President Obama will soon give his “State of the Union” speech before Congress and the American people. President Obama has promised that he intends to stress his feelings of urgency in taking on the challenges pertaining to income inequality as well as transforming the United States from the idea of a minimum wage to the ideals of a livable wage and even a guaranteed minimum salary which would be received from the government for those who are not employed. President Obama is continuing down the road to transform the United States Constitution from a guarantor of negative liberties which limit the ways that government is permitted to act and influence any individual’s life, into a guarantor of positive liberties where the government takes an active role in everybody’s’ lives guaranteeing things the government must provide and perform for every citizen. Never mind that President Obama aims to fashion the United States by implementing every failed concept ever attempted by any European country, exactly the opposite of what has separated the United States from European fantasies and experiments in socialist policies and central planning which combined to make the United States so successful where many European governments and nations have failed. This is the final push to complete President Obama’s promises from his initial campaign for the Presidency when he peddles the mantra of “Hope and Change”, “Fundamentally Changing the United States”, “Altering the Constitution from an Interpretation of Negative Liberties to an Interpretation of Positive Liberties”, and finally “Changing the Concepts to Ones Supporting Equality and Fairness” which stands for central planning for the economy thus guaranteeing to lessen wage disparities and providing employment, salaries and benefits for every American. But what do all these high sounding phrases mean going forward for the average American?
Taking them in some form or order, let’s start with minimum wages. The one truth which has been proven by virtually every study of minimum wages done outside of government subsidized studies has shown a marked decrease in the number of positions earning minimum wage in the job market. This is despite one of the consequences of raising the minimum wage which takes those who have worked their way up from the minimum wage and are showing some degree of promise find themselves back making the minimum wage as the increase either brought the minimum wage up to their salary level or took it beyond their salary level which gave them a backhanded raise in salary though less of one than those people who had been making merely the minimum wage before the increase. The loss of positions available after the government raises the minimum wage is obvious just as when the price of apples is raised people will buy less apples in order to remain within their allotted food budget. The total effect of raising the minimum wage is difficult to measure as it remains unknown if the number of positions available for employment ever reaches the identical level as it would have done if the minimum wage was never changed. Then there are the sarcastic arguments that if raising the minimum wage by a dollar or two is such a great idea, then why not simply raise the minimum wage to $20.00/hr or higher still to whatever price one believes is necessary to support the average family of four.
That argument brings us into the livable wage argument which claims that the minimum wage be scrapped and the livable wage be substituted. There are some among those supporting a livable wage who actually agree that in such a system the livable wage be calculated for every individual area such that the livable wage for New York or Los Angeles would be different than the livable wage for Wasilla, Alaska and Rawlins, Wyoming. Calculating the livable wage such that a family of four can afford to live at an agreed defined level of comfort if one person working at a livable wage was their sole source of income would have a wide disparity depending upon where one sampled in order to make such a determination. As stated above, the differences between major metropolitan areas and small towns and rural areas would have little commonality. The one truth is that in almost every location a livable wage being implemented would spike the minimal salaries far higher than any proposed adjustment which has been proposed for the increased minimum wage. The damage and loss of positions available in the job market under a livable wage law would be far more drastic than should the minimum wage be raised rather than replaced by a livable wage. So, the arguments both for and against a livable wage system and a simple raising of the minimum wage are close to identical with the main difference being the predicted results effect on the job market. Either idea being implemented currently with the still sluggish rate of the recovery would be a shot through the heart on the economy and would still any recovery for the immediate future until equilibrium was reestablished. The new equilibrium is also another argument that raising the minimum wage either to a higher level or drastically raising it to meet livable wage standards has to be addressed. Eventually prices will catch up to the increased minimum wage and inflation will have erased any amount of additional salary earned at the lowest level of wages. If a family has their gross income increased by five percent because the minimum wage was increased five percent, they will initially feel the benefit but within a year or possible two the family will find that their new higher level of income no longer has any effect on their purchasing power. Prices will eventually track upwards and remain at the same or only bear a slight difference from the percentage of income the family paid at the previous level. There is little to any residual improvement when the minimum wage is raised except that government debt gets reevaluated lower but only because of inflation making each dollar worth less and eventually could render the dollar worthless.
