Why Free Trade Is So Important

 

My blog “It Does Not Add Up” addresses our country’s two major problems:

  • Slow Economic Growth, only 2.1% annually for the past seven years and
  • Massive Debt, now 74% of GDP, the highest it has been since the end of WWII.

These two problems are, of course, closely related.  Faster growth would bring in more tax revenue and reduce our annual deficits.  Shrinking the debt, as a percentage of GDP, will demonstrate that the world’s strongest economy will not falter when interest rates inevitably return to more normal (and higher) levels.
Capture5There is a strong correlation between trade and world-wide economic growth as shown in the above chart.  A recent Gallop poll found that 58% of Americans consider foreign trade an opportunity for economic growth and only 34% view it as a threat.  Not surprisingly, the opponents are lower-income, blue-collar workers who are the most vulnerable to economic change.  Consider:

  • It is technology, not trade, which is behind the loss of manufacturing jobs. Between 2000 and 2010, employment in manufacturing fell by 5.6 million. But productivity growth accounted for 85% of the job loss. Only 13% resulted from trade.
  • Since trade is not the underlying cause of job loss, protectionism is not the solution. If, for example, the U.S. imposes 45% tariffs on imports from China, production would merely shift to other low-wage developing countries in Asia. Pretty soon we’d have a massive trade war.
  • Trade Adjustment Assistance consists of extended unemployment compensation as well as retraining programs. This program misses the millions more who are unemployed due to technological change. Furthermore, extended unemployment compensation leads to deterioration of work skills. A better way to help displaced workers is to expand the Earned Income Tax Credit which supplements all low-income work.
  • NAFTA is a huge economic and foreign policy success. Trade between the U.S. and Mexico has greatly increased sine 1994 and 40% of the value of imports from Mexico consists of content originally made in the U.S. Furthermore NAFTA has promoted the growth of a large middle class in Mexico.
  • Starting in 2001 when China became a WTO member, U.S. companies became more interested in foreign investment in China and other countries and offshoring has proliferated since then. Substantially reducing the corporate tax rate would bring many of these foreign operations back to the U.S.

Trade is win-win for everyone except the production workers who lose their jobs to foreign competition. We can clearly do much more to help them maintain their standard of living.

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Should the National Minimum Wage Be Raised?

 

A recent column by David Brooks in the New York Times, “Minimum Wage Muddle,” is a good summary of the pros and cons of raising the minimum wage for the whole country. Mr. Brooks refers to a recent Congressional Budget Office report that a hike in the minimum wage to $10.10 per hour might lift 900,000 out of poverty but would also likely mean a loss of 500,000 jobs.
Capture5As suggested in a recent post, one of the things we could do to get beyond our political dysfunction at the national level is to:

  • Put a greater emphasis on state-centered federalism both to encourage experimentation and innovation in the American system and to remove issues from the national agenda which contribute to division, stalemate and endless controversy.
    Capture4Considering that income inequality varies so greatly from one part of the country to another, (see above), it makes a lot of sense to federalize the minimum wage issue. In other words, let cities and states set their own minimum wage levels based on their own local circumstances.
    For example, the state of Nebraska, with very little inequality and where I live, has just raised its minimum wage to $8/hour ($9/hour beginning January 2016). Nebraska’s lowest in the country unemployment rate of 2.6% means that hardly anyone will lose their job.
    As Mr. Brooks says, “Raising the minimum wage will produce winners among job holders from all backgrounds, but it will disproportionately punish those with the lowest skills, who are least likely to be able to justify higher employment costs.”
    Conclusion: raising the national minimum wage is not the best way to address the inequality and fairness issue. A better way is to create more jobs by boosting the economy overall. Then help low wage workers take home more money with a (perhaps expanded) Earned Income Tax Credit. Cities and states can establish their own individual minimum wages however they wish.

“We’ve Got to Do Something about Income Inequality”

 

This is what I hear over and over again from my liberal-minded friends.  Their solution is to raise taxes on the rich and give to the poor.  This might help a little but not nearly enough.
The best way to help middle- and lower-income people is to give them more opportunities for self-advancement by providing more upward mobility in society.  Right now the middle class is being “hollowed out” as shown in the chart just below.
CaptureThere are three major reasons for this:

  • Economic Globalization which provides low cost goods from around the world and thus puts pressure on low- and semi-skilled workers in the U.S.
  • Rapid technological advancement which puts a higher premium on educational attainment and advanced skill acquisition.
  • Slow economic growth averaging only 2.3% since the end of the Great Recession in June 2009.

