Wednesday, March 05, 2014

EITC doesn't replace minimum wage

By Frank Moraes

Jonathan Chait has a good article about Obama's new budget plan, Obama To Republicans: You're Right, Let's Expand The Earned Income Tax Credit. After Obama started talking about raising the minimum wage, the whole Republican movement went around crying, "Raising the minimum wage is a bad idea; let's increase the Earned Income Tax Credit (EITC) instead!" Chait notes that this is just Obama's way of calling their bluff.

What Chait doesn't mention is that the whole Republican EITC offer is just their usual bait and switch. It reminds me very much of the whole individual mandate. When the Republicans were afraid of single payer healthcare reform or even HillaryCare, the Republicans were all for the "free market healthcare reform" that was Obamacare. But the moment that Obamacare became the Democratic plan, it was, "Socialism! Socialism I tell you!"

The same thing is going on with the EITC. As long as the Republicans are afraid that the Democrats might raise the minimum wage, then the EITC is a great talking point. It implies that they actually care about the poor, but just disagree about tactics. But the moment that the Democrats start talking about the EITC, the Republicans will turn against it. Many of them will go back to their usual "moochers" narrative that far from getting money from the government, low wage workers should be paying. Otherwise, they will support the welfare state. Blah blah blah.

But the more common response will be, "Yes, let's raise the EITC! How are we going to pay for it?" Because that's a requirement whenever a Democrat is in the White House. (A requirement that the Democrats have been very compliant about.) So now that Obama has agreed to the EITC discussion, the Republicans will have new demands about how it will be paid for. Obviously, there can't be any taxes. And it can't come out of any spending that the Republicans support. How about this: we cut food stamps to increase support for the EITC!

The point of all this, however, is not to actually increase funding for EITC. The point is to have a plausible position to avoid doing anything for the poor. So moving around some money so that how the poor are helped would be fine, although even that would likely get push back from many conservatives. Ultimately, what the Republicans want is to make the poor even more desperate. That is effectively what Paul Ryan is pushing in his poverty report,The War on Poverty: 50 Years Later.

Think for a moment about what raising the minimum wage does. As I write about all the time around here: raising the minimum wage (or the corporate income tax or whatever) does not cause prices to go up. That's not how markets work and its not what business owners do. So raising the minimum wage is effectively a tax on businesses that employ minimum wage workers. That's why Republicans hate it: it takes money from the wealthy and gives it to the poor; conservatives think the flow should go the other way. And it usually does!

The EITC, however, works the opposite of the minimum wage. By having a program that gives low wage workers cash, the government subsidizes low wage employers. According to economist Arindrajit Dube, 27% of the money given to workers via EITC goes indirectly to their employers in the form of lower wages. So you can see why Republicans have mixed feelings about it.On the bad side, three-quarters goes to poor people, but on the good side, one-quarter goes to those heroic job creators!

So note: moving money from food stamps to the EITC would be a net loss for low wage workers. And, in fact, any pay-for that would be acceptable to the Republicans would be a net loss for low wage workers. So Democrats would be crazy to cut a deal. But I'm sure they won't. Jonathan Chait is right, "Obama's embrace of Republican proposals to expand the EITC will likely wind up serving the sole function of calling their bluff."

(Cross-posted at Frankly Curious.)

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