My last post pointed out that there appears to be an inverse correlation between tax rates and economic growth in developed countries. In particular:
Tax levels in the U.S. have stayed relatively constant since 1965 while they have grown significantly in other O.E.C.D. countries.
GDP, on the contrary, has been growing faster in the U.S. than it has in these same countries.
Median wages, while growing more slowly in the U.S., are still much higher than in the other major O.E.C.D. countries.
A new report from the Brookings Institute analyzes the factors which have contributed to relatively slow wage growth in the U.S.
Labor productivity has been growing faster than hourly compensation since the mid-1970s.
Benefits have grown much faster than wages in recent years.
Labor’s share of income, compared to capital’s share, has been dropping in recent years.
Wage gains have been greater in the higher wage quintiles.
Domestic manufacturing output has increased even as manufacturing employment has decreased.
Entrepreneurship (i.e. new business formation) has declined in recent years even though it may now be starting to pick up.
Labor market slack has declined since the Great Recession though some still remains (measured as the share of the work force that works part time for economic reasons).
Recent labor productivity growth has been especially slow, restraining wage growth.
Conclusion. As everyone knows, slow wage growth is a highly contentious issue in the U.S. In addition to being a fundamental measure of a society’s wellbeing, it played a central role in the outcome of the 2016 Presidential election.
What can and should be done to speed up wage growth in the U.S.? Stay tuned!
One of my favorite economic journalists is Eduardo Porter of the New York Times who writes the weekly column Economic Scene. In his latest column. He points out that taxes (federal, state and local) for the U.S. and the O.E.C.D. average were about the same 27% of GDP in 1969. But now, almost 50 years later, the U.S. tax level has stayed the same while the O.E.C.D. average has grown by 7% (see chart below).
Mr. Porter says that according to Wagner’s Law “government spending as a share of the economy will increase as nations get richer and their citizens demand more and better public services.”
Americans may be receiving fewer public services than citizens of the OECD countries but we are also enjoying faster economic growth as pointed out by the AEI scholar James Pethokoukis using data from the International Monetary Fund (see chart below).
According to the Pew Research Center our median family wage is also one of the highest in the world (see chart below).
As pointed out by Mr. Pethokoulis, lower taxes are a fundamental reason for the superior performance of the U.S. economy. Other (tax-related) reasons are:
The most competitive large economy as ranked by the World Economic Forum.
Labor markets which generally link workers and jobs unimpeded by excessively restrictive labor regulations.
A growing population fueled by immigration based on economic opportunity.
A culture and tax-transfer system that encourages hard work and long hours.
A favorable regulatory environment, relatively speaking.
A decentralized political system in which states compete both tax-wise and by other means.
Conclusion. Americans pay lower taxes than other developed countries and also enjoy faster economic growth and higher median wages than most. There appears to be a strong connection between these three fundamental measures of economic wellbeing.
In my opinion both of the two main presidential candidates have overall poor economic plans. But at least several major Democratic figures such as Hillary Clinton, the NYT columnist Thomas Friedman, and the economist Larry Summers do understand the importance of economic growth.
In particular, says Mr. Summers, “What is unfortunate is that many (progressives), in their eagerness to focus on fairness, neglect the single most important determinant of almost every aspect of economic performance – the rate of growth of total income, as reflected in the gross domestic product.”
More growth means more employment. For each 1 point increase in adult male employment, the employment of young black men rises by 7%.
More growth reduces the need for desperation monetary policies that risk future financial stability.
If U.S. growth continues to have a 2% ceiling, it is doubtful if we will achieve any of our major national objectives. If we can boost growth to 3%, interest rates will normalize, middle-class wages will rise faster than inflation, debt burdens will continue to melt away and the power of the American example will be greatly enhanced.
The question is not whether business success is desirable. The question is how it can be achieved.
All of the above is very positive on the part of Mr. Summers. But then he adds, “What is needed is more demand for the product of business. This is the core of the case for policy approaches to raising public investment and increasing workers’ purchasing power.” In other words Mr. Summers is ignoring that:
Investment in new business structures, equipment and intellectual property has now fallen for three quarters in a row.
Conclusion. The way to achieve the faster rate of growth which Mr. Summers (and almost everyone else) wants is not more public investment but rather more private investment. The House Republicans have a plan to accomplish exactly this.