Lending a Lasting Hand

Economists of many stripes argue that poor people and the unemployed need more help from the government

The Chronicle of Higher Educaiton
From the issue dated January 16, 2004
http://chronicle.com/free/v50/i19/19a01401.htm

By DAVID GLENN

The walls of the Department of Employment Services center in northeast Washington, D.C., are inevitably festooned with glossy motivational posters. "Career vs. Job ... a Matter of Choice or a Matter of Chance," reads one sign. Visitors might be forgiven for thinking that they're back in the assistant principal's office.

Reginald McCoy, a 35-year-old telecommunications technician, was laid off by WorldCom seven months ago. He is using one of the center's computers to search for a new job. "If you go from this" -- he flashes a W-2 form that reported annual earnings of more than $58,000 -- "to making nothing, you have a problem," he says. "I know guys who were laid off before me who are at McDonald's, or working out at the airport. They've taken a thirty- or forty-thousand-dollar pay cut."

Mr. McCoy is anxious, but he sees hope for himself. Last week he had an interview at Verizon. Across the room, photocopying a business proposal, is a woman whose anxiety is more severe. Khaleedah Harris, a lifelong resident of Washington, says that she and her husband have usually had steady jobs, but some of their eight children have not. "When I was in the District of Columbia public schools," she says, "we had various vocational and trade, office, and clerical classes. We had barbering. We had all kinds of things that you could do if you were not going to be collegebound. Well, when my kids came through school -- all of them -- those programs were gone."

This employment center offers a mélange of the pragmatic, small-scale programs favored in the Clinton era. If you want to learn how to perform during a job interview, the center's counselors will teach you. If you want to learn how to apply for the earned-income tax credit, which benefits low-income workers with dependent children, they'll show you. In 2004, seven years after federal welfare reform took effect, this is the rough consensus of policy makers: Give a small helping hand to people who want to help themselves. Anything more ambitious is only likely to do damage -- to the economy, or to poor people themselves.

Not everyone is satisfied with that consensus. An ideologically diverse group of scholars is putting forward sweeping proposals that, they say, would transform the low-wage labor market for the benefit of poor people and society at large. One plan would guarantee all citizens a small basic income; another would revive the New Deal model of a government-created job for anyone who wants one; still another would provide huge public subsidies to private employers in order to raise the wages of low-skilled workers.

The proponents of these schemes, as you can readily imagine, do not always agree with one another. But their proposals have a few common denominators: The plans are all designed as universal benefits and are intended to avoid the perverse incentives (against work, against marriage) that have afflicted the U.S. welfare system. And all of the proposals -- yes, even the guaranteed-job scheme -- are touted by their designers as minimizing government bureaucracy and micromanagement of the economy. These plans are thoroughly postsocialist, these scholars say. We can provide much more to people at the bottom of the ladder and still allow the free market to do its thing.

Back to Basics

The most controversial of the plans is the universal basic income, whose best-known contemporary proponent is Philippe van Parijs, a professor of economic and moral philosophy at the Catholic University of Louvain, in Belgium. In his 1995 book Real Freedom for All: What (if Anything) Can Justify Capitalism? (Oxford University Press), Mr. van Parijs argues that the liberal value of freedom presumes that humans have an array of realistic choices. And having such choices, he says, depends in turn on having at least a certain level of resources. Therefore society should guarantee everyone a basic income, which would be financed through progressive taxation. The basic income, Mr. van Parijs says, should be as large as the economy can efficiently sustain.

The most common objection to Mr. van Parijs's model is that it would represent an unjust transfer of resources from people who do productive work to people who choose not to. (Scholars like to refer to this as the "Malibu-surfer problem.") Mr. van Parijs replies that the liberal principle of neutrality among conceptions of the good life, as articulated by such philosophers as Ronald Dworkin and the late John Rawls, demands that the state not favor the industrious (the "crazy," as Mr. van Parijs facetiously calls them) over the lazy.

Mr. van Parijs also makes a more subtle point: He says that a universal basic income might actually draw certain unemployed people into the labor market. "Part of what motivated this plan," he says, "was an awareness that the existing benefit schemes tend to create dependency traps." In means-tested benefit programs like the U.S. welfare system, you can often immediately lose all of your benefits if you take a job. "But if you have this floor of income that you're entitled to no matter what," he says, "that's a way of getting you out of that trap." (The same insight lay behind the conservative economist Milton Friedman's early-1970s proposal for a negative income tax, which would be structurally similar to Mr. van Parijs's universal basic income.)

Would Mr. van Parijs's proposal wreck the economy by shrinking the pool of workers willing to work for low pay? "I don't think the decrease in labor supply would be as severe as some commentators believe," says Michael A. Lewis, an assistant professor of social welfare at the State University of New York at Stony Brook and a proponent of the basic income. "Employers would tend to increase the wages they offer, and that would draw people back in."

