Thursday, February 26, 2015

Even Better than a Tax Cut

The challenge is to ensure that a typical worker’s wages grow 
along with profits and productivity.

This from the EPI President Larry Mischel in the NY Times:
WITH the early stages of the 2016 presidential campaign underway and millions of Americans still hurting financially, both parties are looking for ways to address wage stagnation. That’s the good news. The bad news is that both parties are offering tax cuts as a solution. What has hurt workers’ paychecks is not what the government takes out, but what their employers no longer put in — a dynamic that tax cuts cannot eliminate.

Wage stagnation is a decades-long phenomenon. Between 1979 and 2014, while the gross domestic product grew 150 percent and productivity grew 75 percent, the inflation-adjusted hourly wage of the median worker rose just 5.6 percent — less than 0.2 percent a year. And since 2002, the bottom 80 percent of wage earners, including both male and female college graduates, have actually seen their wages stagnate or fall.

At the same time, taxation does not explain why middle-income families are having a harder time making ends meet, even as they increase their education and become ever more productive. According to the latest Congressional Budget Office data, the middle 60 percent of families paid just 3.2 percent of their income in federal income taxes in 2011, less than half what they paid in 1979.
Yes, a one-time reduction in taxes through, say, expanded child care credits or a secondary earner tax break, as Democrats propose, could help families. But as wages continue to stagnate, it is impossible to continuously cut taxes and still pay for things like education and social programs for the growing population of older Americans.

Republican tax proposals, like the reforms put forward by Representative Paul D. Ryan of Wisconsin, focus on lowering individual and corporate tax rates alongside revenue-saving efforts to simplify the tax code. But this same approach has been tried for decades — the same decades in which wages have continued to stagnate. Instead, these cuts have helped corporations, shareholders and the top 1 percent capture a larger share of economic growth.

Similarly, President George W. Bush’s 2001 and 2003 tax cuts, which likewise promised to increase middle-class income, were followed by slower productivity and wage stagnation. The latest proposed Republican cuts won’t even provide much short-term relief, as they tend to be targeted at the highest-income households. For example, under a much-touted proposal by Representative Dave Camp of Michigan, the middle fifth would gain just $279 in tax relief a year, according to the Tax Policy Center, while the top 0.1 percent would garner the largest rate cut, valued at $248,000.

Obtaining better economic growth, another goal of these cuts, is certainly worthwhile, but it establishes only the potential for broad-based wage growth — it’s no guarantee. Again, we have seen plenty of growth since 1979, but this expansion has not “trickled down” to middle-wage workers.
The challenge is to ensure that a typical worker’s wages grow along with profits and productivity. There is no silver bullet, but the key is to make raising wages the central focus of economic policy making and to reverse decades of decisions that have undercut wage growth.

We need to start with monetary policy. In the next few years, the most important decisions being made about wages are those of the Federal Reserve Board as it determines the scale and pace at which it raises interest rates — and thereby slows job growth. Before raising rates, it is essential we achieve a robust recovery, with roughly 3.5 to 4 percent annual wage growth. This will ensure that wage growth matches productivity growth and that everyone can benefit from the rebounding economy.
Another short- to medium-term policy decision affecting wage growth is to avoid trade deals, such as the proposed Trans-Pacific Partnership, that would further erode Americans’ wages and send jobs overseas.

And there are several things we can do to bolster the labor standards and institutions that support wage growth. Raising the minimum wage to $12.50 an hour by 2020 would ensure that the minimum wage equals more than half the average wage, as it did in the late 1960s. And it has been too long since we have raised the salary threshold for overtime pay; raising it to $50,000, so that anyone making below that would get overtime, would move us closer to what prevailed in the 1970s, when about two-thirds of salaried workers received overtime pay.

Protecting and expanding workers’ right to unionize and bargain collectively is also essential; the erosion of collective bargaining is the single largest factor suppressing wage growth for middle-wage workers over the last few decades. And we need to modernize our New Deal-era labor standards to include earned sick leave and paid family leave so workers can balance work and family.

Finally, stronger laws and enforcement to deter and remedy wage theft and the illegal treatment of employees as independent contractors could put tens of billions of dollars into workers’ pockets.
Contrary to conventional wisdom, wage stagnation is not a result of forces beyond our control. It is a result of a policy regime that has undercut the individual and collective bargaining power of most workers. Because wage stagnation was caused by policy, it can be reversed by policy, too.
Lawrence Mishel is the president of the Economic Policy Institute and co-chairman of Americans for Tax Fairness.

And this from the Washington Post:

The GOP is debating whether Reaganomics needs an update

Leading Republicans are clashing over a signature issue the party has treated as gospel for nearly 40 years: the idea that sharply lower taxes and smaller government are enough by themselves to drive a more prosperous middle class — and win national elections.

That simple philosophy has been the foundation of every GOP platform since the days of Ronald Reagan. Now, some of the party’s presidential hopefuls — along with some top conservative economists and strategists — are sending strong signals that they believe today’s beleaguered workers need more targeted help, even if growth speeds up. They are embracing plans to give direct relief to low- and middle-income workers; a few of those plans mirror ideas that President Obama has proposed.

Rifts are beginning to form in the party’s prospective 2016 field over the dispute.

