Can We Solve All Our Fiscal and Economic Problems at the Same Time?

Posted on April 2, 2015 by jackheidel

This website, It Does Not Add Up, is devoted to discussing our country’s most serious economic and fiscal problems. They are:

Stagnant Economy. Since the end of the Great Recession in June 2009, the economy has been growing on average at the historically slow rate of about 2.3%. Slow growth means higher unemployment, stagnant wages and less tax revenue.

Massive Debt. U.S. public (on which we pay interest) debt is now 74% of GDP (highest since WW II) and projected by CBO to grow rapidly unless strong measures are taken to reduce it. This puts our country’s future wellbeing and prosperity at great risk.

Increasing Income Inequality. Incomes for the high-skilled and well-educated are increasing much faster than for the low-skilled and less-educated workers.

The new Republican majorities in Congress are stirring the waters by proposing a ten year plan to shrink the deficit down to zero, i.e. to balance the budget by 2025. The opposition claims that this would “sharply cut the scale of domestic spending, which would mostly fall on the poor.”
But the American Enterprise Institute’s James Pethokoukis points out that social spending in the U.S., both public and private, is very generous and second only to France in the entire OECD. So here is how we could proceed to address our basic problems in a unified manner:

Balance the Budget by a combination of Republican spending cuts and cutting back on two major tax deductions: Employer-sponsored Health Insurance (cost: $250 billion per year) and Mortgage Interest (cost: $70 billion per year).
Boost Economic Growth by expanding the Earned Income Tax Credit to encourage more people to accept low paying, entry level jobs. Increase the Social Security eligibility age from 67 to 70, thereby keeping near retirees in the workforce for three additional years (this will also extend the solvency of the Social Security Trust Fund).
Decrease Income Inequality. Cutting back on tax deductions, in part to pay for expansion of the EITC, lessens income inequality as well as shrinking the deficit. A faster growing economy also lessens inequality by providing more opportunities for upward mobility.

In other words, addressing each of these fundamental problems in an intelligent manner contributes to solving the remaining problems as well. This creates a virtuous circle for economic progress!

Too Much Income Inequality is Harmful to Society

Posted on March 31, 2015 by jackheidel

It is well understood that income inequality is increasing in the U.S. and that there are lots of reasons for it. Globalization provides low cost goods from around the world and thus puts pressure on low-wage workers in our own country. Rapid technological advancement puts a high premium on educational attainment and skill acquisition and thus helps individuals who are highly motivated to succeed. The Great Recession and our slow recovery from it have held back the growth of employment and wages increases for middle- and lower-income workers.
Increasing income inequality is a pernicious social condition and has lots of unpleasant consequences. A new study of U.S. counties has shown that there is a strong correlation between more inequality in a particular geographical area and shorter average live spans. It is quite reasonable to expect that higher-income people will be more health conscious than lower- income people. Excessive inequality is bad for lots of reasons.
The question is what we can do about it. Here are two good ways to address it:

Faster economic growth would help a lot. The American Enterprise Institute’s Michael Strain has recently proposed a fairly modest plan for increasing employment by cutting tax deductions for the wealthy, increasing the Earned Income Tax Credit for the poor and at the same time decreasing deficit spending. I have made a more substantial proposal along the same lines.
Boost educational performance across the board. College-ready middle class kids will take care of themselves so the emphasis should be on the 70% of young adults who will not go to a four year college. There are lots of good jobs available for the highly skilled and so we need more career education in high school. We also need more early childhood education to prepare kids from low-income families to get off to a good start in elementary school.

Increasing economic growth and expanding educational opportunities for the non-college bound will require little, if any, new federal spending. Such policies as above are simply common sense ways to reduce income inequality and achieve a more inclusive society.

The Great Wage Slowdown and How to Fix It

Posted on November 11, 2014 by jackheidel

With a new Congress just elected, this is a good time to reflect about what changes should be made in public policy. Our biggest economic problem is to speed up growth in order to provide more and better paying jobs. In addition, a faster growing economy would bring in more tax revenue which would help pay our bills and reduce the deficit.
A column in today’s New York Times, “The Great Wage Slowdown, Looming over Politics,” by David Leonhardt, proposes a cut in the marginal tax rate for the middle class as a way of boosting their incomes. As can be seen in the above chart, median household income has been flat since the year 2000, and even lower since the 2008 recession. Mr. Leonhardt goes on to say that any tax cut for the middle class should be balanced by a tax increase for the wealthy.
It so happens that I proposed such a plan several months ago as a way of boosting the economy and reducing inequality at the same time. The idea is to enact broad-based tax reform whereby tax rates are lowered for all, offset by shrinking tax deductions. The 64% of taxpayers who do not itemize deductions will receive a big tax cut. But these are the very middle-class wage earners with stagnant incomes. So they will likely spend their tax savings, thereby giving the economy a big boost.
More specifically:

Individual tax deductions total about $1 trillion per year.
Let’s suppose that these deductions are cut in half to $500 billion per year.
Let’s further suppose that half of this amount, or $250 billion per year, is cut from the taxes of the 64% who do not itemize deductions.
If these 64% spend just 2/3 of their new income (instead of saving it or paying off debt), this will total $170 billion which is 1% of GDP.
This would increase the rate of growth of GDP from the 2.2% average, since the end of the Great Recession, to 3.2%. This represents an enormous boost to the economy and would return average GDP growth to about its 3.3% average since 1947.
Mr. Leonhardt suggests that presidential contenders in 2016 would greatly benefit from proposing a tax rate cut for the middle class. Here’s a specific plan they can use!