Mr. van Parijs does not believe that low-wage jobs would disappear, but he believes that a certain kind of low-wage job would vanish. "Jobs with low immediate productivity, but that offer serious training or opportunities for advancement through social networks, would be able to find people to fill them," he says. "On the other hand, if you have really lousy jobs that don't offer any training, that are done under bosses that treat workers badly, these sorts of dead-end jobs will be more difficult to fill than before."

Mr. van Parijs would not mourn the loss of such jobs. "Just as there is nothing particularly good about slavery, there is nothing particularly good about a system in which lousy jobs can easily be filled," he says.

Removing Incentives?

A final objection to the basic income is that it would weigh down the economy by reducing people's incentive to learn new skills. "Basic income grants and the earned-income tax credit have a negative impact on human capital formation -- both theoretically and according to empirical evidence," says Robert A. Moffitt, a professor of economics at the Johns Hopkins University, who is generally skeptical of Mr. van Parijs's plan.

Mr. van Parijs replies that such concerns are based on "petty accounting." The basic income, he says, might actually help people to go to school or learn a new trade because they would have more flexibility to reduce their hours (or leave the work force entirely). "Basic income is part of a package that's far better adjusted to both the economic needs and to the social needs that result from the new technological and market complex in which we live."

Maybe so, but the basic-income scheme has no immediate political prospects in the United States. A small band of economists and political scientists will gather in Washington next month for the third annual meeting of the U.S. Basic Income Guarantee Network, but they have no illusions about the terrain. The one serious moment of possibility, several of them say, came during the Nixon administration, when Mr. Friedman pitched his negative income tax.

"You get this paternalistic, cumbersome welfare system, and we almost had the opportunity to replace that with a negative income tax," says Karl Widerquist, the network's coordinator. Mr. Widerquist is an economist who is earning a doctorate in political science at the University of Oxford. "It just didn't happen," he says ruefully.

Mr. van Parijs says that some European countries are slowly creeping toward something that looks a great deal like a basic income. Belgium, Britain, France, and the Netherlands have all recently introduced refundable tax credits for low-wage workers. And almost all West European countries already offer a basic income to people who do not work.

The basic-income idea has also generated active political movements in two unlikely countries: Brazil and South Africa. In December, the Brazilian Congress approved a bill that will create a basic income beginning in 2005, though the plan will initially focus on Brazil's poorest citizens. Meanwhile, in South Africa, there is a growing popular movement for a universal basic income.

Granting Guarantees

A very different set of reforms is offered by the economists L. Randall Wray and Mathew Forstater, both professors at the University of Missouri at Kansas City. They would like to bring back the New Deal model of government-guaranteed jobs for anyone willing and able to work. They argue for their scheme primarily on the grounds of efficiency, not ethics. A modern capitalist economy, they maintain, will never generate a strong, steady, sufficient demand for labor. Even during the boom years of the late 1990s, many people unsuccessfully sought work. In order for the economy to reach its true productive potential, Mr. Wray and Mr. Forstater say, the government must step in and provide jobs.

The Missouri economists' job program would look like this: The federal government would give large grants to states and localities, which would set up nonpartisan commissions to administer the program. Nonprofit groups and government agencies would submit bids explaining how they would make use of federally subsidized workers. All of the subsidized jobs would pay only the minimum wage -- the idea is that workers should be indifferent about whether they worked in a federally subsidized job or in the lowest-paid job in the standard private sector, so that workers would readily switch back into private jobs during upswings of the business cycle. But the federal government would be responsible for offering a minimum-wage job to each and every able, willing person in the country. "Of course, people can be fired if they don't perform up to standard," says Mr. Wray. "We might design the system to give them a second or third chance, but not more than that."

Mr. Wray insists that only such a job-creation program can solve the modern problem of structural unemployment. He says that the training-and-education programs currently favored by policy makers are based on a fallacy. "If you bury nine bones and send 10 dogs out to get them," he says, "only nine of them are going to come back with bones. Now, you can take that one dog and teach him the latest, most up-to-date bone-finding techniques, and he might come back with a bone the next time. But you know that some dog is always going to come back empty."

Mr. Wray says that the scheme would have only gentle effects on the labor market, because, again, the subsidized jobs would intentionally be no better than the least attractive private-sector job. Many more-orthodox economists, however, argue that a situation of full employment would lead to an inflationary spiral. At the height of the boom in 1999, Alan Greenspan told Congress that he worried that the "pool of available workers" was shrinking, and that "significant increases in wages, in excess of productivity growth, will inevitably emerge" unless the Federal Reserve took steps to slow the economy.

But some observers believe that Mr. Greenspan's model has little to do with the current environment. "We're so far away from any kind of wage inflation that it seems foolish to talk about these things," says Heather Boushey, an economist at the liberal Center for Economic and Policy Research. "Workers have been able to capture very little of the gains in corporate profitability." Ms. Boushey speculates that a full-employment plan like Mr. Wray's might actually reduce workers' bargaining power in the private sector, because employers would find it easier to find and hire well-trained workers if their current crop started to get restive.