On one end, Sen. Marco Rubio of Florida has built an economic agenda around tailored tax breaks for workers and families with children. On the other, Wisconsin Gov. Scott Walker has reassured prominent conservatives in recent days that he supports a strictly Reaganesque economic approach, including lowering income tax rates and reducing the number of tax brackets.

In the middle, for now at least, sits former Florida governor Jeb Bush. This week, his presidential campaign hired April Ponnuru, a major advocate for Republicans overhauling their economic agenda to target wage stagnation and other contemporary economic anxieties, as an adviser. That followed Bush’s maiden economic speech, in which he repeatedly discussed economic opportunity. 
Republican Sens. Ted Cruz (Tex.), Rand Paul (Ky.) and Marco Rubio (Fla.) discussed what they see to be the current U.S. economy’s weak spots at a forum Sunday night. All are thought to be potential 2016 presidential hopefuls. (Reuters)
Bush has also been consulting with a leading conservative economist who wants a “radical expansion” of a tax break that benefits single workers — a group that has been struggling in the recovery.

Still, Bush has not endorsed major new policies that challenge GOP orthodoxy and is likely to try to hold on to the mantle of Reagan even while advancing new ideas so as not to turn off the party’s faithful.

The debate is ramping up as Republicans come to grips with the fact that their economic plans have not in recent years delivered the results they’d like at the presidential level.

Republicans are wrestling with the question of whether their tax-cutting message has lost potency — and what new ideas are there to deal with the twin problems of relatively slow growth and long-stagnant wages.

GOP hopefuls will speak this weekend in Palm Beach, Fla., to the Club for Growth, a group that has threatened primary challenges to Republicans who do not embrace a hard-line view on taxes and spending.

It is too early to tell what specific economic proposals most candidates will put forth. What is shaping up is a struggle for candidates’ attention among factions of economic thinkers within the party.

Reagan stalwarts Arthur Laffer and Steve Forbes recently formed a group called the Committee to Unleash American Prosperity to push candidates to advocate traditional Reaganesque economic policies.

“Our concern is that vision — what we’d call the Reagan vision — is not shared by everybody” in the GOP, said Larry Kudlow, an influential conservative economic strategist and former Reagan administration official who is also leading the group. “One reason that the GOP has been losing is that Reagan’s message has not been used.”

Republicans roundly agree that their party needs an updated economic message to improve their chances at retaking the White House. They are looking for new ways to critique Democrats on the economy now that the recovery from recession is accelerating.

Doug Holtz-Eakin, a former top adviser to 2008 nominee John McCain, said crafting policies to benefit the middle class is essential for the party’s chances in 2016. “If we’re going to play on the same turf we’ve always played on, we’re going to have a beautiful set of policies for aging white guys in the South,” he said. “That’s not going to work.”

The intraparty debate centers around the question of whether Republican policies, and not just rhetoric, must evolve along with economic circumstances.

Middle-class incomes are no higher today than they were 25 years ago, after adjusting for inflation. There is a growing sense among many conservative economists that faster growth by itself will not suffice to lift those incomes at the rate middle-class workers came to expect a generation ago.

“There’s a recognition that folks in the middle and bottom of the income distribution are in need of [new] policy solutions,” said Michael Strain, an economist at the right-leaning American Enterprise Institute who has pushed hard for conservatives to consider more targeted measures for those workers. “And I expect there to be an effort on the right to address that with policy. I think that’s starting now.”

The most recent GOP president, George W. Bush, signed two tax packages that cut rates from the top bracket on down — and then watched the economy deliver the slowest job growth of any presidency in the modern era.

The 2012 nominee, Mitt Romney, proposed a rate-reduction plan that he promised would rev up the sluggish recovery from the Great Recession, but he lost the election.

It’s too soon to tell where many of the would-be candidates will fall in the debate.

Kudlow and Laffer’s group recently met with Walker, whom Kudlow said delivered a “Reaganesque” message. He said the group will meet with “everybody” in the field.

Some contenders still appear to be finding their way to economic plans. Former Texas governor Rick Perry has met with Laffer and Kudlow’s group. He has also hosted marathon briefing sessions with economists who favored a new approach to the economy. New Jersey Gov. Chris Christie has given little indication of which camp he might join, several conservative economists said.

Bush walked a careful line in his first major economic speech of the cycle earlier this month, adopting the language of middle-class assistance but proposing few specific policies beyond the promise of growing the economy at 4 percent per year. He pledged to offer more detailed plans in the weeks to come.

Bush’s economic advisory team is still shaping up. But if he follows the lead of one of the top economists he has been talking with, he could be on the path to more targeted tax cuts.

“Traditional economic policy from conservative politicians and conservative economists has been about economic growth,” Glenn Hubbard, a former top adviser to Romney in 2012, said in an interview. “But that belies the question of who gets the benefit of that, and are we empowering opportunity?”

Hubbard, who many conservative economists expect will head up economic policy for Bush this cycle, has consulted with Bush and other prospective candidates but would not say if he had signed on to a campaign. He said he favors a “radical expansion” of the earned-income tax credit for single workers.

“It wouldn’t do, I think,” Hubbard said, “for a platform just to be about growth, and not about work and opportunity, too.”

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