Americans are a generous and kind-hearted people. We are more than willing to go to bat for the less fortunate among us. The question is how to do it effectively. A post six months ago, “A balanced and Sensible Anti-Poverty Program,” laid out four principles for an effective anti-poverty program from Robert Doar of the American Enterprise Institute. They are:
work requirements for welfare recipients
work incentives such as the Earned Income Tax Credit
fostering married, two-parent families
business growth and investment to create more jobs
There is currently much interest in , and public support for, raising the minimum wage at both the state and national levels. This is viewed by the general public as an effective way of addressing poverty. However a new report from Mr. Doar makes clear that simply holding a real job, even with low pay, is what makes the biggest difference as to whether or not someone is able to rise above poverty. Even though the overall poverty rate in the U.S. is about 14%, the poverty rate for fulltime workers is only 3% and even for part-time workers it is just 7% (see the above chart). Furthermore, as detailed in the second above chart, the total income (including selected benefits) of a low-income earner, at $8/hour, with two dependent children, and working fulltime, is $30,204, well above the poverty line.
Conclusion: yes, poor people need public assistance but it is equally important to work with them to find and hold a job, regardless of hourly wage. Not only will this meet their basic material needs, it will also put them on track to become self-supporting, productive citizens.
In my last post I endorsed raising Nebraska’s minimum wage from $7.25/hour to $9.00/hour because Nebraska’s unemployment rate is only 3.6% and so a minimum wage boost is unlikely to put very many people out of work. I also stated opposition to President Obama’s proposal for a raise in the national minimum wage to $10.10/hour because it would likely put at least 500,000 people out of work. A recent article in National Affairs by Charles Lane, “A Grand Bargain on the Minimum Wage,”suggests an approach to end a perennial controversy over how to set a minimum wage at the national level. It is based on the following observations:
Increasing the minimum wage has broad public support. A recent Gallop poll found that 76% of Americans support an increase to $9.00/hour.
However, just 4% of minimum-wage workers are single parents. Only 11.3% of workers who would benefit from an increase in the minimum wage come from poor households. The majority of minimum-wage workers do not live in poverty.
A more efficient, better targeted support program for the working poor is the Earned Income Tax Credit which provides a refundable tax credit as high as $6,143 for an adult worker with three children.
Since 1959 the average income for a full time worker earning the minimum wage has equaled two-thirds of the poverty line for a family of four. The current poverty line for such a family is $23,850. This equates to a minimum wage set at $8.00/hour.
Another option would be to set the minimum wage at 45% of today’s average private sector wage of $20/hour. This would make it $9.00/hour. The CBO has estimated that a $9.00/hour minimum wage would put “only” 100,000 people out of work.
Once a new minimum wage level is determined, it should be automatically adjusted for inflation using the Consumer Price Index.
The EITC is not cheap; it currently gives $63 billion in benefits to 27 million workers. However the EITC’s improper-payments rate regularly exceeds 20% per year.
An expansion of the EITC to single, childless workers could be paid for by tightening up EITC’s payment methods.
All of these considerations suggest a way forward to end a long-standing political controversy in a productive manner. The national minimum wage should be raised to somewhere between $8.00 and $9.00/hour and then indexed to the CPI. At the same time the EITC should be tightened up and expanded to single, childless adults. Such a program combines fairness with a strong work incentive and should have broad appeal.
Yesterday’s New York Times has a very interesting article, “U.S. Middle Class No Longer World’s Richest”, demonstrating that from 1980 -2010 the median wage in many other developed nations has grown faster than in the U.S. The chart below does show that the U.S. median wage is still growing but just not as fast as elsewhere. The authors suggest three reasons to explain what is happening:
Educational attainment in the U.S. is growing more slowly than in the rest of the industrialized world.
A larger portion of business profits in the U.S. is going to top executives meaning less for middle and low income workers.
There is a higher degree of income redistribution (through taxation) in Canada and Western Europe than in the U.S.
The data presented in this article is more elaborate but nevertheless consistent with what other studies are showing. We are still on top but we need to make some major changes in order to stay there. For example:
Most states have adopted the national Common Core curriculum for K – 12 schools. In today’s highly competitive global environment, this will enable a more rigorous evaluation of educational attainment between the states and should, therefore, improve overall academic achievement.
The best way to raise salaries for middle and low-income workers is to boost economic output overall. Fundamental tax reform, with lower tax rates for everyone, offset by closing loopholes and lowering deductions for the wealthy, will put more money in the hands of the people most likely to spend it. This will increase demand and make the economy grow faster.
