Category Archives: economic inequality

A Much Better Way to do Tax Reform

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My last two posts, here and here, have pointed out the folly of the tax plans of the presidential candidates from both parties:

  • The Republican plans would stimulate the economy but at a cost of huge increases in the national debt, even using dynamic scoring to take into account the growth effects of these plans.
  • Raising the top tax rate to 50%, a Democratic idea, would bring in $100 billion per year, but this is not enough to either make a big dent on budget deficits or lower income inequality appreciably.
    CaptureThe Tax Foundation has just published an excellent guide to income tax policy which makes several good suggestions for using tax reform to boost the economy:
  • Eliminating the deduction for state and local taxes would raise $81 billion per year. Using this revenue to reduce individual income tax rates would grow the economy by 1.77% of GDP over 10 years.
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  • Eliminating the mortgage interest deduction would raise $75 billion per year. Reducing individual tax rates by the same amount would grow the economy by 1.61% of GDP over 10 years.
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  • Capping itemized deductions at $25,000 would bring in $188 billion per year. Reducing individual tax rates by the same amount would grow the economy by 1.99% over ten years.
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Sensible, i.e. revenue neural, tax reform will do wonders for the economy as this study from the Tax Foundation shows. It will bring in more tax revenue to help pay the bills.  It will raise salaries for the already employed.  It will create new jobs for the millions of unemployed and underemployed people who want them.  It will thus reduce income inequality by increasing the wages of people on the bottom. Why is this so hard for so many people to understand?

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Are Democratic Presidents Better for the Economy than Republicans?

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In his usual provocative manner, Paul Krugman reminded us yesterday that, according to a recent study by Alan Blinder and Mark Watson, ever since President Truman the economy has grown faster under Democratic presidents than under Republican presidents.  There are a lot of different explanations for this, not necessarily demonstrating better economic policies by Democratic presidents.  Nevertheless, it is a noteworthy finding which fiscally conservative, fix-the-economy types, need to be aware of.
CaptureAmong other things, Republican presidential candidates must become more credible about their economic policies than they have been so far.  They have all proposed big cuts in tax rates to stimulate the economy. But their plans lose trillions of dollars in tax revenue.  At a time of huge deficits and a rapidly growing national debt this is simply unacceptable.
In today’s Omaha World Herald, the economics journalist, Robert Samuelson, reports on a new Brookings Institute study about the effect of raising the top individual tax rate from 39.6% to 50%.  Such a tax hike would raise as much as $100 billion per year.

  • However, if used to lower deficit spending, it would cover less than ¼ of current deficit spending ($439 billion in 2015, for example).
  • If used to reduce income inequality for the poorest 1/5 of Americans, it would give such households an average of $2,650, and the overall effect on income inequality would be very modest.

The point is that neither costly tax cuts to boost economic growth nor a sizable tax increase on the wealthiest Americans represents a viable program to straighten out our economic problems. What we need to grow the economy is:

  • Revenue neutral tax reform, lowering rates across the board, paid for by closing loopholes and shrinking deductions.
  • Lightening the regulatory burden at least on small and mid-size businesses in order to speed up business growth and entrepreneurship.
  • Trade expansion and immigration reform to increase productivity.

Fiscal conservatives are badly needed to implement such policies effectively but neither party can get the job done alone. It will take both parties working together to make progress.

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Combating the Politics of Distrust

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My last post, “The Politics of Distrust” presents the view that the main reason for the divisiveness of today’s politics is “the stubborn torpor of the American economy.” If this is true then the solution is obvious: speed up economic growth!
CaptureA couple of weeks ago the economist Alan Blinder, a Hillary Clinton advisor, had an Op Ed in the Wall Street Journal, “A Fairness Agenda for Winning Over Angry Voters” with which I largely agree. Here are the highlights of Mr. Blinder’s fairness agenda:

  • A labor market tight enough to leave employers scouring the land for workers, the best tonic for workers the world has ever known. Mr. Blinder does say that looser purse strings by Congress would help create more demand but it is simply too risky to keep running up our already enormous national debt. Eventually interest rates will return to normal and interest payments on the debt will skyrocket.
  • Raising the federal minimum wage would be an enormous help for wage earners at the bottom. Many states and cities are doing this on their own which is a better way to go because of huge regional differences.
  • Increase the Earned Income Tax Credit, especially for childless workers. A very good way to incentivize work.
  • More Vocational Training and Apprenticeships. Strengthening community colleges and career education in high schools would go a long way to accomplish this.
  • Provide quality pre-K education for families who can’t afford it. Early childhood education for children from low-income families is another very good idea.
  • The tax code is a national disgrace. The corporate tax may be even more complex, inefficient and unfair than the personal tax. The mantra of tax reformers has always been: broaden the base, lower the rates. Amen!

