Should Taxpayers Subsidize Poverty Wages at Large Profitable Corporations?

Senate Budget: Should Taxpayers Subsidize Poverty Wages at Large Profitable Corporations? February 25, 2021 (They do not accept comments - so, never mind).

Abstract

I assume that this hearing is not appoint PPP. Even if it is, I would still comment on the well know practice of companies using public funds to mitigate the suffering caused by low wage work. This suffering is not confined to large businesses. “Small business” benefits from these practices. It is the nature of capitalism to do so and to cover up the information on how it occurs. This is especially the case in labor markets. Union busting, both at home and abroad, is another way wages are kept low. 

The title of the hearing also assumes that taxpayers include all of us. That is not necessarily the case.  Inadequate support from the taxpayers, especially the wealthy ones, keeps workers in the low wage economy. More generous benefits allow workers a way out, rather than making them lazy. Low benefits are another way to keep up the supply of low wage workers, as are training programs that lead to low wage work rather than increased education. Punitive immigration laws further depress wages by forcing undocumented workers into the shadows.

There are a wide range of solutions to these problems. The most basic one is to give single workers and families tax credits to increase both income and spending. This still keeps the two-tiered economy in place, rewarding companies indirectly for paying too little.  A higher minimum wage is essential, especially if support for families is increased, so that no one is working only for a family benefit.  UI beneficiaries should also receive an increased family benefit and anyone in an educational program should be paid a minimum wage to attend. Immigration reform and paying all students after sophomore year will keep wages up.

The ultimate cure is employee-ownership. Employee-owners have the information that capitalism keeps from them.  Advancing employee-ownership (along with cooperative consumption, finance and human services) decreases the need for government services, if not eliminating it. The best libertarianism is collective action.

The purpose of this hearing

Divining what a hearing is about from its tittle without being invited to testify and provided with a list of questions to address is more art than science, although over time I believe I have done a fairly good job of it, The title of this hearing may imply an investigation into who receives benefits from the Paycheck Protection Program and whether these benefits are making it to the workers. Given the witness list, the focus could also be about whether large employers are gaming the system, counting on government to provide a level of basic service, thus allowing the payment of low wages.  

The PPP and COVID relief

As to the first, PPP support should be as wide as possible while the pandemic rages. As I wrote in my comments to Aravind Boddupalli’s TaxVox post last week, it will be interesting to see whether the new round of PPP, which allows companies to apply for the program without changing their accounting systems, will attract a different set of employers. Boddupalli’s article provides a good summary of how round one went. The restaurant and hospitality industry did not use the program much. In my estimation, it is because they employ many low wage workers, especially those who subsist largely on gratuities. Others in the low wage industry lack documentation and work off the books.  PPP will not be used to save their jobs either.

As to the second, I am heartened that the Committee is not following the herd into COVID overdrive. If current trends continue and the virus does not rebound because it lacks the available vectors to do so, certain features of the COVID relief bill will be harder to pass as COVID relief, while they are essential to bring more justice to the economy. The remainder of my comments will be in relation to that theme. First, some basics.

Corporations vs. Capitalism

One of the great over-generalizations in economic discussion is to assume that all large firms are corporations or that one form of ownership is bad, while others are good, Capitalism can occur in large and small firms, in corporations, partnerships and sole proprietorships. Use of the term “corporations” is a way not to be seen as a Marxist and a Russian sympathizer. What we used to call big businesses are now referred to as corporations.

The rise of Putin shows that capitalist authoritarianism can take many forms, from state capitalism to oligarchs. In the United States, the old Soviet Union and modern (?) Russia, the form of organization of a firm has no bearing on its true nature. The only difference in recent times is that a modern Republican President brought sympathy with Russian authoritarianism, and its methods, to the White House.

The term capitalism is widely misused. Many conflate it with free markets. They are not the same thing. The key feature of capitalism is the exploitation of workers, consumers, suppliers and (in corporations) shareholders. The key feature of that exploitation is not size, it is the withholding of information. Entrepreneurs, whether they are in the C Suite, Trump Tower or the back office is the ability to monopolize information. 

