Mark Thoma: Minimum Wage and Earned Income Credit are Complementary

     It's a good point because that argument that we liberals should go with EITC rather than raising the minimum wage is out there in force. Evan Soltas recently urged Republicans to offer a more generous EITC instead of raising the MW.

    http://diaryofarepublicanhater.blogspot.com/2013/02/scott-sumner-gop-and-minimum-wage-laws.html

    It is an argument that superficially might appeal to many liberals. Indeed, one very high profile liberal-Christina Romer, Obama's former chair of his Council of Economic Advisors has come out in favor of this "the minimum wage is too distortionary, let's just raise EITC" arguent:

    "It’s precisely because the redistributive effects of a minimum wage are complicated that most economists prefer other ways to help low-income families. For example, the ... earned-income tax credit... This approach is very well targeted — the subsidy goes only to poor families — and could easily be made more generous. ...

    "So where does all of this leave us? The economics of the minimum wage are complicated, and it’s far from obvious what an increase would accomplish. If a higher minimum wage were the only anti-poverty initiative available, I would support it. ...

    "But we could do so much better if we were willing to spend some money. A more generous earned-income tax credit would provide more support for the working poor and would be pro-business at the same time. And pre-kindergarten education, which the president proposes to make universal, has been shown in rigorous studies to strengthen families and reduce poverty and crime. Why settle for half-measures when such truly first-rate policies are well understood and ready to go?"

      http://economistsview.typepad.com/economistsview/2013/03/christina-romer-the-business-of-the-minimum-wage.html

      I think Thoma has a good answer: as the title of this post says, the two are complementary, it shouldn't be an either/or. 

      "The point of the argument that the minimum wage and EITC are complements rather than substitutes (i.e. they fill different needs and hence work together) is to avoid setting one against the other in a political fight. The minimum wage costs the federal government nothing, while an expansion of the EITC would requite an increase in federal spending. My fear is that opponents of the minimum wage on the right will team up with well-meaning Democrats to say yes, we agree, the EITC is much, much better way to help the poor -- that's what we should do -- and use it as an excuse to block minimum wage legislation. Then, when it comes time to fund the EITC, we'll here that it's a good idea, but with the budget the way it is, we just can't afford it right now."

       "There was a time when I would have joined the "let's use the EITC rather than the minimum wage to attack this problem," but I've been convinced the minimum wage and the EITC really are complementary, and the political reality right now is that if we are going to help the poor at all in an environment where the right has whipped up so much fear of the government debt as a way of reducing support for social programs, the best bet is the minimum wage."

       Let me point out that while I agree with Thoma that we shouldn't make this an either/or, the EITC was intended to be not a complement to the minimum wage but it's substitute/replacement, Recall, Milton Friedman and other conservatives were its advocates. While I'm happy to take both, this was not the initial intent. 

       However, if we truly did have to take one or the other I would say take the minimum wage. Why? The minimum wage really is effective at getting Americans out of poverty in a way that the EITC isn't. If we had simply indexed the minimum wage to inflation and productivity gains-as we did prior to 1969 the minimum wage would be at about $16-as it is in Australia where there is hardly sky high unemployment. 

        http://diaryofarepublicanhater.blogspot.com/2013/02/how-does-sumner-explain-australia.html