Tag Archives: inequality

The California Drought and Inequality: So What’s New?

There was once water here

There was once water here

At first blush, the California Drought and Inequality are not intimately related. Yes, some class warfare has broken out around water usage and new conservation rules.   But that’s not what the title of the blog post is about.  What do the California Drought and Economic Inequality in the U.S. have in common?  The answer is: Neither are nearly as unique or exceptional, as we’re prone to think, because of our blinders and narrow perspectives.  In the great span of geologic time and economic history, each problem, in it’s own realm,  is more the norm, than the exception; more typical than unusual,  It’s important to know this, because, as the adage goes, you must know your enemy to defeat him.

On the Economic Inequality side, it is gradually sinking-in that the period of (relative) equality during the roughly 40 years after World War II, is an historical anomaly for the U.S; an exceptional era, when stars were aligned to create a large middle class that included a large swathe of the “working class.”

On the Drought side, you may be very surprised to learn that the period of explosive growth in Southern California (and the rest of the Southwest) — the 1970s, 80s, and 90s — occurred during the wettest decades in the last two millennia.  Yes, that’s 2000 years, or back to “ancient times.”  That’s not at all exaggerated. Scientists at the U. of Arizona and Columbia U. have built a remarkable hydrology data base dating back to ancient times, which says that the areas we know as California and the U,S. Southwest experienced numerous droughts in the past, more severe than the current one, lasting decades, not just a few years. Read about it and listen to a riveting discussion here.  If you want more technical (and cool) information, try this and this.

Thus, water conditions in Southern California (and most of the Southwest) over the last 15 years would have been considered normal, neither unprecedented nor dire, centuries ago. The situation today is dire” only because we built civilizations where nature may not have intended.  And the technology and ingenuity to overcome nature, may have reached its limits. The situation is real bad.  Here are some amazing photographs of today’s California Dust Bowl.  These are not shown much outside California, because the disaster is proceeding too slowly for the appetites of cable and network news.

Don’t hold your breath or bet on California pistachios while waiting for cheap Mega Desalinization, though MIT is trying hard to overcome the expense and impracticalities of using sea water for drinking and irrigation.  Stay tuned.  Another avenue of hope are the amazing Israeli desalinization efforts, to the point where Israel now has more water than it can use.

In terms of the economy, the several decades from the end of World War II, through the late 1970s, which liberals view as a model for compassionate capitalism, is glaringly atypical in American history, at least back to about 1910.  Piketty & Saez, have documented that, to the satisfaction of most mainstream economists.  You can find all of that data if you start from here.  There is some evidence that Inequality was also the general rule in the U.S. for most of the 19th century, but that is much harder to confirm.

The precise conditions making it possible for wider prosperity in the decades following WW II were never sustainable; some of the factors we don’t want repeated.  The special circumstances include the Great Depression, which ushered in New Deal regulatory, tax, and labor reforms; the economic boost from World War II, the mother of all stimulus packages; and America’s emergence from the Great War as the only intact industrial economy in the world.

The best advice to Drought warriors: Start looking at the Drought as something that doesn’t just end in a few years. The best counsel for Inequality warriors: Stop looking at Inequality as something that will correct itself as soon as job growth accelerates and labor markets tighten.

One difference between the California (Southwest) Drought and Economic Inequality is that lack of water in the Region is natural (going back at least two millennia); while Inequality (arguably) is not natural, not an inevitable result of capitalism, globalization, or human DNA. The leading academic behind the view that Inequality is man made, and can be lessened considerably, with the right policies, and to the betterment of all, is Joseph Stiglitz. He’s a capitalist of the Roosevelt variety (both Teddy and FDR). He’s not a communist.

Am sure you are asking whether human caused global warming is contributing to the Great Drought, which would mean it’s not totally natural. In fact, most mainstream climate scientists believe global warming caused by humans, is exacerbating the current Drought; making it worse than it would otherwise be. You can read about some of that here and here.

Whether or not you believe the Drought or Inequality is a return to a natural state of affairs, it appears there is more hope for rebuilding the U.S. middle class, than for preserving the California life style, as we’ve known it.  There may be other good reasons for not preserving all of it.

