About the author
The Obama White House has fully embraced the idea that the economic fortunes of the American middle have suffered 30 or 40 years of stagnation. In other words, our problems didn’t begin with Obamanomics.
Recall the president’s late 2011 speech in Osawatomie, Kansas, where he described the last few decades as little more than ones of rising inequality and declining income mobility. More recently, Jason Furman, the head of Obama’s Council of Economic Advisers, explained that the recent strengthening of the US economy “presents an opportunity to address a long-standing challenge for the US economy – the 40-year stagnation in incomes for the middle class and those working to get into the middle class.” And in the Wall Street Journal yesterday, Furman again argued that the economic upturn is “not enough to make up for decades of subpar gains for middle-class families.” So the Reagan and Clinton booms weren’t really that great?
First a quick data point. Furman mentions CBO data that show median US incomes up 17% since 1973. Now I am pretty sure that number refers to before-tax “market income” (excluding government transfers) using data also found in this 2014 CBO study. But that report also shows that “cumulative growth in the inflation adjusted after-tax income [including transfers] of households in the 21st to 80th percentiles” was an estimated 40% from 1979 though 2011. So more than twice as much.
Anyway, Furman’s recent writings and views, I think it is fair to say, are also a bit more dour that they were pre-recession, particularly concerning how the US economy has fared since the 1970s. Here is Furman in 2006 remarking on an economic debate between pessimist Larry Mishel and optimist Stephen Rose (via Brad Delong):
But the facts are not entirely irrelevant…. I would much rather we all… spend our time figuring out what to do about rising inequality. But… Rose is right, people are substantially better off than they were 30 years ago…. [T]oday’s workers are earning more than their counterparts did 30 years ago.
Ignore the statistics for a second and use your common sense. Remember when even upper-middle class families worried about staying on a long distance call for too long? When flying was an expensive luxury? When only a minority of the population had central air conditioning, dishwashers, and color televisions? When no one had DVD players, iPods, or digital cameras? And when most Americans owned a car that broke down frequently, guzzled fuel, spewed foul smelling pollution, and didn’t have any of the now virtually standard items like air conditioning or tape/CD players?…
A long life — it’s four years longer today than it was in 1975. A college education — 38 percent of young adults are enrolled today, compared to 26 percent back in 1975. A home — also more common today than in 1975 .. .
Some of the wage statistics that Mishel tosses around suffer from a number of limitations, virtually all of which bias the picture in the same way. The biggest one is that wages … are reported after the cost of increasingly generous and technologically advanced health insurance is factored out … . Health isn’t the only problem with the wage data; other benefits have grown as well — in addition to the fact that the wage comparisons rest on a measure of inflation that is almost universally believed to be biased and ignore the influx of immigrants who weren’t in the data back in the 1970s.
So living standards are a lot higher now than then. And I think Furman’s criticisms of the stagnationist stance hold up, even with the subsequent Great Recession and Not-So-Great-Recovery. Americans today are still far better off than they were in the 1970s, political rhetoric aside. Team Obama should not be afraid to concede that.
For instance, a recent New York Times story noted that while the middle class – defined as households earning between $35,000 and $100,000 — has been shrinking since the 1960s, “the shift was primarily caused by more Americans climbing the economic ladder into upper-income brackets. At least through 2000.
And then there is this new Brookings piece by Rob Shapiro, which finds that through the 1980s and 1990s, “households of virtually every type experienced large, steady income gains, whether they were headed by men or women, by blacks, whites or Hispanics, or by people with high school diplomas or college degrees.” Unfortunately, as Shapiro adds, these “data also show that this broad income progress stopped around the turn of this century: From 2002 to 2013, the incomes of most households stagnated or declined even as they aged through nine years of expansion and two years of recession.”
I get that some progressives want to argue that the more market-friendly tax, regulatory, and trade polices that started in the early 1980s — and were continued by Bill Clinton — brought nothing more than higher inequality and middle class stagnation. The modern Democratic Party is nostalgic for the high tax, union-dominated 1950s. But you can make the case that America needs a substantial policy shift today to create a high-growth economy where gains are broadly shared — particularly with demographic headwinds — without drawing economically errant, though politically convenient lessons from the past.
