The Economic Policy Institute has just issued a provocative new report, “Raising America’s Pay: Why It’s Our Central Economic Policy Challenge”. It is based on the now widely accepted view, as summarized in the chart below, that wages for the typical (i.e. median, not average) American worker have been stagnant since the early 1970’s, even though productivity has continued to increase at its historical rate. First of all, the authors make reasonable arguments that:
The slumping of hourly wage growth for the vast majority explains the overall trends in income inequality.
Wage stagnation stalls progress in reducing poverty.
Wages are the root of economic security for the vast majority. This includes the fact that Social Security benefits depend upon wage earnings before retirement.
Then they ask: “Why has wage growth faltered for the vast majority, and what can be done?” Here is where the report becomes controversial!
The authors do agree that globalization of markets and technological change have contributed to the wage growth slowdown but argue that this overlooks the impact of labor market and tax policy and business practices as follows:
Falling top tax rates have increased the income share of the top 1 percent.
The Federal Reserve has prioritized low rates of inflation over low rates of unemployment in recent decades and high unemployment suppresses wage growth.
The erosion of the inflation adjusted minimum wage and the share of the workforce represented by a union explain much of the entire rise of wage inequality over this time period.
The authors are completely correct that stagnant wages for American workers is a critical, even “central,” problem facing the economy at the present time. The question, of course, is how to address this problem most effectively. In my opinion, the authors have completely neglected to take into account how a faster rate of economic growth would contribute to a solution of the problem and how this could be accomplished. I will address this question in my next post in a couple of days.
They conclude by saying that this report is only the first in a multiyear research and public education initiative of the EPI. We have a lot to look forward to!
Most people agree that income inequality and wealth inequality are increasing in the U.S. Likewise anyone who’s paying attention is aware of our slow rate of GDP growth, averaging 2.2% per year, since the end of the recession five years ago. Is there a connection between inequality and slow growth? Maybe! First of all, it is important to note that income inequality in the past 30 years has been greatly offset by federal taxes and transfer programs as shown in the October 2011 chart (above) from the Congressional Budget Office. Secondly, the Economist discusses this situation in the article “Inequality v growth”. The economists Jonathan Ostry, Andrew Berg and Charalambos Tasangarides have shown (see above chart) that a large amount of redistribution affects growth more negatively than a smaller amount of redistribution.
Economists generally agree that the recovery has been slowed down by a lack of demand by consumers for more goods. So the recovery should speed up as less affluent consumers feel secure enough to spend more money. Two things, to start with, can make this happen. One is a restoration of the housing market so that homeowners have more equity (which can be borrowed and spent). Another way to accomplish this is with government redistribution programs, such as food stamps and Medicaid, for low income people.
But there is an even better way to put money in the hands of people who will spend it, and at no cost to the government. I am talking about broad based tax reform, whereby tax rates are lowered for everyone, offset by closing tax loopholes and shrinking deductions, which primarily benefit the wealthy. For the two-thirds of taxpayers who do not itemize deductions, and who tend to be the less affluent, such a tax rate cut will put money in their pockets, most of which they will spend.
Such a tax program as this would be a direct shift of resources from the wealthy to everyone else, thereby lessening inequality. It would stimulate the economy, creating millions of new and higher paying jobs, and thereby increasing tax revenue and lowering the deficit. Win, win, win, win!
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:
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!