An article in yesterday’s Wall Street Journal, “What Clever Robots Mean for Jobs,” illustrates the stark fact that “automation is commandeering much middle-class work such as clerk and bookkeeper, while creating jobs at the high- and low-end of the market. This is one reason the labor market has polarized and wages have stagnated over the past 15 years.” The above chart shows the divergence between productivity growth and payrolls beginning in the year 2000. It is a vivid portrayal of the “hollowing out” of the middle class which is causing so much grief.
Now let’s turn to a column in today’s New York Times, “What Is Middle-Class Economics,” by the journalist, Josh Barro. The term, of course, refers to the policies by which President Obama hopes to appeal to the millions of middle-class families with stagnant incomes. According to Mr. Barro, the President’s policy proposals have three facets:
Tax and regulatory provisions such as tax credits for childcare, college tuition and a second earner in households where both parents work. Employers would be required to provide paid sick leave and the minimum wage would be raised.
Make workers more productive by expanding access to community college.
Increase overall economic growth with increased infrastructure spending and new trade agreements.
The problem, as Mr. Barro points out, is that such policies would have only a small effect on the taxes of a middle-income family, amounting to a cut of no more than $150 per year on average. This is much less than the average family will save from falling gasoline prices.
On the other hand, it is generally understood that stagnant middle-class wages will not rise very much until the labor market becomes tighter as a result of falling unemployment. Mr. Barro suggests that the government can help this process along in two ways:
By the Federal Reserve holding down interest rates, or at least letting them increase only very slowly.
With policies to make it easier to work less. The Affordable Care Act does this by decoupling health insurance from full time work. The surge in disability insurance recipients takes people out of the labor market. The rapid retirement of baby-boomers does the same thing.
Unfortunately there are many negative effects from both the Federal Reserve’s easy money policy as well as a shrinking labor participation rate. I will return to this issue soon!
President Obama has proposed a $3.99 trillion budget for next year, a $340 billion increase from the current 2015 budget year. As shown in the charts below, it projects deficits of about 2.6% over the next ten years equal to its (optimistic in comparison to the CBO) growth projections for GDP. This means that the debt would stabilize at about 73% of GDP. And, of course, achieving his predicted stabilization of debt will require big tax increases over this ten year period. Here are the major weaknesses in the budget:
Sequestration. The President declares that “I’m not going to accept a budget that locks in sequestration going forward.” Everyone deplores the mindlessness of sequestration but the only responsible alternative is to make targeted cuts throughout the budget. The President makes no attempt to do this. And he wants to add spending for various new education and research initiatives, as well as an expanded Earned Income Tax Credit for low-income workers.
Infrastructure. Spending over the next six years would increase by $238 billion to be raised from a 14% repatriation tax on the $2 trillion in foreign earnings held overseas by American multinational corporations. The problem is that any repatriation tax should be tied in with overall corporate and business tax reform, exchanging lower tax rates in return for closing loopholes and deductions, in order to make U.S. business taxes competitive with those of other countries. Fundamental tax reform is the key to getting our economy growing faster.
Entitlements. The President’s budget does not even mention the biggest threat to long-term fiscal sustainability, namely the rapidly increasing spending for Social Security, Medicare and Medicaid. It will be very difficult to make progress on this critical issue without presidential leadership.
Stabilization of the Debt. The President’s budget, with quite optimistic revenue and growth projections, stabilizes the debt over ten years. But this is not nearly good enough. To be satisfied with a public debt of 73% of GDP indefinitely into the future is simply too risky. What’s going to happen when we have another financial crisis, as we surely will? How are we going to cope with our growing rivalry with China with very little budget flexibility? And one can imagine any number of other possible emergencies which might occur. Putting the debt on a clear downward trajectory is the only prudent thing to do!
The projected cost of $6 billion per year is too high and the program is highly duplicative with other scholarship programs such as Pell grants.
Education is primarily a state and local responsibility, not federal.
The graduation rate at community colleges is only 21%, much lower than at other types of educational institutions.
There is a whole new marketplace of non-degree credentials such as competency-based programs and micro-certifications which often provide greater variety, quality and monetary value than community college programs.
