Tag Archives: jack heidel

Should Government Address Inequality Directly?

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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!

Who Are the Enemies of the Poor?

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In his usual provocative fashion, New York Times columnist Paul Krugman says that Republicans are “Enemies of the Poor” because “they’re deeply committed to the view that efforts to aid the poor are actually perpetuating poverty, by reducing incentives to work.”
CaptureBut the Heritage Foundation’s Robert Rector has recently pointed out in the Wall Street Journal, “How the War on Poverty Was Lost”, that “the typical American living below the poverty line in 2013 lives in a house or apartment that is in good repair, equipped with air conditioning and cable TV.  He has a car, multiple color TVs and a DVD player.  The overwhelming majority of poor Americans are not undernourished and did not suffer from hunger for even one day of the previous year.”  In fact we are now spending $600 billion a year of our $3.4 trillion federal budget and another $230 billion by the states to fight poverty.  The poverty rate was 19% in 1964 and is 16% today (when government benefits are included).
Mr. Rector reminds us that “LBJ’s original aim (in initiating his antipoverty program) was to give poor Americans ‘opportunities, not doles’.  It would attack not just the symptoms of poverty but, more important, remove the causes.  By that standard, the war on poverty has been a catastrophe.  The root ‘causes’ of poverty have not shrunk but expanded as family structure disintegrated and labor force participation among men dropped.”
So what should our poverty agenda look like going forward?  We are already providing the basic necessities of life.  Our future efforts should therefore be focused on improving the quality of life for the poor.  This means more effective education and job training.  It means more effort to keep families together by reducing marriage penalties.  But most of all it means providing more opportunities for employment and job advancement.  This requires faster economic growth.  There are many ways to accomplish this.  Back to square one!
The true enemies of the poor are those who refuse to accept the progress which has been made in the War on Poverty and the need to change our approach in order to make further progress.

How Do We Increase Economic Mobility?

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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).
CaptureIn 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!

Why a High Corporate Income Tax Is So Damaging to Our Economy

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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.
CaptureA 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?

Fundamental Tax Reform Is the Key to Solving Our Economic and Fiscal Problems II. The Graetz Plan

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The Yale Tax Law Professor, Michael Graetz, has proposed a new tax system “100 Million Unnecessary Returns: A Simple, Fair, and Competitive Tax Plan for the United States” which would do wonders towards straightening out the huge fiscal and economic problems now facing our country.
CaptureHow do we rev up the national economy in order to put more people back to work and, at the same time, raise the revenue needed to operate the government in the 21st century without mountains of debt?  Mr. Graetz’s basic idea is to tax consumption rather than relying totally on an income tax.  Under his plan both savings and investments will be taxed at a lower rate which will encourage more of both.  The Plan has these features:

  • A broad based Value Added Tax of about 14% is enacted on goods and services.  The U.S. is the only advanced economy without a VAT.
  • Families earning less than $100,000 are exempted from the income tax.  For incomes between $100,000 and $250,000, the tax rate would be 15%.  For income over $250,000, the rate would be 25%.
  • The corporate income tax rate is lowered to 15%.
  • The Earned Income Tax Credit (EITC) is used to provide relief from the VAT burden to low-income families by using payroll tax offsets.
  • The plan is designed to be revenue neutral as verified by the Tax Policy Center.

This plan has many advantages including:

  • Taxing consumption and lowering the corporate tax rate to 15% from its current level of 35% would dramatically encourage investment in the U.S. thereby stimulating the economy and creating both new jobs and higher wages for American workers.
  • It would eliminate more than 100 million of the 140 million U.S. tax returns.
  • With many fewer Americans paying income taxes there would be far less temptation for Congress to use income tax exclusions, deductions and credits to try to address social and economic problems.
  • The plan retains all of the progressive features of our current tax system whereby higher income earners pay higher tax rates.

The point of describing the Graetz Plan in some detail is not to suggest that it is the best way to implement tax reform but rather that here, at least, is one attractive way to do it.  The purpose is to move the discussion forward.  We badly need to make changes along these lines!

Fundamental Tax Reform Is the Key to Solving Our Economic and Fiscal Problems I. Why Change Is Needed

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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.
CaptureThese 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!

Oklahoma’s Senator Tom Coburn: We Need More like Him!

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Senator Tom Coburn of Oklahoma has an Op Ed column in the Wall Street Journal from two days ago “The Year Washington Fled Reality”, discussing many of the things that are wrong with our national government.  Granted that all elected officials “play politics” to some extent or another, nevertheless Dr. Coburn, an obstetrician, is amazingly independent of the reigning political culture.  He spent three consecutive terms in the House of Representatives, left Congress for four years, and now is back serving his second term in the Senate.  He has announced that he will not run for re-election in 2016 when his present term ends.
CaptureDr. Coburn is constantly drawing attention to, and attacking, the enormous amount of wasteful and inefficient spending approved by Congress.  The Popular Romance Project, pictured above, is an example. His office has just published its fourth annual report on government waste, “Wastebook 2013”, detailing 100 different “examples of government mismanagement and stupidity. … Collectively these cost nearly $30 billion in a year when Washington would have you believe everything that could be done, has been done to control unnecessary spending.”
Dr. Coburn has prevailed upon the Government Accounting Office to issue annual reports called “Actions Needed to Reduce Fragmentation, Overlap and Duplication and Achieve Other Financial benefits.”  Three of these reports have now been issued. Altogether they list almost 400 individual actions which could be taken to improve the efficiency and effectiveness of 162 different program areas.
In spite of all the good work he is doing, Dr. Coburn would be even more effective if he had more help.  Fiscal conservatives should stop wasting their time on senseless gestures like trying to defund Obamacare.  They need to get down in the trenches with serious deficit hawks like Tom Coburn and whittle away at wasteful programs one by one.
                                                  

An Optimistic View of America’s Future!

