Instead of management collecting on higher profit margins, certain businesses could raise wages and attract workers during this “Great Resignation” (where many workers are quitting) that American society is having.
If This is a Wage-Price Spiral, Why Are Profits Soaring?
That’s the question millions are asking, even if economic reporters are not. The classic story of a wage-price spiral is that workers demand higher pay, employers are then forced to pass on higher wages in higher prices, which then leads workers to demand higher pay, repeat.
We are seeing many stories telling us that this is the world we now face. A big problem with that story is the profit share of GDP has actually risen sharply in the last two quarters from already high levels.
The 12.4 percent profit share we saw in the second quarter is above the 12.2 percent peak share we saw in the 00s, and far above the 10.4 percent peak share in the 1990s. In other words, it hardly seems as though businesses are being forced by costs to push up prices. It instead looks like they are taking advantage of presumably temporary shortages to increase their profit margins.
This doesn’t mean that some businesses are not in fact being squeezed. We are seeing rapidly rising wages for low-paid workers. That is putting a strain on many restaurants and other businesses that pay low wages.
That is unfortunate for them, but this is the way capitalism works. The reason we don’t still have half our population working on farms is that workers had the opportunity to work at higher-paying jobs in manufacturing. If workers now have the option to work at better-paying jobs, the restaurants that can adapt to higher pay will stay in business, but some obviously will not.
Among the most ridiculous things in America is how wages for most workers have been mostly stagnant for 40 years.
That may sound pretty crazy, but that’s roughly what the minimum wage would be today if it had kept pace with productivity growth since its value peaked in 1968. And, having the minimum wage track productivity growth is not a crazy idea. The national minimum wage did in fact keep pace with productivity growth for the first 30 years after a national minimum wage first came into existence in 1938.
Furthermore, a minimum wage that grew in step with the rapid rises in productivity in these decades did not lead to mass unemployment. The year-round average for the unemployment rate in 1968 was 3.6 percent, a lower average than for any year in the last half century.
The $26 an Hour World
Think of what the country would look like if the lowest paying jobs, think of dishwashers or custodians, paid $26 an hour. That would mean someone who worked a 2000 hour year would have an annual income of $52,000. This income would put a single mother with two kids at well over twice the poverty level.
And, this is just for starting wages. Presumably workers would see their pay increase above the minimum as they stayed at their job for a number of years and ideally were promoted to better paying positions. If we assume that after 10 or 15 years their pay had risen by 20 percent, then these workers at the bottom of the pay ladder would be getting more than $60,000 a year.
While that is hardly a luxurious standard of living, it is certainly enough to support a middle-class lifestyle. For a two-earner couple this would be $120,000 a year. Imagine this is what people at the very bottom of the labor force could reasonably expect when they are in their thirties and forties.
Don’t Try This at Home
The $26 an hour is useful as a thought experiment for envisioning what the world might look like today, but it would not be realistic as policy for local, state, or even national minimum wage without many other changes to the economy. A minimum wage this high would almost certainly lead to large-scale unemployment, and that would be true even if it were phased in over five or six years.
The problem is that we have made many changes to the economy that shifted huge amounts of income upward, so that we cannot support a pay structure that gives workers at the bottom $52,000 a year. This is the whole point of my book, Rigged [it’s free], we have restructured the economy in ways that ensure a disproportionate share of income goes to those at the top. If the bottom half or 80 percent of the workforce got the same share they got 50 years ago, we would have an enormous problem with inflation.
Just to quickly run through the short list, we can start with my favorites, government-granted patent and copyright monopolies. Items like drugs, medical equipment, and computer software, which would all be relatively cheap in a free market, instead cost us huge amounts of money because of these monopolies. In the case of prescription drugs alone, patent monopolies and related protections may add more than $400 billion a year (roughly $3,000 per family) to our annual bill. In total, the cost from these protections can easily exceed $1 trillion a year (almost $8,000 per family).
Not only did the federal minimum wage not keep pace with productivity growth, it did not even keep pace with inflation. A person working at the minimum wage today is getting substantial lower pay than a worker did 53 years ago in 1968.
