And why this period of American history offers important lessons for today.
Already this year, five states have raised their minimum wage. In a speech last week, President Obama vowed to make reducing income inequality a primary focus of his final years in office. He called on Congress to raise the federal minimum wage. Senate Democrats are promoting a measure that would hike it to just above $10 an hour. The U.S. Chamber of Commerce and many Republicans are opposed to any increase in the wage floor. They argue it would be bad for business, impede job creation and do little to help the poorest Americans. We talk about the arguments on both sides of the issue.
- Norman Ornstein Resident scholar, American Enterprise Institute; co-author of "It's Even Worse Than It Looks."
- Annie Lowrey Economic policy reporter, The New York Times.
- Douglas Holtz-Eakin President of the American Action Forum, chief economist and director of the Congressional Budget Office from 2003 to 2006.
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The president says growing income inequality and decreased economic mobility poses a fundamental threat to American prosperity. He and Democratic lawmakers are pushing for an increase in the federal minimum wage, but many business owners and Republicans think it's the wrong approach.
MS. DIANE REHMJoining me to talk about efforts to raise wages for the lowest paid Americans: Norm Ornstein of the American Enterprise Institute, Annie Lowrey of The New York Times, and Douglas Holtz-Eakin of the American Action Forum. Do join us. You are always part of the conversation, so I'd like to hear your thoughts. Give us a call, 800-433-8850. Email us at firstname.lastname@example.org. Follow us on Facebook or send us a tweet. And welcome to all of you.
MR. DOUGLAS HOLTZ-EAKINHi, Diane.
MS. ANNIE LOWREYHi. Thanks for having me.
MR. NORMAN ORNSTEINThanks for being on.
REHMGood to see you all. Annie Lowrey, I know you've written a lot about income inequality. Give us a picture of what's out there.
LOWREYSo, if you are somebody with a college degree or you're, say, in the upper 30 or 20 percent of the income distribution, the economy's actually working pretty well from you. You've seen a pretty good bounce back from the recession. But if you are in that bottom 80 percent or you don't have a college degree, the economy is still really rough for you. You might have seen your income actually decline in real terms throughout the recovery.
LOWREYYou have very high unemployment rates. And, because those unemployment rates are so high, businesses don't feel like they need to pay their workers more to keep them or to attract workers. And so that's why you feel -- even though the economy is getting better, a lot of people feel a lot of pain. The economy doesn't feel better to them.
REHMThere's been a lot of talk about that upper 1 percent. What does that 1 percent look like in comparison to the rest?
LOWREYSo that upper 1 percent, very often they're making a lot of money not from a salary but from investments. And because corporate profits have been so strong, you've seen this great boom in the stock market, also in part because of the Fed's easy money policies. They're doing great. I don't think that they're actually quite at their pre-recession peak, but they're very close to it. And they've just seen really great gains because of stock prices, because of housing, because of their access to credit in many cases, so the economy's actually -- it's great for them in many cases.
REHMAnd to what extent does research tell us that minimum wage actually affects income inequality?
LOWREYSo it has an effect, absolutely, in the sense that if you're taking these people and you're going to force corporations to transfer a lot more money to them, it's going to have a serious effect. I think that the White House has estimated that about 20 percent of the run-up in income inequality that you've seen is due to the stagnating minimum wage or that you could erase it by bringing it back up. But, that said, I don't think that people think of it as being a major cause of income inequality. This is kind of a blunt instrument that you could use to dampen the effects.
REHMSo to you, Norm Ornstein, President Obama wants to raise the minimum wage because he wants to deal with the issue of income inequality. How much would it help to raise the minimum wage?
ORNSTEINOh, it would definitely make a difference in terms of income inequality, but I think there's another even more important reason for it, Diane. And that is, I believe there's a -- and I think the president does, too, and he mentioned this in his speech. There's really a social contract that, if you do what we expect people to do in this society -- you get out there and work, and you work a full-time job -- what you get in return is the ability to support a family at least at a minimum decent level.
ORNSTEINYou'll be able to find a place to live. You can put food on the table, clothes on their backs, and some of the other necessities of life. At the moment, with a minimum wage of $7.25 an hour, which is worth significantly less in real terms than it was when the minimum wage was $1.60 an hour back when I was first working in a job, if you're making -- if you work 40 hours a week, 52 weeks of the year, you gross $15,080.
ORNSTEINYou net under $14,000 after you take out the payroll taxes. Tell me how a family of four can manage that. Now, we have a web of other subsidies that government pays for, but even with that, it's an enormous struggle. And if a second person in the family works, because of the way our government programs work, in effect, you pay a 95 percent tax rate on what that second person is making. So we've created disincentives for work and a horrible situation for people who simply cannot live on what we pay them.
REHMAnd, Douglas Holtz-Eakin, you think raising the minimum wage is the wrong way to go. Why?