The Problem of Soaring World Population

Posted on November 9, 2014 by jackheidel

As I remind readers from time to time, this blog is focused on the fiscal and economic problems of the U.S. Our biggest fiscal problem is not having enough tax revenue to pay our bills. Our biggest economic problem is a stagnant economy which leaves too many people unemployed or underemployed.
My last three post have been on the subject of climate change. This is a worldwide problem which has a huge effect on the U.S. There’s going to be a cost in cutting way back on carbon emissions. But there will soon be a much greater cost if we don’t cut back and therefore suffer the growing adverse environmental effects.
Now there is another looming problem. The journal Science has just published the article “World population stabilization unlikely this century,” reporting that world population, now 7.2 billion, is likely to reach 9.6 billion by 2050 and 10.9 billion by 2100. Much of the increase will take place in Africa due to higher fertility rates because of a recent slowdown in the pace of fertility decline.
The implications of a growing world population are huge:

First of all, it will add even more stress to an environment which is already being increasingly stressed by global warming.
Secondly, it will aggravate a slowdown in middle-income wage growth throughout the developed world. This is very evident in the above chart. What is happening is that the force of globalization is shifting lower skilled work to lower paid workers in the developing world. A larger population in the developing world will simply exacerbate this trend.

The noted economist, Tyler Cowen, has a different perspective on this problem, “A Strategy for Rich Countries: Absorb More Immigrants,” in today’s New York Times. But Mr. Cowen’s approach is untenable for the long run. The idea that you can offset an increase in the elderly population with an even bigger increase in the younger population will lead to an ever-growing overall population.
What then is the answer to over-population? It is either more birth control or less sex. Take your pick!

Income Inequality and Rising Health-Care Costs

Posted on October 7, 2014 by jackheidel

There seems to be a general consensus on the reality of increasing income inequality in the U.S. and even some agreement on its two main causes: globalization and the rapid spread of technology. The slow growth of the economy since the end of the recession has made the inequality problem that much worse.
Not surprisingly, slow economic growth in the past five years has led to stagnant wages for many workers. My last post addressed this problem. The above chart from the New York Times shows that incomes for top wage earners have been rising in recent years while they have been stagnant for middle- and lower-income workers.
But there is more to it than this. In yesterday’s Wall Street Journal, Mark Warshawsky and Andrew Biggs point out that, “Income Inequality and Rising Health-Care Costs,” in the years 1999 – 2006, total pay and benefits for low income workers rose by 41% while wages rose by only 28%, barely outpacing inflation. For workers making $250,000 or more total compensation rose by a lesser 36% while wages grew by a greater 35%. This apparent anomaly is explained by the fact that health insurance costs are relatively flat across all income categories, thus comprising a much larger percentage of the total pay package of low-income workers than for high-income workers.
In fact, the Kaiser Foundation has shown that low-wage workers tend to pay higher health insurance premiums, as well as receiving lower insurance benefits, than higher paid workers (see the above chart).
Overall, what this means is that employer provided healthcare is taking a huge chunk out of the earnings of low-income workers which makes income inequality much worse than it would be otherwise. Of course, the cost of healthcare is a huge burden for the entire U.S. economy, currently eating up 17.3% of GDP, twice as much as for any other developed country.
For both of these reasons it is an urgent matter for the U.S. to get healthcare costs under control. Avik Roy of the Manhattan Institute has an excellent plan to do just this as I have discussed in several recent posts.

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

Posted on October 5, 2014 by jackheidel

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.
How 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.
The 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?

Posted on September 11, 2014 by jackheidel

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.
GSG 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.
GSG 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.
What 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!

How to Increase Growth and Decrease Inequality at the Same Time!