“Enterprise zones” have an intuitive appeal. Flood a poor area with all sorts of aid to attract business. Create thriving little Hong Kongs in places of despair, particularly urban areas, through the miracle of free enterprise. Some folks, especially on the right, have suggested turning Detroit in a giant, low-tax enterprise zone. And President Obama has proposed his own version, “promise zones.” More from the San Francisco Fed:
Federal Empowerment Zones consist of relatively poor, high-unemployment Census tracts. They offer businesses tax credits of up to $3,000 per worker for hiring zone residents and (in the original zones) block grants of up to $100 million to be used for business assistance, infrastructure investment, and training programs. Benefits vary across state programs, but many also emphasize hiring credits.
But do these enterprise zones actually work? I have been trying to assemble an urban policy agenda. But I don’t find these results especially compelling. Again, the SF Fed:
First, even though some research on federal Empowerment Zones finds some evidence of positive employment effects, other research fails to find evidence of reduced poverty, and points to some increases in the share of households falling below other low income thresholds. Second, there is consistent evidence of housing price increases, implying that benefits are received by unintended recipients. Other results not included in the table sometimes point to negative spillover effects on nearby areas, suggesting that enterprise zones largely rearrange the location of jobs rather than creating more of them.
Our overall view of the evidence is that state enterprise zone programs have generally not been effective at creating jobs. The jury is still out on federal programs—Empowerment Zones in particular—and we need more research to understand what features of enterprise zones help spur job creation. Moreover, even if there is job creation, it is hard to make the case that enterprise zones have furthered distributional goals of reducing poverty in the zones, and it is likely that they have generated benefits for real estate owners, who are not the intended beneficiaries.
For decades, states across the South, Great Plains and Rocky Mountains enacted policies that prevented organized labor from forcing all workers to pay union dues or fees. But the industrial Midwest resisted.
Those days are gone. After a wave of Republican victories across the region in 2010, Indiana and then Michigan enacted so-called right-to-work laws that supporters said strengthened those states economically, but that labor leaders asserted left behind a trail of weakened unions.
Now it is Wisconsin’s turn. On Monday, Gov. Scott Walker — who in 2011 succeeded in slashing collective bargaining rights for most public sector workers — signed a bill that makes his state the 25th to adopt the policy and has given new momentum to the business-led movement, its supporters say.
I’ve been dismissive of the theory that the decline of unionization is the overriding force explaining middle-class wage stagnation:
Inequality and wage stagnation are problems witnessed across advanced economies. Wages haven’t been going up in Canada either, even though the share of the workforce in unions is twice that of America’s and holding steady, according to the OECD. An international macro story requires an international macro explanation — like technology, manifested as automation (computerization eliminating “routine” jobs such as assembly line workers and receptionists) and globalization, itself enabled by the IT revolution.
Indeed, the apparent connection between falling unionization and rising income inequality may itself be the result of how “computerization … and globalization may a have fostered a more dynamic, and unequal, American capitalism to which unions were poorly adapted,” according to a 2011 paper out of Harvard and the University of Washington.
But what future do unions have? Rich Yeselson offers a supportive view from the left, while Adam Ozimek thinks modern unions should “focus on generating useful services rather than simply increasing bargaining power.”
Much good news and (a little) bad news on the US budget, via Dow Jones:
The Congressional Budget Office raised its forecast for the 2015 budget deficit Monday by $18 billion to $486 billion. The increase was due to changes in estimates for costs of federal programs including Medicare, Medicaid and student loans. … The CBO lowered its 10-year projection for the deficit by $431 billion due to factors including lower costs for the Affordable Care Act, higher tax revenues and lower interest costs on the national debt. Cumulative deficits over the next 10 years are projected to total $7.2 trillion. Long-term estimates are lower, yes, but still historically high relative to gross domestic product, notes the non-partisan CBO. By 2025, it says the federal debt could total 77% of GDP, more than any year prior to 1950.
The massive drop in the US budget deficit is still one of the great, lightly reported economic stories, from 10% of GDP at the start of the Great Recession to less than 3%. But enjoy it while it lasts. The entitlement tidal wave fast approaches.
