My last two posts, here and here, have dealt with the contention by Richard Reeves that the real inequality gap in the U.S. is not between the top 1% (the wealthy) and the bottom 99% but rather between the top 20% (the upper middle class) and the remaining 80%.
The top 20% are the highly educated doctors, lawyers, business managers, successful entrepreneurs, academics, journalists, etc. who thrive in the global economy, largely shielded from the intense market competition faced in the non-professional occupations. Basically the upper 20%, with incomes of $112,000 and up, have it made.
The question is then, how do we give a boost to the people in the middle- and lower-income brackets so that more of them can enjoy much of the same prosperity as the top 20%?
The answer is to:
Make the economy grow faster than the slow 2% annual GDP growth we have had since the end of the Great Recession in June 2009. With sensible tax and regulatory reform, we should be able to achieve a growth rate of 2.5% per year. This will create more jobs and better paying jobs.
Improve educational opportunities by, for example, making early childhood education widely available to low-income families, attracting the best teachers to the poorest schools with targeted bonus pay, and funding college more fairly by requiring that all student debt repayment be income-based.
Fundamentally reform the American healthcare system in order to reduce healthcare costs from the current 18% of GDP to about 12% which is the average for other developed countries. This will save the American economy $1 trillion per year in unnecessary and extravagant costs, which could be put to much better use for higher worker pay, expanded social services and shrinking annual deficit spending.
Conclusion. The U.S. is a very prosperous country but clearly we can do an even better job to improve the quality of life for many more Americans.
For several years now Americans have been having a lively debate about income inequality and the supposedly shrinking middle class. The American Enterprise Institute scholar, Mark Perry, has an enlightening new post on this topic. The AEI has produced a vivid graphic showing that the American Middle Class (defined as the middle 50% of Americans by household income) has dramatically increased in income from 1971 through 2001 but has been stagnant since the Great Recession in 2008-2009. He has other charts showing that both the Low-Income group and the Middle-Income group have been shrinking since 1971 precisely because the High-Income group (defined to be households with $100,000 or more in income in constant 2014 dollars) has been growing so rapidly. Isn’t it obvious what we need to do to restore confidence to the Middle Class? Clearly we need to speed up economic growth. For example we could:
Implement broad-based tax reform. Lower the rates for both individual and corporate taxes, paid for by closing loopholes and limiting deductions. Better yet, shift from taxing income to taxing consumption.
Remove roadblocks to innovation by making it easier to start new businesses.
Improve K-12 education, especially for low-income kids who need extra help. Enhanced early childhood education, more emphasis on career (vocational) education, and charter schools in big cities are the way to get this done.
Make attending college more affordable. There are many good schools around the country which are not expensive to attend (the University of Nebraska at Omaha where I teach is one of them). College students and their families should make it a top priority to avoid huge debt. Attending a prestigious (and expensive) institution is simply not necessary to get a good education.
There are other more controversial ways to speed up economic growth such as increasing international trade and reforming our broken immigration system. But just the measures above will go a long way and shouldn’t be that difficult to implement.
Our economy has been stagnant since the end of the Great Recession five years ago. The median household income has not nearly returned to its pre-recession level. And now a new report has just appeared, “Room to Grow: conservative reforms for a limited government and a thriving middle class”, suggesting new approaches to address this major problem. The lead author, Peter Wehner, declares that “Americans do not have a sense that conservatives offer them a better shot at success and security than liberals. … Rather than speak about the economy in broad abstractions, conservatives need to explain how to put government on the side of people working to better their conditions.”
How can we raise median household income and put millions of unemployed people back to work, at the same time? Deficit spending is no longer a viable option because our national debt is way too high already. Quantitative easing by the Federal Reserve has been tried, hasn’t helped very much, and is now being unwound.
Consumer spending makes up 70% of GDP and so the most direct way to boost the economy is for people to spend more money. Can this be accomplished effectively and efficiently with government policy? The answer is yes!
Broad based tax reform is the way to do it. Lower tax rates across the board for everyone, paid for by closing the loopholes and deductions which primarily benefit the wealthy. Two thirds of the American people do not itemize deductions on their tax returns. This means that lower tax rates for all of these middle income people will put more money in their pockets, most of which they will spend, thereby massively boosting the economy.
Of course there will be pushback to this course of action from the millions of affluent Americans who benefit from all of the loopholes and deductions in our tax code. But our first priority by far is to help the many more millions of middle income Americans who are suffering from stagnant incomes at best or may still even be unemployed as a result of the recession.
According to Peter Wehner, a senior fellow at the Ethics and Policy Center, the middle class consists of Americans “who do not consider themselves poor or rich, and can imagine their fortunes turning either way.” “We’ve moved towards an economy that more significantly favors skilled over unskilled labor. In addition, jobs, including even higher skilled jobs, are being outsourced to countries like China and India as the economy grows more globalized.”
“While President Obama has shown that he is able to effectively describe these trends, he has proved singularly unable to improve the economy in light of them. Indeed, a slew of economic indicators have worsened during his presidency.”
“Among the public there is a very deep sense of unease and apprehension. Ground that people once believed was stable is seen as crumbling, and many Americans seem unsure what to make of it. But one thing they do believe: right now politics is out of touch with what they’re experiencing. We’ve witnessed a collapse of trust in the federal government, and when it comes to Republicans and Democrats, the public’s attitude is: a pox on both your parties.”
“Most Americans have lost confidence in President Obama; they are deeply unhappy with both his policies and their consequences. …Yet Americans have not so much turned to the Republicans as they have turned against the Democrats.”
“Americans do not have a sense that conservatives offer them a better shot at success and security than liberals. … Rather than speak about the economy in broad abstractions, conservatives need to explain how to put government on the side of people working to better their conditions.”
I consider these excerpts from Mr. Wehner’s introductory essay in the document “Room to Grow: conservative reforms for a limited government and a thriving middle class” to be an excellent summary of the mood of the American Middle Class. Some of the accompanying policy prescriptions are good ideas and some are not. Stay tuned!