Globalization and technological advancement are strong worldwide forces likely to continue indefinitely.  We will simply have to adapt to them with long term strategies such as improved educational outcomes at all levels (early childhood, K-12 and post-secondary).  But speeding up economic growth is under our direct control with tried and true methods which are not being fully utilized at the present time. Such as:

  • Tax Reform. We should lower tax rates for individuals across the board, paid for by shrinking deductions for the wealthy. This will give middle- and lower-income workers, as well as new entrepreneurs, more money to spend, thereby boosting both supply and demand in the economy.
  • Increasing the Earned Income Tax Credit paid for by using some of the increased revenues from shrinking deductions for the wealthy. This would encourage more people to take and hold onto entry level jobs, thus boosting the economy by increasing the size of the workforce.

In other words, much can be done to reduce income inequality.  Redistribution of tax revenue is fine as long as it is done in a way which increases economic growth, rather than just punishing the rich.

How Do We Boost Middle Class Jobs?

 

Income inequality is a serious political issue these days as it should be.  America’s future well-being depends on widely shared prosperity.  One of the very best ways to lessen inequality is to increase mobility into the middle class.
Capture  The political and economic analysis group, FiveThirtyEight, has just reported new data (see above) that “Mid-tier Jobs Are Seeing Less Growth.”  The middle class has already been hollowed out by the gale-wind forces of globalization and technological advancement.  Now the Great Recession, and the slow recovery from it, has made things that much worse.  It’s long past time to focus on middle class recovery.
The best way to do this is to make the economy grow faster as follows:

  • Tax Reform. Lowering individual rates should be the first priority, paid for by closing loopholes and shrinking deductions for the wealthy. This will give middle- and lower-income workers more money to spend and encourage startup small businesses. Lowering corporate tax rates, again offset by shrinking deductions, will incentivize multi-national corporations to bring their profits back home for distribution or reinvestment.
  • Increase the Earned Income Tax Credit, paid for with some of the increased revenues from shrinking deductions for the well-to-do. This will encourage more people to take and hold onto entry level low-wage jobs, thus increasing the size of the workforce.
  • Putting More Emphasis on Career Education in High School. Not everyone wants to or needs to go to college. There are lots of well-paying middle class jobs for high skilled workers and a shortage of workers for these jobs in many labor markets.
  • Miscellaneous. Immigration reform, trade expansion, and easing regulations on small business would also help grow the economy.

 

Economic growth since the end of the Great Recession in June 2009 has averaged a meager 2.3%. Speeding up growth is the best way to raise wages and lower unemployment at a much faster rate.  This is the best way to boost middle class jobs!

An Alternative Way to Boost the Wages of Low Income Workers

 

Several days ago I had a post entitled “A Rational Approach to a National Minimum Wage,” in which I expressed support for a national minimum wage level of somewhere between $8.00 and $9.00/hour combined with an expansion of the Earner Income Tax Credit program to single, childless workers, paid for by tightening up on the EITC payment methods.
CaptureThere is an interesting alternative to this combined minimum wage/EITC approach.  It is the so-called wage subsidy program described in the book, “Rewarding Work: how to restore participation and self-support to free enterprise” by the economist Edmund Phelps.  Click here for a short summary.
The idea is that low wage work would be directly subsidized by the government to the employer.  A firm employing low-wage workers, let’s say from $7.25 up to $10.00/hour, just to be specific, is paid a subsidy for each such employee on a sliding scale.  The higher the wage is, the lower is the subsidy, until it has tapered off to zero.  The subsidy is paid to the firm once a year as a nonrefundable credit against taxes.  Competitive forces would ensure that most of the subsidy would be paid out to the low-income workers as higher wages. Mr. Phelps gives a persuasive argument that his program is a much more efficient way to increase low-income employment than either a minimum wage or the EITC.
It is unrealistic to expect a rollback of our current minimum wage of $7.25/hour.  However, a wage subsidy could take the place of an increase in the minimum wage.  Raising the minimum wage, even to $9.00/hour, is predicted by the CBO to lead to a loss of 100,000 jobs.
Likewise, as Mr. Phelps says, the EITC “program is not really a tool to reward and stimulate the unemployment of low-wage workers so much as a program of credits for those who, for whatever reason, have low wage incomes.”
Conclusion: a wage subsidy creates low-income jobs and boosts their pay by making it profitable for businesses to hire low wage workers and pay them well.  Such a program, a la Phelps, would need to be carefully melded with our current EITC program to achieve maximum cost efficiency.

