Where Have All the Raises Gone?

Posted on March 4, 2014 by jackheidel

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.
The 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.”

A Breath of Fresh Air

Posted on February 27, 2014 by jackheidel

U.S. Representative David Camp (R, Michigan), Chair of the House Committee on Ways and Means, has just introduced the “Tax Reform Act of 2014” and describes it in a column in yesterday’s Wall Street Journal, “How to Fix Our Appalling Tax Code”. This legislation, developed over the past three years by the committee he chairs, has lots of attractive features. Mainly, however, it would give the economy a substantial boost. Congress’s Joint Committee on Taxation estimates that it would increase GDP by $3.4 trillion over the next ten years and create 1.8 million new jobs.
It will accomplish this goal by trimming or eliminating tax breaks and loopholes for the wealthy in order to reduce tax rates for almost everyone. For example, the home mortgage deduction will be cut, for new homeowners, from the current value of $1,000,000 to $500,000. The deduction for state and local taxes will be eliminated. The charitable deduction will only apply for contributions in excess of 2% of income. The middle class is protected by raising the standard deduction to $11,000 per individual or $22,000 per couple. This means that 95% of taxpayers will be able to avoid itemizing.
The two basic tax rates would be 10% up to $75,000 in income, then 25% up to $400,000. Over $400,000 there would be a 10% surcharge on salaried or “non-production” income. The corporate tax rate would be cut from 35% to 25%, again by eliminating special exemptions and loopholes.
All of these features add up to a dramatic simplification of our tax code which will save an estimated $168 billion annually in preparation fees.
But always keep in mind the larger purpose of broad based tax reform like this. In the words of the economist Glenn Hubbard, it is “a policy shift in favor of mass prosperity – dynamism and inclusion.” It will do more for the poor than raising the minimum wage because it will actually create new jobs and better paying jobs.
This legislation represents a fantastic starting point for a national discussion on pro-growth tax reform. Let’s get on with it!

Truth and Myth about Inequality

Posted on February 25, 2014 by jackheidel

Two of my favorite columnists are the Brooking Institution’s William Galston, a social economist who has a weekly column in the Wall Street Journal and the economics journalist Robert Samuelson who writes for the Washington Post.
Most people agree that income inequality in the U.S. is steadily getting worse. Mr. Galston make a good case (see my last post) that it is primarily caused by the large gap between the rising productivity of American workers and the stagnant level of their pay which has developed since 1973. He thinks that we need a fundamentally new social contract which links worker compensation to productivity. This, of course, is a tall order and it is not at all clear how such a new order would be achieved.
Mr. Samuelson has a different perspective: “Myth-making about Economic Inequality”. For example:

The poor are not poor because the rich are rich
Most of the poor will not benefit from an increase in the minimum wage because only 6% of the 46 million poor people have full time jobs
All income groups have gained in the past three decades, even though the top 1% has gained the most (see the above chart from the CBO, December 2013)
Widening economic inequality did not cause the Great Recession

These two perspectives on inequality are quite different but not contradictory. Basically what Mr. Samuelson is saying is that we have to be careful in how we address this problem or we’ll just make it worse. Raising taxes on the rich is unlikely to help and might hurt if it slows down the economy. Raising the minimum wage will only raise a fairly small number of people out of poverty and may cause a lot of unemployment along the way.
My solution: focus on boosting the economy to create more jobs in the short run (tax reform, immigration reform, trade expansion) and improved educational outcomes for the long run (early childhood education, increasing high school graduation rates, better career education).
But I agree with Mr. Galston that it is imperative to lessen income inequality, one way or another. Otherwise as a society we’ll have big trouble on our hands.

Invested in America

Posted on January 30, 2014 by jackheidel

The Business Roundtable, an association of chief executive officers of leading U.S. companies, has just issued a new report, “Invested in America: A Growth Agenda for the U.S. Economy”, describing four actions which policymakers can take to rejuvenate the U.S. economy.
They are:

Restore Fiscal Stability: constrain federal spending in a manner that reduces long-term spending growth, making both Medicare and Social Security more progressive and less expensive.
Enact Comprehensive Tax Reform: adopt a competitive, pro-growth tax framework that levels the playing field for U.S. companies competing in global markets. Several studies estimate that cutting the U.S. corporate tax rate by 10 % (e.g. from 35% to 25%) would boost GDP by 1% or more.
Expand U.S. Trade and Investment Opportunities: pass updated Trade Promotion Authority legislation and use TPA to complete many new trade agreements which are already pending.
Repair America’s Broken Immigration System: increase the number of visas for higher skilled workers and provide legal status for the millions of undocumented immigrants currently living in the U.S.