HOLTZ-EAKINThese concerns over inequality are real and legitimate, and the facts are what Annie described. The pain being felt by the middle class in a recovery that has seen the median family income decline, not rise, that has seen real wages not grow at anything like the rate they should, all of this is, I think, a legitimate force behind this desire to raise the minimum wage.
HOLTZ-EAKINThe sad reality is it doesn't solve the problem people are feeling. And 2 percent of workers actually get paid the minimum wage, so you're not going to affect many people. Three-tenths of a percent of workers are paid the minimum wage and are actually in poverty. If you want to find out solutions to poverty, you've got to look to getting people in work.
HOLTZ-EAKINThe dividing line between poverty and non-poverty in the United States is not working versus working. About 7 percent of people who work are in poverty. About 24 percent who don't work are in poverty, so we've got to get people into work. And there's nothing about the minimum wage that gets people into work.
HOLTZ-EAKINIt's a bar against work. And so I think it's a real problem, but this isn't the solution.
REHMNorm, what evidence is there that raising the minimum wage would help, as Doug says, help the poor and the middle class?
ORNSTEINWell, I think, first of all, it's going to affect more than the 2 percent. It's going to have an impact on wages elsewhere. There's a substantial body of evidence now that economists have done that would suggest that this doesn't dampen employment. It doesn't deter companies from hiring individuals. And, at the same time, you're putting a lot of money into the economy.
ORNSTEINOne way in which you can get some growth is if you put money out there that people can get, that we know they're going to spend. If you're making 15 and you move up to $18,000 a year, it's not like you're going to be socking it away somewhere. It's going to go right out into the economy and will provide some additional help as well.
REHMWhat about that, Doug?
HOLTZ-EAKINWell, on both of those points, there's no particular evidence that you raise the minimum wage and you see mass layoffs. I mean, that specter is misplaced. There is evidence that it deters the hiring, especially among low-skilled and young workers. And half of the people that make the minimum wage are between 16 and 24 years of age, and this is the group that has been out of work the longest, harmed the most by the recession. And I think it's unwise, especially at this time, to make it harder at all for them to get into work.
HOLTZ-EAKINI mean, we're really facing long-term damage to their careers, given what's gone on. So that's sort of point number one. Point number two, you know, you always have to ask the question, where does the money come from? It's nice to have more money in your pocket, but where does it come from? Take the fast food demonstrations and the things we've seen in that area recently.
HOLTZ-EAKINLet's suppose we do a $15 wage in McDonald's. Who goes to McDonald's? Well, not a bunch of millionaires, I promise you. So we're going to raise prices at McDonald's and take the money from poor people and put it in the pockets of other poor people. Now, which part about that is antipoverty or stimulus?
REHMThe point you made about half the low-income workers, 16 to 24, the other 50 percent, I gather, are adults.
REHMAnd are the primary wage earners in their families.
HOLTZ-EAKINWe know they're older, but they're not always the primary wage earners. Most of them are in two-earner households. Let's face it. I mean, Norm's right. This is not a full-time wage that supports families of four. We know that. It was never actually designed to be that. But if you want to make it that, then you're going to have to deal with the other costs of raising the minimum wage.
REHMSo what are the Republican alternatives to raising the minimum wage?
HOLTZ-EAKINWell, there have been precious few, to be honest. We haven't seen much in the way of legislation. I think the most promising policy that's out there is one that Republicans have supported traditionally, and that's the earned income tax credit. The earned income tax credit supplements wages. It has a very strong research record of moving people from not working to working, which is the key to fighting poverty.
HOLTZ-EAKINAnd it could be stronger. It's got some holes in it. In particular, if you're a single male who is not a custodial parent so you don't have kids around, the earned income tax credit's a very, very modest thing right now. And we could beef that up in the course of tax reform, which people are talking right now, and do a lot of good.
REHMWhat about that, Norm?
ORNSTEINYou know, the earned income tax credit was originally a Republican idea for just the reasons that we're talking about. One of the things that's disturbed me over the last number of years is the number of conservatives who've turned against it. And they've turned against it, in effect, by saying, people who are getting the earned income tax credit and therefore do not pay federal income tax are takers. They're leaches on society.
ORNSTEINAnd I think you've got to start to move back from a kind of rhetoric that is foolish and destructive and begin to think of a panoply of policies that can work. Now, I -- you know, I think if we start a discussion that, for example, talks about a lower minimum wage for entry people, younger people, while having that higher wage for those who are actually supporting families -- and there are ways of doing that.
ORNSTEINIf we think about apprenticeship programs as the Germans have done and other ways in which you can begin to get people into the job market and actually get them skills and they get paid along the way, there are ways of dealing with what is, I think, a terrible problem in this society of people who are starting their careers who can't get on that first rung of the ladder.
