An Economy That Works for Everyone

As I remind my readers, I am a non-ideological fiscal conservative and social moderate.  I am a strong supporter of economic growth as measured by GDP.  GDP growth hit 3% in 2018 for the first year time since 2005, helped out by both recent deregulation and the tax reform which lowered our top corporate rate to an internationally competitive 21%.

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But it is well understood that blue collar workers have not benefitted from recent economic growth as much as the most highly educated.  Many less skilled workers have been hurt by both globalization and the increasing automation of industry. The economic and social pain they are suffering has been especially well chronicled by the social scientist, Charles Murray, in his book, Coming Apart.

Globalization and automation are desirable trends in general because they are economically efficient ways of raising living standards worldwide. The question then is: what should the U.S. do to help those workers who have been left behind in the present job market?

The best existing program to do this is the so-called Earned Income Tax Credit.  It subsidizes low-income working families at an overall cost to the federal government of about $70 billion per year.  But is has several weaknesses.  It only applies to families with children so that many millions of individual workers are left out.  Furthermore it is only paid out once a year, at tax time, and therefore does not provide a steady stream of extra income.  Finally, the tax credit starts declining at an income of $19,000 for a married couple with two children, for example, and disappears entirely at $50,000.

A better plan has been proposed by Oren Cass in his recent book, The Once and Future Worker.  It is called a wage subsidy and applies to every worker who makes less than a target wage of, say $16 per hour.  It pays half of the difference between the actual wage and the target wage.  For example, if a worker makes $10 per hour, then his employer pays him/her an extra $3 per hour and deducts the $3 from his tax payment to the federal government.  This approach ties redistribution directly to productive employment and therefore is superior to other types of such programs.

It would cost the federal government $200 billion per year, much more than the current EITC program costs.  The additional $130 billion cost could be transferred from the $1 trillion per year now spent on federal welfare programs without hurting the poor.

Mr. Cass’s proposal is founded on the principle that “a labor market in which workers can support strong families and communities is the central determinant of long-term prosperity and should be the central focus of public policy.”

The wage subsidy program would be a giant step in this direction.

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