In the information age, firms like Wal-Mart and McDonald’s track product preferences at the transaction level. They leverage their information to give the people what they want and their relationships to do this at the lowest possible price. Lower prices bring in customers. Like gerrymandering, where politicians pick their voters, information age firms pick their customers.

Firms can become monopolies formany reasons. For some, it is because they have control of an invention or production process. If they don’t control something, they use their resources to buy off the competition. This ability dampens innovation, which sets the purpose of the patent and trademark power in the Constitution on its head. The other way monopolies and oligopolies exist is in control over suppliers and of the workforce.

Perfect competition requires everyone knowing everything. Such competition is rare in real life. Imperfect competition exists in both selling (monopoly) and buying (monopsony).  These forms range from total Monopoly and Monopsony to Oligopoly and Oligopsony to Monopolistic and Monopsonistic Competition. The less imperfect forms, where there is a degree of branding but a freer market is what defenders of capitalism like to assume. Big business gives us more monopoly and less competition.

Labor markets

On the labor side, monopsonistic competition means lower prices and the ability of workers to move from one employer to another to demand better pay, working conditions and management, or to find another job where a fresh start can be made – that is, that some kind of permanent record does not follow the employee around. The perception that there is such a record is use to keep some employees in line. 

In monopsonistic and oligopolistic labor markets, such a record does exist, especially on those who attempt to organize their fellow workers into the union movement. With the rise of internet background services, including their use by larger employers, the concept of a permanent record is becoming more real than dystopian fiction. 

There are two ways in which big business fight unionization. One is that they threaten to and go through with closing stores rather than letting workers organize at their store. Their actions on the supply side are equally harsh. Unionized suppliers are simply not used when possible, with foreign governments, from China to Latin America, doing the dirty work to dissuade union organizing, from blacklisting to actual violence.

The other method is franchising. By treating local operations as franchisees, no store is big enough to unionize. These firms earn the label “small business” in government statistics, even when they must abide by corporate rules, from personnel to suppliers. Franchisees often complain, in response to minimum wage hikes, that they will earn less than their employees if the wage hike is passed. More about that below. Franchisees are often sole proprietorships, not corporations. We cannot continue to demonize corporations when small businesses share the sins of capitalism.

Government, by not enforcing labor laws, has become part of the problem – both in not enforcing fair pay and in dropping the ball in helping workers organize.

Who pays taxes?

The sad irony is that government benefits serve the interest of taxpayers. How is that again? Half of income tax collections are levied on the top 2.5% of the population. These are the same population as those who benefit from the second-tier economy. They are “middle management” and the executive/donor class. Government services are a way to keep their advantages in place, including the actual control over their workers, not just the minimization of their compensation. They also benefit from deficit spending. They own most of the bonds, which leverage their speculation on Wall Street. The game is rigged on both sides. Please see my first attachment for ore on this.

Government Services and the low wage economy

The most public abuse at the taxpayer’s expense is cutting hours so that employees must rely on government services for health care and decent food.  Some firms, like Wal-Mart, will tell you that the economy forces them to hire low wage workers, as paying more would put them at a competitive disadvantage (even as they ruin main street firms who are truly small businesses). From their point of view, their assistance in providing access to benefits is remediation rather than a way to prey on the taxpayers.

The Earned Income Tax Credit also falls into the category of government support for low wage labor. Housing assistance (for the lucky unlucky) and energy assistance round out the list of public transfers to low wage employers AND those who provide them with services. Doctors and the food industry benefit from public support of low wage employees as the workers themselves.

That low wage workers must also eat fast food, shop at second rate groceries (some of which are not even lower cost), and discount stores, seek medical care in emergency rooms instead of private doctors and send their children to substandard public schools in poorer neighborhood. They live in what Michael Harrington called “The Other America.” Reliance on low wage employment, government support and cheaper consumer goods (often their employers) has created a second-tier economy.