ORNSTEINAnd we know we have a lot of evidence that that's disastrous for them. Raising the earned income tax credit and maybe even adding in food stamps and other things, those are good ways to go. They're not as good as giving people the money directly, in part because what we're doing is subsidizing companies. It's, in effect, welfare for companies.
LOWREYYeah. I think that one of the reasons that you've seen the White House come and start really putting their shoulder behind this idea along with Congressional Democrats is that they feel like they're never going to get another dollar out of Congress. And the minimum wage is not something that's going to cost the government money, but they believe that it will help this subset of people that are really, really struggling. So, you know, talking about bolstering the tax credits, you know, it gets expensive. I think that's the issue.
REHMAnnie Lowrey, economic policy reporter for the New York Times. Short break, right back.
REHMAnd welcome back. We're talking about both income inequality and the president's push toward raising the federal minimum wage. Five states have done so just this year. More may follow suit. Here in the studio, Douglas Holtz-Eakin. He's president of the American Action Forum, chief economist and director of the Congressional Budget Office from 2003 to 2006.
REHMAnnie Lowrey is a reporter for the New York Times. Norman Ornstein is at the American Enterprise Institute, co-author of "It's Even Worse than It Looks." We are going to open the phones shortly. I do want to hear what you have to say about this subject. Annie Lowrey, have wages kept up with inflation?
LOWREYNo, in many cases. It's going to be a complicated picture, but if you look at median income, it's declined in real terms throughout the recovery. And wages, especially this year, they've kind of been growing a little bit, but the issue is that they haven't kept pace with inflation in many cases. Just as a general point, if you are a wage earner, again, who's a little bit less educated or is making less money, this economy has absolutely been punishing to you, even if you've been employed. You just haven't seen a lot of wage growth in the past decade, frankly.
REHMAnd, Doug, you wrote recently that a better way would be to improve the economy and job market and empower workers with the skills they need for better jobs. But how would you propose doing that?
HOLTZ-EAKINWell, I'd echo some things that both Norm and Annie have mentioned. I mean, first, I think it's incredibly important to recognize that this is a terrible recovery. People talk a lot about the jobs, but most Americans have jobs. I mean, we can measure comprehensive underemployment at something like 14, 13 percent right now. That means the rest are in a job, and they haven't seen their raises rise. They haven't seen their standard of living rise. And that's why I think there's a lot of frustration on the ground.
HOLTZ-EAKIN(unintelligible) ones have better economic recovery, a better set of growth policies. That's a long debate, and the Congressional gridlock isn't helping, but that really would be beneficial. That would improve the labor market for everyone. Inside that there are these two crucial dividing lines, the line between poverty (word?) poverty is working. And the second line between success and not getting ahead is education.
HOLTZ-EAKINAnd we have, I think for a decade now, pretty much identified that our K to 12 education system's failing, but we've not done anything about it really. And that remains a great challenge. Inside of that is, I think, one of the great missteps of the American education system, which was the basically deemphasizing and, in some cases, demonizing of vocational training and the acquisition of trade skills. And that's we need to get back to.
REHMBut isn't that a long-term process and would people...
HOLTZ-EAKINAbsolutely. I mean, none of this happens quickly.
HOLTZ-EAKINI agree with that. And so the frustration you hear -- you know, that you see is real. The solutions I just talked about are decadal in length. Some people want to raise the minimum wage. I mean, I understand the sentiment. I'd just like them to run the traps on the problems they're going to cause in the process.
REHMAnd the last time the minimum wage was raised was 2005, eight years ago. Aren't we due, Norm?
ORNSTEINYeah, and we've certainly -- we've done this periodically. But, again, it's important to emphasize, Diane, that, as we've done it, we still haven't kept pace with the cost of living. The minimum wage today is significantly less in terms of purchasing power than it was 60 years ago or 10 years ago. And so people are falling further behind.
ORNSTEINNow it is the case, as you mentioned, in a number of states and localities, they're actually stepping up and increasing minimum wage. Nineteen states have minimum wages that are higher than the federal minimum wage. And we've seen other instances in SeaTac, which is a town that supports the Seattle Sea-Tac, Seattle-Tacoma Airport. They actually did a referendum and raised the minimum wage to $15 an hour over the bitter objections of (unintelligible).
REHMSo how have those states that have raised the minimum wage fared? Has hiring fallen off? Have people -- more people been out of work? What?
LOWREYSo there's a lot of dispute about this among economists. But it seems that the evidence is that modest increases in the minimum wage don't reduce employment, especially if the folks that -- you know, whose minimum wage is getting raised. They're in jobs like factory workers or -- sorry, many, you know, sort of boxing -- and it's all pretty low-quality stuff, or you're a fast food worker. And what it does is it seems that, instead, it reduced employee turnover. And so it ends up not...
REHMSo how do you define modest?
LOWREYSo I think that that's -- that's one of the questions, right? And, again, I think that there's certainly evidence that really big increases in minimum wage would have probably a pretty bad employment effect. And, you know, it's going to depend a lot on what companies are dealing with and how much you're raising the wage, I think.