After the U.S. middle class has been rehabilitated, they may not be flocking in such large numbers to California, Arizona, Oklahoma, and Texas anymore.  If the Great Drought had happened sooner, the Dodgers might still be in Brooklyn.

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Channeling Elizabeth Warren: What an Uncensored Liz Might Say About the Hillary Clinton Announcement

What was Elizabeth Warren thinking as Hillary Clinton formally announced her candidacy for President?   What would Liz be saying if she was not a realistic and committed Democrat?  Let’s channel the more aggressive, less practical side of the Massachusetts Senator, imagining what she might tweet.  On the Sunday morning talk shows, Liz says she too is “ready for Hillary.”   Perhaps she really is!  The line that stood out most from Hillary’s announcement yesterday was: “the deck is still stacked in favor of those at the top.” That’s vintage Warren.

Nonetheless, here are five imaginary, edgy Warren tweets that were never sent. And won’t be.

1. Over more than two decades, the Clintons advanced and accelerated fundamental policies which have helped America edge closer to oligarchy than it’s been in more than a 100 years.

[Ed. Note: This process began well before the Clintons arrived on the scene. The U.S. is perhaps at a quarter to twelve on that clock; not yet mid night].

2. Bill and Hillary drank a lot of the post 1970s De-regulation Kool-Aid, some of which was sound and needed; but overall (in its zealotry) harmed a lot of average people.

[Ed.Note: The post 1970s De-regulation Movement, reversed a lot of Progressive era and New Deal policies aimed at (harmful) concentrations of wealth and power and protections for consumers and labor. While some deregulation fostered more competition, a good (rhetorical question) looms: “Is there a single example of consumer prices going down and market competition increasing after deregulation of a U.S. industry?”]

3. Speaking of deregulation, the Clintons were totally on board to gut decades old financial regulations in 1999 which had protected average people’s money from being squandered in risky big bank investments.

[Ed. Note: In 1999, Democrats led by Bill Clinton and Republicans by Senator Phil Gramm, repealed the Glass-Steagall Act, which had (among other things), separated commercial and investment banking. That enabled big banks to use the money of average people and (barely) middle class home buyers to make risky investments. The ensuing crash decimated the wealth in the middle.  Repeal of Glass-Steagall was of course not the only reason for the crash, but it played a big part].

4. The Clintons have been gung-ho NAFTA style free traders, and brought a lot of other Democrats with them. The form of free trade they supported helped decimate the wages and benefits of U.S. workers.

[Ed. Note: For U.S. multinational companies, in particular, NAFTA has been a way to keep a lid on worker wages and benefits, and avoid thorny regulations (which presumably restrain trade).  This is not your father’s, nor David Ricardo and Adam Smith, Classic Free Trade. There is evidence that trade pacts help nations avoid conflict. That’s good. But that has costs which need to be borne by all of society, not just average people].

5. Clintonian Welfare Reform left many poor people with no work or low wage, subsistence jobs. Democrats’ support for “welfare reform” helped feed Republican ideology around “free-loading” and Romney’s 47 percent theory.

[Ed. Note: New Deal and Great Society welfare (public assistance) needed to be reformed. But Clinton policies were long on getting people off welfare rolls (and maybe into work), and short on providing the right training (or apprenticeships) to find decent paying jobs. These are the main criticisms of Clinton welfare reform.  Arguments that trumpet the policy’s success are represented here].

Channeling Elizabeth Warren’s aggressive side as it might view the Clinton presidential candidacy was a revelation.  It was soon clear that most of the words pouring out didn’t do a very good job of separating Hillary from Bill. Is that sexist?  And unfair?  Perhaps both,  though surely not intentionally.

The problem is that we don’t know very much about Hillary’s position on wage stagnation, inequality, financial sector regulation, free trade, the condition of the middle class, and many  other core and defining financial and economic issues of our time.

That’s partly because Hillary dealt mostly in foreign affairs during the years these issues have been front and center.  But she has also avoided saying much about them, beyond high level generalities.  She won’t be able to continue doing that much longer.

If she watched the video announcing Hillary’s presidential run, am sure that Warren appreciated her saying “the deck is still stacked in favor of those at the top.”  That is, indeed, vintage Warren!   But it still falls in the platitudinous category.  It will be fascinating to see how the cross word puzzle is filled-in over the next twenty months.