As a highly visible way of addressing economic inequality in the U.S., institute a relatively small, i.e. 1% or 2%, wealth tax on the assets of individuals with a net worth exceeding $10 million. This would raise up to $200 billion per year which could be used for an extensive infrastructure renewal program, creating lots of jobs and further boosting the economy, with a lot left over to devote to shrinking our massive federal deficits.
A program like this encourages everyone to work hard and reach their highest potential, including accumulating as much wealth as they are able to. But the people at the very top, i.e. the superrich, will be required to give back a little bit more in order to benefit the entire country.
Work requirements as a condition of public assistance. The work first approach has been shown to have better outcomes with regard to attachment to the labor force than even approaches which focus on training and education.
Robust work supports for those who are working at low wages. The Earned Income Tax Credit accomplishes this and should be extended to childless adults.
Business growth and investment. Policies that raise the cost of doing business and deter growth do little to create what the poor need most: jobs.
Foster married, two-parent families. We need to mitigate marriage penalties in public assistance programs and we need to be honest about the consequences for children of single parenthood.
Mr. Doar points out that 10.2 million American’s are unemployed at the present time, 3.6 million have been jobless for more than 27 weeks, 7.3 million are involuntarily working part-time and 837,000 workers are so discouraged that they have stopped looking for work. Labor force participation has dropped from over 66% in 2007 to 63% today while the poverty rate has risen from 12.5% to 15%. Raising the minimum wage will not help the job prospects of most poor Americans. Only 11.3% of individuals who would benefit from raising the minimum wage are living below the poverty line. The Congressional Budget Office estimates that raising the minimum wage to $10.10 per hour would lead to 500,000 people losing their jobs. CBO also estimates that the Affordable Care Act will reduce full-time employment by 2.3 million by 2021. Given the strong anti-correlation (see the above chart) between labor participation and poverty, this means that the poverty rate may go higher yet.
The conclusion to draw from this excellent poverty synopsis (with lots of references) is that there are intelligent and effective ways to fight poverty and also much poorer ways to try to do it. Good intentions are not enough!
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!
As the Wall Street Journal reported several days ago, “Economic Mobility Is the New Flashpoint”. “Both parties agree the opportunity gap is widening, but the proposed solutions are starkly different.” The Democrats want to increase the minimum wage, extend unemployment benefits, and expand access to college. The Republicans suggest a whole potpourri of approaches such as reforming welfare (including food stamps), extending school choice, cutting taxes, and relaxing regulations on new businesses.
A look at the latest jobs report from the Labor Department should provide the focus which Congress needs to figure out how to increase economic opportunity. Although the unemployment rate dropped substantially to 6.7% from 7.0% at the beginning of December, only 74,000 new jobs were created in December. The explanation is that 347,000 left the labor force last month. The labor force participation rate, the share of the U.S. working-age population employed, age 16 and over, has dropped from 64.5% in 2000, to just under 63% at the beginning of 2008 to near a post-recession low of 58.6% last month (see chart below). In other words, Congress should be totally focused on speeding up economic growth in order to create more jobs. Since new businesses create the most new jobs, we should indeed relax as many regulations as possible which impede entrepreneurship. We should lower the corporate tax rate from its very high current value of 35% to get American multinational companies to bring their trillions of overseas profits back home for reinvestment in the U.S. Moving to a national consumption tax (see the Graetz Plan discussion in my January 7 post), could mean dropping the corporate tax rate to as low as 15%.
Isn’t is obvious that the best thing we can do to give low income people an opportunity to rise up the economic ladder is to just give them a job in the first place? If they’re ambitious they’ll take any opportunity they can get and run with it!
My previous post, “Fundamental Tax Reform Is the Key to Solving Our Economic and Fiscal Problems II. The Graetz Plan”, describes a tax reform plan which establishes a 14% national consumption (VAT) tax, exempts families earning under $100,000 from paying any income tax and also reduces the Corporate Income Tax to 15%. All of this is done in a revenue neutral manner while also preserving all of the progressivity of our current income tax system. A recent Op Ed column in the New York Times, by the economist Lawrence Kotlikoff, “Abolish the Corporate Income Tax”, makes the case that such a proposal “might sound like a gift to the rich, but it would actually help workers. … Apple’s tax return says it all: The company, according to one calculation, paid only 8% of its worldwide profits in United States corporate income taxes, thanks to piling up most of its profits and locating far too many of its operations overseas.”
Our corporate income tax rate, at 35%, is one of the highest in the world and this is what encourages American multinational companies to move their business to other countries. Whether we abolish the corporate income tax entirely, or just reduce it to 15%, is less important than recognizing the need to overcome popular prejudice about big business and make fundamental changes in our tax structure.