HOLTZ-EAKINSo here's the geeky truth. The geeky truth is that our economy is actually remarkably flexible over the long term. And it gets back to full employment. People get back to having jobs. The question is, what will be the character of those jobs, and how fast does it get there? So we raise the minimum wage in fast foods. Those fast food franchises will automate. No longer will you talk to a clerk. You will punch in your order. We'll make the burgers in a far less personalized fashion. We'll loosen jobs in the fast food industry. I have no question about that.
REHMAgain, it's long term.
HOLTZ-EAKINAnd they'll get jobs somewhere else.
HOLTZ-EAKINMy concern is that right now we're in a very precarious situation. We're not recovering quickly enough. We need to take care of particular sectors of the economy. And people -- teens have an unemployment rate that's above 20 percent. We know this affects teens. And right now is a terrible time to make it worse for them...
REHMBad timing, Norm?
ORNSTEINWell, I think we have to take into account what we can do to provide incentives for younger people to get on that ladder. And there are other ways of doing that. But I think it's also important -- you know, let's talk about "It's Even Worse than It Looks," which is a Congress that is so dysfunctional that at this point for people who are at the lower end of the wage spectrum who are struggling, who need rent subsidies, Medicaid, food stamps, you have a Congress taking a meat axe to the food stamp program.
ORNSTEINYou have a Congress and a bunch of states which are starting to cut back on Medicaid, including for people who are struggling who work. So the other elements of a safety net that we have stepped in to provide, probably not the best way to do it. There are better ways in giving people the money directly. And in some instances, the way it works, there are disincentives to work if you get some of those.
ORNSTEINBut taking them away at a time of a difficult economy -- here in the District, we opened two Walmarts. Twenty-five-thousand people showed up for 200 jobs. The idea that people want to sit back and just get benefits and not work is simply false. Americans want to work. It's part of their identity. And it's the obligation of government, I think, to do what it can working with private industry to make this process work. And, at every level, we're not.
LOWREYYeah, I think that the other big part of what Norm is talking about is that the emergency unemployment insurance benefits are going to expire very suddenly in the last week of December. And it's going to be about 2 million -- I think it's 1.5 million families that'll be immediately affected. And over the course of the year, it's about, I think, 6 million people that would've received those. Again, it's this issue. It's expensive to extend them, and there's some evidence that it lengthens the amount of time that people are out of work.
LOWREYBut if you're a long-term unemployed person, very often, there's nothing for you except for maybe food stamps. And I think that -- there's 4 million people who've been out of work for more than six months. I think that that's going to be a real problem. And again I think -- and the constrained budget environment, it's just really, really hard to tackle these issues.
REHMSo, Doug, why do you think that these states on their own, these state legislators went ahead and raised the minimum wage?
HOLTZ-EAKINOh, I don't think it's hard to understand, for all the reasons that have been articulated. The fact that the safety net elsewhere might not be strong enough, that there is real economic pain out there. It's not an illusion. It's not a political movement, but I think that it's great for states and localities to run this experiment. I'm deeply concerned about the cost of this, that they will be, number one, not as effective I think.
HOLTZ-EAKINAnd, number two, think of the discontent on the ground when you say, yeah, there's a big inequality and poverty problem. We're going to solve it. We're going to raise the minimum wage. You roll the clock forward four years. You haven't really done anything. Why are they going to believe our politicians? It feeds the cynicism. So there are states that have the right to do that. We'll watch how it turns out. I'm skeptical.
ORNSTEINYou know, one of the -- Doug has talked about the sluggish recovery. And he's absolutely right. But one reason for it is that we've had a fiscal drag because of the policies that we've pursued here in Washington. We cut too much too soon. We're just starting to get over that. We're starting to see some of the recovery, but Congress could make it work.
ORNSTEINAnd if you look at something like unemployment insurance, we know that it actually provides a stimulus to the economy because you're putting money out there that people are spending. So cutting back now is not going to help the economy grow and do some of the things in a natural way that Doug would want. It's stupid policymaking.
REHMAnd isn't that one of the budget make or break?
ORNSTEINWell, you know, it was interesting to see that Dick Durbin, the Senate Democratic whip, said yesterday that it might not be a make-or-break issue as they try and just break the gridlock and keep the sequester's really dumb policies from going forward as they have been. Nancy Pelosi has set it as a bottom line. And we don't know what the real bottom line is.
ORNSTEINBut what we do know is that if you give as a Christmas present to the people that Annie was talking about, a cut-off in their money so they're not going to be able to heat their apartments or get through the holiday period in the winter, that's not a very good signal to send.
REHMAll right. Here's our first email from Bob in Rochester, N.Y. "Can someone describe the rationale in a capitalist economy for having taxpayers subsidize businesses who pay such low wages that their employees have to depend on government programs to get along? Wasn't there something to the effect that McDonald's was urging its employees to go ahead and get food stamps?"