What Mr. Blinder is calling a fairness agenda turns out to be a growth agenda in disguise. I would add a few more items like deregulation to encourage entrepreneurship and business expansion but basically Mr. Blinder has suggested an attractive program for economic growth which should appeal to a broad collection of political interests.

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The Politics of Distrust

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I define myself as a fiscal conservative with a social conscience, because I want to address budget deficits and income inequality at the same time.  There is so much divisiveness in politics these days that liberals accuse me of favoring austerity while, at the same time, conservatives accuse me of being soft on welfare.
The author Jay Cost has an article, “The Politics of Distrust” on this topic in yesterday’s Wall Street Journal.  He says that the principal cause of this distrust is “the stubborn torpor of the American economy.”
Capture0According to Mr. Cost:

  • For roughly half a century after WWII economic growth averaged 3.6% a year.
  • Over the past 14 years, real growth has averaged only 1.7%.
  • Persistently weak economic growth has contributed to our sour civic mood in three important ways:
  1. It has prompted voters to turn against the incumbent party time and again.
  2. Underwhelming growth has heightened anxieties about economic anxiety – liberals blame the unfairness of market-based capitalism and conservatives blame the corrupting hand of government – in taxation, regulation and monetary policy.
  3. Finally, weak economic growth has damaged the credibility of the experts – the experts failed to foresee the slowdown of the early 2000s, failed to anticipate the housing bubble, failed to predict that economic growth would remain weak after it burst, and failed to implement policies to return it to our postwar norm.
  • These trends amount to a comprehensive assault on the political equilibrium of the past half century. During the postwar era public policy could evolve because broad agreement existed. Now the consensus has vanished and we are left with gridlock, indecision and drift.
  • The tonic to this stalemate is as obvious as it is elusive: economic growth that approximates the levels of the late 20th century.

Perhaps surprisingly there is a fair amount of agreement between liberals and conservatives on how to speed up economic growth. This will be the subject of my next post.

A Fiscal Conservative with a Social Conscience

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My last two blogs were “Why racism exists in America” and “Educare and the Academic Achievement Gap.”  I often describe myself as a fiscal conservative but it would be more accurate to say that I am a fiscal conservative with a social conscience.
Capture0By this I mean:

  • First and foremost I want to shrink our annual federal budget deficits enough so that our national debt begins to decline as a percentage of GDP. Right now the public debt (on which we pay interest) is at 74% of GDP which is the highest it has been since the end of WWII. This high level of debt is unsustainable and will inevitably lead to a new and much worse financial crisis if it is not put on a downward path.
  • Closely related to the first goal is the need to get our economy growing faster than the 2% average rate of growth since the end of the Great Recession in June 2009. This will have the twin benefits of producing more tax revenue which will make it easier to shrink our annual budget deficits as well as creating more and better paying jobs for everyone.
  • A third goal is to reduce income inequality. The best way to do this is not with more income redistribution from those with higher incomes to those with lower incomes but rather by achieving faster economic growth which will raise incomes for all. Yet another critical way of making American society more equal is to focus on:
  • Reducing social inequality. There are many different forms of social inequality  in our society but let’s focus on one of the most severe aspects: black-white racism.  America will be a more peaceful and prosperous country if we can reduce the glaring inequalities between the two races.

I am sufficiently optimistic to think it is possible to make progress on all of these fronts at the same time. It won’t be easy but momentum is slowly but surely building in this direction.

