Category Archives: income inadequacy

Economic Growth and Economic Justice II. What Needs to Happen

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In today’s fractious political climate, it is at least widely recognized that skilled blue-collar workers are often suffering from stagnant income growth and/or job loss. Unfortunately, the political parties often disagree on how to address this major problem.  There are several different perspectives from which to view the overall situation:

  • Slow economic growth, averaging only 2% per year since the end of the Great Recession in June 2009. From 1950 – 2000 the economy grew at over 3% per year and produced a prosperous American middle class. Now, with strong headwinds from globalization and constantly improving technology, we badly need faster overall economic growth to provide more and better paying middle class jobs.
  • Income inequality. There is increasing income inequality in the U.S. even though the top 25% or so are doing very well. But raising taxes on the wealthy could slow down economic growth by discouraging new investment. In addition, redistribution of tax revenue to lower income Americans will not give them much of a boost.

  • Income insecurity. This is a huge problem for the many blue-collar workers who are struggling to make ends meet. There are a number of specific government actions which could alleviate this enormous societal problem.
  • Economic justice. Poverty in the U.S. is widely distributed geographically, with almost as much in rural and small town areas as in big cities. This could provide an opportunity for Republicans and Democrats to work together to address a very challenging problem.

Conclusion. Our country has very serious economic and fiscal problems which are not being addressed because of severe partisan infighting in Congress. But slow economic growth, income insecurity and poverty affect a wide variety of people with different political outlooks.  It’s inexcusable to allow partisan bickering to get in the way of finding workable solutions.

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How Bad Is Income Inequality and How Do We Fix It?

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The latest news on the American economy is mixed. The unemployment rate fell to 5.9% in September but the labor force also fell by 97,000 last month.  The labor participation is now down to 62.7%, a level last seen in 1978.  On the plus side 248,000 new jobs were created but the share of the population employed stayed at 59%, less than its 59.4% level at the end of the recession in June 2009.  In other words, job growth is definitely picking up but not fast enough.
CaptureHow about income inequality?  One simple way of describing and understanding the degree of income inequality in the U.S. is to look at median household income and how it changes over time.  The above chart from the WSJ shows how the median U.S. household income fell from an all-time high of $56,895 in 1999 to $51,939 in 2013.  However it also climbed back up to $56,436 in 2007 before dropping precipitously until 2012.
Capture1The Global Strategy Group discovered in a recent survey that registered voters overwhelmingly rate economic growth as a higher priority than economic fairness.  This means that any policy designed to speed up economic growth is likely to receive favorable support by the electorate.
In a recent post I describe a plan for broad-based tax reform specifically designed to speed up economic growth.  It would involve an across-the-board cut in tax rates totaling about $500 billion per year, but completely paid for by closing loopholes and deductions which primarily benefit the wealthy.  The 64% of taxpayers who do not itemize deductions would receive a tax cut.  And they would likely spend this extra money in their pockets because they are precisely the middle- and lower-income wage earners with falling incomes.
An income tax redistribution like this would greatly reduce inequality but in a way which is designed to give the economy a big boost!

Which Is More Important: Increasing Growth or Decreasing Inequality?

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The progressive Global Strategy Group has recently released a new survey report “Focus on Growth to Frame Priorities” with a valuable message for all political candidates, left, right and center.
CaptureGSG surveyed 3000 registered voters earlier this year and discovered that they overwhelmingly rate economic growth as a higher priority than economic fairness, economic justice, expanding the middle class, increasing wages or decreasing income inequality.  In fact, economic growth trumped all of these alternative policy strategies by wide margins as shown below.
Capture1GSG then goes on to list various possible growth strategies in order of voter popularity such as making college more affordable, modernizing infrastructure, improving K-12 education and others (see below). This list of possible growth strategies is made up mostly of new spending programs.  The less costly might be doable by reforming existing spending programs.  But expensive new programs simply will not fly in today’s high deficit environment.
Capture2What is needed is a growth strategy which does not require new spending.  The obvious choice is tax reform.  For example, the fourth item in the above chart, reduce outsourcing by American companies, could be addressed by reforming corporate taxes.
But an even better growth strategy is individual tax reform whereby tax rates are lowered across the board, paid for by shrinking the many loopholes and deductions which primarily benefit the wealthy.
I described such a plan in detail in a previous post, but here is a brief summary: 64% of taxpayers do not itemize their deductions.  This means that any reduction in tax rates will put money in their pockets.  Since these are primarily the same middle- and lower-income workers with stagnant incomes, they will likely spend most of their increased pay, thus giving the economy a big boost.
In summary, the GSG report provides ammunition for political candidates of all ideological stripes.  Let’s have a contest to see which party can be the most pro-growth.  The winner will be the American people!