LOWREYYeah, it was a call that a longtime McDonald's worker had made to their employee help line. And they told her, I believe, where a food bank was and to get heating assistance. And so that caused this big fuehrer. But it's true that the government does a lot of things to raise people above the poverty line and to supplement wages at the lower end, so, again, the earned income tax credit has enormous support in Washington.
LOWREYIt has this proven track record of especially keeping women in the workforce or bringing them back into the workforce. It was in part what it was initially designed to do. And so I don't think that that's actually controversial among either Democrats or Republicans. But that's at, I think, the scope of benefits and who you're helping and how effective the help that you're giving is, is a source of great concern and great debate.
HOLTZ-EAKINI think it's -- you have to be very careful asking who's subsidizing who. So you hear this claim made a lot of times that, if we just raise the minimum wage, then we take people off food stamps, and wouldn't that be great? But again, if you go back to the example of these fast food chains, which have very thin profit margins and when -- if you go to the $15 minimum wage, they're going to raise prices by about 20 percent.
HOLTZ-EAKINAnd by and large, we will then switch from a system where the relatively affluent who pay taxes in the United States are subsidizing the food stamps to the poor, to a situation where the poor are subsidizing the minimum wages of the poor. That doesn't strike me as sensible.
REHMDouglas Holtz-Eakin, and you're listening to "The Diane Rehm Show." Here's an email from Josh in Cincinnati, Ohio. He says, "Congress' reluctance to help the minimum wage keep pace with inflation is simply one more piece of evidence that their corruption by wealthy campaign contributors. The more president Obama can get Congress to do to combat wealth inequality in this and other areas, the better. But I'm not hopeful that there will be much real progress." What does Congress think about minimum wage, Annie?
LOWREYSo to the readers comment, this is very popular among Americans, very, very popular.
REHMRaising the minimum wage.
LOWREYIt's very -- raising the minimum wage.
HOLTZ-EAKINIncluding among Republicans.
LOWREYIncluding among Republicans, it is very unpopular among many businesses, though not all. And so I think that if you are a legislator in congress, those are the two messages that you're hearing at the same time. And I think it's unclear whether that public pressure is going to be enough to cause Congress to act on this, especially given that they have a very -- you know, that they're very hamstrung right now and that they can't agree on much.
REHMAll right. I'm going to open the phones now, 800-433-8850, first to Evansville, Ind. Hi there, Jake, you're on the air.
JAKEThank you, Diane. My question concerns the impact on the economy by raising the minimum wage, specifically that it -- that, I believe, it contributes to inflation as significantly as printing money does and that it affects -- and as far as a cycle that allows inflation to increase at a steady rate, the cycle is that -- that money (unintelligible) inflation goes up and the cost of living goes up, so minimum wage has to go up and so on and so forth. Do you think this is a good argument that (unintelligible) ?
REHMAll right. All right. Thanks for your call, Jake. What do you think, Doug?
HOLTZ-EAKINI think that, qualitatively, that's a nice story, but the facts on the ground aren't going to give me much concern. As I said, only 2 percent of workers get paid the minimum wage. There's zero evidence of inflationary pressures in the economy right now. So I don't think inflation is going to be a big result of raising the minimum wage.
REHMAll right. To Chris in Raleigh, N.C. Your turn.
CHRISWell, thank you so much for having me, Diane. I appreciate you all talking about this.
CHRISMy point actually got nipped in the bud a little bit about how they -- companies don't actually incur the cost. They pass it on to the consumer. And your guests seem to think that that would have the poor subsidizing their own wage increases. And while that is true, when you're talking about a 15 or 16 living wage, it's not as much of an issue.
CHRISAnd when we're talking about 20 percent increase on dollar menu items, that's -- you know, everybody pays into that, not just the poor. So I don't think that was a -- excuse me, I'm sorry -- a genuine issue. I think if people actually could afford food, water, shelter and then some, it'd be easier for them, you know. That's -- thank you.
REHMIndeed. Thanks for calling. Norm.
ORNSTEINYou know, I do think you'll see some -- you would see some increase in prices. I don't think it would be 20 percent, I mean, unless you did as some have proposed, move it up to $15 an hour for fast food workers. We're going to see some interesting exercise in this. You know, the earlier email about how we're all subsidizing businesses, in California, Ron Unz, conservative entrepreneur who has championed a number of referendums, is now out there doing one that goes against the conventional wisdom and grain and...
REHMSpell his last name. It's U-N-Z.
ORNSTEINAnd spent several years as publisher of the American Conservative. And for just this reason, he said, you know, let's try and wean off of the government subsidies. He wants to raise the California minimum wage through a referendum to $12 an hour. Now, if you do that -- and I suspect it's popular enough that this referendum -- he will finance getting it on the ballot and all that -- will go through.
