Magazine article U.S. Catholic

Pay Up

Magazine article U.S. Catholic

Pay Up

Article excerpt

We've trickle-downed our way to shocking income inequality and a sluggish economy. Now it's time for a reality check.

At this year's State of the Union address President Barack Obama, stating that "America needs a raise," proposed that Congress increase the federal minimum wage from $7.25 to $10.10 per hour. On the surface, the president's push to raise the minimum wage appears to be directed toward a small portion of the working population. But the real target is the dramatic rise of wealth inequality in America, which has essentially divided the country into two societies. Much of the president's case for raising the minimum wage comes directly from the Catholic Church's own "just wage" doctrine.

The negative reaction some have to this proposal is based on protecting the economic and political gains of the rich, which have come at the expense of the poor and middle class. But their argument that raising the minimum wage will cause inflation or unemployment is based more on ideology than evidence.

The $26.7 billion in bonuses paid by Wall Street firms to 165,000 employees in 2013 illustrates the redistribution of income away from workers and toward the financial elite. The Institute for Policy Studies recently noted that this largesse is greater than the total yearly compensation of all full-time minimum wage workers combined. The income of those nearly 1.1 million minimum wage workers totaled $15.1 billion in 2013--just more than half of what the Wall Street executives received in bonuses.

Distributing money to the already overpaid creates one third less economic growth and job creation than distributing it to lower-paid workers. But the more fundamental issue is why Wall Street has $26.7 billion to pay out in bonuses. No doubt the practitioners of "casino capitalism" would paraphrase John Houseman from the classic 1970s Smith Barney commercial: "We make money the old-fashioned way ... we earn it." In an ironic sort of way, they would be right, because the "old-fashioned way" of creating wealth is the use of force and fraud. Whether it's the Roman Empire or the British Empire, Viking raiders or corporate raiders, conquistadors or Russian oligarchs, slave traders or stock manipulators, force and fraud have been a main part of how people or countries got rich.

The modern way to create wealth is to increase productivity, expand physical capital, improve management efficiency, and most importantly, increase the education and skill level of workers. When mutually beneficial trade is the model of economic activity, both wages and profits go up. This is what happened from the end of World War II until the swing to the right with Ronald Reagan and Margaret Thatcher. Since then nearly all income gains have gone to the top 1 percent, with the bottom 80 percent having rising debt instead of rising wages.

Two changes in the economy help explain society's extreme inequality: rewriting the rules regulating finance to benefit speculators and fraudsters, and the removal of supports for low-income workers. Besides the out-and-out theft that is rampant on Wall Street, finance increases its share of income by increasing the amount of economic activity that passes through their hands, allowing them to take a cut each time. Housing, health care, higher education, and even basic food commodities are all merely means to the higher end of commissions and capital gains. All these activities can be more efficiently produced and distributed without Wall Street involvement.

The second major factor has been withdrawing support of low- and moderate-income workers. Contrary to the dominant ideology, most wages are determined by the relative bargaining power of workers versus employers. If workers bargain as one, then they can force the firm to share some of the surplus created by technological change with them. Minimum wage laws--along with other forms of social protection like a strong social safety net, universal education, and a commitment to full employment--will also support the bargaining power of workers. …

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