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Robert Haveman Responds

In my essay, I stepped back to review the nature of the employment and equity problems plaguing the industrialized world, and to put forth a combination of policy measures that may offer a better way of doing business. Some of the commentators liked the ideas; all had reservations and alternative suggestions.

Political Feasibility. Benjamin Page suggests--contrary to both conventional wisdom and Rebecca Blank--that the universalistic aspects of the program may make it politically attractive. To him, opposition to the proposals will come from politically powerful businesses and high-income people, who fear loss of a competitive edge in the face of increased international capital mobility, immigration, and a global labor pool. These interests require either productivity enhancement or tax relief as the price for any program aimed at improving opportunities for poor people and unskilled workers, and see neither in my suggestions.

Page's concerns strike me as deeply disturbing, and too pessimistic. Even edgy business interests and wealthy people understand the dangers to long-term prosperity from persistent poverty, dependency, and the demoralization that comes from lousy jobs or no jobs at all. A plan offering the combination of both more efficiency and more equity than our current arrangements should strike a responsive chord. If socially productive social policy proposals face the obstacles that he describes, perhaps we should all trade in discussion and debate for more activist ventures.

Rebecca Blank also sees political obstacles. In her view, cash-based redistribution systems, even when they are linked to work subsidies, are objectionable because of their universalism. She suggests that analysts and reformers should respond to the nation's current fascination with more targeted programs, and with mandates aimed at encouraging specific behaviors, and assist in the design and implementation of effective versions of this strategy.

Frankly, I don't much like that role. In my view, those of us concerned with issues of efficiency, equity, independence, incentives, and opportunities ought to identify and debate policy approaches that promote these principles, whether or not they march to the beat of current paternalistic policy-making.

I am also troubled by Blank's characterization of my proposal as a centralized, universal, guaranteed income support system. To be sure, it has a refundable credit income tax at the base of the system. However, by design, the implicit income guarantee of that plan is a modest, well-below-the-poverty-line minimum,1 similar to some of the flat rate tax proposals supported by some economists, and politicians of all stripes. The guarantee level in my proposal simply assures that no citizen will fall below some minimally acceptable level of living, a standard that we still do maintain in the United States.

Indeed, the main thrust of my suggestion is targeted, and it is aimed at encouraging a specific behavior--namely work. How else can one view the wage rate subsidy, the marginal employment tax credit,2 and the elimination or scaling back of more generous unemployment compensation, disability, and welfare programs? Given the low guarantee of the credit income tax, and the scaled-back categorical cash transfer programs contained in the proposal, the work is necessary in order to live a middle class life, and if that work carries a low market wage rate, it ought to be subsidized.

Substantive Policy. Blank and Robert Solow take me to task for failing to include in my portfolio direct labor market job search and training programs designed to raise earning power at the bottom of the distribution. They are right; I do not emphasize these measures, and for good reason. Over the past two decades, we have tried and evaluated scores of such approaches. The results are not encouraging. While many of the best ones pass a benefit-cost test, the earnings increases of the low-skilled trainees rarely exceeds $1,000 per year.3 Earning power at the bottom of the distribution is raised, but not by much. Solow notes that such efforts might be worthwhile in the long-run "if we knew where to start." That is precisely the rub, and the reason why they are not highlighted in my proposal.

Fritz Scharpf makes an important distinction among European welfare states. He notes that some (e.g., the Scandinavian states) sustain high employment through large-scale public employment in service activities sheltered from international competition. In the health care, child care and education sectors, workers are paid relatively high wages, apart from their productivity. The continental welfare states (e.g., Germany and France) do not adopt this approach. From this he concludes that the strategy that I suggest may be successful for the latter states, but not for Scandinavia. While his distinction among the European states is most helpful, I fail to see why elements of my suggested approach would not be effective in Scandinavia. By his own description, these states are hard pressed by the high tax burdens required to support both the subsidized, high paid public jobs in sheltered service activities and generous categorical cash transfer programs. Would not these states benefit from a wage rate subsidy supporting the somewhat lower pay of unskilled workers that private employers would hire? Would not the competition to the public jobs provided by private sector competition promote efficiency? Would not a scaling-back of the high benefit, categorical transfer programs in these countries reduce the high rates of low-skill worker joblessness which these countries are increasingly encountering?

On a quite different note, Arnie Graf and Jonathan Lange criticize the income support and subsidized wages to poor citizens and low skill workers that I suggest. They characterize these as "subsidizing the private sector," and urge me to sign on to living-wage ordinances, which are but disguised well-above-market minimum wage plans. I have little trouble accepting the modest labor demand reductions associated with upward adjustments in the existing federal minimum wage. However, Graf and Lange's proposed high living-wage mandates fly in the face of a labor market that I am prepared to alter, but not to flaunt.

Finally, Solow notes that for wage rate subsidy and employer-based subsidy arrangements to be successful, they need to be permanent fixtures with continuing costs. I agree. The fact is that reducing poverty and inequality--and bringing youths and those with low skills to the point where work will "work"--cannot be done "on the cheap." Surely, parents know this from their own child-rearing experiences. We give our children lots of education, with monitoring and advice and expectations and parental participation in schools. Then, when they finish their schooling, we support them for a time while they get their heads together. Sometimes they engage in a job search, sometimes they ski, sometimes they travel. Following this, we actively and individually help them with their job search. We help them prepare a rsum, put them in touch with friends and acquaintances, help them prepare for job interviews--all so they can find their own special niche in the world of work. Finally, we often support them in moving far from our home if that is where the best opportunity lies. And think of how often, even with all of the nurturing, the process doesn't work out too well.

1 Robert Solow also misses the skimpy nature of the low guarantee, which minimizes the marginal tax rate disincentives about which he is concerned.

2 Solow erroneously suggests that the marginal employer subsidy may fail to provide incentive for hiring low-skill workers. Consider an employer needing labor equal to $50,000 of productivity. Assuming substitutability between low- and high-skill workers, either hiring five low-skill workers at $10,000 each or hiring one high-skill worker at $50,000 will meet the need. A subsidy equal to $25,000 is reaped if the five low-skill workers are hired; hiring the high-skill worker carries a subsidy of $5,000. Therein lies the incentive.

3 See the articles by Blank, Burtless, and Glazer in Demetra Nightingale and Robert Haveman, eds., The Work Alternative (Urban Institute, 1995).

Originally published in the Summer 1997 issue of Boston Review

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