Inequality, Productivity and Compensation

The Brookings Institution social economist, William Galston, has an interesting column in yesterday’s Wall Street Journal, “The U.S. Needs a New Social Contract”, deploring the fact that worker compensation (i.e. wages + benefits) has not kept up with gains in worker productivity since the 1970s.  Here is a chart published by the Economic Policy Institute showing the divergence between productivity and compensation for a “typical” ( i.e. in the middle) worker beginning in the 1970s:
CaptureThe Heritage Foundation’s James Sherk has addressed this same question in a recent report “Productivity and Compensation: Growing Together” and shows that the “average” compensation of an American worker does track productivity very closely as shown in the chart below:
Capture1What is the explanation for this apparent discrepancy?  In fact, it is the difference between the average earnings of U.S. workers and the earnings of the median or middle worker.  The very high earnings of the top 10% and the even higher earnings of the top 1% raise average worker compensation way above the income level of the median worker.  In other words it is the result of the skewed and unequal distribution of incomes which is heavily weighted toward those at the top of the scale.  The typical or median worker is falling behind and is not benefitting from the steady rise in the overall productivity of the American economy.  This is what income inequality is all about.
The question is what to do about it.  Faster economic growth will create more opportunity by creating more jobs and better paying jobs.  Raising high school graduation rates as well as creating high quality technical training programs will also help.
Mr. Galston insists that this is not enough.  Too many workers will continue to lag farther and farther behind.  We could raise the Earned Income Tax Credit for low income workers but this would be very expensive in our currently tight fiscal situation which is likely to continue indefinitely.
Do we need a new social contract?  If so, what form will it take?  How will we pay for it?  These are indeed very difficult questions to answer!

Should Government Address Inequality Directly?

 

Wall Street Journal columnist William Galston suggests in “Where Right and Left Agree on Inequality”, that both sides of the political spectrum agree that economic inequality is increasing in America and that government needs to address this problem.  “Poverty is part of the explanation, as liberals insist.  But so are parenting and family structure, as conservatives believe.”
CaptureIt so happens that we have a broadly supported federal program which simultaneously addresses both poverty and family structure.  It is the Earned Income Tax Credit program.  It provides $3,305 a year to low-income working families with one child and up to $6,143 for families with three or more children.  The U.S. spends $61 billion a year on this program and it has proven to be very successful in encouraging low-income people to find and keep jobs.  In fact, the economist, Gregory Mankiw, recommends the EITC over a higher minimum wage as a better way to increase the earnings of the working poor.
The New York Times’ Eduardo Porter reports in “Seeking Ways to Help the Poor and Childless”, that New York City is conducting an experiment to see if a locally run program similar to the EITC  will have the same positive effect in increasing employment of childless adults.  It is understood that many of the jobs being created in today’s economy are low paying service jobs.  As Mr. Porter says, “for the American market economy to remain viable, being employed must, one way or another, provide for workers’ needs.”
Conclusion:  as important as it is for Congress and the President to adopt measures to increase economic growth (e.g. tax reform, fiscal stability, expanded foreign trade, immigration reform), in order to create more and better paying jobs, government also has a responsibility to provide direct help to the needy who are trying to help themselves.  The EITC program is an excellent way to do this!

The Floundering of America

 

In yesterday’s Wall Street Journal, columnist William Galston talks about “The Floundering of America”.  Based on recent reports from the Congressional Budget Office, Mr. Galston says that “Today we are hurtling toward a less dynamic economy, a meaner society and a riskier world.”
His argument is based on these observations:

  • For the past 40 years, 1970-2010, the labor force expanded at an average rate of 1.6% per year.  It will soon slow to only .4% annual growth, because of more retirements and a plateauing of women’s labor-force participation. This means that growth in GDP will slow down to about 2% annually from its historical average of over 3%.
  • America is aging very fast.  Today there are 57 million Social Security beneficiaries which will increase to 76 million in 2023.  Obviously this will rapidly increase entitlement spending on retirees.
  • America already spends 18% of GDP on healthcare costs and the CBO projects that this will grow to 22% by 2038.

“In sum, current trends and policies will yield lower rates of economic growth, painfully slow gains in real incomes, huge increases in outlays for expenses related to an aging population, and a health sector that devours more and more of the national product”, he says.
These trends are all contributing to an explosion of the national debt.  The only current strategy to keep this debt even roughly stable during the next decade, let alone reduce it, is to shrink discretionary spending through sequestration.  This will lead to a decline in discretionary spending to 5.3% of GDP by 2023.  This means roughly 2.6% of GDP for national defense with an equal share or all other domestic purposes.
“This is pure folly”, says Mr. Galston. “The country needs a new national strategy for a viable future.”
How do we achieve a new strategy?  Immigration reform will increase the size of the workforce.  Tax reform could boost the economy by encouraging business expansion, risk taking and entrepreneurship.  True (consumer-driven) healthcare reform could dramatically lower the cost of healthcare.  In other words there are potential policies out there that address our national floundering. We simply need leaders who are capable of going beyond partisanship in order to help create a better future!

Is It Mean Spirited to Cut Food Stamps?

In yesterday’s Wall Street Journal, columnist William Galston writes “In Defense of Food Stamps” that “food stamps reach their intended targets, poor and near-poor Americans. The large increase in the program’s cost over the past decade mostly reflects worsening economic conditions rather than looser eligibility standards.  Since 2000 the number of individuals in poverty has risen to 46.5 million from 31.6 million.”
Mr. Galston also states that “the number of able-bodied adults without dependents receiving benefits under the food stamp program has risen to nearly 5.5 million from under 2 million since 2008 even as work requirements for those individuals have been relaxed.  Here the critics have a case: the federal government should reconsider the waivers of current requirements it has extended to 44 states and the District of Columbia and it should consider toughening those standards.”
Congressional Republicans have proposed cutting $40 billion from the food stamp program over 10 years, or $4 billion per year.  Since the total food stamp budget is $80 billion per year, this amounts to a 5% cut.  And this 5% cut is directed precisely at those 5.5 million able-bodied adults without dependents.  Expecting these people to find a job, even if minimum wage, in return for receiving food stamps, is not asking too much.  It is really just “tough love” more than anything else.
Putting a substantial portion of these 5.5 million able bodied adults back to work would also be a big boost to the economy.  One of the biggest drags on the economy at the present time is the low labor participation rate which has dropped from about 66% to 63% since the recession began in 2008-2009.
Trying to make the food stamp program more cost effective is really just an example of what should be done across all programs of the federal government, routinely, as a matter of sound operating procedures.  It is unfortunate that ideology and political partisanship get in the way of such common sense!