These are the same “big four” policy changes which many progressive business leaders as well as evenhanded think tank experts often recommend. They are really just common sense ideas which reasonable people should be able to come together on.
Isn’t it obvious that we’ll soon be in big trouble if we don’t get our enormous budget deficits under control? And that controlling entitlement spending is key to getting this done?
Isn’t it just as obviously commonsensical that even U.S. based multinational corporations will try to avoid locating business operations in countries like the United States with very high corporate tax rates?
Isn’t it likewise obvious that foreign trade is just an extension of domestic trade and that the world is better off with as much trade as possible?
Finally, the secret of a vibrant, growing economy is to encourage as much initiative and innovation as possible. Who take more initiative than the immigrants who figure out how to get here in the first place?
We don’t have to accept a sluggish economy, high unemployment and massive debt! But we do need to take intelligent action to extricate ourselves from the predicament we are in!

What Is the State of the U.S. Economy?

Posted on January 28, 2014 by jackheidel

On the eve of the President’s State of the Union address, the New York Times gives an answer to this question in today’s paper, “Obama’s Puzzle: Economy Rarely Better, Approval Rarely Worse”. The charts below do show the basic trends all moving in the right direction. But is this good enough?
The unemployment rate is moving steadily downward but it is still a high 6.7% almost five years after the recession ended in June 2009. And this is with a labor participation rate of only 58.6%, which is historically very low.
The budget deficit is dropping but is still unsustainably high. In the five years, 2009 – 2013, deficits have totaled $6 trillion dollars. As soon as interest rates return to their historical average of 5%, interest on this $6 trillion in new debt alone will total $300 billion per year, forever! Furthermore, the Congressional Budget Office, the most credible source of budget information, predicts that the deficit is likely to resume an inexorable climb within a few years as baby boomers retire in ever greater numbers, rapidly driving up entitlement costs.
Economic growth was stronger than expected in the last quarter of 2013 and this is a good sign. But it has averaged only about 2% since the recession ended which is very low by historical standards, in a post recessionary period.
The point is, do we really need to settle for such mediocre performance: a stagnant economy, high unemployment and massively accumulating debt? Should we just declare that in a highly competitive global economy with an ever higher premium on information and technology, that we just can’t do any better than we already are? Isn’t there some way to make our economy grow faster in order to provide more and higher paying jobs?
I think that the answer to this last question is an emphatic yes! In fact, this is what my blog is all about. Just read some of the other recent posts and let me know if you disagree with what I am saying!

A Global Perspective on Income Inequality II. Where Are the Jobs?

Posted on January 26, 2014 by jackheidel

My last post on January 23 shows vividly what the challenges are in restoring the American middle class to the prosperity which existed up until the Great Recession hit in late 2007. The problem, of course, is the gale strength force of globalization which is lifting up low wage workers all over the developing world and creating huge competition for the many low-skilled workers in the United States.
In today’s New York Times, the former Obama Administration car czar, Steven Rattner, writes about “The Myth of Industrial Rebound” in the United States, explaining why manufacturing jobs are coming back much more slowly than other jobs. “Manufacturing would benefit from the same reforms that would help the broader economy: restructuring of our loophole-ridden corporate tax code, new policies to bring in skilled immigrants, added spending on infrastructure and, yes, more trade agreements to encourage foreign direct investment.”
The above chart shows the huge decline in manufacturing jobs relative to other parts of the economy such as the education and health sector as well as the professional and business sector. Of course, these more rapidly growing service sectors are the ones benefitting from the information technology revolution. In manufacturing, on the other hand, the low skill jobs are going overseas while the high skill jobs, using technology such as robots, are much fewer in number.
Conclusion: in order to increase manufacturing jobs in the U.S., we better government policies, as outlined above by Mr. Rattner. But we also need to recognize that there aren’t going to be as many high skilled manufacturing jobs in the future. We are going to need much better K-12 and post-secondary educational outcomes to prepare the middle class for the high skilled service jobs which will predominate in the future.

A Global Perspective on Income Inequality

Posted on January 23, 2014 by jackheidel

In connection with the annual World Economic Forum in Davos Switzerland, the World Bank has published a breakdown of income growth around the world, as reported yesterday by the Wall Street Journal in the article “Two-Track Future Imperils Global Growth”. The key finding, as shown in the chart below, is that it is precisely the middle class in the developed nations which saw the slowest income growth in the years from 1998-2008.
It is clear from this chart what is going on around the world. The top 1% makes its money from capital investments and historically the return on capital exceeds economic growth. The next 9% are both the skilled workers and the educated professionals who are benefitting from the growth of knowledge industry. The medium skilled middle class in the developed world, from the 75^th percentile through the 90^th percentiles, are the ones who are seeing the smallest income gains. Their jobs are being eliminated by the force of globalization which is shifting lower skilled work to lower paid workers in the developing world.
The article points out, consistent with the above chart, that the income, including benefits, of the poorest 50% in the U.S. grew 23% in this same time period. So it really is the middle class which is hurting the most in the U.S. There are three basic ways of addressing this problem:

The federal government can help by taking much stronger measures to boost the economy thereby creating more jobs as well as higher paying jobs. Tax reform, trade expansion, immigration reform and fiscal stability are what is needed to get this job done.
The states can help by improving our K-12 education system to make sure that everyone acquires the basic academic skills, such as reading and math, which they will need to achieve their highest potential in life.
All concerned and aware individuals (such as ourselves!) must constantly beat the drums to encourage young people to stay in school and take learning seriously.