OK, So We All Agree Inequality Has Gotten Out of Hand: What Next?

No one said anything last night about black smith wages

No one said anything last night about black smith wages

Almost everybody now agrees we have an acute problem (in the U.S. and in most advanced economies) around income inequality, wage stagnation, and the disappearance of the middle class.  President Obama made these issues the centerpiece of yesterday’s State of the Union message. The other day, the President’s 2008 opponent, Mitt Romney, said he may run for President again because he wants to help the poor, the disadvantaged, workers, and the beleaguered middle class.  Mitt was a “severe conservative” before he became a severe liberal.  Go Mitt!

Here is the best single chart — heretofore called, “The Chart” —  I’ve seen depicting the inequality and wage stagnation problem.  (Thank you to my friend and colleague Kurt Lightfoot for sharing  this).

Workers’ Hourly Compensation Versus Productivity

The upper line tracks “productivity” in the U.S. economy since 1948.  Productivity represents the combined effects of technology and harder/better work to (potentially) raise prosperity and the standard of living.  The lower line shows the trend in the compensation of workers. The two lines tracked perfectly from the end of World War II to the mid 1970s. Since then, workers haven’t shared in the prosperity.  You can see full analysis and discussion here.

So, what might Mitt do if he becomes President?  Am afraid the things which need to be done are anathema to Mr. Romney’s party and even to many (a majority?) of Americans, at this point in time.  Mitt and his party will support their usual remedies for greater prosperity (and for any other ailment):  lower taxes on the rich and corporations, less regulation, and more “freedom” for all. Of course, not all of that is bad. But is there any evidence it works?  Maybe giving lip service to wage stagnation is a step forward; but it can just as easily be a bait and switch.

Obama’s State of the Union address proposed other remedies, which could help move the lower line on The Chart a little higher, like a raise in the minimum wage and better access to education, but those won’t (and really can’t) by themselves get us back to the trend of shared prosperity.

If we want compensation to track closely again with productivity, It will take reviving organized labor (with reforms), tempering the effects of “free trade,” genuinely repairing an unfair tax system, and seriously containing health care costs (so that some of employers’ premium costs can move to the wage column).

Regarding “free trade,” the President last night championed the Trans Pacific Trade Agreement (some call it NAFTA on steroids). Those agreements, which Democrats supported as heartily as Republicans, have contributed greatly to the dismal trend in wages.

As this blog has voiced many times, we need a new paradigm and intellectual basis for “free trade” agreements,  which doesn’t make them bobsled vehicles for race to the bottom.  That said, this blog doesn’t champion “protectionism,” nor yearn for Smoot-Hawley II.

“Why Turn Health Care System Topsy Turvy and Raise Costs for All, Just to Help 15% of the People?”

critterThe question in the blog post title is now being asked even by Obamacare/ACA supporters, including some Democrats, like the erstwhile Senator Charles Schumer, from New York, who thinks health care reform distracted his party from taking care of the middle class.

But, the premises of the question are all wrong.

In the same vein, Republican Mike Huckabee was even more to the point than Schumer about the “irrelevance of health care reform” to average Americans. Here is what Huckabee, soon to be a presidential candidate, had to say in an interview:

Q: What about ObamaCare? Is reaching those 30 million uninsured people a priority?

HUCKABEE: It ought to be a priority. But the priority should have been to deal with the 15% of people who didn’t have insurance rather than disrupt the system for the 85% who did and who were largely satisfied with insurance…..

It still matters what the facts are, even if that’s become a quaint concept.  Let’s start with the “15% uninsured” fact-let that’s implanted in Huckabee’s and everyone else’s brain. It’s very misleading. It persists because the true picture is harder to explain.

The “15% percent uninsured”  figure is a snapshot, taken at a point in time.  Over a materially longer period – more than six months, to one, two, or ten years – anywhere from 25% to 50% of Americans experience a significant spell without individual or family coverage.  That’s very large.  It’s a lot more than just “the poor.”

An even higher number of people are in perpetual fear of losing health care coverage, which keeps them in dead end jobs and contributes to  the “dead wood” we complain about in the next cubicle.    None of that may be disturbing to Huckabee or Schumer, who probably have never had to think about going without health insurance for their families, even for a few months; and haven’t worked in a cubicle for decades.