A Rational Approach to a National Minimum Wage

 

In my last post I endorsed raising Nebraska’s minimum wage from $7.25/hour to $9.00/hour because Nebraska’s unemployment rate is only 3.6% and so a minimum wage boost is unlikely to put very many people out of work.  I also stated opposition to President Obama’s proposal for a raise in the national minimum wage to $10.10/hour because it would likely put at least 500,000 people out of work.
CaptureA recent article in National Affairs by Charles Lane, “A Grand Bargain on the Minimum Wage,”suggests an approach to end a perennial controversy over how to set a minimum wage at the national level.  It is based on the following observations:

  • Increasing the minimum wage has broad public support. A recent Gallop poll found that 76% of Americans support an increase to $9.00/hour.
  • However, just 4% of minimum-wage workers are single parents. Only 11.3% of workers who would benefit from an increase in the minimum wage come from poor households. The majority of minimum-wage workers do not live in poverty.
  • A more efficient, better targeted support program for the working poor is the Earned Income Tax Credit which provides a refundable tax credit as high as $6,143 for an adult worker with three children.
  • Since 1959 the average income for a full time worker earning the minimum wage has equaled two-thirds of the poverty line for a family of four. The current poverty line for such a family is $23,850. This equates to a minimum wage set at $8.00/hour.
  • Another option would be to set the minimum wage at 45% of today’s average private sector wage of $20/hour. This would make it $9.00/hour. The CBO has estimated that a $9.00/hour minimum wage would put “only” 100,000 people out of work.
  • Once a new minimum wage level is determined, it should be automatically adjusted for inflation using the Consumer Price Index.
  • The EITC is not cheap; it currently gives $63 billion in benefits to 27 million workers. However the EITC’s improper-payments rate regularly exceeds 20% per year.
  • An expansion of the EITC to single, childless workers could be paid for by tightening up EITC’s payment methods.

All of these considerations suggest a way forward to end a long-standing political controversy in a productive manner. The national minimum wage should be raised to somewhere between $8.00 and $9.00/hour and then indexed to the CPI.  At the same time the EITC should be tightened up and expanded to single, childless adults.  Such a program combines fairness with a strong work incentive and should have broad appeal.

A Balanced and Sensible Anti-Poverty Program

 

The American Enterprise Institute’s Robert Doar recently testified before the U.S. Senate Committee on the Budget with ”Back to Work: How to improve the prospects of low-income Americans”.  His recommendations are based on the four principles:

  • Work requirements as a condition of public assistance.  The work first approach has been shown to have better outcomes with regard to attachment to the labor force than even approaches which focus on training and education.
  • Robust work supports for those who are working at low wages.  The Earned Income Tax Credit accomplishes this and should be extended to childless adults.
  • Business growth and investment.  Policies that raise the cost of doing business and deter growth do little to create what the poor need most: jobs.
  • Foster married, two-parent families.  We need to mitigate marriage penalties in public assistance programs and we need to be honest about the consequences for children of single parenthood.

Mr. Doar points out that 10.2 million American’s are unemployed at the present time, 3.6 million have been jobless for more than 27 weeks, 7.3 million are involuntarily working part-time and 837,000 workers are so discouraged that they have stopped looking for work.  Labor force participation has dropped from over 66% in 2007 to 63% today while the poverty rate has risen from 12.5% to 15%.
CaptureRaising the minimum wage will not help the job prospects of most poor Americans.  Only 11.3% of individuals who would benefit from raising the minimum wage are living below the poverty line.  The Congressional Budget Office estimates that raising the minimum wage to $10.10 per hour would lead to 500,000 people losing their jobs.  CBO also estimates that the Affordable Care Act will reduce full-time employment by 2.3 million by 2021.  Given the strong anti-correlation (see the above chart) between labor participation and poverty, this means that the poverty rate may go higher yet.
The conclusion to draw from this excellent poverty synopsis (with lots of references) is that there are intelligent and effective ways to fight poverty and also much poorer ways to try to do it.  Good intentions are not enough!