Now of that $431 billion long-term deduction, $142 billion came from a revised spending forecast for Obamacare. First, with health premiums rising more slowly that expected, government subsidies to purchase health insurance also came in less than expected. Second, via the WaPo: “slightly fewer people are now expected to sign up for Medicaid and for subsidized insurance under the law’s marketplaces. That’s because the agency now says that more people than anticipated already had health insurance before the law took effect, and fewer companies than anticipated are canceling coverage.”
The downward revision since March 2010 to the estimate of the net federal costs of the ACA’s insurance coverage provisions (measured year by year) is attributable to several factors, including changes in law, revisions to CBO’s economic projections, numerous improvements in CBO and JCT’s modeling, the Supreme Court’s decision to allow states to choose whether to expand eligibility for Medicaid, administrative actions, and the availability of new data.Another notable influence is the slowdown in the growth of health care costs covered by private insurance and in the Medicare and Medicaid programs. Although it is unclear how much of that slowdown is attributable to the recession and its aftermath and how much to other factors, the slower growth has been sufficiently broad and persistent to persuade CBO and JCT to significantly lower their projections of federal costs for health care.
View related content: Pethokoukis
Turns out that Reihan Salam is also concerned that the Lee-Rubio tax plan would simply raise too little tax revenue to be politically viable. ( I have registered a similar concern here, here, and here for both political and fiscal reasons.)
If Lee-Rubio ever gets to the point where it’s being debated in Congress, it will simply have to raise more revenue. It won’t necessarily have to raise as much as the current tax code, or even as much as the Bush-era tax code would have raised had it remained in place. But it will have to be in that ballpark. And once we get to that point, we’re going to actually have debate these trade-offs: do we go with the cuts in capital taxation or do we shrink the child credit? Should we balance out cuts in capital taxation with higher rates? Try as we might, we can’t dodge these issues. I understand that the debates we have in party primaries are different from the debates we have in general elections, or in Congress. That’s fair enough. But one of the reasons conservatives have grown cynical is that candidates will run on one set of ideas and then abandon them once in office. That is why it’s important that Lee and Rubio address serious concerns about their proposal sooner rather than later.
Structurally, the Lee-Rubio idea of moving the code more toward a consumption tax while also providing tax relief to middle-class families has much, much to recommend. But the red ink is just too much, although Lee-Rubio might actually end up more fiscally responsible that most of GOP tax plans we’ll see in the 2016 race — at least if 2012 is a guide.
So the options are some combo of (a) smaller cuts to labor income tax rates, (b) shrinking the child tax credit expansion, (c) smaller cuts to investment income taxes, which Lee-Rubio would eliminate, and (d) scaling back tax breaks for upper-income Americans. All that even with entitlement reform. It’s also important to make sure the distributional impact of the CTC and other tax changes are such that working class Americans see substantial benefit.
Scott Sumner makes the case for leaving capital income untaxed, while adding a third, 50% bracket for labor income. I’m not so hot about that. Yet leaving capital gains and dividends untaxed at the individual level is politically inflammatory, despite the sound economics behind the proposal. (If you don’t believe me on the economics, just ask left-of-center writer Matthew Yglesias.) Some might even say that feature undermines the whole pro-middle class appeal of Lee-Rubio. Another option would be to lower the 25% Lee-Rubio corporate tax rate even lower and compensate by raising individual investment tax rates to those of ordinary income. (I would consider adding the twist of phasing out long-term capital gains over a number of years to further boost investment.) Here is how that might work:
The second option, which could be adopted unilaterally by the United States, would replace the corporate income tax with increased taxation of shareholders. American shareholders of publicly traded companies would be taxed on both dividends and capital gains at ordinary income tax rates and capital gains would be taxed upon accrual. The option would ensure that American shareholders in both U.S. and foreign-based multinational corporations pay tax on their worldwide income, while improving incentives for both domestic and foreign corporations to invest in the United States and increasing the competitiveness of U.S.-resident MNCs. It would also curtail a host of closed-economy distortions, including the current system’s biases against corporate equity-financed investment, dividend payments, the sale of appreciated assets, and specific industries and types of capital.