Solving our country’s many problems, from rising inequality at home to projecting adequate strength around the world, requires that the U.S. have a strong economy. An annual growth rate of 2% of GDP is not nearly good enough to end our current economic stagnation. To accomplish this will require overcoming the strong headwinds of increasing global competition and the replacement of people with machines. We will need innovative thinking and initiative to break out of the old ways of doing things which are holding us back.
Are the American people “exceptional” enough to accomplish this challenging task?
In my previous post I laid out the view of the economist, Tyler Cowen, in his new book “Average is Over”, that the powerful trends of globalization, technology, and ever increasing machine intelligence (such as Google’s search engines), will lead to a super elite 10-15% of American’s who will have the ability and self-discipline to master tomorrow’s technology and profit from it. The average middle class worker will be increasingly replaced or downgraded by intelligent machines. Social and economic inequality will continue to grow and this new trend will be very hard to overcome. This is a bleak prospect for the future of America. What can be done to resist this trend and to try to turn it around? Jim Clifton, the CEO of the Gallup Organization, says in “The Coming Jobs War”, that “what everyone in the world wants is a good job” and he has many ideas about how to boost the economy in order to produce more good jobs. According to Mr. Clifton, there is no shortage in this country of creativity, new inventions and innovation. What is lacking are successful business models to commercialize the good ideas which are already out there and create customers for new products. We need entrepreneurship. “Entrepreneurship has a direct impact on supply and demand, but with a distinction. It doesn’t just provide supply, it builds demand.” Next question: how do we boost entrepreneurship? We get government out of the way as much as possible. This means the lowest possible tax rates (offset by eliminating tax loopholes for the wealthy) and fewer burdensome regulations (such as the employer mandate for health insurance). As a society we have to decide which is more important: creating more and better jobs by growing the economy faster or making everyone more equal with higher taxes and more income redistribution. We can’t have it both ways. To reverse or at least slow down the trends which are now shrinking the middle class, the best policy is to go all out for entrepreneurship and investment!
In today’s New York Times it is reported that President Obama, “Obama Proposes Deal Over Taxes and Jobs”, proposes “a cut in corporate tax rates in return for a pledge from Republicans to invest in more programs to generate middle class jobs.” Reducing the top corporate tax rate from 35% to 28%, for example, balanced by tightening tax deductions and loopholes, would raise additional revenue on a one time basis as companies switch from one tax system to another. It is this new one time revenue which would be spent on the president’s priorities.
The President’s proposal has given a boost to Senator Max Baucus and Representative David Camp, the chairs of Congress’s tax writing panels, “Lonely Bipartisan Push to Overhaul Tax Code Finally Gets Noticed”, who are working together to construct a broad based, pro-growth, plan to reform the entire tax code, for both individuals and corporations.
Which is the better way to proceed? What is the best way to boost the economy? Revamping only the corporate tax structure to raise new tax revenue for public spending projects? Or by eliminating as many deductions and loopholes as possible over all in order to enact the lowest possible tax rates for both individuals and corporations?
To me the answer is obvious. It is investment, risk taking and entrepreneurship which create the most jobs for the long term. The best way to stimulate the private economy is with the lowest possible tax rates for all. It is unfortunate that the President will not accept this basic economic truth and work with Congress in a bipartisan manner to move the economy forward and create more jobs.
In his ever provocative fashion, columnist Paul Krugman claims in today’s New York Times that fiscal conservatives, i.e. Republicans, are conducting “War On the Unemployed” because extended unemployment benefits are being allowed to expire both nationally and in various states around the country. According to Mr. Krugman it is “meanspiritedness converging with bad economic analysis” because more government spending will boost the economy and, moreover, the federal deficit is nothing to be concerned about.
The problem is that we have now had enormous fiscal stimulus, i.e. huge federal deficits, for five years, as well as a highly expansive monetary policy, and the economy is still barely limping along at a 2% growth rate. It is unfortunate that so many liberals are ideologically opposed to broad-based tax reform whereby tax rates would be lowered in a revenue neutral way by either eliminating entirely, or else cutting back substantially, the many tax preferences, deductions and loopholes which pervade the tax code. By emphasizing profit potential over tax avoidance strategies, this would give a big boost to business risk takers and thereby lead to economic growth and lower unemployment.
At the same time that our economy is suffering from low growth and high unemployment, our national debt is exploding to a large extent because the federal government is spending too much money. Efforts to rein in government spending across the board are highly desirable and should be supported as simple common sense.
By advocating tax reform to boost the private economy and, at the same time, restraining federal spending wherever possible, fiscal conservatives are helping the long-term unemployed far more than their supposed champions who are doing just the opposite!