Richer and Poorer

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As I often remind readers, this blog is primarily concerned with three basic fiscal and economic problems facing the U.S. They are: 1) our stagnant economy, 2) our massive debt, and 3) income inequality. Today I discuss inequality. The March 16 2015 issue of the New Yorker contains an extensive article on this topic by Jill Lapore, “Richer and Poorer.” However it suffers a common defect of only presenting one side of a complex issue.
There are facts about inequality which more people need to be aware of. For example:

  • The scope of income inequality is greatly reduced once incomes are adjusted for government transfers and federal taxes as shown in the following chart from the Congressional Budget Office.
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  • There is a strong correlation between inequality and growth as shown by the second chart just below from the World Bank.
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  • Globalization has had a dramatic effect on incomes world-wide as low skill work has shifted from the developed world to the developing world as shown in the chart below from the Wall Street Journal. Hundreds of millions of people in the developing world have been lifted out of poverty at the cost of lost jobs to low skill workers in the U.S. and other developed countries.
    Capture3Any effective strategy for decreasing income inequality needs to be reality based. Yes, it exists but its severity is exagerated. The Americans who need help the most are the ones unlikely to either attend or graduate from college. What they need most is vocational training to prepare them for the millions of high skill jobs going begging in the U.S.
    The best thing we can do to decrease income inequality in the U.S. is to get our economy growing faster. Since the end of the Great Recession in June 2009, it has grown at the historically slow rate of 2.2% of GDP and this slow rate of growth is predicted (by the CBO) to continue indefinitely under current government policies. A return to the historical 3% growth rate would create jobs and better jobs for millions of the unemployed and under-employed as well as providing bigger raises for the middle class as employers have to compete for qualified workers.
    How can we make the economy grow faster? I have addressed this critical issue many times and will return to it soon.

Inequality and Growth

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In my opinion the two most serious problems facing the U.S. at the present time are 1) stagnant growth and 2) massive debt. As discussed by William Galston in yesterday’s Wall Street Journal, the U.S. presidential campaign is now beginning to address the first of these issues.  For example:

  • Bernie Sanders rejects “growth for the sake of growth” and says that “our economic goals have to be redistributing a significant amount back from the top 1%.”
  • Hillary Clinton says that we have to build a “growth and fairness” economy. “We can’t create enough jobs and new businesses without more growth, and we can’t build strong families and support our consumer economy without more fairness.”
  • Jeb Bush argues that there is nothing wrong with household incomes that 4% growth wouldn’t solve.

The readers of this blog will have little difficulty figuring out where I stand on this continuum of economic values. My view is illustrated by the chart just below from the World Bank which shows that countries with the fastest growing economies also have the least amount of inequality.
CaptureLet’s be more specific. Mrs. Clinton would achieve more fairness by:

  • Raising the minimum wage.
  • Guaranteeing child care and other family friendly policies.
  • Encouraging profit sharing.
  • Encouraging more innovation by increasing public investment in infrastructure, broadband, energy and scientific research.

These are attractive goals but how do we achieve them? The best way to raise wages is to get the economy growing so much faster that it creates a labor shortage. Then businesses will be competing for labor and wages will go up. This is exactly what is happening in Omaha NE where I live and the unemployment rate is down to 2.9% (2.6% in Nebraska as a whole).
Furthermore, in a tight labor market, businesses will automatically try harder to keep good employees by providing extra benefits such as childcare and profit sharing.
Public investment in infrastructure, etc. will be more easily affordable with the higher tax revenue generated by a faster growing economy.
Conclusion: faster growth is the best way to create a more fair and equal society!

“The Dung of the Devil”

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My last post, “The Moral Case for Free Enterprise,” was motivated in part by a recent speech of Pope Francis comparing the excesses of global capitalism to the “dung of the devil.”
Capture2The scholar Mark Perry of the American Enterprise Institute has just published an interesting chart (just below) demonstrating an 80% reduction in world poverty in the 36 year period from 1970 to 2006.  He quotes AEI President Arthur Brooks that “if you love the poor, if you are a good Samaritan, you must stand for the free enterprise system, and you must defend it, not just for ourselves but for people around the world.  It is the best anti-poverty measure ever invented.”
CaptureIn a previous post, a year and a half ago, “A Global Perspective on Income Inequality,”  I referred to another chart (just below) to demonstrate the massive growth of income in the developing world.  To a large extent this is the result of economic globalization shifting low-skill employment from the developed world to the developing world where the cost of labor is less expensive. As Arthur Brooks says, “It was globalization, free trade, the boom in international entrepreneurship.  In short, it was the free enterprise system, American style, which is our gift to the world.”
Capture1So, yes, the world as a whole is now much better off but American workers have paid a price for the global shift in low-skill work.  The answer is not to impede globalization but rather to:

  • Speed up the growth of our own economy in order to raise wages and provide more jobs for the unemployed and underemployed.
  • Improve K-12 educational effectiveness and expand career educational opportunities to better prepare present and future workers for the many new high-skill jobs being created all the time.