But none of these are easy answers, which is to be expected when are trying to reform a complex tax code at the same time your unfunded social insurance liabilities are rolling fast toward you.
McKinsey offers a nice compilation of global growth prediction (see above chart) and offers this consensus on the US economy:
The US economy has momentum from stronger-than-expected growth at the end of 2014. Consumer sentiment and trade activity increased, the unemployment rate fell to 5.6 percent in January, and financial markets benefited from upbeat investor sentiment. However, retail sales dipped in December, and real wages continued to stagnate. The US economy has overcome a number of hurdles to see its way clear to a deeper and stronger recovery: the range of growth forecasts exceeds 3 percent for 2015
Again, maybe this will be the Year of Acceleration to 3%+ growth, but it’s off to a bad start — at least as measured by GDP. Here is JPMorgan last Friday:
In light of the data we’ve received this week – January reports for real consumer spending, construction spending, and net exports that varied from disappointing to downright weak, as well as a softer February print for car sales –– we are marking down our tracking for annualized real GDP growth in Q1 from 2.5% to 2.0%. Even after this revision risks are more skewed to the downside than upside.
Also note this from the Atlanta Fed’s real-time GDP tracker:
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2015 was 1.2 percent on March 6, unchanged from its March 2 reading. The nowcast for the contribution of net exports to first-quarter real GDP growth fell from -0.5 percentage point to -0.8 percentage point following this morning’s international trade report from the U.S. Census Bureau. This was offset by increases in the nowcasts of equipment investment and inventory investment.
And yet those job creation numbers in February were pretty strong. Perhaps 2015 will mirror 2014, slow start and then a quickening pace. (Maybe the job numbers partially reflect business expectations for faster growth.) JPMorgan, for once, thinks this may be the case.
Been awhile since I’ve written explicitly about Walter Russell Mead’s Blue Model analysis concerning the decline of, as WRM explains, “the core institutions, ideas and expectations that shaped American life for the sixty years after the New Deal don’t work anymore.”
Gone is the world of heavily unionized and regulated Corporate America, dominated by oligopolies, with little overseas competition, to a large extent living off the huge technological advances of the 1920s and 1930s. As Ashwin Parameswaran has described the era:
Most large American firms were also largely insulated from strong shareholder pressure to improve profitability. This combination of low import competition, low rate of entry by new firms and weak shareholder pressure meant that there was very little process innovation or cost control. It is not a coincidence that many view the 1950s and 1960s as a golden age of economic growth and stability. It was essentially a period when neither firm owners, managers or workers felt the threat of failure or even had the incentive to improve efficiency or control costs. It was a period of stability for all, masses and classes alike.
Blue Industry continues to evanesce, while Blue Government isn’t far behind — though further than it should be. There are three key elements of the Blue Government meltdown, according to WRM: (a) the exploding costs of government-provided benefits, (b) the inefficient, progress-inhibiting, unionized public workforces, (c) the inability of nostalgic bureaucrats and politicians to think outside the Blue Model.
Yet the existence of Blue Government will continue to be pressured by (a) private-sector workers with insecure jobs and defined contribution plans who don’t want to pay higher taxes to support Blue Government bureaucrats, (b) voters frustrated by the quality contrast between private- and public-sector services, and (c) the inability of the Blue Model to properly regulate the 21st century economy.
Keeping the Blue Model in mind, here is a bit from this weekend’s WSJ profile on Bruce Rauner, the new governor of blue-state, Blue Model Illinois:
Welcome to government in Illinois, the worst-managed state in the country. The Land of Lincoln is buried under staggering debts, including a projected $6.7 billion operating gap for the next fiscal year and an $111 billion unfunded pension liability. Government unions and politicians engage in legal collusion that fleeces taxpayers. Between 2002 and 2014, 86% of Illinois state lawmakers received union contributions, according to the Illinois Policy Institute.
All of this takes an already chilly business climate down another few notches. Over the past five years Illinois lost 41,000 manufacturing jobs while Indiana gained 51,000 according to the Bureau of Labor Statistics. As Illinois has economically trailed its neighbors in the past dozen years, 277,000 people have left the state, according to the Census Bureau.