Slim Political Chances

Like the universal basic income, the Missouri economists' employer-of-last-resort scheme has no particular political traction in the United States. Among other barriers, there is widespread skepticism that it is feasible. The public-jobs programs of the Carter administration are widely regarded as a failure. "I would say that the overwhelming view of most labor economists is that it just didn't work," says Mr. Moffitt. "State and local governments were not capable of the kind of flexibility in hiring and creating jobs that were necessary to make them work. All indications are that productivity was extremely low."

But this plan, too, has found adherents in unlikely places. Mr. Wray recently flew to Turkey to discuss a jobs-creation plan with government officials. And after its 2002 economic crisis, Argentina enacted a program guaranteeing jobs to low-income households with children. The World Bank estimates that 1.7 million people are participating.

What does Mr. Wray think of Mr. van Parijs's model? "I'm not opposed to a basic-income guarantee at all," he says. "We should provide a basic standard of living to all human beings. But a basic income does nothing to resolve the unemployment problem. Handouts will never be viewed the same way as jobs. I don't believe that handouts lead to the same sense of responsibility and control over one's life that a job can offer."

Subsidizing the Unskilled

A third call for radical reform comes from someone well-respected within the realm of orthodox economics. Edmund S. Phelps, a professor emeritus at Columbia, has for more than a decade campaigned for a system of public subsidies to increase the wages of low-skilled workers. The fullest elaboration of his model appears in his 1997 book Rewarding Work: How to Restore Participation and Self-Support to Free Enterprise (Harvard University Press). If Wal-Mart is willing to pay a cashier the minimum $5.15 an hour, for example, the government would provide a $3 subsidy to raise the wage to $8.15. The subsidy would phase out gradually at higher levels. A worker earning $11.50 an hour would get a small subsidy; a worker earning $12 or more would receive no subsidy at all.

Mr. Phelps argues that his plan -- which, in his view, should entirely replace the welfare and food-stamp programs -- would draw hundreds of thousands of discouraged workers into the labor market. In turn, he says, that would reduce the cycle of self-destruction that afflicts many poor neighborhoods. He predicts that violent crime and prison costs would substantially decline.

William P. Quigley, a professor of law at Loyola University New Orleans and the author of the recent Ending Poverty As We Know It: Guaranteeing a Right to a Job at a Living Wage (Temple University Press), believes that Mr. Phelps's plan is worth trying. "Every one of us in this country is already subsidizing Wal-Mart for its employees," he says. "Family members, churches, and nonprofits provide housing and medical assistance to help low-wage workers get by. It would be a lot better to do it formally."

Private wage subsidies are vastly preferable to government-created jobs, Mr. Phelps says, because an employer-of-last-resort system would reduce workers' attachment to jobs in the private sector. He writes in his book that employment policies' goal should always be "to permit the broadest possible integration of disadvantaged workers into the business of society, which is the activity of the private sector."

The most common objection to Mr. Phelps's plan is that employers would somehow play the system and reduce the wages they would otherwise offer to their employees. Jared Bernstein, a senior economist at the Economic Policy Institute, a liberal think tank, says that it is a mistake to assume, as Mr. Phelps does, that wages always clearly reflect a worker's value to the firm. "That's certainly right some of the time," he says. "But it's not right all of the time. It also depends on things like workers' bargaining power. So there is a real danger that this system would wind up subsidizing low-wage employers. That's very worrisome."

Mr. Phelps replies, "It makes no sense to imagine that employers can just hang on to whatever they want to hang on to," he says. "Competition will pull up wage rates to the level dictated by the employee's productivity."

This proposal, too, is not likely to be enacted by Congress any time soon. France and the Netherlands have, however, recently enacted policies that echo features of Mr. Phelps's plan.

Show Me the Money

In the view of many economists, all three proposals are deeply misguided. "If we go through the history of the United States," says Walter E. Williams, a professor of economics at George Mason University, "it is a history of poor people coming to the United States without a pot to piss in or a window to throw it out of, and still they've made it into the mainstream of American society. In the 1840s, when Irish people fleeing the potato famine landed in New York or Boston, there was no welfare program.

"The other question," Mr. Williams continues, "is where in the world is the subsidy going to come from? It's not the Tooth Fairy or Santa Claus that's going to provide the subsidy. Taxes are going to have to increase, or there will have to be spending cuts somewhere else."

But the plans' proponents insist not only that their proposals would reap savings in prison and other social costs, but that structural reform is overdue. "Say that we have this problem of chronic unemployment," says Mr. Wray. "It would be one thing if that burden were equally shared across society. But it's just beyond dispute that the burden is not being equally shared. People of color suffer more, the less educated suffer more. And if you're out of the labor force over the long term, you just basically have no chance."

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Volume 50, Issue 19, Page A14


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