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!
“When the Athenians finally wanted not to give to society but for society to give to them, when the freedom they wished for most was freedom from responsibility, then Athens ceased to be free.”
Edward Gibbon, 1737 – 1794, The Decline and Fall of the Roman Empire
In my last blog, “The Government We Deserve,” I reported on a new book “Dead Men Ruling” by Eugene Steuerle, which shows how “Dead and retired policymakers have put America on a budget path in which spending will grow faster than any conceivable growth in revenues.” Our country is clearly in a huge predicament. We can get out of this jam by:
Restoring Balance: our legislators should only appropriate spending for one year at a time.
Investing in our future: i) opportunity is a more optimistic goal than adequacy ii) policies to assure adequacy often reduce opportunity by creating negative incentives (e.g. food stamps, disability programs, housing vouchers) iii) means-tested programs are often anti-family (i.e. discourage marriage)
Building a Better Government: our main goal today should be to restore fiscal freedom by allowing future generations to create the government they need and want. i) constrain the automatic growth in big federal tax subsidy, health and retirement programs ii) reorient government towards investment, children, opportunity and leanness
“Both parties talk the talk about deficit reduction but fail to see that the deficit is but a symptom of a much broader disease – the extent to which both have tried to legislate far too much of what future government should look like.”
Here are the kinds of fixes which are needed:
Eschew Constitutional Fixes (i.e. a balanced budget amendment, term limits).
Require Presidents to propose budgets which balance over a business cycle.
A True Grand Compromise (end automatic growth of entitlements, generate revenues needed to pay current bills).
As Mr. Steuerle says, “If the obstacles to progress are considerable, the payoffs are enormous.”
“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!
Several days ago, David Bonior, a former Congressman from Michigan, wrote in the New York Times about “Obama’s Free-Trade Conundrum”. “The President cannot both open markets and close the wage gap.” There is an “academic consensus that trade flows contribute to between 10 and 40 percent of inequality increases.” This happens because “there is downward pressure on middle-class wages as manufacturing workers are forced to compete with imports made by poorly paid workers from abroad.” But there is another point of view, provided, for example, by the report “NAFTA at 20: Overview and Trade Effects”, prepared by the Congressional Research Service about a year ago. “U.S. trade with its NAFTA partners has more than tripled since the agreement took effect (in 1993). (Canada and Mexico) accounted for 32% of U.S. exports in 2012. 40% of the content of U.S. imports from Mexico and 25% of U.S. exports from Canada are of U.S. origin. In comparison, U.S. imports from China are said to have only 4% U.S. content.” In other words, NAFTA at least has been a huge success.
Being able to trade with others is the foundation of private enterprise. Foreign trade is simply an extension of domestic trade. To limit trading opportunities with other countries would be a huge barrier to economic growth and therefore to future prosperity as well.
But at the same time we do want a more equal society as well as well as a more prosperous one. The key to resolving this “conundrum”, as Mr. Bonior puts it, is to address “opportunity inequality” as well as “income inequality.”
It is estimated that each billion dollars in U.S. exports provides employment for about 5000 workers. Nebraska, for example, exported $12.6 billion worth of goods and services in 2012 which translates into 63,000 jobs.
More jobs and better jobs are what create economic opportunity. One way to create more jobs and better jobs is to promote foreign trade by removing as many trade barriers as possible. Hopefully Congress and the President can work together to get this done!
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!
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 75th percentile through the 90th 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!
I have been writing this blog for just over a year. It addresses what I consider to be the two biggest problems faced by our country at the present time. First is our enormous national debt, now over $17 trillion, and the huge annual budget deficits which are continuing to make it worse. The second problem, of equal magnitude, is our slow rate of economic growth, about 2% of GDP annually, ever since the Great Recession ended in June 2009. These two problems are closely related. If the economy grew faster, federal tax revenue would grow faster and the annual deficit would shrink faster. Not to mention that a faster growing economy would create more jobs and lower the unemployment rate, which is still a high 7%.
The impediments to solving these problems are huge. Our public debt, on which we pay interest, is now over $12 trillion or 73% of GDP. Although it may stabilize at this level for a few years, it will soon begin climbing much higher, without major changes in current policy. This is primarily because of exploding entitlement spending for retirees (Social Security and Medicare) who will increase in number from about 50 million today to over 70 million in just 20 years. As interest rates return to normal higher levels, just paying interest on the national debt will become, all by itself, a larger and larger drain on the economy.
The impediments to faster economic growth are increasing global competition, such as inexpensive foreign labor, as well as rapid advances in technology, such as electronics and robotics. Both of these trends reduce the need for unskilled workers in America which in turn holds down wages and slows down economic growth.
At the same time we have an antiquated tax code to raise the huge sums of money necessary to pay for a large and complex national government. It worked fine through the post-World War II period, as long as the U.S. had the dominant world economy with little significant competition from others. But this situation no longer exists. We now have a tax system which doesn’t raise enough money to pay our bills and at the same time is so progressive that the highest rates (39.6% on individuals and 35% for corporations) are not sufficiently competitive with other countries. This discourages the entrepreneurship and business investment we need to grow the economy faster and create more jobs.
We have an enormous problem on our hands! Is it possible to fundamentally change our tax system to turn things around? My next post will answer this question in the affirmative!