America is “exceptional” because it is the strongest, freest, and wealthiest country the world has ever known. But our future success is by no means guaranteed. We have to constantly work for it and earn it!

Harnessing Market Forces versus Offsetting Market Forces

Posted on January 21, 2014 by jackheidel

The economist Matthew Slaughter writes in today’s Wall Street Journal that ’High Trade’ Jobs Pay Higher Wages. He points out that the 22.9 million Americans who work for U.S. headquartered multinational companies made an average of $73,338 in 2011 compared with the overall average wage of about $55,000 that year. “Workers in multinational firms earn more, as global engagement fosters innovation and productivity growth.”
“There is a growing concern about stagnant or falling incomes, yet most of the measures proposed to deal with the issue – raising the minimum wage and reinstating unemployment benefits – purport to help workers by offsetting market forces. Less attention is given to harnessing market forces.”
This can be done by “liberalizing U.S. trade, investment, immigration and tax policies.” In other words, we need more trade agreements like NAFTA, which has been so successful in increasing trade in North America. We need more high skilled workers, both domestic and foreign. We need lower corporate tax rates to encourage multinational corporations to bring their trillions of dollars in overseas profits back home.
We should always strive for a more equal society with less income inequality. But the best single way to do this is to create more opportunity by growing the economy, i.e. by harnessing market forces.

How To Address Inequality: A Summary

Posted on January 19, 2014 by jackheidel

I have had many recent posts addressing the problem of income inequality in the United States and what can and should be done about it. Below is a chart, from the Congressional Budget office, which also appeared in my December 24, 2013 post. It shows that all income groups have made gains since 1980 but that higher income groups have gained the most.
This means that income inequality is increasing. The question is what to do about it. My own attitude is to try to provide more economic opportunity for low income people. How do we do this in the most effective way?

First and foremost by stimulating the private economy to grow faster and therefore to create more and higher paying jobs. This can be done with broad based tax reform (lowering tax rates offset by closing loopholes), fiscal stability achieved by eliminating deficit spending, expanded foreign trade for a more efficient global economy, and finally, immigration reform to give legal status to undocumented workers and allow more high skilled foreigners to immigrate to the U.S. Such measures as these require action by Congress and the President.
Secondly, by improving human capital, meaning fixing underperforming schools, improving rundown neighborhoods, combatting inner city crime more effectively, providing at least part-time jobs to young people and combatting teenage pregnancy. Problems such as these are best addressed at the state and local level.
Finally, providing more motivation for the unemployed and underemployed to find jobs and hold onto them. A very effective way to do this is with the federal Earned Income Tax Credit. It supplements the salary of working adults with children. New York City is conducting an experiment to see if a similar program will also motivate childless adults to try harder to find work and stay employed.

Conclusion: the best way to address inequality is to give people the best possible opportunity to obtain full time employment. This means 1) creating more jobs, 2) providing better qualified workers for all jobs and 3) motivating the unemployed more strongly to find jobs and hold on to them.
Government at all levels can help people find jobs, in one way or another, and therefore become more productive citizens. This will lead to a happier, healthier, and therefore a stronger society. All of us will benefit from this happening!

Who Are the Enemies of the Poor?

Posted on January 14, 2014 by jackheidel

In his usual provocative fashion, New York Times columnist Paul Krugman says that Republicans are “Enemies of the Poor” because “they’re deeply committed to the view that efforts to aid the poor are actually perpetuating poverty, by reducing incentives to work.”
But the Heritage Foundation’s Robert Rector has recently pointed out in the Wall Street Journal, “How the War on Poverty Was Lost”, that “the typical American living below the poverty line in 2013 lives in a house or apartment that is in good repair, equipped with air conditioning and cable TV. He has a car, multiple color TVs and a DVD player. The overwhelming majority of poor Americans are not undernourished and did not suffer from hunger for even one day of the previous year.” In fact we are now spending $600 billion a year of our $3.4 trillion federal budget and another $230 billion by the states to fight poverty. The poverty rate was 19% in 1964 and is 16% today (when government benefits are included).
Mr. Rector reminds us that “LBJ’s original aim (in initiating his antipoverty program) was to give poor Americans ‘opportunities, not doles’. It would attack not just the symptoms of poverty but, more important, remove the causes. By that standard, the war on poverty has been a catastrophe. The root ‘causes’ of poverty have not shrunk but expanded as family structure disintegrated and labor force participation among men dropped.”
So what should our poverty agenda look like going forward? We are already providing the basic necessities of life. Our future efforts should therefore be focused on improving the quality of life for the poor. This means more effective education and job training. It means more effort to keep families together by reducing marriage penalties. But most of all it means providing more opportunities for employment and job advancement. This requires faster economic growth. There are many ways to accomplish this. Back to square one!
The true enemies of the poor are those who refuse to accept the progress which has been made in the War on Poverty and the need to change our approach in order to make further progress.

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

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