The Cure for Inequality in the U.S.

As stated by the Hoover Institute’s Edward Lazear, “In rich countries around the world, the top half of the income distribution has been pulling away from the bottom half.  Productivity growth among high-wage workers, driven by technological change, is the reason.”

Many people think that American capitalism is broken.  They say that there is too much inequality, too much wealth for too few and too much greed.  Some CEOs say that there should be less emphasis on short term profits and more emphasis on treating employees better.
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Right now our economy is growing at a rapid clip and unemployment is at a 50 year low of 3.6%.  Not only does this mean more choices for job seekers and higher wages for most workers, it also means many new opportunities for under-served populations such as women and minorities.

Worker productivity rose 2.4% in the first quarter of 2019, compared to a year ago.  This is the fastest year-over-year growth since 2010.   There is now a huge shortage of high skill workers in the U.S., along with excellent pay for entry level jobs.

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Some people worry that the development and spread of artificial intelligence will eliminate jobs for many workers.  But it sure hasn’t happened yet.  Right now labor markets are getting tighter, not slacker.  Obviously what our economy needs is more skilled workers at all levels, whether it be with high school degrees, associate degrees, bachelor’s degrees or postgraduate degrees.

Summary.  There is indeed increasing income inequality in the U.S. and around the world.  The reason for this growing inequality is a combination of globalization and the advance of technology.  The people with the most education and the highest skill levels are pulling away from the rest.  The best way to fix it is not to pull down the wealthy but to raise up the non-wealthy.  To accomplish this we need better and more relevant education at all levels.

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The Many Benefits of Faster Economic Growth

Economic growth is picking up speed in the U.S. which, in turn, pushes down the unemployment rate now at a fifty year low of 3.6%.  This is not only bringing more people into the job market but also raising wages more quickly especially at the lower end of the pay scale.
Of course there are a few negative consequences of faster growth, such as an increase in carbon emissions which cause global warming, but the overall effects are highly beneficial to American society in many different ways.
For example:

  • Blue Collar Workers. Another important factor is that there are many good job opportunities for blue collar workers in the interior of the country, away from the crowded coasts.  These are in thriving cities especially in the midlands which have a much lower cost of living as well.

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  • Women.  One huge benefit is the opening up of many new employment opportunities for women in the blue collar jobs long dominated by men (see first chart).  For example, 9% of over-the-road truck drivers are women as are 5% of welders.

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  • Black unemployment is steadily dropping and is now as low as it has been for fifty years (see second chart).
  • Trade flexibility. As the U.S. and China close in on an historic trade agreement, President Trump has more flexibility to insist that trade abuses such as intellectual theft and restrictive business practices be sharply curtailed.

Summary.  Faster economic growth, along with the lower unemployment rate it engenders, has many, many benefits for Americans.  It means jobs for more people, higher wages for all, new employment opportunities for those who are ambitious and especially for women and minorities.  Everyone benefits when the American economy is humming.

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Economic Growth Is Critical Even With Side Effects

I often write on this blog about the importance of economic growth.  We have just learned that U.S. GDP growth is continuing to soar, increasing at 3.2% in the first quarter of 2019 (see chart).  Growth is so important because it keeps the unemployment rate, now at 3.8%, very low, which in turn is responsible for creating better paying jobs.  Ultimately it is better paying jobs for the American worker which will reduce inequality in American society.

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But faster economic growth may cause problems of its own which need to be dealt with as separate issues.  For example:

  • Global warming. Although U.S. carbon emissions are dropping overall in line with the 2015 Paris Accord standards, they did rise in 2018 which was a year of faster (2.9%) GDP growth.  This makes it all the more important to take the threat of global warming seriously.  In fact, we should adopt the most economically sound and efficient way of doing this, namely a (refundable) carbon tax.
  • Residential diversity. The New York Times has pointed out that suburban areas of many big cities are growing more diverse as minorities are more and more capable of affording houses in these areas.  On the other hand, minorities are being displaced in poor inner city neighborhoods as middle class whites are able to pay higher prices for available houses and vacant lots.  In other words, increasing prosperity is leading to more residential integration even though it happens differently in different parts of town.  The economic progress and increasing diversity should be celebrated rather than constantly focusing on racial inequality.
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  • Two wage earner families are becoming more unequal.  As two professional wage earner families want to have children, it is usually the wife who takes a leave of absence or goes part time, rather than the husband.  Our vibrant economy puts a premium on the willingness to work long hours and it is more likely the man than the woman who is willing to do this.  This is a small sacrifice for couples to have to make compared to the rewards of being part of a dynamic economy.

Summary.  Americans are incredibly fortunate to live in a dynamic society with so many opportunities for advancement.  There are costs to pay for such a satisfying environment but they are well worth it.

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Is “Medicare for All” a Good Idea?

I am not a socialist.  I am not a supporter of Bernie Sanders for President.  But “Medicare for All” has one very attractive feature.  It will substantially lower the cost of healthcare in the U.S.

As I repeat many times on this website, our country’s biggest long term problem by far is the rapidly growing, out-of-control, and unsustainable national debt.  The driving force of our debt problem is the rapidly increasing cost of entitlements.  And the cost of entitlement spending is primarily driven by the cost of healthcare: Medicare, Medicaid and private healthcare in that order (since Social Security insolvency is a conceptually easy fix).