ORNSTEINThat's not like a small state raising the minimum wage where McDonald's isn't going to change its overall amounts. If California does, we'll have a real empirical exercise about how much this affects prices. My guess is not much.
REHMAnd after a short break, I want to hear Doug's response to that thought put forward by Ron Unz of California. Short break here and right back.
REHMAnd welcome back. We'll go right back to the phones to Eva in Roanoke, Va. Hello, there.
EVAHello. Thanks for taking my call.
EVAI listen most every day.
EVASo this -- thank you. I've been listing to the -- about as far as -- I'm glad you're talking -- I'm just talking about the minimum wage, $15. I think it's probably not the most important thing that really is going on is that the low wages that most people have are from $8 to $15. I work for a large restaurant chain, and we make $2.13 an hour.
EVAAnd everybody must think we just make beaucoup money on tips, but we don't. I mean, people are all -- if they're going out to eat, they kind of hold back on that, which I'm not real crazy about pitting the American public against our clients because we have to live on tips. They shouldn't have to pay us. The corporation that makes billions of dollars should have to pay their employees.
EVAAnd not just that. For the last five years they've been cutting our hours back to where -- it has nothing to do with Obamacare. They just they cut us back to where we can't even get insurance unless you have 30 hours. So most of us are struggling just to get 30 hours, if 17 hours, and that's pretty average. But that's pretty much my thought of it is to make it all fair.
REHMOK. Eva, can I ask you a question? With tips, what do you think you make an hour?
EVAI'm lucky to have minimum wage because of business down and the -- you know, I could -- there are times when it's busy enough and you have a chill night, it's luck of the draw. It really is because you can have people that are generous to you. And I think I do pretty well for -- because of my care of myself with my guests -- my, you know. I just can't really average it out. There's no way. You can't depend on it.
EVAYou have nothing to depend on.
REHMAll right, Eva. Thanks so much for your call this morning.
REHMAny comments, Annie?
LOWREYYeah, well, I think that that is a really visceral example is a problem that a lot of workers are having. And so, even if were to average it out and it were to be, you know, $6 or $7 an hour, it's just not enough to live on. It's a really, really tough economy for folks who are making money in that way. I know that some Democrats and also Republicans actually proposed some technical fixes to the minimum wage to help folks.
LOWREYI think that restaurant workers who rely on tips are also a lot more vulnerable to things like tip theft. And even some restaurants have moved toward eliminating tips and just having restaurant workers paid a salary for that reason. But, by and large, it's completely legal for them to be paid a lot less than the minimum wage, even if there are wage standards around it.
REHMWhy is that? Why were restaurants put in that very different category of being able to pay $2 or $3 an hour?
ORNSTEINYeah, well, the minimum wage, as Eva suggested, for restaurant workers making tips is $2.13 as opposed to $7.25, which is the other minimum wage. And there's a simple reason for it, which is the clout of the National Restaurant Association. So, you can thank Herman Cain in part for that. And at least the theory was that, you know, in an hour, you ought to be able to make enough in tips that it would take you significantly over the minimum wage.
ORNSTEINBut, as Eva said, in a tough economy, people who go into restaurants are much more careful with their money. And you can provide wonderful service, and it doesn't mean you're going to be able to make that. So you might end up making $4 or $5 an hour some weeks or months. And, if you're living paycheck to paycheck, that's really tough.
REHMRon -- I mean, Doug, I want to go back to Ron Unz' proposal of putting on a referendum in California. Where do you think that's going to go? What are the underlying concerns?
HOLTZ-EAKINWell, I think the concerns are simple. They are the concerns I've laid out before about the efficacy with which this will actually help the people we care about. I think it's a very weak instrument. It has very little to do with poverty. It can harm some particular targeted workers. I don't think it's particularly fair.
HOLTZ-EAKINOn occasion, it actually gets shifted onto exactly the people we're trying to help. So I'm not a fan. The politics of it, however, are very powerful. I mean, people are angry. They want this. It's very popular. If I were a political strategist, I'd put it on every state's ballot initiatives. And I'd defy anyone to oppose it. I mean, there's no question...
REHMHere's -- here's what he said. He said, "We have all these low-wage workers getting $7.50, $8 or $9 an hour. And because they earn such small wages, the government subsidizes them with billions or tens of billions of dollars of social welfare spending that comes from the taxpayer. It's a classic example of businesses privatizing the benefits of their workers, while socializing the costs."
HOLTZ-EAKINAnd, again, on the surface, that's such an appealing argument, and I'm sure it's very powerful. But my concern is, if you dig through it and you ask the question, you know, let's raise the minimum wage from $7-ish to $12 an hour, where does that money come from? It comes from one of three places. It comes from raising prices and thus comes from consumers, not all of whom are going to be affluent.
