One of my favorite economic journalists is Eduardo Porter of the New York Times who writes the weekly column Economic Scene. In his latest column. He points out that taxes (federal, state and local) for the U.S. and the O.E.C.D. average were about the same 27% of GDP in 1969. But now, almost 50 years later, the U.S. tax level has stayed the same while the O.E.C.D. average has grown by 7% (see chart below).
Mr. Porter says that according to Wagner’s Law “government spending as a share of the economy will increase as nations get richer and their citizens demand more and better public services.”
Americans may be receiving fewer public services than citizens of the OECD countries but we are also enjoying faster economic growth as pointed out by the AEI scholar James Pethokoukis using data from the International Monetary Fund (see chart below).
According to the Pew Research Center our median family wage is also one of the highest in the world (see chart below).
As pointed out by Mr. Pethokoulis, lower taxes are a fundamental reason for the superior performance of the U.S. economy. Other (tax-related) reasons are:
The most competitive large economy as ranked by the World Economic Forum.
Labor markets which generally link workers and jobs unimpeded by excessively restrictive labor regulations.
A growing population fueled by immigration based on economic opportunity.
A culture and tax-transfer system that encourages hard work and long hours.
A favorable regulatory environment, relatively speaking.
A decentralized political system in which states compete both tax-wise and by other means.
Conclusion. Americans pay lower taxes than other developed countries and also enjoy faster economic growth and higher median wages than most. There appears to be a strong connection between these three fundamental measures of economic wellbeing.
The latest issue of the Economist shows quite dramatically in the article “Labour Pains” that labor’s share of national income is dropping. In the U.S. workers’ wages have historically been about 70% of GDP. In the early 1980s this figure started falling and is now 64%. Similar declines are occurring in many other countries.
This phenomenon is closely related to what others are observing as I have reported recently. Tyler Cowen’s new book “Average is Over” discusses the threat of technology to the middle class. Daniel Alpert in “The Age of Oversupply” talks about the increase of competition from various global forces. Stephen King’s “When the Money Runs Out” makes the case that “a half-century of one-off developments in the industrialized world will not be repeated.”
Historically the stability of the wage to GDP ratio “provides the link between productivity and prosperity. If workers always get the same slice of the economic pie, then an improvement in their average productivity – which boosts growth – should translate into higher average earnings. … A falling labour share implies that productivity gains no longer translate into broad rises in pay. Instead, an ever larger share of the benefits of growth accrues to the owners of capital.”
A shrinking share of a GDP which itself is slowing down is a double whammy. The only way to address the problem effectively is to deal with the root causes.
First of all, we need to boost overall economic growth by the proven methods of broad based tax reform, especially including much lower corporate tax rates, making regulations less onerous, carrying out immigration reform, and giving special attention to helping entrepreneurs create new businesses.
How can we, additionally, help low skilled and low waged workers move up the ladder? Long term the most worthwhile action is to change K-12 education by putting more emphasis on career education to produce more highly skilled workers. Short term, we should provide crash job training for the estimated three million current job openings in the U.S. which require skilled workers.
Economic inequality in the U.S. is becoming progressively worse all the time. There are fiscally sound ways to address this alarming problem and it is important that they be clearly and forcefully advocated.