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Buy Low, Sell High

July 6, 2016

Today’s New York Times features an argument in favor of expanding the Earned Income Tax Credit, apparently instead of increasing the federal minimum wage. But it’s not an either-or deal; we ought to do both.

The federal minimum wage is 78 years old, having started out in 1938 at 25 cents an hour. It was enacted as part of the Fair Labor Standards Act, which also established a standard 40-hour work week and time-and-a-half overtime.

Congress has increased the federal minimum wage 22 times, but the actual buying power of the minimum wage peaked almost a half-century ago, in 1968. That year, the minimum wage was increased to $1.60 an hour, which is the equivalent of $10.86 in 2015 money. Although the nominal minimum wage has since then more than quadrupled, to $7.25, the real value of the minimum wage is lower by a third than it was when Lyndon Johnson was president. Today’s minimum wage workers are paid as much by the federal government, in the form of public assistance and tax credits, as by their own employers.

President Obama has raised the minimum wage for employees of federal contractors to $10.10. Democrats have introduced legislation to raise the federal minimum wage to $12. Many Democrats, including Hillary Clinton, support an increase to $15. New York and California have enacted phased-in increases to state minimum wages that will eventually reach $15 per hour at least for some workers.

There should be no question that a $15 minimum hourly raise would be an important departure from history – $15 is more than double the current minimum wage, and 50 percent higher than the historical high real minimum wage in 1968. A fully employed minimum wage worker would earn about $30,000 a year – which is hardly wealthy, but would keep a single-income family of four above the federal poverty line.

The federal Earned Income Tax Credit is about half as old as the federal minimum wage. Enacted in 1975, the idea of the EITC was to reward low income work over public assistance. By off-setting federal income and social security taxes of low income workers, the EITC removed financial disincentives to work.

The EITC enjoyed broad bipartisan support until recently. Ronald Reagan called it “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.” The liberal Economic Policy Institute says the EITC “is, by far, the most progressive tax expenditure in the income tax code.”

For the 2015 tax year, the EITC produced a tax credit for a single worker making less than $14,800, for a married couple making less than $20,300, and for a family with children with income as high as $53,300. The maximum credit applies to earnings well below those maximum incomes; at incomes above that, the amount of the credit decreases as income increases. The phase-out provisions avoid disincentives to marginally increasing income.

The only real problem with the Earned Income Tax Credit is that it is complicated, and therefore substantial amounts of the tax credit go unclaimed.

Unfortunately, the Republican Party that once championed the EITC as a vehicle for moving people from welfare to work has recently turned against it. The stated argument is that there are too many people who pay no federal income taxes. It’s unfair to the rich that low income people pay no federal income taxes.

Whatever. Let’s say that any worker whose federal income tax liability would be reduced to zero by the EITC will automatically have the EITC reduced to an amount that would require that worker to pay, say, $100 in federal income taxes. Then let’s adopt President Obama’s proposal to expand the EITC. We can spend that $100 on H & R Block vouchers for EITC-eligible workers to make sure they get the tax credits they’re entitled to.

Raising the minimum wage and expanding the Earned Income Tax Credit are both great ideas that will reduce poverty and enhance private sector employment and its rewards. But another piece of the puzzle is still missing. The best way to increase earnings is to create jobs, increasing the supply of employment while the demand for employment remains constant. As it happens, this country has a really big need to create lots and lots of jobs – in infrastructure construction, repair and maintenance.

The American Society of Civil Engineers issues a report card on the state of American infrastructure every four years. The ASCE rates 16 infrastructure categories, from aviation to waste water. In its last assessment, in 2013, only one category of infrastructure rated as high as a B-minus: solid waste. Eleven categories were rated D-plus, D, or D-minus: aviation, dams, drinking water, energy, hazardous waste, inland waterways, levees, roads, schools, transit, and waste water. The ASCE estimated that we will need to invest about $3.6 trillion in infrastructure by 2020 to bring our infrastructure up to standard.

Our antiquated electrical grid is grossly inefficient, and modernization could save us both money and carbon emissions. The grid is vulnerable not just to outages but also to terrorism. A sophisticated attack – or just an unusually big solar flare – could send our economy into deep freeze.

Our drinking water infrastructure has virtually eliminated water-borne disease in this country, but the infrastructure is, well, really old. ASCE says we endure 240,000 water main breaks each year. Breaks impose substantial costs on individuals, municipalities and businesses. Post-Flint media interest in drinking water quality has revealed that, although our water infrastructure keeps us safe from disease, it does not keep us safe from lead poisoning.

ASCE estimates the average age of our 84,000 dams to be 52 years. The number of “high hazard” dams, meaning dams that would flood populated areas if breeched, constantly rises, and is now almost 12,000. Of those, about 2,000 are “deficient.” Dam failures can cost lives, as well as tens and sometimes hundreds of millions of dollars in property damage and economic losses.

Apart from infrastructure failures, like power outages, water main breaks and dam failures, poorly maintained infrastructure imposes huge costs. For instance, the poor condition of our roads costs the average urban driver $700 to $1,000 in vehicle damage and extra gas, in addition to lost time. Midwestern farmers lose about a quarter billion dollars a year to freight transportation delays.

Poor infrastructure reduces employment, wages and productivity; exports, tourism and economic activity generally; personal health and safety; national security; education, quality of life, and life expectancy. The current state of our infrastructure will cost trillions of dollars in lost gross domestic product by 2020, and tens of trillions by 2040.

Spending money to fix our infrastructure creates jobs. Lots of jobs. Engineering jobs, skilled equipment operator jobs, manual labor jobs, clerical jobs. Creating jobs increases economic activity. Increasing economic activity raises tax revenue, off-setting costs. And a great way to move wage-earners above the need to claim Earned Income Tax Credits is to create a few hundred thousand new unionized labor jobs.

Yes indeed, $3.6 trillion is a lot of money to spend by 2020. So let’s start slow. Let’s attack the 11 of 16 infrastructure categories that ASCE graded in the D range and leave the Cs to another decade. And let’s aim for 2030 instead of 2020. If we commit to increase infrastructure spending by $2.8 trillion by 2030, that comes to $200 billion a year, which is just a little more than we spent on the wars in Iraq and Afghanistan at their peak from 2007 to 2011. And unlike those wars, infrastructure investment would pay considerable, measurable financial dividends, direct and indirect, short-term and long-term.

Entirely aside from how much economic activity and tax revenue improved infrastructure would produce, now is the ideal time to make this investment. Ten-year U.S. bond yields hit an all-time low yesterday, at just over 1.3 percent. Thirty-year bond yields, which have been on a generally downward trend for almost 35 years, are just trivially above their all-time lows – 2.3 percent yesterday, compared to 2.25 percent at the nadir of the Great Recession in January 2009.

In other words, the cost of money is historically low just now, and everybody knows you should buy when prices are low. We have the coincidence of historically low cost of money and historically high need for infrastructure investment. This ought to be a match made in heaven.

Fortune magazine equates the low cost of money to a “free lunch,” and says the match of the low cost to borrow money and the great need to spend on infrastructure is a timely “win-win.”

Along the way, we get to turbo-charge our economic recovery to full-employment and reap trillions of dollars in increased economic activity for decades to come.

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