Category Archives: inequality

How to Create a More Just and Equal Society

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In a recent Washington Post column, “Government is Not Beholden to the Rich”, the economics writer Robert Samuelson shows that the federal government is actually “beholden to the poor and middle class.  It redistributes from the young, well-off and wealthy to the old, needy and unlucky.”
For example, in 2006 “53% of non-interest federal spending represented individual benefits and healthcare.  Of these transfers (nearly $1.3 trillion), almost 60% went to the elderly.  Of the non-elderly’s $550 billion of benefits and healthcare, the poorest fifth of households received half.  The non-elderly paid about 85% of the taxes, with the richest fifth covering two-thirds of that.  If government taxes and transfers – what people pay and get – are lumped together, the average elderly household received a net payment of $13,900 in 2006; the poorest fifth of non-elderly households received $12,600.  By contrast, the net tax payment for the richest fifth of non-elderly households averaged $66,000.”
A couple of months ago a Wall Street Journal Op Ed “Obama’s Economy Hits His Voters Hardest” by the economist Stephen Moore, points out that during the time period 1981 – 2008, the Great Moderation, income for black women was up by 81%, followed by white women up 67%, black men up 31% and, finally, white men up only 8%.  Of course, all of these groups have lost income in the last four years, during the very weak recovery from the Great Recession.
The answer is clear.  The best way to help low income people lift themselves up is not to redistribute even more government resources to them but rather to boost the economy to create more and better jobs.  There are tried and true methods to get this done: tax reform (to encourage more risk taking and entrepreneurship), immigration reform (to provide more willing workers) and true healthcare reform (to get healthcare spending under control).
We need national leaders who understand how to make the economy grow faster and are able to stay focused on this urgent task.

Where Are the Jobs? III. The Real Inequality Gap

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Today’s Wall Street Journal has a story “Job Gap Widens in Uneven Recovery”, which shows how unbalanced the economic recovery is.  For workers aged 25 and older, unemployment is only 6%, compared to the overall unemployment rate of 7.3%.  But for the young, ages 16 – 24, unemployment is 15%.  Since the end of the recession in June 2009, wages have risen by 12% for the highest paid 25% of all workers.  For the lowest paid 25%, wages have only risen by 6% over this time period.
“Households earning $50,000 or more have become steadily more confident over the past year and a half.  Among lower income households, confidence has stagnated.  The gap in confidence between the two groups is near its widest ever.  That isn’t only bad for those being left behind.  It’s also hurting the broader recovery, because it means families are able to spend only on essential items.  Consumer spending rose just .1% in September 2013, after adjusting for inflation.”
Unfortunately, this data is entirely consistent with other gloomy economic trends which I have been reporting on recently such as the threat of technology to the middle class, the increased competition from globalization, and the shrinking size of the labor pool because of baby boomer retirements.
The New York Times has a running series of articles on “The Great Divide” and how to address it.   Here is a clear cut example of this divide: how older, better trained and more affluent Americans are recovering from the recent recession more quickly than the less well off.  This evident unfairness is damaging to the health of our society.  The question is how do we address it in an effective manner?
The basic problem is the overall slow growth of the economy, about 2% of GDP per year, since the recession ended in June 2009.  There are many things that policy makers can do to speed up this growth if they were only able to set aside ideological differences.  The best single action by far is tax reform, for both individuals and corporations, lowering overall rates in exchange for reducing deductions and loopholes which primarily benefit the wealthy.
Here is yet another reason why it is so important to speed up the growth of our economy.  How exasperating that our national leaders cannot figure out a way to come to together and get this done!

What Is the Best Budget Outcome in the Current Standoff?

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In yesterday’s Wall Street Journal, columnist Holman Jenkins describes “The Best Budget Outcome: Tax Reform”.  His point is that the only way we can possibly continue to pay for our rapidly growing entitlement programs of Social Security, Medicare and Medicaid, is by speeding up the growth of our economy.
All of the various fiscal reforms of these programs which have been suggested such as means testing for Medicare, raising the Social Security wage base ($113,700 in 2013), changing the way the COLA is computed, raising eligibility age limits for both Social Security and Medicare, and block granting Medicaid to the states, can at best slow down the growth of their costs.  This is because the number of retirees is growing so rapidly as well as the number of eligible recipients for Medicaid.
Most sensible people know that we have to do a much better job of controlling the cost of entitlement programs, even though it is tough in practical terms to agree on specifically which costs to rein in.
In addition to holding down the growth of government spending, the other way to shrink the deficit and slow down our soaring national debt, is by speeding up economic growth.  The best way to do this is by lowering tax rates (offset by closing tax loopholes) in order to encourage more entrepreneurial investment and risk taking.
But too many people are ideologically opposed to lowering tax rates because they think that it increases economic inequality.  As Mr. Jenkins says, such people would rather “see the lives of the young and unskilled be blighted by a slow-growth economy than approve a reform of rates and loopholes that …(could be mislabeled)… as a tax cut for the rich.”
In other words, the two sides in the budget debate can probably hammer out some reasonable ways to rein in entitlement spending.  But they probably will not be able to agree on sensible tax reforms which would grow the economy faster and put more people back to work.  What a shame!