The world is changing rapidly but there are effective ways for the U.S. to adapt if only we have the good sense to move forward!

The Land of the Free and the Home of the Brave

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As we celebrate the 239th anniversary of the signing of the Declaration of Independence in 1776, Americans have much to be thankful for.  It is often said that the United States is the strongest, wealthiest and freest country the world has ever known.  Although this may be somewhat of an exaggeration (see below), it is still indicative of how fortunate we are compared to the rest of the world.
CaptureAs we celebrate our good fortune, we need to be acutely aware that our continued success as a great nation is not automatically assured.  In fact we face a number of troubling and persistent problems which are not likely to disappear unless we take strong action to address them.  For example we have:

  • A stagnant economy with only 2.2% annual growth since the end of the Great Recession. And the Congressional Budget Office predicts no speed up over at least the next ten years, based on current policy. Such slow growth condemns 20 million unemployed and underemployed citizens to unfulfilling lives, as well as lackluster pay raises for many more tens of millions.
  • Massive debt. Our public debt (on which we pay interest) is now at 74% of GDP, highest since the end of WWII, and predicted by the CBO to grow rapidly under current policies. When interest rates return to the normal 5% level, interest payments on the debt will skyrocket, making it much more difficult to fund all of the federal programs we depend on for our quality of life.
  • Increasing Income Inequality is real even if overhyped in the media. America is still a land of great opportunity but basic fairness demands that all citizens be able to share in our national abundance.
  • Threats from abroad. ISIS now controls much of Iraq, Syria and northern Africa and must be defeated. NATO needs our very strong support, all the more so with the Eurozone and European Common Market under increasing pressure from within.

 

As the strongest nation in the world we have much responsibility for continued world peace and prosperity.  We can’t fulfill this role adequately unless our own internal fiscal and economic policies are in fundamentally sound shape.
Let’s be thankful for what we have and bear down hard to insure that we keep it!

Letting Young People Drift and the Liberal Disconnect

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The New York Times had an excellent lead editorial on Sunday, “The Cost of Letting Young People Drift,” describing how 5.5 million young Americans, ages 16 – 24, are neither working nor in school.  “At a time when the economy is requiring workers to have higher levels of skills, one in seven of America’s young adults can’t even get started.”
CaptureThe NYT editorial is based on new research, “Zeroing In on Place and Race: youth disconnection in America’s cities” performed by Measure of America.  The report points out that the problem has gotten much worse since the Great Recession in 2008, as shown in the chart below.
Capture1It also breaks down the youth disconnection rate by state.  For example, Nebraska (7.6%), North Dakota (7.9%) and Iowa (8.8%) have the lowest percentages, while Mississippi (18.5%), West Virginia (19.6%) and Louisiana (19.8%) have the highest percentages (as shown below).
Capture2Capture3But also look at the latest “Unemployment Rates for States” published by the Bureau of Labor Statistics.  There is a very close connection between a state’s unemployment rate and its youth disconnection rate, as shown below. In other words, one of the best ways to keep young people connected is to give them a better chance of finding a job.
Capture4Capture6But it requires faster economic growth to provide more jobs.  Just yesterday the NYT had an editorial, “Obstacles to Economic Growth,” lamenting our very slow rate of economic growth of about 2.2% for the past six years.  According to the NYT, “What’s needed most is public and private investment in the economy sufficient to support strong growth and rising productivity.”  The editorial then goes on to berate Congress for being more interested in budget cuts than in new spending programs to stimulate the economy.  According to the NYT, “the pathway to prosperity is clear for leaders who will dare to take it.”
The NYT thus recognizes the need for more private investment to stimulate the economy but has no apparent interest in policy measures to encourage it.  How can a news organization as sophisticated as the NYT be so passionate about wanting to improve society and so clueless about the best way to do it?