We have excellent healthcare in the U.S. but we pay too much for it, in fact 18% of GDP for all of healthcare, public and private.  This is almost double what any other developed country pays.  The federal government subsidizes the cost of U.S. healthcare (i.e. for Medicare, Medicaid and private) at over $1 trillion per year.  This exceeds even our increasing annual budget deficits.

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“On average, the government (i.e. Medicare and Medicaid) pays the government 87 cents for every dollar of their costs compared with private insurers that pay $1.45.”   In other words, a government run “Medicare for All” program would force hospitals to operate much more efficiently and thereby lower overall hospital costs by an estimated 40%.  This is the plus side of “Medicare for All.”

The negative side of a single payer system like “Medicare for All” is its likely negative effect on innovation.  According to the economist Tyler Cowan, “The American healthcare system, high expenditures and all, is driving innovation for the entire world.”

Summary.  The sixty four thousand dollar question is: “How do we dramatically lower healthcare costs in the U.S., which are burgeoning out of control, without losing the cutting edge medical advancements produced by the U.S. healthcare system?”

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How to “End Economic Inequality, Grow the Middle Class, and Heal the Nation”

“Solving inequality in earnest will require dramatic changes. … It will take vision, wisdom, creativity, patience, courage, and will to fully change our current inequalities.  But we can start with urgency in the business arena.  We can change the dynamic of our precarious current state.  We can change the dialogue and turn the crisis into a discussion of constructive possibilities.  With caring and compassion our attitudes will shift.  The good people will multiply and their efforts will be transformational.  Progress and success will beget more of the same.” 

These are the closing words of retired CEO Peter Georgescu in his new book, “Capitalists, ARISE: end economic inequality, grow the middle class, heal the nation.”  According to Mr. Georgescu, this can all happen if business CEOs will stop worrying so much about the return on investment to their stockholders and instead give more concern to the welfare of their employees.

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But it is not necessary for CEOs to act altruistically for these good things to happen.  In 2018 our economy grew at a rate of almost 3% and the unemployment rate is now down to 3.8%.  Such a low unemployment rate means we have a nationwide labor shortage!

In fact wages are now rising at a fairly rapid clip, faster than 3% per year (see second chart).    Many big companies, such as Amazon, Home Depot and Walmart, are individually raising their minimum wages in order to be able to attract the large numbers of workers they need to operate their businesses.

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Summary.  In other words, the best way to achieve Mr. Georescu’s laudable goals, is to keep the unemployment rate as low as possible, at least under the 4% benchmark.  This will accomplish far more economic good for the average worker than acts of altruism by individual or groups of CEOs.  And by and large it is faster economic growth which lowers the unemployment rate.

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The Stupidity of Modern Monetary Theory

Modern Monetary Theory says that deficits don’t matter, unless inflation increases a lot, because the U.S. can always just print new money to pay off its debts.  The idea being that if inflation does increase then the Federal Reserve would respond by increasing interest rates which would in turn drive up interest payments on the debt.
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Another way to say it is that we are okay with huge deficits, adding each year to our already large debt, as long as inflation remains low.  Yes, it is true that that right now, interest rates are so low that our huge almost $22 trillion debt is almost free money, costing us “only” about $300 billion per year in interest payments.

The problem is, of course, that this currently happy low inflation era will eventually end and the Federal Reserve will be forced to raise interest rates, perhaps dramatically.  The longer this takes to occur, the more our debt will have accumulated in the meantime.  Right now debt is 78% of GDP (for the public part on which we pay interest), and is predicted by the Congressional Budget Office to keep growing steadily worse without major changes in policy.

I find it shocking that many financially experienced people take MMT seriously.  They should know better.  The very simple logic that inflation, and therefore interest rates and interest payments on the debt, will significantly increase, sooner or later, should be easy to understand.  The longer this takes to happen, the more severe will be the eventual problem and therefore the more traumatic will be the necessary fiscal adjustments to make at that time.

Summary.   It is depressing to clearly foresee the awful fiscal hole that our nation is gradually sinking into and be unable to do anything to stop it.

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Tax Policy and the Wealthy

Most of the Democratic candidates for President want to raise tax revenue to pay for new programs of various sorts.  Senator Elizabeth Warren of Massachusetts has in fact suggested creating a new wealth tax, 2% annually on wealth over $50 million and an additional 1% on wealth over $1 billion.
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Is a wealth tax a good idea?

Normally I am skeptical of the economic ideas of Harvard University’s Larry Summers.  He has stated many times that slow economic growth may be the new normal.  He has also said quite recently that we should stop worrying about trillion dollar budget deficits.  These are both very dangerous ideas. (here and here)

But he has two recent columns in the Boston Globe about wealth taxes which make a lot of sense.  First of all, he points out the many problems in trying to tax wealth rather than income.  Secondly, he identifies several ways to broaden the income tax base and close loopholes which would raise significant amounts of new money.
For example:

  • Auditing the tax returns of even just 25% of million dollar earners could greatly increase the compliance rate and likely raise $400 billion over ten years.
  • Closing corporate tax shelters would raise $360 billion over ten years.
  • Closing individual tax shelters would raise $420 billion over ten years.
  • Eliminating the stepped up basis for unrealized capital gains on inheritances would raise $250 billion over ten years.

Just these four tax revenue enhancements alone would more than pay for the $1 trillion cost of the Trump tax cuts passed in December 2017.

Summary.  The Democrats want a variety of new government programs which will have to be paid for.  And the trillion dollar annual deficits already projected for the future are totally unacceptable and need to be greatly decreased.  Broadening the tax base and closing loopholes, as suggested by Larry Summers, will meet both of these needs.

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