Posted on July 31, 2014 by jackheidel

The Department of Commerce has just reported basic economic data for the second quarter of 2014. As the chart below shows, the economy gradually lost steam from 2004 – 2008, sunk badly in 2008 and 2009, and has now grown at a slow but steady rate of about 2% during the period 2010 – 2014.
One of my favorite journalists, the New York Times’ economics reporter Eduardo Porter, has just written again on the topic of inequality, “Income Inequality and the Ills behind It.” He quotes the economist Tyler Cowen as saying “The right moral question is ‘are poor people rising to a higher standard of living?’ Inequality itself is the wrong thing to look at. The real problem is slow growth.” The economist Gregory Mankiw is quoted as saying that “Policies which address the symptom (of inequality) rather than the cause include higher taxes and a more generous safety net. The magnitude of what we can plausibly do with these policy tools is small compared to the size of the growing income gap.”
What Mr. Cowen and Mr. Mankiw are both suggesting is that we can’t effectively attack income inequality without also increasing economic growth. I believe that it is possible to address both problems at the same time by implementing broad-based tax reform as follows:

Individual income tax rates should be lowered across the board, paid for by closing loopholes and shrinking deductions, in a revenue neutral way.
The 64% of all taxpayers who do not itemize deductions will get a significant tax cut. Since they are largely the middle and lower-income wage earners with stagnant incomes, they will tend to spend their tax savings, thereby giving the economy a big boost.
At the same time the 36% of taxpayers who do itemize their deductions will, on average, see their income taxes go up. But these are, on the whole, the wealthier wage earners who can afford to pay higher taxes.
A plan such as this represents a shift of net after-tax income from more wealthy people to the less wealthy. It therefore reduces income inequality.

If we can cut tax rates, increase economic growth and reduce income inequality all at once, why can’t our national leaders come together and act along these lines?

An Inequality Culprit: Single-Parent Families

Posted on May 6, 2014 by jackheidel

It is generally agreed that income inequality in the U.S. is bad and getting worse. Before we can address it effectively, we have to understand what is causing it. In this regard the Wall Street Journal had an article recently, “Ignoring an Inequality Culprit: Single-Parent Families”, by two scholars, Robert Maranto and Michael Crouch, from the Department of Education Reform at the University of Arkansas.
Mr. Maranto and Mr. Crouch call attention to what they call “the strongest statistical correlate of inequality in the United States: the rise of single parent families during the past half century. … In 1960, more than 76% of African-Americans and nearly 97% of whites were born to married couples. Today the percentage is 30% for blacks and 70% for whites. … This trend, coupled with high divorce rates, means that roughly 25% of American children now live in single-parent homes, twice the percentage in Europe (12%). Roughly a third of American children live apart from their fathers.” In addition, “more than 20% of children in single-parent families live in poverty long-term, compared with 2% of those raised in two parent families.” It is estimated “that 41% of the economic inequality created between 1976-2000 was the result of changed family structure.”
The authors wonder why there is not more public attention given to this depressing state of affairs and conclude that

Intellectual and cultural elites lean to the left and it is primarily social conservatives who promote traditional family structure.
Family breakup has hit minority communities the hardest. Therefore public discussion can be characterized as being racist.
This is a very hard problem to solve. Marriage and childrearing involve highly personal choices which cannot be dictated by society.

In this regard, my March 11, 2014 post “A balanced and Sensible Antipoverty Program”, emphasizes the need to at least remove marriage penalties from government welfare policy.
As the authors conclude, “The first step is to acknowledge the problem.”

The Growth Deficit

Posted on May 1, 2014 by jackheidel

I am a fiscal conservative, as well as a social moderate, which means that I don’t fit very easily into a standard mold. I am non-doctrinaire, non-ideological and mostly nonpartisan. I vote for candidates from both major parties as well as independents. I prefer a balanced government with neither party in complete control.
My most direct sources of information on fiscal and economic issues are the Wall Street Journal and the New York Times, both of which I read assiduously on a daily basis. When these two newspapers disagree on a particular issue, then I usually decide that the truth lies somewhere in between.
Our biggest national problem right now, in my opinion, is the stagnant economy. In today’s WSJ, the lead editorial, “The Growth Deficit”, clearly describes how bad the situation is. Since the Great Recession ended in June 2009, our rate of GDP growth has averaged 2.2% per year. This compares with a 4.1% annual rate of growth for all post-1960 recovery periods.
Such a slow rate of growth causes all sorts of problems. First of all, it explains why our unemployment rate is still so high at 6.7% after five years of recovery. This means that between 15 and 20 million people are still unemployed or underemployed. Such a large human toll means a huge increase in government welfare expenses for food stamps, unemployment insurance, etc. Higher unemployment also means less tax revenue collected by the federal government. This translates into much larger deficit spending, adding to the already massive national debt.
There are lots of things which can be done to increase growth, for example:

Lowering tax rates on individuals to put more money in the hands of the 2/3 of Americans who do not itemize deductions on their tax returns. They’ll spend this extra income and create more demand! Pay for this by closing loopholes and deductions, which are used primarily by the wealthy. Besides stimulating the economy, this will simultaneously address increasing income inequality.
Lowering tax rates on corporations to encourage multinationals to bring their foreign profits back home for reinvestment or paying dividends. Again, balanced by eliminating deductions enjoyed by privileged corporations.
Relax regulatory burdens on small businesses where most new jobs are created.
Reform immigration procedures by boosting the number of H1-B visas to attract more highly skilled, and entrepreneurial, foreign workers.
Grant trade promotion authority to the President to speed up new trade agreements.

We should be clamoring for our national leaders to be acting on these fronts. A strong economy is the very backbone of our success as a nation!

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

Category Archives: income inequality