One of the topics I discuss on this blog is income inequality (here,here, and here). An interesting article in yesterday’s Wall Street Journal, “Upper Middle Class Sees Big Gains, Research Finds,” is highly pertinent to the inequality issue. As can be seen in the above chart, the percentage of people in the middle class or above has greatly expanded between 1979 and 2014. Furthermore, the basic research on this issue,by Stephen Rose at the Urban Institute, shows very clearly (in the chart below) what is happening: the higher is a family income, the faster it is increasing. The best policy response to this phenomenon should be clear. Rather than trying to decrease inequality with higher taxes on the wealthy, we should be trying to boost the less wealthy into higher income classes. The way to accomplish this is to:
Grow the economy faster with broad-based tax reform (lower tax rates paid for by shrinking deductions), immigration (guest worker) reform, (fair) trade expansion, and regulation reform (to help more small businesses get started). This will create more jobs and better paying jobs.
Improve education with early childhood education (to get minorities off to a better start in school), boosting high school graduation rates above the current 80% average (with better career and vocational education) and making college more affordable by putting more resources into community colleges and scholarships for low-income students.
Combat social inequality. The fraction of children with a single parent is the best predictor of upward economic mobility. The lower-income class marriage rate has dropped from 84% in 1960 to 48% in 2010. Policy should therefore focus on removing the marriage penalty in all government programs.
The basic forces of globalization and growing technology use are driving this societal change. The best way to respond is to enable more people to benefit from these basic trends.
“As for the future, your task is not to foresee it, but to enable it.”
Antoine de Saint-Exupery, 1900 – 1944
An important new book, “Dead Men Ruling,” by the Urban Institute’s C. Eugene Steuerle, has just been published. Here is the flavor of its message: “Dead and retired policymakers have put America on a budget path in which spending will grow faster than any conceivable growth in revenues. … The same policy makers also cut taxes so much below spending that they created huge deficits, which have now compounded the problem with additional debt.”
“Both sides have largely achieved their central policy goals – liberals have expanded social welfare programs, conservatives have delivered lower taxes. Both now cling tenaciously to their victories.”
In short, “our central problem is the loss of fiscal freedom.” There are “four deadly economic consequences of this disease:
rising and unsustainable levels of debt,
shrinking ability of policymakers to fight recession or address other emergencies,
a budget that invests ever less in our future and is now a blueprint for a declining nation, and
a broken government, as reflected in antiquated tax and social welfare systems.”
In addition there are “three deadly political consequences:
a decline of ‘fiscal democracy’ depriving current and future voters of the right to control their own budget,
a classic ‘prisoner’s dilemma’ where both left and right leaning elected officials conclude that they will suffer politically if they lead efforts to impose either spending cuts or tax hikes, and
rising hurdles to changing our fiscal course because, to do anything new, requires reneging on past promises of rising benefits and low taxes, that voters have come to expect.”
In other words the U.S. is in a very difficult predicament. Mr. Steuerle thinks it will take a major “fiscal turning point” to escape from the present danger. Both sides will have to make big concessions in order for us to get out of this jam. But how is this possibly ever going to happen? More next time!