Public policy helps keeps workers poor. Government assistance is not generous. Food stamps do not provide enough low carbohydrate food to avoid obesity, which is endemic among recipients. Cash assistance is almost non-existent and is often tied to training programs that direct graduates to lower wage fields, like medical assistant or food service at sports venues like what used to be called the MCI Center, then the Verizon Center and now the Capital One Arena. These jobs are sold as being part of a career ladder, but that ladder often does not include a college education.

Undocumented workers

Opposition to reform provides a supply of undocumented labor forces immigrants into the shadows of the low wage world as well. Undocumented workers do not unionize. Right to work laws are, in fact, right to employ undocumented labor laws. 

This is a one-two punch at undocumented workers. The demand for undocumented workers would dry up if they were allowed to unionize and did not face deportation for doing so. Union power would drive wages up, with or without a decent minimum wage. The presence of these workers keeps wages low for domestic workers, which causes friction between poorer American workers and immigrants.

Perverse incentives

Studies have shown that paying workers more is an incentive toward self-betterment. The theory that low wages and benefits lead to the desire to pull one up by one’s bootstraps is a canard. The reality is that keeping people in poverty is an excuse to create and maintain a ready supply of low wage workers. 

This is also the rationale for keeping the child tax credit low. A higher credit, preferably one distributed with pay, would help workers to get out of poverty, lower the abortion rate and leave the low wage market.

Solutions

There are many possible solutions to the problem of low wage work.

The most obvious one is to increase the EITC, create a universal EITC that functions as guaranteed income and increasing the Child Tax Credit. The latter is an important part of President Biden’s economic plan, which will hopefully be passed before the COVID crisis ends.  As the former President stated, it will eventually go away, like magic. The problem is that magic came at the price of 400,000 dead Americans.

Increases to the minimum wage, also included in the legislation, are preferable. No one should have to work simply to qualify for a higher child credit. While refundability ends that condition, this provision is only for a single year. It should be permanent and should be paid out with Unemployment benefits and participation in subsidized education programs. Students in such programs should also be paid the minimum wage. 

Minimum wage increases often lead to increased wages for those who manage low wage employees, which leads to increased wages all the way to the C-Suite. Executives and sole proprietors (or virtual sole proprietors, like the Walton family) are the chief beneficiaries of low wage work. Stockholders will always be paid a normal profit in comparison to other investors, prices will not go up drastically. Indeed, workers who make more will spend more. Capitalists game the system, including withholding information on how much workers actually produce versus what they are paid, to make themselves rich.

The irony is that higher minimum wage laws stop some employers from further gaming the system for competitive advantage. If everyone pays more, no one is comparatively worse off. This is also the rationale for raising benefits to families. 

$15 is too low. $21 would be optimal, but $18 is acceptable, as is indexation of the minimum wage to inflation (or even productivity).

This is why those who shill for capitalists keep benefits and wages low, oppose immigration reform, practice voter suppression and make sure that campaign finance reform never occurs. These things keep low-wage labor in a second-tier economy. Sadly, support for capitalism is bipartisan. This is why the focus of this hearing is on corporations and not capitalists.

Immigration reform, repealing right to work laws and better funded education programs from ESL to an associate’s degree (including pay for students from junior year in high school through sophomore year in college). Using youth as a low-wage pool is another way to keep low-wage adults in their place.

The ultimate cure for low-wage work and the need for government programs to make it possible is employee-ownership. The only way for workers to know their productive output is to own the company. Ideally, this does more to provide competition for wages, especially management wages, than any form of capitalism – be it corporate, sole proprietor or governmental. Please see my standard attachment on employee-ownership for more details on this option.

Tax reform is a way to advance ownership and shift government services to employee-owners. How this occurs is in the third attachment. Briefly, introduction of subtraction and asset value added taxes can make this work, especially when all sales to qualified ESOPs and COOPs are zero rated.

Attachment - Who Owns and Owes the Debt

Attachment Employee Ownership

Attachment - Tax Reform