I'll Have a Big Mac, Supersize the Subsidies

The U.S. safety net should help people who are willing to work.

Recently, I've been seeing a lot about fast-food workers and public assistance, after a studyfrom the University of California at Berkeley Labor Center came out arguing that these workers get billions in public benefits. Several of my readers have hinted that I, as a welfare-hating libertarian type, should be outraged at all this free-riding.

I don't think this argument works for a bunch of reasons. We're about to see a lot more fast-food workers on public benefits, because of the Affordable Care Act. (Assuming it doesn't implode, of course.) Do companies really have a moral obligation to raise wages every time the public passes a new entitlement? That doesn't seem as if it can possibly be right. Does Obamacare give you a moral obligation to pay your lawn guy more? Do you think it might be hard to pass new public programs if it did?

If the public decides to give people a new benefit, then the public should be responsible for paying it. That is how it should be -- a system where one party gets to order the dinner, but send the bill to someone else who's not even at the table, is a bad system. But it's also what's best for the poor. Jason Furman , now President Barack Obama 's top economic adviser, explained this very lucidly, seven years ago:

Does anyone really think that food stamps, Medicaid, and housing vouchers allow Wal-Mart to line its pockets by paying its workers less? Why don't you tell me which of the following two thought experiments make the most sense to you:

· Wal-Mart is a nice, caring company. It wants its workers to have enough money to afford food, rent, and medical care, so it pays them $20,000 annually. Now along comes the government to give the workers $5,000 in food stamps, housing vouchers, and Medicaid, so now Wal-Mart only needs to chip in $15,000 to ensure its workers can live half decently.
· Wal-Mart is an amoral company that wants to pay its workers as little as it possibly can while still attracting, retaining, and motivating enough workers to operate the business and make a profit. If the government makes food stamps and housing vouchers available, workers will take more time to find a high-paying job and greater leverage to press for higher wages. Wal-Mart will need to pay higher wages to attract the smaller pool of applicants and motivate them more now that the threat of firing someone carries somewhat less weight. (Economics aficionados should note that the EITC, which is only available to people who work, is a somewhat different story.)

So, hopefully you agree with me that Wal-Mart's workers are getting the direct benefits of these public programs and indirectly are probably getting higher wages as well.
But there's more good news for you: Most of the tab is being picked up by the wealthy, since the top 1 percent of Americans pay 39 percent of federal income taxes.
Let's compare this to imposing a living wage. For the sake of argument, ignore efficiency and the impact on employment (not a bad assumption at Kennedy's proposed $7.25 an hour, but to benefit any Wal-Mart workers you would need to support $10 or $15 an hour, at which point it would be a terrible assumption).

Where do you think this living wage would come from? It's too late to get the money from the Walton fortune, which in any event would only be enough to raise wages by $1 an hour (annualized). We could eliminate Lee Scott's salary and use the money to pay an extra 1 cent per hour to Wal-Mart's employees. You would have no way to legislate that Wal-Mart takes this money out of its profits, even if you thought these profits were sufficient. (And it's far from obvious that they are: Wal-Mart's profits per employee are lower than the economy-wide average. For example, Slate's owner, the Washington Post Company, makes $19,000 from each employee. Wal-Mart only makes $6,000 from each employee.)

You shouldn't have any problem believing that what you think is an immoral corporation will pass most of the costs on to its consumers. Now, you might say it's only a 2 percent increase in prices. Given Wal-Mart's $250 billion in annual sales, this works out to $5 billion of "your money" (and more if you add more companies to your list). And "your money" is a more apt term in this case because the top 1 percent of Americans is not picking up 39 percent of this tab.

Moreover, the living wage risks reducing employment, particularly among the least experienced and productive workers. The Earned Income Tax Credit and other similar benefits don't. Yes, I'm familiar with research showing that the disemployment effects are small, or even nothing. Other studies suggest they're larger. And even the studies that show no impact are very short-term -- they have to be, because in long-term studies, other factors can swamp the effect of wage changes. So they don't capture long-term decisions, like whether to open a new fast-food outlet, or to invest in equipment that lets you get by with fewer workers.

I'm a big fan of the EITC because it helps people who are willing to work, but whose work isn't quite productive enough to support them in the minimum style that we think decent for a modern-day American. More of our safety net should be structured toward that goal. The implication of this Berkeley study that's making waves is that we should have a system more like the old European safety nets: Set a very high wage, so that no one in work needs benefits -- then provide lots of benefits to all the people who can't get work at the higher wages. I think that's a fundamental mistake, and so do a lot of European governments, who have been trying to reform those systems with varying degrees of success.

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