There is the Blue Model in action. And Rauner’s attempt to reform it is one of the great political-policy stories happening right now. One with great import beyond the Prairie State.
View related content: Pethokoukis
On the road today, so a full, definitive, take on the February jobs numbers will have to wait. But real quick: 295,000 net new payrolls is a big number. And the jobless rate fell to its lowest level of the business cycle, 5.5%. Yay!
Also, as MKM’s Mike Darda notes, private sector job growth is up 2.8% from year ago levels, the best showing since the fall 1998. Not so good (again) was the slight rise in hourly earnings where an anemic 0.1% increase in average hourly earnings left year-ago wage growth at a flattish 2.0%. What’s more, average hourly earnings for nonsupervisory personal were flat in February, are up just 1.6% year-over-year, according to economist Robert Brusca. And there was a retracement dip in labor force participation, though as JPMorgan notes, the participation rate “has been relatively stable lately, down only 0.2%-point over the past year, in contrast to earlier in the cycle when it was not uncommon for the participation rate to be down well over 0.5%-point over a year ago.”
And if you are worried about the incongruity between job growth and an apparent 4Q-1Q GDP slowdown, another thought from JPM:
Second, production-side indicators of the economy – particularly job growth – can give a useful check on the more familiar spending-side data used to estimate GDP. This may partly reflect the fact that Gross Domestic Income – partly estimated using payrolls data – is a good check on GDP. But it may also be the case that hiring partly reflects business expectations, and so should be smoother than output. In any case, payrolls averaged an above-trend 207,000 per month in Q1 of last year, and so far are averaging 267,000 per month in Q1 of this year.
View related content: Pethokoukis
The public makes sharp distinctions about which groups have benefited – and which have not – from the economic policies the government has put in place since the start of the recession. Majorities say that large banks, large corporations and the wealthy have been helped a great deal or a fair amount by government policies.
By contrast, 72% say that, in general, the government’s policies since the recession have done little or nothing to help middle class people, and nearly as many say they have provided little or no help for small businesses (68%) and the poor (65%). … Currently, 62% say the economic system in this country unfairly favors powerful interests, while only about half as many (33%) think the system is fair to most Americans.
View related content: Pethokoukis
I say some good things about the Mike Lee-Marco Rubio tax plan in my The Week piece, “Marco Rubio and Mike Lee have cooked up the first great tax cut plan of the 21st century.” Yes, an (overly) effusive headline. As I write:
So Lee and Rubio seem to be following the same general Reagan formula, just updated for modern realities. They would immediately attack income stagnation for the middle-class. And they would transform the income tax code into a consumption tax code, which economists tend to agree would promote more investment and long-run economic growth.
Directionally and philosophically, Lee-Rubio is absolutely on the correct path regarding the above points. But as I also write, I have concerns about its revenue-negative impact. And I would guess the Tax Foundation dynamic score is probably on the high end regarding its pro-growth effects. Also, there are a lot of moving parts here that will need to be sorted out regarding its distributional impact. It’s complicated, gang! The authors need to be prepared to tweak as necessary to make sure tax relief is going to middle and lower-incomers. For myself, I would be happy right now doing less — a lot less perhaps — on the personal side regarding the top rate and cap gains/dividends, especially given the sweeping reform of the corporate code. And obviously the politics of taking, say, Mitt Romney’s tax liability to zero are treacherous to say the least. Jim Tankersley in the WaPo:
The plan includes big tax cuts for the wealthiest taxpayers, such as an elimination of taxes on capital gains and dividends, along with reductions in the corporate tax rate and the top personal income tax rate. But it also would significantly expand a tax credit that benefits families with children. …
The question for Republicans is whether such plans can survive Democrats’ attacks — which wounded 2012 GOP nominee Mitt Romney in an effort to portray him as a candidate of the rich. To defend themselves, leading Republicans said, candidates will need to do a better job explaining how their policies would help working families — and they said the party will need to nominate someone who can credibly address the concerns and aspirations of the middle class.