These criticisms are largely valid and should largely be incorporated into the guidelines of the President’s proposal as they are drawn up and submitted to Congress. But they miss the larger point. Today, about 30% of young people in the U.S. graduate from a four year college. Tuition and fees at public college averages $9,000 per year while the comparable cost at private colleges is $31,000. Loan debt for college graduates averages $27,000 per year, and is much higher for many. And, according to the above chart from the New York Times, educational attainment in the U.S. lags behind the rest of the developed world.
Today’s increasingly high-tech and interconnected world puts a huge premium on educational attainment and America’s system of higher education is not meeting the challenge. It is too expensive and not educating enough people, especially minorities and those with low-incomes.
The best way to address this problem in a cost-efficient manner, which is a necessity in today’s fiscal climate, is to expand opportunities at our 1100 community colleges. Community colleges are not only incredibly low cost operations, they accept all students and start them out at whatever academic level is necessary. They provide the ideal venue to lift up large numbers of average and previously-failed students and turn them into productive members of society. Boosting community college enrollments will, in turn, give our economy a big boost.
This is the real reason why President Obama’s free tuition plan should be taken seriously. It will shine a strong light on an educational sector whose potential is greatly under-appreciated by many Americans.
“Family leave, child care, workplace flexibility, a decent wage – these are not frills – they are basic needs.”
“There is only one developed country in the world that does not offer paid maternity leave. And that is us. And that is not the list you want to be on by your lonesome.”
“We need you to tell Congress, don’t talk about how you support families: actually support families.”
The economic journalist, Robert Samuelson, pointed out in the Washington Post a few days ago, ”The Jobs Mystery”, that even though our unemployment rate has now dropped to 6.3%, there are still 9.8 million officially unemployed people, plus an additional 7 million who would like a job but are not looking. There are also 7.3 million part-time workers who would like longer hours. This gives a really quite shocking total of 24.1 million unemployed or underemployed workers.
Granted we had a bad recession which was not the President’s fault, but it ended in June 2009, a full five years ago. In the meantime his administration has done much to retard economic growth (passing ObamaCare and the Dodd-Frank Act) and little, besides huge deficit spending, to boost it. He and the Democratic Party should be held responsible for this neglect and they probably will be.
One thing which would do a lot to boost economic growth is apparently contrary to liberal ideology and therefore off the discussion table. I am referring to fundamental, broad-based tax reform whereby individual tax rates would be lowered across the board, but in a revenue neutral manner, by closing or greatly shrinking the loopholes and deductions which primarily benefit the wealthy. The two-thirds of Americans who do not itemize their tax deductions would get a big boost in take home pay. Since they are primarily middle and lower income workers whose wages have been stagnant since the recession began, they will tend to spend this extra income, thereby giving the economy a big boost.
If the President were to sincerely ask the House Republican leadership to work with the Democratic Party to boost economic growth, something along this line could be acted upon. This is the way to really aid families. Why doesn’t he do it?
According to Peter Wehner, a senior fellow at the Ethics and Policy Center, the middle class consists of Americans “who do not consider themselves poor or rich, and can imagine their fortunes turning either way.” “We’ve moved towards an economy that more significantly favors skilled over unskilled labor. In addition, jobs, including even higher skilled jobs, are being outsourced to countries like China and India as the economy grows more globalized.”
“While President Obama has shown that he is able to effectively describe these trends, he has proved singularly unable to improve the economy in light of them. Indeed, a slew of economic indicators have worsened during his presidency.”
“Among the public there is a very deep sense of unease and apprehension. Ground that people once believed was stable is seen as crumbling, and many Americans seem unsure what to make of it. But one thing they do believe: right now politics is out of touch with what they’re experiencing. We’ve witnessed a collapse of trust in the federal government, and when it comes to Republicans and Democrats, the public’s attitude is: a pox on both your parties.”
“Most Americans have lost confidence in President Obama; they are deeply unhappy with both his policies and their consequences. …Yet Americans have not so much turned to the Republicans as they have turned against the Democrats.”
“Americans do not have a sense that conservatives offer them a better shot at success and security than liberals. … Rather than speak about the economy in broad abstractions, conservatives need to explain how to put government on the side of people working to better their conditions.”
I consider these excerpts from Mr. Wehner’s introductory essay in the document “Room to Grow: conservative reforms for a limited government and a thriving middle class” to be an excellent summary of the mood of the American Middle Class. Some of the accompanying policy prescriptions are good ideas and some are not. Stay tuned!