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Today's Commentary: 01.15.07
Consider Zero:
The Year of Wage Reform By Paul Petillo
Consider zero. From an historical standpoint, zero didn't come into any real usefulness in Europe/Asia until the first millennium A.D. Although it has recently been discovered that it was first used in practical applications among Mesoamerican Indians* at least 1100 years prior to DaVinci's incorporation of it for scientific purposes, living life without it would be difficult.
The presence of zero, once it was understood, changed everything. Zero, unfortunately will change everything for us as well.
Aside from the largely dysfunctional paychecks and bonuses that the news media has sensationalized recently, the reality of life for most of us is wholly devoid of multiple zeros in our paychecks,
We believe that we work to produce a paycheck that in turn provides us with the necessary compensation to ensure our lifestyle. We consider this as positive productivity. Our employers on the other hand, view our productivity somewhat differently. It has become a statistic that boasts of an employer's savvy, speaks of economic strength, and as a tool for bargaining against increased compensation. We are reminded of the global marketplace and how productivity plays a role in that competition. But what happens if the effort we put forth produces increasingly less reward?
Over the last six years, while productivity has increased dramatically, our pay has failed to coincide with those advances. In fact, we have been kept as close to zero pay growth as possible.
Business leaders will tell you that shareholder demands for ever-increasing profits keeps those jobs available, growth strong and the economy humming along.
But that is simply not true. Shareholder demands have increased of late and come to the forefront of far too many business decisions but it has been a result of bad behavior, unfair compensation packages and illusory earnings achieved through pension reductions, stock buybacks, and merger and acquisitions to name a few. But shareholders have not focused on the compensation received by the rank and file.
Productivity to most workers is what leads to job security. It is for many workers an "investment" of labor. If you approach the issue from that position, would Middle America, acting as a "labor investor" be satisfied with 1% increase (how much pay actually increased) in returns over the last six years? What investor would?
If those employees used that money, which based on the 93 million non-farm non-supervisory workers in this country amounts to just over $3.00 per person, and invested it, they would soon find out just how close to zero it really is.
But zero is such a harsh word. In 2007, we will find ourselves facing new words used to soften the blow. This replacement terminology will be designed to hide the truth behind words like productivity. Frank Luntz, Republican wordsmith has fashioned a treatise for CEOs. In it, he suggests ways for these corporate chiefs looking to portray their performance or lack of it in a better light and maybe, in the process convince you that zero isn't all that bad.
Using the same terminology that you often hear from the White House, these execs will now spin their lack of compensation for their employees as the cost of innovation (formerly, the threat of outsourcing) while over-compensating their paychecks (formerly transparency now accountability). The future of the American workforce will be placated with gems such as this: "More Americans are afraid of the principle of globalization than even privatization. The reason? Globalization presents something big, something distant, and something foreign."
This year we are faced with a much wider variety of options to reform those wage discrepancies that include raising the minimum wage to looking at taxation. Because taxes are at the center of every economic discussion originating from the White House, let's start there.
Do wages directly correspond with corporate taxation? It is possible that the argument could be framed in such a way as to suggest that what is happening globally would reflexively happen here. The American Enterprise Institute has recently released information concerning just such a phenomenon. The data however spans a twenty-two year stretch when developing nations (72 were included in the study) slashed corporate taxes to increase outside investment. That kind of growth will not occur here even if our tax rate went to zero.
The belief that Mr. Bush¹s tax cuts if allowed to expire in 2010, would automatically deduct $2,000 from the average paycheck borders on the absurd. Had that sum been added to each paycheck (and not dispersed among the top 10% of wage earners), there would be no argument about their economic virtue. But that is not how those tax cuts worked.
Refocusing the tax debate on the Earned Income Tax Credit has surfaced as a possible solution to the growing gap between wage earners. In principle, the program targets the low-income workers offering them a tax break based on what they earned. The main problem with that program is the complicated nature (read: additional costs) of filing for the credit.
With the limit on earned income set at $11,750 for single filers, if he or she has no children, $31,030 with one child and $35,263 with two or more kids, the program seems, at least on the surface to be a good idea for taxpayers at the bottom of the wage ladder. (Married couples filing jointly are allowed to earn $2,000 more in each of the abovementioned categories.)
The complications I mentioned earlier arise as the filer faces numerous qualification issues, usually must consult a tax preparer and because of that, they often lose some of the money due to a wide variety of offerings designed to get those refunds sooner.
This inflation-adjusted credit can be as much as $4,400 for workers supporting two or more kids. With one child, a worker is eligible to receive up to $2,662 with the credit. ($399 is available to a childless eligible employee.)
Increasing the EITC limit would work like a tax cut. It would put more money back in the hands of those who are most likely to be head of the household. Making it less complicated would also serve to make more widely used.
In the current atmosphere of pay-as-you-go, somewhere, a tax increase would need to be levied. The new Democratic congress could avoid this by making the filing and receiving a refund less costly by offering vouchers to cover the costs. The more people take advantage of a program like the EITC, the better it works.
Another less costly possibility would encourage businesses to promote a zero-tax. Much like the Pension Protection Act encourages employers to enroll workers in 401(k), a zero-tax plan would do the same with the employee¹s W-4. By calculating the correct deductible, the employee will essentially receive an increase in take-home pay rather than the once-a-year refund check from the IRS.
We will hear increased talk about minimum wage as the new Congress takes on the status quo. The House has already approved an increase. Small business understands that wage increases lead to increased buying power. They also understand that inflation has eroded the minimum wage, originally set nine years ago. Small business has also been vocal in the true costs of such an in compensation referring to them as negligible at best.
The evidence that wage reform can work is easy enough to find. Half the nation has enacted pay raises above the federal minimums. The remainder of the nation unfortunately has experienced zero growth.
The next time you hear that the economy is doing well, it would be wise to consider zero and how it affects you. Dick Teresi, a science historian once described the importance of zero like this: Imagine a student taking four courses, each assigned a grade point of one for each letter grade. An 'A' would be worth 4, a 'B' would be worth 3, and so on with a failing grade equaling zero. The student who received the highest mark in two classes but failed two would be entitled to a 'C' average or a 2.0. Without zero, Mr. Teresi tells us, that student could easily say, the failed grades do not exist because zero is not a number and therefore cannot be added to the two passing grades.
While any teacher will argue otherwise, the White House would err on the side of the student. Zero means nothing. And depending on who you listen to, the economy deserves an 'A' when the truth is, it is failing on more than one front.
*The reference to Mesoamerican Indians comes from the Charles C Mann treatise on the Americas prior to Columbus. In 1491, he suggests that the term encompasses all inhabitants of the western hemisphere and dispenses with many of the politically correct terms that have surfaced in recent years.
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