Tag Archives: jack heidel

Income Inequality and Rising Health-Care Costs

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There seems to be a general consensus on the reality of increasing income inequality in the U.S. and even some agreement on its two main causes: globalization and the rapid spread of technology. The slow growth of the economy since the end of the recession has made the inequality problem that much worse.
CaptureNot surprisingly, slow economic growth in the past five years has led to stagnant wages for many workers.  My last post addressed this problem.  The above chart from the New York Times shows that incomes for top wage earners have been rising in recent years while they have been stagnant for middle- and lower-income workers.
But there is more to it than this.  In yesterday’s Wall Street Journal, Mark Warshawsky and Andrew Biggs point out that, “Income Inequality and Rising Health-Care Costs,” in the years 1999 – 2006, total pay and benefits for low income workers rose by 41% while wages rose by only 28%, barely outpacing inflation.  For workers making $250,000 or more total compensation rose by a lesser 36% while wages grew by a greater 35%.  This apparent anomaly is explained by the fact that health insurance costs are relatively flat across all income categories, thus comprising a much larger percentage of the total pay package of low-income workers than for high-income workers.
Capture1In fact, the Kaiser Foundation has shown that low-wage workers tend to pay higher health insurance premiums, as well as receiving lower insurance benefits, than higher paid workers (see the above chart).
Overall, what this means is that employer provided healthcare is taking a huge chunk out of the earnings of low-income workers which makes income inequality much worse than it would be otherwise. Of course, the cost of healthcare is a huge burden for the entire U.S. economy, currently eating up 17.3% of GDP, twice as much as for any other developed country.
For both of these reasons it is an urgent matter for the U.S. to get healthcare costs under control.  Avik Roy of the Manhattan Institute has an excellent plan to do just this as I have discussed in several recent posts.

How Bad Is Income Inequality and How Do We Fix It?

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The latest news on the American economy is mixed. The unemployment rate fell to 5.9% in September but the labor force also fell by 97,000 last month.  The labor participation is now down to 62.7%, a level last seen in 1978.  On the plus side 248,000 new jobs were created but the share of the population employed stayed at 59%, less than its 59.4% level at the end of the recession in June 2009.  In other words, job growth is definitely picking up but not fast enough.
CaptureHow about income inequality?  One simple way of describing and understanding the degree of income inequality in the U.S. is to look at median household income and how it changes over time.  The above chart from the WSJ shows how the median U.S. household income fell from an all-time high of $56,895 in 1999 to $51,939 in 2013.  However it also climbed back up to $56,436 in 2007 before dropping precipitously until 2012.
Capture1The Global Strategy Group discovered in a recent survey that registered voters overwhelmingly rate economic growth as a higher priority than economic fairness.  This means that any policy designed to speed up economic growth is likely to receive favorable support by the electorate.
In a recent post I describe a plan for broad-based tax reform specifically designed to speed up economic growth.  It would involve an across-the-board cut in tax rates totaling about $500 billion per year, but completely paid for by closing loopholes and deductions which primarily benefit the wealthy.  The 64% of taxpayers who do not itemize deductions would receive a tax cut.  And they would likely spend this extra money in their pockets because they are precisely the middle- and lower-income wage earners with falling incomes.
An income tax redistribution like this would greatly reduce inequality but in a way which is designed to give the economy a big boost!

The Government’s Mishandling of the Financial Crisis

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“If stupidity got us into this mess, why can’t stupidity get us out?”
Will Rogers, 1879 – 1935

The Financial Crisis of 2008 and the subsequent Great Recession, from which we are still slowly emerging, is the greatest shock to our fiscal and economic health since the Great Depression of the 1930s.  There are many explanations available for what happened, the most believable ones being written by the major participants themselves. My favorite reference for these events is the book, “Bull by the Horns,” written by the former Chair of the Federal Deposit Insurance Corporation, Sheila Bair, who held this post from 2006 – 2011.  Ms. Bair could see the crisis coming.  She interacted with all of the prime players but was too late on the scene, and with too little clout, to have a major effect on the outcome.
CaptureAnother persuasive account is provided by Richard Kovacevich, Chairman Emeritus of Wells Fargo, in a recent speech, “The Financial Crisis: Why the Conventional Wisdom Has It All Wrong.”  According to Mr. Kovacevich:

