One of my favorite political and economic writers is the Brookings Institute’s William Galston who writes a regular weekly column in the Wall Street Journal. Most recently his article, “The Three-Headed GOP After Trump, “ is particularly lucid.
Mr. Galston sees three factions in today’s Republican party:
Establishment conservatives who favor free trade, immigration reform, are broadly internationalist, believe in climate change, want corporate and individual tax reform, and also support entitlement reform. They would accept tax increases as part of a “grand bargain” to address our debt problem.
Small government conservatives ala House Speaker Paul Ryan and his “A Better Way” plan for American renewal. They believe that government is the principal obstacle to growth, especially with excessive regulation. They want major tax cuts and reductions in domestic spending as well as structural changes in Medicare and Medicaid. They are more nationalist than internationalist in outlook and oppose corporate welfare such as the Export-Import Bank.
Populist conservatives ala Donald Trump, many of them working class. They distrust all large institutions but do not have an ideological preference for small government. They strongly support Social Security, Medicare and Disability Insurance. They view the world outside the U.S. as more of a threat than an opportunity, and therefore oppose trade agreements and large scale immigration. “America First” is their demand.
Can these three groups coalesce into a single working majority? As I see it, Mr. Trump might have been able to accomplish this but has fallen short because he is such a sleazy individual. Mr. Galston thinks that, after Trump, the second and third groups will be able to come together but only without the first group. I see the challenge as the traditional Republican Party, consisting of the first two groups, figuring out how to join forces with the third group. Conclusion. A prosperous and secure future for our country depends on having a strong and viable (fiscally) conservative party. How will this be achieved?
“Low interest rates aren’t working, but we need a debate about what will,” declares The Wall Street Journal’s William Galston yesterday in “Soaring Profits but Too Few Jobs”. “Corporate profits after taxes in the fourth quarter of 2013 rose to an annual level of $1.9 trillion – 11.1% of GDP, a postwar high. Meanwhile, total compensation – wages and benefits – fell to their lowest level of GDP in at least 50 years.” “Businesses are sitting on tons of cash . . . and they’re choosing to invest their capital in hardware, rather than hiring. The reason: they believe that investing in technology is likely to have a better effect on sales than hiring more people.” Furthermore, “today’s (low) interest- rate regime lowers the cost of capital – and therefore of capital investment relative to labor.”
Meanwhile,” Republicans are banging away at the Affordable Care Act while Democrats are busy scheduling votes on a grab bag of subjects designed to boost turnout from the party’s base in the fall elections. The economic problems we face are getting lost in the partisan din.”
We are in a very tough situation. Raising interest rates might give a marginal boost to hiring more workers over capital investment but it will also greatly increase interest payments on our massive and rapidly increasing national debt. And meanwhile we have a stagnant economy with millions of people either unemployed or underemployed. What should we do? How about
Boosting the economy with lower individual and corporate tax rates, paid for by cutting back on tax preferences. This will especially help small businesses grow and hire more employees. It will also encourage multinational corporations to bring their foreign profits back home for reinvestment.
Addressing rising income and wealth inequality by establishing an annual 1% wealth tax on individual assets in excess of $10 million. This will raise about $200 billion per year and could be used to set up a huge infrastructure improvement program to put millions of people back to work.
Interest rates will eventually return to normal levels of 5% or so and this will create a big squeeze on the federal budget. So we also need to get federal spending under control as soon as possible. But this is a separate issue.
Just boosting the economy and putting people back to work while addressing inequality in a very visible way will get us started on a path to recovery.
The social economist William Galston has a column, in last week’s Wall Street Journal, “Closing the Productivity and Pay Gap”, discussing the large gap between the rising productivity of American workers and the stagnant pay level which has developed since 1973 (see below). He points out that “the erosion of the compensation/productivity link has made it harder to sustain robust domestic demand for goods and services, which constitutes more than two-thirds of our entire economy. As the gap widened, U.S. households responded by sending more women into the workforce, expanding the numbers of hours worked, and taking on a greater burden of debt. These strategies have hit a wall. Unless compensation rises more rapidly, stagnant domestic demand will depress economic growth as far as the eye can see.” In other words, workers are no longer receiving their fair share of the productivity gains. And this retards the increased economic growth which we all desire. Without detracting from the seriousness of Mr. Galston’s argument, I would like to make several observations which are pertinent to the discussion. First of all, as pointed out by the Heritage Foundation (in the second chart), wage stagnation since 1973 does not take into account the growth of total compensation including healthcare and other benefits. And since healthcare costs are twice what they are in any other country, this is a huge drag on the growth of worker’s pay. In other words, if the U.S. were able to cut healthcare costs nearly in half, as should be possible with a more efficient system, then the hundreds of billions of dollars saved would give a huge boost to paychecks. Secondly (as shown in the last chart), there is a direct correlation between wages and education level for U.S. workers. Of course, boosting educational outcomes is much easier said than done and, in any event, is a long term process. Nevertheless, any highly motivated and ambitious person can increase their earnings prospects by succeeding in school. Finally, a combination of minimum wage increases and perhaps an expansion of the Earned Income Tax Credit can help those people at the lowest levels of the income scale earn a living wage as long as they are willing to work. As Mr. Galston said in an earlier piece, “We need nothing less than a new norm – a revised social contract – that links compensation to productivity. And because we cannot return to the conditions that once sustained that link, we need new policies to bring it about.”
The Brookings Institution social economist, William Galston, has an interesting column in yesterday’s Wall Street Journal, “The U.S. Needs a New Social Contract”, deploring the fact that worker compensation (i.e. wages + benefits) has not kept up with gains in worker productivity since the 1970s. Here is a chart published by the Economic Policy Institute showing the divergence between productivity and compensation for a “typical” ( i.e. in the middle) worker beginning in the 1970s: The Heritage Foundation’s James Sherk has addressed this same question in a recent report “Productivity and Compensation: Growing Together” and shows that the “average” compensation of an American worker does track productivity very closely as shown in the chart below: What is the explanation for this apparent discrepancy? In fact, it is the difference between the average earnings of U.S. workers and the earnings of the median or middle worker. The very high earnings of the top 10% and the even higher earnings of the top 1% raise average worker compensation way above the income level of the median worker. In other words it is the result of the skewed and unequal distribution of incomes which is heavily weighted toward those at the top of the scale. The typical or median worker is falling behind and is not benefitting from the steady rise in the overall productivity of the American economy. This is what income inequality is all about.
The question is what to do about it. Faster economic growth will create more opportunity by creating more jobs and better paying jobs. Raising high school graduation rates as well as creating high quality technical training programs will also help.
Mr. Galston insists that this is not enough. Too many workers will continue to lag farther and farther behind. We could raise the Earned Income Tax Credit for low income workers but this would be very expensive in our currently tight fiscal situation which is likely to continue indefinitely.
Do we need a new social contract? If so, what form will it take? How will we pay for it? These are indeed very difficult questions to answer!
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.” It 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!