The much better count of how many people have lacked health insurance in the U.S. is documented here and here, by the non partisan Congressional Budget Office and by career analysts at the U.S. Treasury Department.

What about Mr. Huckabee’s point that Obamacare turns the health care system upside down?   Many would say, “If only it were so.”  The ACA went way out of its way to preserve the main pillars of the old health care system – private insurers, pharmaceutical companies, hospitals, and other private providers in a $3 trillion dollar system,  which leads the world in cost per client, but with worse health outcomes.  Whether you like it or not, ACA falls well short of turning the health care system upside down.

As for recent U.S. health care costs, the ACA munificently provides an alibi for anyone who raises insurance premium or shifts higher costs onto workers. Insurance companies, hospitals, and employers have been doing that for decades at rates that far outstrip general inflation and growth in worker wages or middle class income.

So, yes, health care costs have been rising, but since the ACA passed, health care inflation has actually slowed down. That is more likely due to the great recession than to ACA; but it’s a lie that health care costs have soared since the passage of ACA.

Let’s close the loop regarding Schumer’s Monday morning quarter-backing about the ACA and the middle class,  Soaring premium costs over decades have been a big factor in wage stagnation and middle class economic woes.  It’s elementary that the more a business pays for worker health insurance, especially when premium costs outpace profits, the less it can pay in wages. At the time Democrats were in control of Congress in 2010, “health insurance for all,” at affordable prices, was the single most effective and practical way of helping American workers and the middle class.

Perhaps Senator Schumer thinks Congress could have more easily attacked the other causes of middle class doldrums?  It would have been a snap to: (1) reverse NAFTA (and maybe block TPTA negotiations, while they were at it); (2) overturn “right to work” laws in about 25 states, (3) restore marginal tax rates to 90% for high income earners; and (4) put the brakes on technological advances which replace workers and lower their value. Maybe they could have done that in six days and rested on the seventh?

I will give Schumer this: The President and supporters of ACA did a horrible job explaining what they were trying to do; while conservatives have been spectacularly effective persuading a lot of middle Americans and small business folks that ACA is the bane of their existence.

What Does Inequality Mean to You? Conservatively, About $10,000 a Year

textures_patterns02 copy copy copy

Crabbing About Inequality

When the staid, straight laced, Wall Street economists at Standard and Poor’s (S&P) jump on the “inequality,” “growing gap between rich and poor,” “shrinking middle” class bandwagon, you know these issues have moved well beyond the imaginations of class warriors, left wing think tanks, and liberal French economists.  This story should have gotten more exposure.

The recent, surprising, analysis by S&P said that part of the reason for the slow and fitful economic recovery is lack of spending power by the middle class.  Record high levels of income and wealth inequality are a big reason, according to S&P, why consumption has been slow to rebound and why the recovery has not been stronger. Wow!

That of course is not a new theory.  Distinguished Columbia University economist Joseph Stiglitz and Berkeley public policy professor Robert Reich,  for example, have written and lectured extensively on inequality and how it’s been a drag on the U.S. economy. But, coming now from S&P,  deniers (at least the open minded ones) will find it harder to dismiss that viewpoint.  Hardcore deniers will dismiss anything and everything along these lines.  Or, they will say it doesn’t matter.

Still, public opinion about Inequality, what it means, if it’s real or not, and whether anything can (or should) be done about it, is “all over the place,” as Pew survey researchers have found.

Despite many words, graphs, and charts starkly depicting how much better the “one percenters” have done than the rest of us, we really haven’t heard much about what rising inequality means to the average household.  A big reason is that the question hasn’t been posed in a way that leads easily to answers that mean something to dwellers on Elm Street or residents at the Cabrini Green projects. I credit my colleague Kurt Lightfoot, with helping me understand that.

So, instead of asking how much the gap has widened between rich and poor, or between the middle class and people in the top one percent — questions that scare a lot of folks – lets pose the question this way:

How much more income would you have if your slice of the American Pie was about the same today as in 1980?  And what could you buy with that extra money? 