  • Forcing all large banks to take TARP funds, in October 2008, even if they didn’t want or need the funds, was one of the worst economic decisions in the history of the U.S.
  • If Bear Stearns had been allowed to go bankrupt in March 2008, Lehman Brothers would have been sold and the subsequent financial crisis greatly reduced. A total of just 20 financial institutions caused the crisis, half investment banks and half savings and loans, yet 6000 commercial banks are being punished by Dodd-Frank.
  • Dodd-Frank does not address the major causes of the recent crisis and offers few approaches to prevent the next one.
  • Since regulatory agencies are not capable of using the authority they already have to prevent failures, we need a regulatory system which limits the damage of failures. In case of failure, all creditors, other than insured depositors, should take a “haircut”.
  • Requiring excessive levels of capital will only cause financial institutions to take on greater risks. If equity and long term debt, at both the bank and bank holding company levels, is required to be maintained at 30% of assets, it is unlikely that the FDIC will ever incur losses.
  • The quasi-private/public agencies Fannie Mae and Freddie Mac need to be abolished.
  • The Glass-Steagall Act, passed in 1933 and repealed in 1999, should not be reinstated because investment banking is far less risky than commercial banking, and therefore the two forms of banking need not be separated.
  • There are three warning signs when a financial institution is approaching the danger zone: concentration of risk, inadequate liquidity and significant exposure to capital markets. Competent regulators, not Dodd-Frank, are needed to address these risks.

Recoveries from past recessions have been much more vigorous than our anemic 2.2% rate of GDP growth for the past five years. Mr. Kovacevich believes that because of the Dodd-Frank legislation, and the current monetary policies of the Federal Reserve, the bottom 25% of Americans on the economic ladder have restricted access to mortgages and personal loans.  This is inhibiting economic growth and contributing significantly to the inequality gap.

 

An Alternative Way to Boost the Wages of Low Income Workers

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Several days ago I had a post entitled “A Rational Approach to a National Minimum Wage,” in which I expressed support for a national minimum wage level of somewhere between $8.00 and $9.00/hour combined with an expansion of the Earner Income Tax Credit program to single, childless workers, paid for by tightening up on the EITC payment methods.
CaptureThere is an interesting alternative to this combined minimum wage/EITC approach.  It is the so-called wage subsidy program described in the book, “Rewarding Work: how to restore participation and self-support to free enterprise” by the economist Edmund Phelps.  Click here for a short summary.
The idea is that low wage work would be directly subsidized by the government to the employer.  A firm employing low-wage workers, let’s say from $7.25 up to $10.00/hour, just to be specific, is paid a subsidy for each such employee on a sliding scale.  The higher the wage is, the lower is the subsidy, until it has tapered off to zero.  The subsidy is paid to the firm once a year as a nonrefundable credit against taxes.  Competitive forces would ensure that most of the subsidy would be paid out to the low-income workers as higher wages. Mr. Phelps gives a persuasive argument that his program is a much more efficient way to increase low-income employment than either a minimum wage or the EITC.
It is unrealistic to expect a rollback of our current minimum wage of $7.25/hour.  However, a wage subsidy could take the place of an increase in the minimum wage.  Raising the minimum wage, even to $9.00/hour, is predicted by the CBO to lead to a loss of 100,000 jobs.
Likewise, as Mr. Phelps says, the EITC “program is not really a tool to reward and stimulate the unemployment of low-wage workers so much as a program of credits for those who, for whatever reason, have low wage incomes.”
Conclusion: a wage subsidy creates low-income jobs and boosts their pay by making it profitable for businesses to hire low wage workers and pay them well.  Such a program, a la Phelps, would need to be carefully melded with our current EITC program to achieve maximum cost efficiency.

Economic Expansion Is Not Enough

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The Washington Post reporter Robert Samuelson gives our economy today a B-, because the unemployment rate has inched down to 6.1%, fulltime employment is up to 105.8 million in 2013 from 99.5 million in 2010, and full-time women’s pay reached a high of 78% of men’s pay in 2013.  The big negative, of course, is that median household income was $51,939 in 2013, down from $56,436 in 2007, just before the financial crisis.
The Bard College economist Pavlina Tcherneva, as summarized by the reporter Neil Irwin in yesterday’s New York Times, shows what has gone wrong with economic and monetary policy since the end of the Great Recession in June 2009. The American Recovery and Reinvestment Act of 2009 (an $850 billion stimulus package) did boost the economy but it primarily aided “the skilled, employable, highly educated, and relatively highly-paid wage and salary workers.”
Capture2On the other hand the Federal Reserve’s quantitative easing policies have kept interest rates remarkably low and have thereby caused investors to buy stocks rather than bonds in order to get higher returns.  This has artificially boosted stock prices and has been especially advantageous to the top 10% and, even more so, the top 1%.
CaptureWhat is needed, according to Ms. Tcherneva, is a targeted, bottom-up approach to fiscal policy, which provides more and better paying jobs directly to middle- and lower-income wage earners.  Her suggestion is for public works jobs, public service employment, green jobs, etc., all of which would require large infusions of federal money thereby worsening the federal deficit.
A much better approach would be broad based tax reform, lowering tax rates across the board, paid for by closing the loopholes and deductions which primarily benefit the rich.  Since the 64% of taxpayers who do not itemize deductions would receive an effective pay boost, this would amount to a tax reform program targeted to exactly the middle- and low-income wage earners who have not yet recovered from the recession.  These folks would most likely spend their extra income, thus further boosting the economy (see my previous post).

What Happens When We All Live to 100?

