wages and (if they were landlords) higher rents. You say that 30% of wages get spent on housing but that still leaves 70%. I suspect that that would mean that many service sector employers (and that is an ever bigger majority of the economy) would move to the HIGH wage and high rent zones. In principle, manufacturers might like a low wage zone but those few manufacturing jobs that have not been automated or sent off shore are relatively well paid anyway are they not? The minimum wage jobs are service sector or agricultural laboring jobs aren’t they?
    I think this is similar to how even between countries, net capital flows are typically from the poor countries to the richer countries.

  8. Clonal Antibody says


    I tend to agree with @tatere. The only way your suggestion can work is if the Government offers subsidized/free housing – similar to the FDR’s Housing Authority Projects. Three generations of families lived in the “projects” until they were finally torn down.

    Without that you could have a situation seen in the third world where you have inexpensive overt rents, but under the table payments to landlords/previous tenants – this is very similar to what occurs with “rent control”

    • beowulf says

      “Without that you could have a situation seen in the third world where you have inexpensive overt rents, but under the table payments to landlords/previous tenants”

      HUD’s rent index is for liveable, code compliant housing plus utilities, the ULW would be derived from that. Why on earth would people be living in favalas if the minimum wage in their city would be based on what’d it cost to rent decent housing? If people can afford decent housing, your assumption is they’d choose to live in a slum.

      Remember too, there’s no way Brazilian-style favala housing would escape being condemned by code enforcement officers in any American city. If you go to a border town and look across the Rio Grande (when I worked in El Paso I used to jog near the border and see Juarez every day), you can definitely tell which side of the river enforces American building codes.

      I’m curious though, do you think the problem is trying to raise wages or trying to lower cost of housing (the latter by reducing Ed Glaeser’s “zoning tax”)?

      • tatere says

        That’s a good point about zoning laws. One of the most interesting aspects of this is the way it breaks up and realigns the usual metro power blocs, in unexpected ways.

      • Clonal Antibody says

        If you utilize a “land use tax” then what you suggest could work. However, rent control – which has been a staple of cities like NYC and San Francisco has obvious problems. However, even a land use tax has to be dynamic, changing with changing circumstances.

        • beowulf says

          Its not a rent ceiling, its a wage floor. The ULW plan at the link proposes a 10 year phase-in. That’s plenty of time for the civic leaders to decide how they’re going to slice the onion.

          Arguably we already have a land use tax except that landlords and not cities capture the value created by the implicit zoning tax. Glaeser has suggested Congress limit the mortgage deduction on homes in jurisdictions that restrict new residential building as well as expand the Section 8 housing voucher program (eligible families can wait for years to win a slot). I like where his head is at but I think we can be more surgical about (and ideally restrict Section 8, without waiting lists, to those unable to work), I don’t think reducing the market value of McMansions does much good for the working poor looking for a decent apartment. I’m interested in reducing the zoning tax on (otherwise) affordable housing and the best way to do this is by making it clear to employers they’re the ones on the hook for paying this tax (by a higher minimum wage).

  9. beowulf says

    “the obvious move for a worker is to find below-market housing in a high-ULW area”.

    FMR formulas are based on rentals housing that comply with building and rental codes (which are taken seriously by most city governments), so off-book arrangements wouldn’t be included. I don’t know what you mean by favelas, if you mean some different socioeconomic groups live in different neighborhoods, yes, but that’s always bee true. If you mean like in Brazil with lawless areas where paramedics responding to calls carry assault rifles and the police patrol by helicopter gunship, I would say not so much.

    Remember, the idea is to increase lower income wages (which would surely reduce income inequality). One good thing about Brazil, its GINI inequality index score (55) makes the US’s look not so bad (46).

  10. tatere says

    I like this idea in many ways, but might it not end up being a formula for favelas? In that the obvious move for a worker is to find below-market housing in a high-ULW area, and I’d assume the FMR formulas are only based on formal rents, not off-book arrangements, squats, etc.

    • Oliver says

      ‘reforming zoning regulations’ is unintended shorthand for creating urban sprawl, I’d say. I’m not aquainted with US zoning regulations in detail but, assuming scarce land resources, anything that encourages more use of land for residential purposes is counter to any lesson learnt in urban planning since the days of motorization. Any solution imo should not aim at freeing new land resources outside of existing urban areas, but at distributing the equity effect of rising land prices more, well, equitably. Here in Switzerland, which is a small country, there are a number of arrangements and institutions in place for dealing with high rents. For one, tenancy law is very protective of existing contracts. Basically, as an owner you can’t raise rents on existing tenants unless you prove that you’ve added value to the property. Nor are contracts easily terminated. Most contracts have a clause that binds movements looseley to shifts in interest rates, which can aboviously go both ways. Overall, everything is geared towards long term owner-tenant relationships. And in Zurich, for example, about 30% of residentail property is owned by either the state or housing cooperatives, plus lots by pension funds. These arrangements, plus a fairly equitable wages distribution, are somewhat effective against abusive rents., which is important in a country with one of the lowest home ownership rates in Europe.

      On the other hand, urban sprawl is a big problem. One of the reasons is probably the large autonomy that municipalites have in laying out the federal urban planning guidelines and also in setting their own tax rates. So we get exactly what the initiative wants, namely municipalities and regions within the country that are pitted against each other in one great race to the bottom of the urban sprawl barrel. No noticably positive effect on land prices, as it sets of speculative bubbles in the silliest regions and certainly not good for Switzerland’s greatest asset – the alps.

      I can only advise you to look at and learn from small countries, because that is where the effects of the scarcity of land as a resource are most pronounced.

      • beowulf says

        “I’m not acquainted with US zoning regulations in detail but, assuming scarce land resources, anything that encourages more use of land for residential purposes is counter to any lesson learnt in urban planning since the days of motorization.”

        Welcome to America, this is exactly what our local zoning and federal tax regimes encourage. I don’t think that’s necessarily a good thing but we’re not really land scarce. As anyone flying cross-country will notice, we’re pretty empty geographically. Our growth constraints are energy (particularly, the price of oil) and fresh water.

        • Oliver says

          Yes, but the whole problem with urban sprawl is that the greater use of land brings higher energy use with it. Low density housing and segregation of residential an commercial areas generates maximum commutes = more energy. And cheap land generally means larger dwellings = more energy. If you aren’t blessed with natural scarcity, it’s best to create your own :-).