The Cold Equations

It’s not enough for your heart to be in the right place. Your head has to be in the right place, too. It wasn’t lost on me that Bernie Sanders is working on a plan to give everyone who wants one a job paying $15 per hour. In her Washington Post column Megan McArdle crunches a few numbers

Sanders wants the government to provide guaranteed jobs at $15 an hour, plus benefits. His office did not, a representative demurely told Post reporter Jeff Stein, yet have cost estimates for this proposal.

Perhaps we can help the senator out. With two weeks of paid vacation, each worker would make roughly $31,000 a year. Adding, conservatively, about $10,000 for benefits, would bring the total cost to about $40,000.

The United States has between 25 million and 50 million workers making less than this total compensation package. Millions more are unemployed or fully out of the labor force. Assuming most of them did the rational thing and signed on, that would make for a $1 trillion to $2 trillion annual program — rivaling or exceeding our total expenditure on Social Security, with maybe Medicaid thrown in for good measure.

and concludes

The impulse behind this idea is noble, and correct: that all Americans should be able to earn a decent living for themselves. But nobility can’t take a back seat to practicality. This old socialist standby deserves to stay exactly where we left it — on the ash heap of history.

Let me put on my green eyeshades and do a little number crunching myself. Based on figures from the IRS, the total income of the top 1% of income earners is around $1.5 trillion. If Sen. Sanders’s plan is to pay for his program by taxing “the rich”, ceteris paribus he’ll need to realize an effective tax rate of 85% on them.

In 1960 the nominal tax rate on the very richest Americans (the top .02%) was 91%. But the effective rate has never been greater than around 25%. Simply stated we’ve never been able to figure out how to extract that much money from “the rich”.

Nearly a quarter of American workers earn less than the $31,000 plus benefit of the program. He’s talking about devoting around 9% of U. S. GDP to his program—more than defense and Medicare combined.

Grow our way into the amount necessary? Even the Trump Administration doesn’t believe that kind of growth can be coaxed from the economy.

Since we can’t fund the program by taxing “the rich”, why not just extend ourselves credit? I don’t believe that even the most committed Chartalist believes that we can extend credit to the tune of 9% of GDP into the indefinite future without inducing a catastrophic loss of confidence in the dollar.

Bottom line: there’s just no practical way to accomplish it.

And I’m not even starting on the run-on effects.