What could possibly be scary about that?  Now we’re talking about American apple pie, and how big your slice is today compared with thirty years ago?  (We could do this with pizza too). Three charts give us the answers. Alas, neither are pie charts. Look first at Chart #1

chart 1

Chart #1

If you break households into “quintiles” (five groups each representing 20% of all households, aligned from lowest income earners to highest), the average income for the middle class (adjusted for inflation) rose about 10 to 20 percent.

I’m loosely defining middle class here as the second and third quintiles, with average incomes of $30,000 to $50,000 in 2012. Arguably, the fourth quintile (households with $80,000 average income) could be included in the middle, but that group includes a lot of households making over $100K, which would be typically regarded in the “upper middle class.”  Regardless, the data is there for each quintile, so you can choose whichever definition of middle class seems more reasonable.

I’ve broken the highest quintile (the top 20 percent of earners) into two smaller groups: (1) the next highest 15 percent of households (by income), and (2) the top 5%. These groups saw their average household incomes rise by about 55 percent and 80 percent respectively.

Chart #2

Chart #2

Chart 2 gets right to the point, and answers the question: “How much more income would the middle class be earning today (actually in 2012) if its slice of the American Pie had remained the same as in 1980?”

The simple answer is: About $10,000 more per household. Or $100,000 more over a decade.

While that’s substantial foregone dollars for the middle class, visually, Chart #2 may not convey the huge difference between how much incomes actually grew for the middle class, and what growth would have been if everyone’s slice of the pie had grown equally. Chart # 3 depicts that.  Had their slice of the American Pie remained the same, the lowest three quintiles would have seen their average income growth between 20 to 30 percentage points more than actually happened.

chart 3

Chart 3

That’s still about the most conservative estimate you will get from any rigorous look at the data. Thomas Picketty and Robert Reich would say I was “lowballing” it, and that I must be a Wall Street lackey.  Picketty, of course, used “wealth” instead of income to look at disparities. I discuss some of the pros and cons of that in the “caveat emptor” section at the end. Optional reading.

Even if it’s a lowball estimate, $10,000 a year is a lot of foregone dollars. On an annual basis, half of that lost income would pay for decent health insurance coverage  (without Obamacare), with enough left over for a nice, well deserved vacation at a couple of national parks, to celebrate a clean bill of health from the doctor.  Those trips are good for the family and for Arizona.  Or a decent three bedroom apartment, instead of a one bedroom place where the kids sleep on a Murphy Bed in the living room.

Over a decade, the foregone income is $100,000.  Enough to help pay for a kid’s college education at a good school, without her incurring $100,000 in student loan debt, which not only makes her poor, but seriously weakens the overall economy because now she can’t afford to buy a home and start a family (or vice versa).

Chart #2 also says that the top 5 percent of households would be making about $70,000 less per year if everyone’s slice of the American Pie had grown the same since 1980. The S&P economists point out that (1) not much of this $70,000 would have been devoted to consumption spending here at home by this upper income group,  while (2) nearly all of the foregone $10,000 would have been spent by the middle class for consumer goods and services here at home.  And (3), that there’s a lot more people in the middle class than in the top 5%. That is why S&P thinks the slow economic recovery is related to severe income inequality. QED.

Caveat Emptor

As I said in the main body, we’re looking at this from an “income” rather than “wealth” perspective. The widening gap in wealth among the top, middle and bottom is much greater than the growing gap in income. But wealth is more difficult to measure. And it’s much harder to say what more we could buy, if we were wealthier. Income includes things like wages and dividends.  Its liquid.  Its cash.  Wealth is assets, like stock and the value of your home,   But its very important to note that the answer given here to what difference it makes if your slice of the American Pie had remained the same, is very conservative. i.e., it’s a low number. Not because I’m trying to “lowball” it; but because of the technical issues  I mentioned. 

Also, the data are not adjusted for the vast growth in households with two or more wage earners.  To the extent the “middle class” has kept pace at all, its (largely) because a much higher percent of households today have at least two earners, compared with 1980, and even more so compared with any other period, before nearly all women entered the labor force.

The best data I could find for this analysis is not fine enough to look at how much the slice of pie has grown for the top 1 percent of the income distribution. But it still tells the basic story. I was able to break out the top 5 percent. BTW, the Congressional Budget Office, using more detailed data, estimates that average income increased by 200 percent for the top one percent of earners in this same period.

