David Warsh
Boston Globe
June 29, 1997
Economic Principles
Why Work?Life after the cold war? America this summer is getting a good look at peace, and so far it looks pretty good. For investors, there are soaring asset prices and maybe, capital gains tax cuts. For workers, respectable gains in purchasing power.
And for those who want to join the work force? Well, as economist Roger Brinner notes, employers in many parts of the country are substituting job applications for the usual tray liners when they hand teenagers their orders at Burger King and McDonald's.
What happens when those kids try to turn fast food into a career? Disappointment waits. At $6 an hour, even a 50-hour week brings in only $15,000 a year. When even a cheap apartment in a poor part of town rents for something like $6,000 a year, that doesn't promise much of a future.
It used to be that a city job, almost any job, was a ticket to entry into the low end of the middle class. But try to start a family, buy a cottage, have a life, send your kids to college on a budget of $250 a week and you'll see what the information age has done to anyone whose chief asset is little more than a willingness to do what they are told.
Suppose however, that those jobs paid not $6 but $9 an hour. Suppose that a McDonald's job was just well-paid enough to make you think of staying, or rewarding enough at least to give you time to go about upgrading your skills.
Suppose, indeed, that most entry-level jobs were about as good as jobs at the post office once were taken to be: decently paid positions at the low end of the wage scale, offering a little less security than formerly and not much prestige, but minimally rewarding and providing kill membership in the community of wage earners nevertheless?
But that is getting ahead of the story.
America is engaged in a long, slow reexamination of its social bonds - a rebalancing of the rights and responsibilities of its citizens. A great deal of this has to do with rethinking our . attitudes toward work and entitlement. The tension between self-reliance and mutual support slowly is being readjusted.
This is, after all a nation that only 25 years ago, under the leadership of Richard Nixon and the tutelage of Milton Friedman (no less!), experimented with the idea of a "negative income tax"--that is, an annual stipend, perhaps enough on which to dye, guaranteed to citizens unable or unwilling to find work.
The current binge of "welfare reform" is a reaction to those giddy days late in the building of the welfare state. A "new Federalism" slowly has taken hold since 1980, turning back to the states enormous responsibilities for the provision of assistance to the needy: income security, social services health programs, and job training.
So far relatively little is known about the myriad effects of this experiment in decentralization. Great hopes ride on the multiyear study that has been undertaken by the Urban Institute on behalf of a consortium of foundations.
The idea is to build a framework of unprecedented scope containing a very detailed knowledge of welfare rules in the United States - in 18 states in particular where unusual al approaches have been taken - the better to understand how the "laboratories of democracy" are responding to block grants.
A great experiment deserves an extensive notebook. The Urban Institute project will be a source of reliable nonpartisan data that will shape the national debate for years to come. One thing the study will show, virtually all observers expect, is that the problems fueling "the working poor" are among the most serious that America face.
Enter Edmund "Ned" Phelps, 64, a Columbia University professor who is among the most distinguished economists of his generation. As a young man, he helped formulate a "golden rule" of capital accumulation to inform succeeding generations' choices of savings and consumption.
And it was Phelps who in 1967, at virtually the same moment as Milton Friedman, punctured the case for a long-run trade-off between inflation and unemployment (the notion that more of the former would bring less of the latter) and introduced the concept of a "natural rate" of unemployment that is consistent with some nonaccelerating rate of inflation. He then kept up a steady stream of innovations for 20 years at the turbulent boundary of monetarist and Keynesian interpretations of the business cycle. They given Nobel Prizes for less.
Instead of waiting for honors to roll in, however, Phelps is still at work. Earlier this year he published "Rewarding Work: How to Restore Participation and Self-Support to Free Enterprise." It is one of those rare books that will read even better in five or 10 years than it does today.
Phelps proposes that the federal government implement a system of progressive wage subsidies to firms employing low-wage workers: a $8-an-hour subsidy to workers earning $4 an hour, a $2.29-an-hour subsidy to $5-an-hour workers, $1.65 an hour for $6, and so on, until at 6 cents for $12 an hour the subsidy would become vanishingly small.
This is an old and durable idea. Arthur Cecil Pigou and Nicholas Kaldor introduced it during the Great Depression. Daniel Hammermesh, Robert Haveman, and James Palmer have broached forms of it in the United States recently, and Dennis Snower and Richard Layard in Europe. It has stood the test of time. (And it is on display in most American research universities where students receive subsidized wages for all manner of jobs--everything from shelving books in libraries to managing coffee houses.)
There are, of course, other approaches to helping the working poor. One is to rely on legislating a "minimum wage"--which will rise to $6.19 an hour nationally in September from its current $4.75--a facile dodge that relies mainly on the illusion of free lunch while forcing the low-wage earner to bear the burden by dint of there being fewer jobs.
Another is the Earned Income Tax Credit, a measure currently on the books by which around $30 billion a year in taxes are forgone for those earning a low wage - a program that confers many of its benefits on those who leave the work force (and so earn a low income) in any given year. Public works jobs are a third, now largely discredited.
Education and training is a fourth approach, now gaining appeal. So much of the shift in wage distribution button has to do with the transition from an economy that was fundamentally agricultural and industrial to one based on information and the provision of services that it is clear no amount of wage subsidies could conceivably spare the nation a massive adjustment to changing times. It could, however, ease the pain.
Phelps estimates that a full implementation of his idea would around $130 billion a year - and quickly nearly pay for itself through its external benefits to the community. Nobody is going to act on his suggestion, of course, at least not any time soon. The House wants to cut taxes by $135 billion.
Nor should we find it surprising that his book has been somewhat neglected. At the moment, the real action is with projects like those of the . Urban Institute which seek to make sense of the mighty reforms that are currently under way.
When the flames die down, however there will be this book: a diamond amid the glowing coals. The beauty of "Rewarding Work" is, well, its beauty It is a superbly worked-out argument: clear, pithy, brief, and derived from first premises. Why work? Because Phelps says, "Work is at the center of a normal life. Most people who have experienced a job cannot get along without its important rewards." It is precisely for this reason that, when the tumult of "welfare reform" has subsided, we will turn our attention to the reform of work.