More on Warren Buffett’s Enormously Important Article on the Minimum Wage

Charlotte has already blogged on Warren Buffett’s enormously important piece in today’s Wall Street Journal, in which the billionaire investor argues that a crafted expansion of the earned income tax credit would do more to lift people out of poverty than hiking the minimum wage (which would actually lead to more unemloyment). But I’d just like to put in my two cents.

I admire Warren Buffett for many things particularly his philanthropy. What he and his “BFF” Bill Gates have done internationally to combat poverty, malaria, HIV, and other diseases with their private money is beyond belief.

Buffett made his money as a businessman and investor and that too is commendable. I part ways with Buffett on some of his economic policies, including hiking taxes on the wealthy as one way to address our national budget woes. We often hear about the infamous Buffett Rule. It would require households that earn over $1 million pay a minimum tax rate of 30 percent.

But here’s something we do agree with him on: boosting the earned income tax credit (EITC) is a far better way to help poor and lower income Americans than mandating minimum wage increases.

The EITC is a “refundable” credit delivered to beneficiaries such as low-income workers as a direct payment if their net federal-income-tax liability is zero. It has the effect of lifting millions of Americans above the official poverty line by incentivizing them to work and then augmenting their wages.

As we reported yesterday, Los Angeles voted to boost its minimum wage to $15 an hour. Over the long term businesses will be forced to cut some labor or replace labor with machinery and technology which never asks for a raise. Try to tell that to the thousands of protestors rallying outside of the McDonald’s corporate headquarters in Oak Brook, IL, this week to demand a $15 minimum wage.

Buffett should explain to protestors and all of this to his progressive friends that the effect of minimum wage hikes is to put a lot of people, especially those with low skills, out of work. And indeed, it looks like he’s starting to explain with his Wall Street Journal op-ed. My only reservation: I’d love to see a similar piece by Buffett in the New York Times or Washington Post, where the ideas he expressed are more alien. He made great great points:

No conspiracy lies behind this depressing fact: The poor are most definitely not poor because the rich are rich. Nor are the rich undeserving. Most of them have contributed brilliant innovations or managerial expertise to America’s well-being. We all live far better because of Henry Ford, Steve Jobs, Sam Walton and the like.

Instead, this widening gap is an inevitable consequence of an advanced market-based economy…

…. A comparable overlay would leave much of the labor force unmatched to the universe of attractive jobs.

That mismatch is neither the fault of the market system nor the fault of the disadvantaged individuals. It is simply a consequence of an economic engine that constantly requires more high-order talents while reducing the need for commodity-like tasks.

…

In my mind, the country’s economic policies should have two main objectives. First, we should wish, in our rich society, for every person who is willing to work to receive income that will provide him or her a decent lifestyle. Second, any plan to do that should not distort our market system, the key element required for growth and prosperity.

That second goal crumbles in the face of any plan to sizably increase the minimum wage. I may wish to have all jobs pay at least $15 an hour. But that minimum would almost certainly reduce employment in a major way, crushing many workers possessing only basic skills. Smaller increases, though obviously welcome, will still leave many hardworking Americans mired in poverty.

The better answer is a major and carefully crafted expansion of the Earned Income Tax Credit (EITC), which currently goes to millions of low-income workers…

In essence, the EITC rewards work and provides an incentive for workers to improve their skills. Equally important, it does not distort market forces, thereby maximizing employment.

In Policy Focus: Why Earned Income Tax Credit Beats Minimum Wage, IWF fellow Rachel DiCarlo Currie explains that of the two options the EITC is the better choice. The EITC isn’t perfect; it is too complex and imposes high marginal tax rates and marriage penalties on certain recipients. However, it remains a better vehicle for fighting poverty than the minimum wage, which will cost our economy jobs.

Buffett says some uncomfortable things in his op-ed including this:  the poor aren’t poorer because the rich are richer. It would be the height of hypocritical hubris for one of the world’s wealthiest to condemn the system that allowed his investment genius to be rewarded with great profit and wealth. Playing class warfare does no one any favors.

Buffett’s op-ed was a refreshing reminder that public policies aimed at improving the lives of the poor and middle class should not depend on transferring wealth but incentivizing work. Extra points go for also rewarding entrepreneurship and (small) business ownership through lower taxes as well.