Keep Squeezing the Budget!

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Monday’s Wall Street Journal has an Op Ed column by Stephen Moore, “The Budget Sequester Is a Success”, which points out that federal spending has actually shrunk from a high of $3.598 trillion in 2011 to $3.537 trillion in 2012 to a projected $3.45 trillion for 2013.  These spending declines are due to the Budget Control Act of 2011 which accompanied the 2011 increase in the debt limit.  The $100 billion per year budget sequester is a part of that agreement.  The current budget standoff between the Senate and the House is simply an attempt by the Democratic majority in the Senate to renegotiate the spending limits agreed to in 2011.
The sequester will continue to constrain discretionary spending but the two thirds of the federal budget devoted to entitlements is growing at a much faster rate than the overall growth of the economy.  The way out of this dilemma should be obvious to any rational, impartial observer.  We need to slow down the growth of entitlements and speed up the growth of the economy.  But this is much easier said than done!
Democrats will apparently not agree to do either of these two things.  Reining in entitlements takes political courage and the Democrats would rather be able to accuse Republicans of cruelty to the poor and the elderly than to actually address this problem in a serious manner.  Growing the economy faster will require appealing to investors and risk takers, with lower tax rates, for example, as well as loosening anti-business regulations.  Measures like these go against liberal ideology.
While we’re waiting for common sense to prevail in Washington, what more can be done to shrink still very large deficit spending?  There are all sorts of wasteful, duplicative and ineffective federal programs out there.  Fiscal conservatives should just keep going after them, one-by-one, and whittling them down.  Millions of voters and taxpayers will be thankful for this.

What Is the Best Way to Help the Middle Class?

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An article in yesterday’s New York Times, “Obama Says Income Gap Is Fraying U.S. Social Fabric”, quotes the President that “If we don’t do anything, then growth will be slower than it should be.  Unemployment will not go down as fast as it should.  Income inequality will continue to rise.  That’s not a future that we should accept.”  He says that “I will seize any opportunity I can to work with Congress to strengthen the middle class, improve their prospects, improve their security.”
A recent editorial in The Wall Street Journal, “The Inequality President”, shows with a chart that median household incomes have fallen from $54,218 in June 2009 as the recession ended to $51,500 in May 2013.  As the WSJ says, “For four and a half years, Mr. Obama has focused his policies  on reducing inequality rather than increasing growth.  The predictable result has been more inequality and less growth. … The rich have done well in the last few years, thanks to a rising stock market, but the middle class and poor have not.”
There are many things that Congress and the President could do to boost the economy if they were willing to work together and compromise.  Obamacare doesn’t need to be repealed, just modified by dropping the employer mandate which is a job killer.  Broad based tax reform, with lower tax rates, paid for by eliminating tax preferences, would be a big boost to investment, risk taking and entrepreneurship.  A reasonable compromise would be to use a part of the revenue raised from eliminating loopholes for deficit reduction.
But little progress will be made unless the President is willing to show leadership by rising above partisanship.  There are all sorts of ways he could do this.  One simple way would be to show that he understands the seriousness of the rapidly growing national debt by supporting some of the many thoughtful proposals for more government efficiency.
A large majority of people want our first African-American President to be successful.  But right now he is not on track to achieve this.

Income Inequality and What to Do About It

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In yesterday’s New York Times Timothy Noah has a column in The Great Divide series “The 1 Percent Are Only Half the Problem” in which he makes the case that there are two different types of inequality which society needs to address.  First, the income gap between the top 1% and the bottom 99% is getting wider and wider.  But there is also a skills gap between the (college) educated class and those whose education ended in high school.
What can and should be done about these two different aspects of inequality in America?  Controlling the excesses on Wall Street in order to avoid future bailouts will help control the wages of the top 1%.  This is already being done with the Dodd-Frank financial reforms and current efforts to require the biggest banks to hold more capital reserves.
But much more could be done.  Unfortunately, the main effect of the Federal Reserve’s low interest rate policy is to drive up the stock market which favors the more affluent.  Broad based tax reform which would lower tax rates by eliminating unjustified tax breaks for the rich would do much more to stimulate faster economic growth and give a big boost to middle class incomes.
The huge and rapidly growing cost of employer provided health care (now averaging about $5000 annually for individual coverage and about $14,000 for family coverage) is having a huge negative impact on middle class wage growth.  The U.S. spends twice as much of GDP, about 18%, on healthcare as any other developed nation.  Reforming employer provided health insurance by removing the tax exemption (and replacing it with lower tax rates) would get each of us personally involved with controlling healthcare costs.
The skills gap is driven by globalization and the advance of technology and is not going to disappear.  The only way to address it is by improving educational outcomes.  Putting more emphasis on early childhood education (ages 0-5) will help as well as making college more accessible and affordable.  Online education and especially Massive, Open, Online Courses (MOOCs) will help in both respects.  Hopefully more and more students and families will come to realize that there are many attractive alternatives to very expensive and elite residential colleges and universities.  It is not necessary to be wealthy or to borrow lots of money to attend college!
Conclusion:  inequality in American society is a large and growing problem.  But there are effective ways for both policy makers and individuals to respond.