It's All Politics
1:06 pm
Sun December 8, 2013

Debate On Wage And Wealth Gap Heats Up; Solutions Elusive

The national debate about income equality and low-wage labor ramped up this week as fast-food workers across the country rallied for better pay and President Obama assailed the nation's growing income gap as the "defining challenge of our time."

Meanwhile, an $11.50 minimum wage bill was approved in the nation's capital, and giant discount retailer Wal-Mart opened its first Washington stores — accompanied by a flurry of ads defending the company's often-criticized pay and benefits practices.

(Protesters showed up outside the new Wal-Marts, but inside there were bargain hunters and busy cash registers.)

To paraphrase a well-worn weather aphorism, everybody's talking about poor pay and the perils of a growing gap between rich and poor — even Pope Francis weighed in — but no one can agree on what to do about them.

Raise the federally mandated minimum wage of $7.25 to $10.10 ($404 a week), as Democrats and the president have advocated?

Impose stricter rules on Wall Street, which critics say is riding government largesse and bailouts to high-flying profits that benefit a tiny percentage of Americans?

Close tax loopholes? Rethink interest deductions? Tax financial transactions? Just leave wages, banks and money movers alone and let the market decide the path forward?

There are arguments for and against all of the above, some more persuasive than others, others not.

We turned this week to economists and financial analysts for perspective on what brought us to this point, and whether and how it should be addressed. Not surprisingly, their disparate takes mirrored the conflicted national discussion on minimum wages and the wealth gap.

Here's who we heard from, who we've been reading, and what they had to say.

Dean Baker, Center for Economic and Policy Research

Baker, an economist at the liberal-leaning research center, pointed to Wall Street as a driver of the wealth gap.

"We have done almost nothing to rein in Wall Street, which means great fortunes will be made scamming the productive economy in various ways," he said.

Baker pointed to the government's recurrent "too-big-to fail" subsidies to the nation's 10 largest banks, an annual payout that Bloomberg View has estimated at $83 billion — and that has shielded investors from losses.

"This is effectively payment from the government to the big banks," Baker says. "The government is providing enormously valuable insurance for which it is not charging."

That, and tax code loopholes "just invite gaming," he says.

His top proposals to address problems he's identified: impose a modest tax on financial transactions including trades of stocks, bonds and derivatives to raise money and discourage "flipping" or the quick reselling of assets for profits; break up the big banks so they aren't too big to fail; and limit interest deductions to prevent private equity companies "from showing big profits by loading companies with debt."

Says Baker, "These are all reasonably straightforward, and would go a very long way."

Scott Frew, Rockingham Capital Partners

Frew, general partner of the Connecticut-based hedge fund, says he views the phenomenon of the growing income inequality as arising out of globalization and the nation's response to it.

"Globalization and the various free trade agreements that have accompanied it [including NAFTA] were sold as win-win arrangements, but have proved to be a lot closer to zero-sum," he said. "The rising standard of living in the developing world has its mirror image in the falling ones here."

Policymakers who have attempted to stanch the flow of wealth from the U.S. to the developing world — encouraging easy credit, for example — have ended up instead exacerbating the problem, Frew says.

Their actions, he says, "most certainly widened the gap [in the U.S.] between the extremely prosperous upper echelons and everybody else."

The wealthy have profited from the migration of American jobs overseas — from Wall Streeters selling IOU's to the developing world, to company owners outsourcing overseas. It's a practice Frew characterized as a "highly profitable form of labor cost arbitrage."

He also notes that U.S. businesses additionally benefit from their reliance on the government to provide welfare benefits to working Americans being paid poverty-level wages.

Since taxes aren't levied on businesses to specifically offset the costs of those government benefits, which help boost their profits, "these corporations and their owners benefit twice over."

The Financial Times' FTAlphaville, financial markets blog

In a post this week, the blog's Cardiff Garcia laid out the arguments for raising the federal minimum wage (job stability, less reliance on government benefits, workers spending more, etc) and those against (potential to depress employment, not clear if lower turnover a good thing, not as cost-effective as other ideas), and came up with this:

"So what's the right stand to take on the minimum wage in the absence of a better idea that's politically feasible? Honestly, we don't know."

The post prompted a spirited conversation in the blog's comments section.

The conservative Heritage Foundation also weighed in this week with an analysis bolstering its opposition to minimum-wage increases; and the Brookings Institution's Gary Burtless laid out the minimum wage's depleted purchasing power over time.

Income inequality. Minimum wages. Corporate welfare. The future of the middle class. We end the week with myriad questions, elusive solutions, politics beyond complicated, but a real national conversation begun.

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