HOLTZ-EAKINIt comes from cutting back the compensation of some other employees, so we're going to shift it from one worker to another. Let's hope we get the right workers. Or it comes from shareholders. And those shareholders are sometimes very affluent people. They're the people Annie talked about at the outset.
REHMSure. So why shouldn't it...
HOLTZ-EAKINBut some of them are -- but some of them are pension funds for our firemen, our policemen. And so you now have something where you had a government policy that was targeted to have a progressive tax system, take money from people like me to give to people who really need it. And you replace it with a blunt instrument of unknown consequence. That seems to me unwise.
REHMDo we have any idea what McDonalds' profit is on a yearly basis? Annie.
LOWREYYeah, so I think I had looked, and last year the global profit -- it was in the billions of dollars. But when you look at revenue, it's a relatively small margin. It's not like owning an oil well or something. But it's a profitable company.
HOLTZ-EAKINTheir margins are tight. I mean, these differ by industry. But the fast food is a, you know, a 3 percent margin. They make their money on volume and not on big markups.
REHMWhere do Tea Party lawmakers stand on all this? Norm.
ORNSTEINWell, that's a good question. And we don't know. But what we do know is that their leaders, John Boehner, who was a, you know, bar owner, small businessman -- and I think it reflects most of what you see from his party -- are adamantly against an increase in the minimum wage. At the moment, it's not going anywhere. You know, one thing we might say, Diane, is Doug is right. It's going to come from one of three places. But the subsidies are coming from taxpayers as a whole. And Ron Unz has a point there. Now, I don't have a problem with some subsidies.
ORNSTEINMy colleague at AEI, James Pethokoukis, has suggested that we compromise. You raise the minimum wage to $8.50, and then give a tax subsidy for another $1.50 to raise it to $10. There are ways of doing this. But I think what we ought to do is try and get a grand bargain here, in an age where we don't see grand bargains. Let's find all kinds of ways to get young people into the workforce. The German's have a job-sharing plan, with some subsidies for companies, that works for everybody.
ORNSTEINWe've got the apprenticeship program, where you can bring people and teach them trades, pay them while you're doing it, and give them a foundation for moving forward. If we do those things, make sure we provide an adequate safety net, and raise the minimum wage, we could get a win-win situation here. The chances of that with this Congress are zero.
ORNSTEINBut let's get the conversation.
REHMLet's go to Scott who's in Miami, Fla. You're on the air, Scott.
SCOTTThank you so much for taking my call. I love your show. I've -- we've been raising the minimum wage for decades to keep up -- to keep up with inflation, if inadequately. And I think it's silly to suggest that we should stop doing that now. So my question for Doug is, does he think that the minimum wage should be permanently at $7.25 forever? Or if he doesn't think that it should be forever at $7.25, when in the future would be an appropriate time to raise the minimum wage?
REHMGood question. Thanks for calling.
HOLTZ-EAKINYeah, it's a fair point. I don't think there's any reason to freeze it at $7.25 forever and there's nothing magical about that number. And indexing it for inflation is not a big problem for me. I think that's a sensible policy. My concern is sharp increases now. And the political sentiment for sharp increases is real because the standards of living hasn't risen.
HOLTZ-EAKINBut I think the cost of that would outweigh the benefits would do. This isn't a policy that is targeted on poverty. You know, you just can't emphasize that enough. We have a poverty problem but this isn't the solution to it. And it has enough downsides for teenagers and for the folks who have low skills that I don't see why, in a bad economy, we would want to make things harder for them.
REHMHowever, there has been talk that the Fed is going to stop putting money into the banks because the Fed feels the economy is improving.
HOLTZ-EAKINThe Fed has felt the economy's going to improve every year for three years. And it consistently overestimated the recovery. I have little faith in their capacity to get this right. And, quite frankly, Norm is correct. If we're going to get real success and effective policies for better growth, they have to come out of the Congress and the White House. The Fed has done all it can do. It's just out of bullets.
REHMAll right. Several Facebook postings similar to this one from Jay, who says, "Republicans want to reduce social programs but don't want to increase minimum wage. In other words, they want to see more people in poverty. You can't have it both ways. Yet they think it's OK to allow tax breaks and deductions for the wealthiest and corporations in this country. Trickle-down economics only work for the top 1 percent." Annie.
LOWREYWell, I think that, if you look at something like the Ryan budget, yeah, there were cuts to social programs. I think that actually where you see a lot more interest on the Republican side is in cutting entitlements, right -- so Social Security, especially, but also health costs, Medicare, Medicaid. And so I think that there had been some hope that perhaps there was some way to trade cuts to those programs for a reduction in the sequester or other priorities.
LOWREYBut you look at what they're negotiating now with the Dec. 13 deadline. It's a very small package. It's not clear to me that even that is going to be successful. I think you just have to presume deadlock and continuing resolutions from this Congress.