Is Capitalism in Crisis?

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The economist and public lecturer, Richard Wolff, gave an address in Omaha NE last night, entitled “Capitalism in Crisis: How Lopsided Wealth Distribution Threatens Our Democracy”.  His thesis is that after 150 years, from 1820 – 1970, of steadily increasing worker productivity and matching wage gains, a structural change has taken place in our economy.  Since 1970 worker productivity has continued to increase at the same historical rate while the median wage level has been flat with no appreciable increase. This wage stagnation has been caused by an imbalance of supply and demand as follows:
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  • Technology has eliminated lots of low skill and medium skill jobs in the U.S.
  • Globalization has made it less expensive for low skill jobs to be performed in the developing world at lower cost than in the U.S.
  • At the same time as jobs were being replaced by technology and disappearing overseas, millions of women entered the labor force.
  • A new wave of Hispanic immigration has caused even more competition for low skilled jobs.

In addition, stagnant wages for the low skilled and medium skilled worker have been accompanied by an increase in private debt through the advent of credit cards and subprime mortgage borrowing.  This enormous increase of consumer debt led to the housing bubble, its bursting in 2007-2008, and the resulting Great Recession.
Five years after the end of the recession in June 2009, we still have an enormous mess on our hands: a stagnant economy, high unemployment, massive and increasing debt and a fractious political process.  How in the world are we going to come together to address our perilous situation in a rational and timely manner?
Mr. Wolff believes that capitalism’s faults are too severe to be fixed with regulatory tweaks.  He also agrees that socialism has proven to be unsuccessful where it has been tried.  He proposes a new economic system of “Workers’ Self-Directed Enterprises” as an alternative.
I agree with Mr. Wolff that capitalism is in a crisis but I think that it can be repaired from within.  The challenge is to simultaneously give our economy a sufficient boost to put millions of people back to work and to do this while dramatically shrinking our annual deficits in order to get our massive debt on a downward trajectory as a percent of GDP. How to do this is the main focus of my blog, day in and day out!

Where Have All the Raises Gone?

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In yesterday’s New York Times an editorial asks the question “Where Have All the Raises Gone?”, pointing out that wages for college graduates have been stagnant since 2001 (see the chart below.)  A report referred to in the NYT editorial suggests that as the information technology revolution has matured, employer demand for cognitive skills has waned and so some college graduates have had to take lower paying jobs, displacing less educated lower skilled workers in the process.  This makes sense and, of course, new hiring has slowed down even more as a result of the recession.
CaptureThe question then becomes, what, if anything can government do to counteract and overcome this trend?   According to the NYT, “what’s needed to raise pay are policies like a higher minimum wage, trade pacts that foster high labor and regulatory standards, and more support for union organizing.”
Of course there is another point of view and it is expressed very well in yesterday’s Wall Street Journal by Mortimer Zuckerman, the Chairman and Editor-in-chief of U.S. News and World Report, “Fight Inequality With Better Paying Jobs”. Mr. Zuckerman declares that “income inequality isn’t so much the problem as income inadequacy.  A more robust economy, stoked by growth-oriented policies from Washington, would help produce the jobs and opportunities that millions of Americans need to climb the economic ladder.”  He suggests that what is needed is:

  • Lower corporate tax rates so that American multinational companies will bring their foreign earnings back home.
  • Get healthcare costs under control (Obama Care doesn’t do this).
  • Cut back on unnecessary regulations to encourage more business investment.
  • Train more skilled workers.  The National Federation of Independent Businesses reports that 38% of its members have job openings they can’t fill.
  • Restore H1-B visa levels to the higher levels of earlier years – 195,000 per year compared to only 65,000 today.  Skilled immigrants start many new businesses and this is the biggest source of new job creation.

In other words there are lots of things the federal government can do to boost the economy.  As Mr. Zuckerman says, “The political system is failing us.  Washington doesn’t seem to be listening as our political parties are focused more on ideological conflict than the good of the country.”