Originally published at Project-Syndicate | August 28, 2020
In much of the world, there is concern over abysmal wages for the less advantaged and the many victims of racial and gender discrimination. Though tax credits for low-income single mothers provide support and contribute to the development of their children, there are still signs of poverty among working people: malnourishment, poor health, and substance abuse.
Less appreciated is that many low-wage workers often must pass up meaningful work because it pays too little. And without a “good job,” these workers cannot have “the good life.” Such outcomes, particularly in advanced economies, are grim signs that something is wrong: the problem is not “inequality,” but a high degree of injustice.
Wide swaths of society are deeply frustrated with the downward trend in the rewards of work and enterprise. Since the 1970s, there has been a general decline in job satisfaction and a virtual cessation of real-wage growth in the United States, and later in the United Kingdom, France, and perhaps parts of Germany and some other countries. Moreover, real interest rates have sunk nearly to the vanishing point. Underlying this is a decline in innovation. Clearly, some fault in the mechanism of human satisfaction has not been adequately addressed.1
While Western societies work to ensure economic justice, it is essential that they restore and preserve a widespread experience of the good life. That means providing for meaningful work such as that in enterprise capitalism, in which participants allocate their accumulated wealth and developed abilities to establish various industries and invest in various projects. To do this, countries have raised and educated people who can exercise their creativity by conceiving new commercial methods and products – and also people who are wise and brave enough to take a chance on backing innovation.1
At the same time, a debate about economic justice is emerging. Voices in the Democratic Party, including presidential nominee Joe Biden, have raised expectations that, if elected, they will address the injustices decried at their recent convention. In contrast, Republicans – as far back as Ronald Reagan and, on occasion, Donald Trump – have argued that measures aimed at reducing inequality come at the price of economic growth.
They have in mind the large-scale US programs to raise incomes among the working poor over the past several decades, beginning with the “Great Society,” launched by Lyndon Johnson’s administration in the 1960s, and the Earned Income Tax Credit in the 1970s. Also, as recently noted, Democrats legislated “Medicare, food stamps, Head Start, and a host of other programs that helped whites and minorities alike.” Has all this slowed growth?
It does appear that productivity growth – more precisely, total factor productivity, and ultimately labor productivity – slowed just after this legislation was enacted, and, apart from the peak years of the Internet revolution, remained subdued. Yet, as the old saying goes, “correlation is not causation.”
My contrary thesis, which has been argued at length and now tested extensively, is that the great productivity slowdown was really caused by a major loss of people still keen on devising new commercial products and methods, and not by the Great Society. Certainly, it is implausible that those helped by the Great Society are to blame. In any case, there do not appear to be any econometric studies showing that countries that aid the disadvantaged more have less growth.
There is also a worry on another score: call it the “fiscal capacity charge.” Some economists and businesspeople fear that boosting already high tax rates in the hope of raising the money needed for substantial poverty reduction would fail to collect much more revenue. Revenue might even be lost as taxpayers cut back their supply of labor and companies lose interest in increasing their efficiency. Yet there is not a shred of academic evidence showing that Western economies – and certainly not the low-tax US economy – have reached the limits of their fiscal capacity.
The US (and other Western governments to varying degrees) therefore has enough room to attack economic injustice. To bring low-paid workers’ wages to an acceptable level, the state will want to institute a schedule of subsidies to pull up most strongly the wage rates of those at the bottom. The schedule would then set progressively lower subsidies for each ascending wage bracket.1Sign up for our weekly newsletter, PS on Sunday
Much of the attention now paid to economic injustice derives from A Theory of Justice,philosopher John Rawls’s landmark work of nearly 50 years ago. Remarkably, Rawls argued that justice requires pulling up the pay of the lowest paid to the maximum – which would entail taxing to capacity. (I soon thereafter built a model of Rawlsian taxation in a 1973 paper.) Of course, a theory abstracts from much, and Rawls focused on poverty from all sources. My hope today is to work for an economy that is both inclusive and just.1
While it is important to know the way out of poverty, it is equally important to know the way not to go. We must oppose a universal basic income – a lamentable use of public revenue that would be better directed toward increasing low-wage workers’ income to a level enabling them to support themselves, which is essential for self-esteem. But a UBI would also draw (or keep) people and their children away from work, which is for many the only available avenue to personal fulfillment and to satisfying involvement in the world.
Edmund S. Phelps: The 2006 Nobel laureate in economics and Director of the Center on Capitalism and Society at Columbia University, is author of Mass Flourishing and co-author of Dynamism.