ORNSTEINYou know, I think we could -- we might be able to find a different kind of social compact here as well. Paul Ryan and others talk about a culture of dependency. And there's some truth to it. There are disincentives for working. And some of those are baked into the tax system. I mentioned earlier, when you have a 95 percent marginal tax rate if you add a second worker.
ORNSTEINThat's just stupid. Let's try and get a focus on reducing that culture, provide incentives to work, although lots of people want to work. And, in return, to give people some basic safety net of services, so that they can pay for a place to live, food on the table, health care, and clothes, and maybe a little bit of money to go out to a restaurant every once in a while. Maybe you can find a better way of bringing people together.
REHMNorm, I know you have to leave us. Let's take one last call from Anthony in Columbus, Ohio. You're on the air.
ANTHONYHi. How are you this morning?
ANTHONYFor your guest, Doug, I have two points. He said earlier in the show that education is more of a solution to this problem than raising the minimum wage. I don't know if this is his position, but people on his side of this argument have, for 40 years now, slashed education budgets and done so very successfully for higher education, for K through 12 in districts and states throughout the country.
ANTHONYSo you end up in a place, and, again -- I'm not saying that this is necessarily his argument, but it is what has happened -- you end up in a situation where, on the one hand, you're saying, we can't give you any more money at work because that would be bad for a number of reasons. But at the same time, we think that education is the solution, but we're going to take all of the money out of funding public education at the same time.
REHMAll right, sir. Thanks for your call. And, Doug, do you want to respond...
HOLTZ-EAKINWell, I think the benefits...
REHM...after I remind people that you're listening to "The Diane Rehm Show."
REHMGo right ahead.
HOLTZ-EAKINYou're listening to "The Diane Rehm Show." And the core of this is real simple. There's a great piece of work done by Eric Hanushek out at Stanford that points out that if we could get U.S. educational attainment in our kindergarten to 12th grade education system, up to the level of not some foreign country like China, but Canada -- you know, something very much like us -- it would raise real wages for everybody by about 20 percent.
HOLTZ-EAKINThat's huge, a fifth larger. That's -- the minimum wage pales in comparison, the ITC pales. And that's about better performance in our education system. It's -- could be some money involved. I don't want to dispute that. But it's more than money, because we're spending twice what we did 20 years ago -- in real terms, adjusted for inflation -- with no better attainment of better performance. We need to perform better.
ORNSTEINThat's exactly right. I think the idea that we're not putting enough money into education, there's certainly areas where we need to put more money in. And we're seeing cutbacks in arts and civic education and areas that I think are really devastating and destructive to the society. But it's much more a rethinking of what we do with the education system.
ORNSTEINAnd I entirely endorse what Doug said about turning a focus more towards vocational education and trades. We've got to get people who can get out there with good jobs as plumbers and electricians and doing things where there's a demand and there always will be. We're not going to outsource those jobs. And we have not focused enough on those things.
REHMWell, we are, I think, beginning to see that move toward vocational education, which I do believe is going to help. Norm, I know you have to leave us. Thanks for being here this morning.
ORNSTEINThank you, Diane.
REHMNorman Ornstein, resident scholar at the American Enterprise Institute. And here is one last email from Dallas, who says, "I'm a lifelong Democrat, concerned for the welfare of the poor. As a school psychologist for 15 years, I've personally worked with many hard-working families plagued by poverty. I now own a small business in San Antonio. I employ three part-time students. I pay them $7.25 to $8.00. And, after 2 1/2 years, I don't draw a paycheck for myself yet. If minimum wage is raised, I will be forced to significantly cut their hours." And that's certainly an argument you hear.
LOWREYYeah, absolutely. And I don't think that anybody would dispute that some businesses would not be able to tolerate a minimum-wage increase. But you tend to think about these things in big, aggregate terms. And I think that the argument coming from the White House is that, you know, for the whole country -- for everybody who would see a wage increase because of this -- they think that it's a good idea. Whereas many folks, like, I think, Doug, has really articulated the arguments on the other side. But it's absolutely true. Some businesses would really suffer because of this.
REHMSo, what do you think is going to happen?
LOWREYI think it's going to be interesting. I think that this is so popular that, if you saw Democrats really pushing for it, you could end up seeing some Republican defections. And they might bring it forward. Republicans have voted for minimum-wage increases before. And I think that it's going to be a lot more palatable to some of them than other budget deals.
HOLTZ-EAKINI think the politics of this are very powerful. I mean, you know, from a Republican perspective, what they see the president doing is shifting the blame for poor performance from his policies to the business community. And they think, wow, that's a clever political move. Now, how do I stand in the way of this? They won't. If the vote comes up, they'll vote yes.
REHMThey'll vote yes.
REHMInteresting. Douglas Holtz-Eakin, president of the American Action Forum, Annie Lowrey, economic policy reporter for The New York Times, thank you so much for being here.
REHMAnd thanks for listening, all. I'm Diane Rehm.
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