At one point, Cox and Alm oppose socialism and capitalism: “Socialism, a failed and receding system, sought to impose artificial equality. Capitalism, a successful and expanding system, doesn’t fight a fundamental fact of human nature - we vary greatly in capabilities, motivation, interests, and preferences.” (p87). The argument is at kindergarten level again. The American success story derives as much from FDR’s initiatives as from ‘capitalism’. Western European welfare states have come about by active participation of Christian and Social Democrats. The latter often called themselves ‘socialist’, but certainly didn’t close their eyes to human differences. Indeed, there is quite a difference with Cox and Alm.
44. Relating to the OECD and some of its authors
The OECD in general
It has been well-recognised that OECD economies have a problem with jobs with a low level of productivity and thus a low level of market-earned income. The OECD has done great research here. A standard reference here is to the OECD (1994) “Jobs Study”, that also was followed up with studies such as OECD (1995), Marsden (1995), Tyrväinen (1995), OECD (1998), the OECD Economic Studies 31 (2000/II) issue, with contributions of Pearson and Scarpetta (2000), Hotz and Scholz (2000), Dilnot and McCrae (2000), Fitoussi (2000), and Phelps (2000). But, while all this is recognised, the OECD shows no attention for this present analysis, even though it has been available on the internet since 1995.
Two main comments can be made with respect to the OECD (2000) Outlook, chapter 2, “Making the most of the minimum: statutory minimum wages, employment and poverty”:
(1) “High marginal effective tax rates associated with the phase-out range of the benefit give rise to disincentives to increase earned income beyond a certain limit.” (p55). This is the poverty trap - that however does not exist. When there are ample employment opportunities, people on benefit can be fined if they reject reasonable job offers. (Above minimum income, there also is the dynamic marginal rate.)
(2) “Both theory and empirical evidence are inconclusive about the precise employment effects of minimum wages over some range relative to average wages. However, at high levels, there is general agreement that a statutory minimum wage will reduce employment.” (p57) This tries to distinguish but does not distinguish sufficiently between (a) a minimum wage in general, and (b) its position at a high and low value. Much of economic analysis on the minimum wage concerns aspect (a), but that is less relevant. What is relevant is that the tax void allows a reduction of the minimum wage from a high position to a lower position, creating lots of employment.
Three main comments can be made with respect to the OECD (2001) Outlook, chapter 2, “When money is tight: poverty dynamics in OECD countries”:
(1) The issue of ‘poverty dynamics’ can also be seen as much of a non-issue. First one causes a disease and then one studies how some patients show different patterns of colours than others. A wrong economic policy causes unemployment and poverty, and then some people have more such spells than others. The crucial point is to get rid of unemployment in the first place, not study its dynamics.
(2) “Despite substantial economic growth in the OECD area during recent decades, a significant portion of the population consists of individuals whose household income does not support living conditions considered adequate in their country of residence. Individuals living under such conditions are typically labelled as being in poverty, even if their physical subsistence needs can be met.” (p37) This does not distinguish properly between earned income and its tax component that causes unemployment.