August 9, 2006

Economic Policies Designed to Fail

Which is harder – generating sympathy for rich dead people or generating sympathy for their heirs?

Wait. I know. I’ve got something harder than both of these combined. Try getting the present Republican-controlled Congress to come up with any sort of economic proposal that is based on economic reality.

When George W. Bush wanted to repeal the federal estate tax early in his presidency, the fearless, principled economic warriors on Capitol Hill gave him what he wanted – sort of like the alcoholic who vows not to drink again until the next time he passes a liquor store. The 55 percent tax was gradually repealed, with complete elimination in 2010. And only 2010.

Come 2011? It’s back! And in full force. This is what passes for “getting something done” on Capitol Hill these days, but Bush took the deal at the time hoping he could come back later and get a permanent repeal passed. Two Republican election victories later, this would now seem plausible, but that would presume the presence of congressional leaders who are actually serious about passing sensible economic policy.

Since we have no such congressional leaders, we instead got a proposal to tie the estate tax repeal to one of the worst job-killing economic proposals imaginable – an increase in the minimum wage.

If you’re going to give something to rich people, then give something to workers too! So goes the argument being made by, well, actually no one. The Capitol Hill Cowards have managed to come up with a proposal everyone hates, which is actually useful insofar as it is designed to fail. What better election strategy, sillies, than to claim you were willing to “give workers a raise” while blaming the other side for preventing it?

Permanently repealing the estate tax is one of the best things Congress could do for the storied “workers,” if we’re going to use language that would make Lenin’s heart sing. Raising the minimum wage is about the worst thing you could do. There are enough members of Congress who do understand this that it could probably be explained to the rest. But there are few who think the voters can be made to understand it.

They give you too little credit, and themselves too much. It’s simple.

Even with the estate tax exemption raised to $1.2 million – meaning you only pay the 55 percent on every dollar after that amount – consider an estate worth $1.3 million, proud property of a small business owner. The tax on such an estate would be $55,000. Hey! No problem if you have $1.3 million, right? But you don’t have $1.3 million. You have equipment, real estate, inventory and receivables worth that much. If you are selling products or services to large companies, they probably make you wait 90 to 120 days to get paid, which means you have to borrow against your receivables just to make payroll.

In most cases, such a company does not have $55,000 in cash lying around to send to Washington. It needs almost everything it’s taking in to make payroll, fund procurement, pay utilities and meet other expenses. So where do you get $55,000? You trim payroll, sell assets or, in many cases, sell the entire company.

If you go the route of trimming payroll, who goes? The highest-paid employees, you say! Not necessarily. The highest-paid people are usually your most productive. More likely, you part ways with those who are making more than they’re worth. These are the people you pay a certain amount because you have to, not because you want to. Hello, minimum-wage workers.

Let’s be honest. The vast majority of minimum-wage workers are making so little because they are worth so little – or less. They are generally teenagers working their first or second job, and their managers’ biggest concerns are getting them to show up on time, getting them to stop gabbing in the back and pay attention to the shake machine, and figuring out how to have enough of them on hand to work when they’re all asking for the same week off to go to camp.

They make $5.25 an hour because the law says they have to, not because they are worth that much. With all due respect to utterly immature teenagers – and really, how much respect do you think they are due? – employers are usually doing them a favor by giving them jobs at all. They’re in the training phase of their lives, and most of them can only be trusted to perform the most menial tasks if they show up consistently at all.

Raising the minimum wage would force employers to overpay them even more than they already do. And since the same pool of money will be available to pay them, that means fewer of them will have jobs.

If Congress repeals the estate tax, at least some of those marginal family-owned businesses will be able to avoid cutting low-value workers in order to pay their bills to Uncle Sam. On a Capitol Hill run by principled Republicans – not the duds we’ve got now – it might be worthwhile to hope for something like this. Instead, we get proposals designed to fail, and worthy of their fate. Just like their designers.

This is Column # DC45.  Request permission to publish here.