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This is the title of an article in the current issue of Atlantic. Of course, it is a rhetorical question, but it raises a very serious issue.  There are 43 million Americans age 65 or older today and this number is expected to reach 108 million by 2050.  How will society cope with so many more senior citizens?
CaptureThis blog is concerned with the most critical fiscal and economic problems facing our country.  The biggest fiscal problem we have is how to pay for the three major entitlement programs: Social Security, Medicare and Medicaid.  Social Security can be shored up with small adjustments to either the benefits formula or by raising taxes a little bit.  Medicaid can be kept under control by block-granting the program to the states.  But Medicare is a much bigger problem.
Capture1The cost of healthcare, both public and private, is rising rapidly as shown in the above chart from the New York Times.  We badly need a new approach to control costs and Avik Roy from the Manhattan Institute has given us such a plan “Transcending Obamacare: A Patient-Centered Plan for Near-Universal Coverage and Permanent Fiscal Solvency.”
The problem is that, as Mr. Roy explains, “by creating a universal, single-payer health care program for every American over 65, regardless of financial or medical need, the drafters of Medicare made the program extremely difficult to reform.”  But now we have to reform it because the costs are becoming so huge.  How do we do it?
First of all, Mr. Roy’s plan keeps the exchanges created by the Affordable Care Act and turns them all into state-based exchanges.  It also eliminates both the individual and employer mandates, replacing these mandates with financial incentives.
Mr. Roy’s core Medicare reform is very simple.  The plan increases the Medicare eligibility age by four months each year.  The result is to preserve Medicare for current retirees, and to maintain future retirees – in the early years of their retirement – on their exchange-based or employer-sponsored health plans.  In other words, retirees will gradually be migrated to the same system, with the same level of subsidy, as for working people.
Everyone, workers and retirees alike, will be treated the same. Not only is this an eminently fair system, it insures that Medicare remains affordable, for both retirees and the whole country.

Poverty and the Minimum Wage

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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.
CaptureHowever 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).
Capture1Furthermore, 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.

A Rational Approach to a National Minimum Wage

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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.
CaptureA 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.

Let’s Raise Nebraska’s Minimum-Wage but Not the Whole Country’s

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In his State of the Union address last January, President Obama proposed raising the national minimum wage to $10.10 per hour from its current level of $7.25 per hour. The Congressional Budget Office has estimated that this would raise the wages of 16.5 million workers but also put at least 500,000 out of work. At a time of high unemployment, with an estimated 24 million people either unemployed or underemployed, this would be a bad tradeoff.
CaptureThe Wall Street Journal reports, “Some Republicans Back State Minimum-Wage Increases,” that five states, including Nebraska where I live, have minimum-wage proposals on the ballot this year. In Nebraska the minimum-wage would increase in two steps to $9.00/hour from $7.25.  Nebraska’s unemployment rate is currently 3.6%, and it is estimated that there are only 27,000 people in the state being paid the minimum wage.  In other words, Nebraska actually has a labor shortage and it is unlikely that a mild increase in the minimum wage will put very many people out of work.
Capture2A minimum wage contributes to fairness but not to growth.  Both are important but growth is the more important of the two.  A minimum-wage increase in Nebraska will increase fairness without hurting economic growth and so I support this.
At the national level, an increase in the minimum wage would increase fairness but also hurt economic growth (by causing substantial unemployment) and so I oppose it.

A Glaring Example of the Need for Tax Reform

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Nowadays there are many advocates for both individual and corporate tax reform. I have had several posts recently on this issue. A new report from the Tax Foundation “Is the Tax Code the Proper Tool for Making Higher Education More Affordable?” make a compelling argument that it is futile to try to do this.
CaptureFor example:

  • Education tax credits have grown from a $4.5 billion program for 4.7 million taxpayers in 1998 to a $17.4 billion program claimed by over 7 million taxpayers in 2011.
  • Education tax credits are not well targeted toward low- and middle-income families; almost 50% of the benefits accrue to taxpayers earning more than $75,000, often much more. A much more sensible way to target low income students would be to increase Pell grants.
  • The overuse of tax credits by the federal government has turned the IRS into a spending agency, with refundable tax credits projected to double to nearly $200 billion in the next five years.
  • Trading the elimination of education tax credits for lower marginal tax rates would grow the economy by $19 billion per year and create 121,000 new jobs.

Capture2

The authors go on to say: “It is likely that instead of helping, tax credits may be contributing to the rising cost of college education. Colleges are what economists call price discriminators because they can maximize the price that each student can pay.  Because of the Free Application for Federal Student Aid (FAFSA), the college has intimate knowledge of each student’s (or family’s) income and if they are eligible for tax credits, loans, or other financial aid.  This information allows the college to simply adjust its financial aid package in order to capture the maximum value of the tax credit.  Instead of being a helping hand for students, tax credits have turned into a windfall for universities.”
There are many, many reasons to reform the tax code.  The education tax credit is just one very good example!