What Can Realistically Be Done About Inequality?

boat11 copy

Lifting All Boats, Even This Little One?

An important opinion piece on the Inequality issue by Joseph Blasi ought to get more exposure, because it makes a good faith effort to propose something realistic that could be done about it.  How refreshing!   Blasi suggests we look at ways to help workers at the middle and bottom of the income/wealth distribution acquire (a lot) more capital, and receive more capital income, via forms of shared corporate ownership.

This is the type of approach Democrats don’t think about much.  And it has a “collectivist” tone for many Republicans, depending on how it’s couched.  But it’s not a bad idea, especially in comparison to the puny (e.g. minimum wage adjustments),  grandiose (e.g., “rethinking free trade”), or delusional (e.g. repealing state “right to work” laws) ideas.  Most of  of the grandiose ideas,  not surprisingly, lack detail.

The famed Microsoft employee stock options (in addition to good salaries) is a leading example of what Blasi is talking about.  Microsoft Millionaires got that way not by inching up the career ladder at the company, or climbing the steps in the personnel department’s salary schedule, but by cashing in their stock options.  That’s not a realistic possibility for all companies and workers, and the Microsoft model doesn’t immediately translate to a medium sized restaurant establishment, but there is a lot more room for this sort of approach in the U.S. economy, enough to make a real dent in the income and wealth distribution.

Ownership sharing, with a reasonable apportionment of risk, has a lot more potential to move the needle than tweaks to the minimum wage. It has a much less catastrophic downside than “targeted protectionism.”  And it’s just a wee bit more pragmatic than constitutional amendments to overturn (anti union) “right to work” laws in the states, or restoring marginal tax rates to pre 1970s levels.

It’s also more realistic than Thomas Picketty’s international tax on wealth, while (in effect) accepting his theory that capitalism tends to produce gross inequalities over time because capital (right now owned by the few) reproduces itself much faster than ordinary income.  This is not to say, that disparities can’t get so great, with devastating effects on the overall economy, that more radical ideas won’t ever be palatable.

The “free market” on its own isn’t likely to deliver more sharing of profits and stock with workers. It would require, as Blasi says, “restructuring the tax code in ways that encourage a broader range of companies to embrace low-risk profit-sharing and employee ownership programs, perhaps even making such programs a condition for receiving federal corporate tax deductions.”  It’s hardly a slam dunk that liberals and conservatives could come together on this with just a little negotiation; but it’s a lot more likely than a consensus around wage regulation, higher taxes on the rich, or demolishing “free trade.” .

Employee ownership is not a panacea and can be bad for workers, depending on how its done.  Microsoft offered stock options to employees in addition to high salaries. Many companies offer them in lieu of good wages; especially start-ups, which can’t afford (or won’t risk) paying high salaries. Since start-ups also have high failure rates, workers may spend a some years at barely above minimum wage, and are then left holding worthless stock when the company tanks.

Another caution: I am aware that the last time liberals and conservatives collaborated to create an “ownership society,” we wound up with horribly bad home loans, an abundance of junk level securitized mortgages, and the worst U.S. financial sector collapse since the Panic of 1873.  Always nice to end on a high note.

“Prevailing Wage” Policies – Don’t Throw Out the Baby With the Bath Water

Wonder if they paid prevailing wage for this?

Wonder if they paid prevailing wage for this?

“Prevailing wage” policies (in essence) require government construction contractors to pay wages closer to what union shops pay, which is of course generally higher than pay at non union companies, sometimes much higher. Along with the minimum wage, prevailing wage policy is one of the few remaining tools government can still (realistically) use to prevent the further erosion of worker wages.

“Prevailing wage” is under attack ideologically by politicians opposed to wage regulations of any kind, even where the government is contracting for the labor.  Opponents also say that paying “prevailing wages”  inflates government capital budgets, either limiting how many schools, bridges, roads and other projects can be built, or making taxpayers pay “more than necessary” for capital projects.

In most of the battles around the country over prevailing wage policies, there are only two choices – retain it or scrap it.  Policy-making in general today is binary. But, prevailing wage requirements are eminently scalable. Without implacable ideologies, and where compromise is still possible, adjustments can be made so that capital budgets are not being busted, while skilled construction labor can still receive a “living wage,” materially above minimum.

