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.
A new book by the two economists Glenn Hubbard and Tim Kane “Balance: The Economics of Great Powers from Ancient Rome to Modern America” analyzes the decline of many of the great empires and civilizations in human history. According to the authors, they all declined (or are now declining!) primarily for internal economic reasons rather than from external military threat. The authors conclude that America’s own existential threat is fiscal. Our lowest debt level in recent years was 23.9% of GDP in 1974 ($344 billion) which has climbed to 75% of GDP today ($12 trillion) and is predicted to keep growing worse in the years to come.
Our political system is too polarized to solve our huge debt problem. Republicans want lower taxes; Democrats want higher spending. If Republicans succeed in cutting spending, it upsets the voters and gives the Democrats an advantage. If Democrats succeed in raising taxes, it upsets the voters and gives the Republicans an advantage. So we end up with low taxes, high spending, fiscal imbalance and political stalemate. This is the dilemma we are in.
But the authors propose a solution: a flexible balanced budget constitutional amendment where total outlays for a year do not exceed the median annual revenue collected in the seven prior years. A three-fifths supermajority of each house of Congress can declare a one-year emergency exemption. Additional one-year exemptions may be approved only by escalating votes in each house of Congress. The amendment would take effect in the seventh year following ratification by the states. During the seven year transition period the deficit would be reduced gradually each year until it reached zero.
Messrs Hubbard and Kane provide an excellent, nonpartisan analysis of the deep predicament in which our country now finds itself as well as an attractive means of extricating ourselves from this precarious situation.