That brings us to income inequality. The first thing one needs to understand is that government has very little effect on income inequality or income disparity. Anything the government could enact to lessen the amount of income disparity has to have one or the other effect, either it raised the bottom end of the salary scale or it lowers the upper end of the salary scale. Raising the lower end we discussed when looking at minimum wage and livable wage programs and realize that these tactics really have little if any permanent effect. When the government raises the minimum wages of worker that initially will decrease the disparity between the bottom and the top temporarily but over time such changes will only result in an even larger amount of disparity. This is due to a simply principle that the top salaries tend to reflect the level of the salaries of those at the bottom. The top salaries will usually stay at a certain multiple of the lowest end wages. If you increase the bottom end of the wage scale by two percent, this will work out to increase the top salaries by two percent in close order. That mean that the total amount of wages will increase by the same percentage but that also means that the top scale rises faster and farther than the bottom. A simple example is one person makes $20,000 per year and another makes $2,000,000 per year. Then let’s say that both people receive a five percent increase but that the person at the higher level has that increase take place over a two year span while the lower paid person gets their increase immediately. At the end of two years the higher paid person will be making an additional $100,000 while the person at the lower end will receive an additional $1,000. This makes an increase to the difference of their two salaries of $99,000 even though both people got a two percent increase. The real question is if we consider the person at the higher level has a steady, straight-line increase for the two years, how long will it take before the higher salaried person eclipses the totality of the increase of the other person. Remarkably enough, it would take one week for their respective salary increases to balance dollar-wise, give or take a day; and after that first week, every subsequent week would represent an increase in their wage inequality. Obviously raising the bottom salary range upward with no restraints of the top salaries would prove completely ineffective.
This leaves placing limits of some kind on the salaries of those earners at the top end of the scale in order to limit income inequality. The easiest way to curtail higher incomes is to raise the taxes beyond a certain point; even to the point of making salaries beyond whatever is considered the maximum reasonable wage taxed at or over one-hundred percent. Relying on this application of limiting wages has been implemented in the past and all it proved was that the people at the top of the wage scales are not idiots. They, almost to an individual, took far lower salaries and replaced the rest of their earning into stock options, a company vehicle, company house, company jet, company membership to a gym, country club, exclusive restaurant privileges plus any additional privileges and other dispensations as replacements of dollar salary. No matter the restrictions or limitations placed to force the appearance of wage equality, there will be no lifestyle equality as the people at the top have direct control of the levers and accommodations which they will receive as compensation, otherwise known as salary except that the salaries at the top and even some mid-level positions will be given in a form which is not attacked by the income tax rate. That is why raising the tax level actually is counter-productive and will not actually change the most important inequality, the inequality of the quality of life at the various levels of the wage scale. The reality is actually even more depressing than income inequality; almost any method which is implemented to erase income inequality through government intervention actually results in increasing lifestyle inequality and makes it more difficult for those people aspiring to climb into the ranks of the top echelons in compensation in succeeding in their quest. The reason this is true is the disparity between the very rich and the average and poor is not a function of income or even compensation but is a result and measure of wealth which is not taxed. This is in no way a call for such taxation and even if it were, the very people in Congress would never pass such a law as it would have dire effects upon them and their well-heeled moneyed backers. A true wealth tax would not be simply a tax on savings, like the theft of savings from the banks as was committed by the Greek government, but would encompass all wealth including homes, cars, jewelry, gold, silver, precious metals, gemstones, stocks, bonds, real estate and an almost endless list of assets. Should such a tax ever be levied, even if it advertised as an emergency one-time tax, then it is time to worry and worry deeply as such a bald-faced theft committed by the government is a definitive sign of insolvency and possible imminent threat of default on debt payments. Such an act would be an act of desperateness and would shake the very foundations of the economic system under which such a desperate act was resorted to. A nation in such a desperate state as to literally legislate such a theft is a nation where income inequality is the least of their worries, keeping civil order in the aftermath would be the immediate problem as any government which resorts to stealing from the people cannot be expected to stand and would become a pariah among nations as their promises would no longer be trustworthy. Even a simple savings tax as proposed recently by some from the IMF (International Monetary Fund) would be an indicator that the government has gone economically beyond the cusp and into the valley below the cliffs, a valley from which climbing out takes generations if it is even possible without dissolution of that government and the implementation of new governance. Such is a very painful place to live and there are few examples other than Zimbabwe or, from history, the Weimar Republic. Under such conditions even tulips may become a basis for currency, but I have heard even that was tried and failed.
Beyond the Cusp