Something like that appears to have happened recently in Delaware. The Delaware story wasn’t buried in Delaware, but it was in the rest of the country. You can read about it here. In contrast with battles in places, where prevailing wage rules have been repealed, the Republican controlled legislature in Delaware passed a law which affects the way prevailing wage is determined, but the core policy appears to remain intact.

The public is a lot more aware of minimum wage, but the higher wages paid to government contracted construction workers under prevailing wage rules, can have much greater impact on local economies. Yes, the impacts can be negative or positive, but I argue that, just like the minimum wage, when the upward adjustments are reasonable,  paying the higher prevailing wage is beneficial to the overall economy of a region. More about that later.

The change adopted in Delaware is not easy for headline writers. It involves which data are used to determine the prevailing wage in a community. That may elicit a yawn, unless you’re a numbers junkie…..or really care enough about workers wages to venture into the weeds a bit.

The bill passed in Delaware says data provided by the federal Bureau of Labor Statistics (BLS) shall be used in administering the State’s prevailing wage law, rather than data from other sources. State Labor and Industry agencies across the nation often provide the information used for prevailing wage determinations.

Without maligning data from all Labor and Industry agencies, or that used from other sources, it is true that sloppy or politically compromised wage surveys, from time to time, result in outrageously skewed wage data (usually in the high direction). That of course affects the prevailing wage mandated by governments, and has contributed to opposition. However, ideologues, who don’t want any government involvement in wage setting, would oppose prevailing wage even if the data were not sometimes skewed.

In my own experience, managing a large state research shop which provided labor market data, the BLS data were generally the most trusted.  Under contract with BLS, we obtained the data through large scale, professionally conducted surveys. Our surveyors worked hard to construct representative samples (neither under or over sampling union shops) and to encourage accurate responses from both union and non union employers. The survey process was insulated from politics.

I am discouraged by arguments against prevailing wage which cite examples of outrageously high wages mandated by some governments for certain projects. These problems are solvable. I am especially skeptical and discouraged by arguments, appealing to taxpayers, that prevailing wage requirements bust capital budgets, limit the number of projects that can be accomplished, and cause higher taxes.

When politicians say their government can save, say, $20 million on their $100 million capital budget, it doesn’t mean the jurisdiction’s annual budget is reduced by $20 million, or that citizens will see that reduction in tax bills, or that another $20 million in additional projects can be funded, if only prevailing wage would get out of the way. On the latter point, it could mean some projects don’t get done as quickly, but not that they fall off the radar screen altogether.

Governments typically issue 20 to 30 year bonds to fund capital projects. On a current account basis, the government is paying debt obligations annually on those bonds, not $100 million at once. For a hypothetical $100 million capital outlay supported by 20 to 30 year bonds, the government is probably spending anywhere from $5 million to $10 million in annual debt payments. So, even if eliminating prevailing wage reduced the cost of capital projects by 20 percent — which is a high estimate in most cases – a local government is saving perhaps $1 to $2 million in their operating budget.

That is nothing to sneeze at, but is it too high a price to pay for retaining one of the last policy instruments available (in practical terms) to address income gap and inequality issues?  Moreover, my back of the envelope estimate of budget/tax burden – the $1 to $2 million figure — is on the high side, because it doesn’t include tax collections from increased spending in the community by higher paid workers.

Yes, the owners of construction companies may have to absorb some of the costs of paying a higher wage (though they are likely passing it along to the customer – in this case the government, where it’s further passed on in tiny amounts to numerous tax payers).  But, even if the owners are making less profit, evidence is strong that lower income people, like a typical worker, spend any extra income more quickly, and more of it in their own communities, than higher income folks.

Of course all bets are off if a minimum or prevailing wage intervention by government is large and precipitous. Yes, you can sink an economy if wage policies are extreme.  But, ideologues don’t seem to care if the re-distribution is small or large; they are against it anyway. And those same folks invoke slippery slopes and tipping points. I understand and respect that; but it’s a matter of when your risk aversion comes into play. It’s a simple truth, that conservatives and liberals are risk aversive about different things, around who’s ox is at risk of being gored.