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In the latest issue of Barron’s, Frederick Rowe, the managing partner of Greenbrier Partners Capital Management, asks in “More Than a Sugar High?” , “Can you imagine a country that is managed in an economically rational manner, creating the wealth that’s necessary to take proper care of the citizens who get left behind? … What if our economic recovery is more than a sugar high?  What if there is more here than insanely stimulative monetary policy from the Federal Reserve?  What if the U.S. has already begun to steer an economic course to a period of unprecedented and genuine prosperity, achievement, and problem solving?”
Here are eight factors which Mr. Rowe gives to point us in the right direction:

  • North American Energy Independence (already on the horizon).
  • Sensible Immigration Reform: encouraging our most enterprising and hard-working people to become citizens rather than chasing them away.
  • Repatriation of Corporate Income: if a company domiciled in the U.S. makes money in Argentina and wants to invest it in the U.S. we double-tax the daylights out of it.  It would be hard to imagine a more counterproductive tax policy.
  • Changing Directors and Their Thinking: the once unthinkable mindset of corporate directors acting on behalf of long-term owners (rather than the CEOs with whom they play golf) is actually gaining traction.
  • Lowering Corporate Taxes: the tax-writing committees in Congress are working on this.
  • Increasing Technological Leadership: the most dynamic technology companies in the world are domiciled in the U.S. Technology, in the short run, displaces workers.  But eventually workers catch up because new technology creates new kinds of jobs that were never imagined before.
  • Americanization of the World: more than three billion people around the world will soon be able to afford to live much more like the 300 million Americans do.  So companies which make it big here have an automatic global opportunity.
  • Obamacare:  Even this bureaucratic catastrophe provides a large opportunity for economic opportunity.  Think of Jimmy Carter’s failures which led to Ronald Reagan’s successes.

“Let your imagination run and consider all the things that can be accomplished by an energy-independent, cash-generating, cash-repatriating country that is a hotbed of technological innovation.”
I can’t possibly say it any better than this!

Is the American Middle Class in Decline?

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Many political commentators have been complaining recently about the financial difficulties of the American middle class.  For example, a recent report from Bill Moyers and Company, “By the Numbers: The Incredibly Shrinking American Middle Class”, has a chart showing that the median middle class salary, adjusted for inflation, is now no better than it was in 1989 and not much higher than in 1979:
CaptureBut there is another point of view, very well described by the two economists, Donald Boudreaux and Mark Perry, in the Wall Street Journal just about a year ago, “The Myth of a Stagnant Middle Class”.  They make several pertinent points:

  • The Consumer Price Index overestimates inflation by underestimating the value of improvements in product quality and variety.
  • Wage figures ignore the rise over the past few decades in the portion of worker pay taken as (nontaxable) fringe benefits.  Health benefits, pensions, paid leave, etc. now amount to almost 31% of total compensation according to the Bureau of Labor Statistics.
  • The average hourly wage has been held down by the great increase of women and immigrants into the workforce over the past three decades.  Because the economy was (before the Great Recession) so strong, it created millions of jobs for the influx of often lesser skilled workers into the workforce.

Messrs. Boudreaux and Perry point out several other improvements in the quality of life which Americans enjoy:

  • Life expectancy has increased to 79 years for an American born today, five years longer than in 1980.  And the gap in life expectancy between whites and blacks has narrowed.
  • Spending by households on the basics of food, housing, utilities, etc. has shrunk from 53% of income in 1950, to 44% in 1970 to 32% today.
  • Although income inequality is rising when measured in dollars, it is falling when measured in terms of our ability to consume.  For another example, air travel is now as common as was bus travel in an earlier era.  And another: the latest electronic products are available to even middle class teenagers.

Conclusion: We should stop complaining about inequality and thank our lucky stars for the free enterprise system which has been so successful in improving our quality of life.

More on Inequality: What Does the Data Mean?

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In yesterday’s Wall Street Journal, the economist Robert Grady addresses “Obama’s Misguided Obsession With Inequality”.  The basic problem is that an important Congressional Budget Office report in 2011, “ Trends in the Distribution of Household Income Between 1979 and 2007”, is easy to misrepresent and misinterpret.  Here are three basic pieces of data from the CBO report:
Capture3CaptureCapture1The first chart shows that yes, between 1979 and 2007 the rich did indeed get richer relative to the rest of the population.  The second chart shows, however, that median household income increased by 62% during this same time period.  And the third chart shows that all five income groups made substantial gains at the same time.
As Mr. Grady says, “Here is the bottom line.  In periods of high economic growth, such as the 1980s and 1990s, the vast majority of Americans gain and have the opportunity to gain.  In periods of slow growth, such as the past four and a half years since the recession officially ended, poor people and the middle class are hurt the most, and opportunity is curbed. … The point is this: If the goal is to deliver higher incomes and a better standard of living for the majority of Americans, then generating economic growth – not income inequality or the redistribution of wealth – is the defining challenge of our time.”
So then, what is the best way to address income inequality?  Should we concentrate on raising taxes on the rich and increasing spending on social programs like we have done in the last five years?  Or should we rather concentrate on speeding up economic growth, as Mr. Grady says, in order to create more jobs and more opportunities for advancement?
Compare the enormous growth in the period from 1979 to 2007 with the stagnation of the past five years.  Isn’t it obvious which is the better way to proceed?