It would be a great story if we could reestablish the link between the minimum wage and productivity and make up the ground lost over the last half century. But we have to make many other changes in the economy to make this possible. These changes are well worth making.
A world where full-time minimum wage workers are earning $60,000 a year (at a $30 an hour wage) would be far different. A full-time minimum wage worker earns only $14,500 a year at a $7.25 an hour wage.
President Biden has proposed raising the minimum wage to $15 an hour by 2025. This has led to the predictable cries of economic disaster from business organizations and right-wingers more generally.
The standard argument against raising the minimum wage is not supported by the evidence.
We now have considerable experience with state and local governments having substantial increases in their minimum wages. Several cities, including New York, San Francisco, and Seattle, already have a $15 an hour minimum wage. California’s statewide minimum wage is now at $14 an hour and is scheduled to hit $15 an hour for mid-size and large employers next year and all employers in 2023.
Dozens of economists have carefully analyzed these minimum wage hikes. To the surprise of many, including me, there is noevidence that these minimum wage increases have led to job loss. Instead, they have resulted in substantial improvements in living standards for millions of low-wage workers.
To be clear, this doesn’t mean that no businesses have reduced employment or possibly even gone out of business due to higher minimum wages. Small businesses are always struggling, and many close every day of the week. Any additional expense can be a burden, whether it is higher rent, the electric bill, or the minimum wage, but that is how the economy works.
We want to run the economy in a manner that ensures that workers can earn a decent living. We don’t have a responsibility to ensure that businesses can survive by paying their workers very low wages.
And again, the research indicates that when one business is cutting back employment or shutting its doors because of a minimum wage hike, another is opening or expanding employment. Economists have looked hard for evidence of job loss from these minimum wage hikes and have generally been unable to find it.
The federal minimum wage currently stands at $7.25 an hour. It hasn’t been raised for 12 years, the longest period without a hike since the national minimum wage was first established in 1938. That translates into an annual income of $14,500 for a full-time worker. That’s not far above the poverty line for a single person and well below the poverty line of $21,720 for a family of three.
Economists often point out that If the minimum wage had simply kept pace with inflation since 1968, it would be over $12 an hour today and around $13.50 by 2025. The unemployment rate that year averaged 3.6 percent when the minimum wage was at its inflation adjusted peak value, so it did not seem to be causing unemployment then.
But this is an incredibly low bar. Setting the 1968 level as a benchmark would mean that minimum wage workers would be seeing no increase in their standard of living over a nearly 60-year period.
In the 30-year period — from when the minimum wage was established in 1938 to 1968 — the minimum wage rose in step with productivity. This meant that low-wage workers shared in the gains as the economy grew more productive and people were able to enjoy higher standards of living.
If the minimum wage had continued to rise in step with productivity growth, it would have been $24 an hour last year. By 2025 it would be close to $30 an hour, roughly twice the level that President Biden targets in his proposal. In that scenario, a full-time minimum wage worker would be earning $60,000 a year.
To be clear, raising the minimum wage to $30 an hour in 2025 would almost certainly lead to serious job loss. We have made many changes to the economy that have been designed to redistribute income upward, such as rules on patents and trade policy. Unless we reversed these policies, the economy would be unable to support a minimum wage anywhere near $30 an hour.
Nonetheless, the $30 an hour minimum wage can be a useful benchmark. It is what workers at the bottom would be earning in 2025 if we had kept the policies that we had in place over the three decades from 1938-1968.
In this context, a $15 minimum wage in 2025 can be recognized as a very modest target that will nonetheless provide enormous benefits for tens of millions of workers and their families. We really need to do it.
American president Donald Trump will not be victorious in the popular vote — that is certain. He will probably lose the popular vote by an even higher margin than what Hillary Clinton beat him with in 2016. That said, the Electoral College is what determines presidential outcomes, and there are factors that may allow Trump to win the Electoral College again.
A poll credited with predicting Trump’s Electoral College win in 2016 — the IBD/TIPP Poll — shows Trump with a 0.7 point lead among Hispanics and a 3 point lead in the Midwest. The Midwest is particularly important to win due to having swing states such as Michigan, Ohio, Wisconsin, and Pennsylvania. Most polls show that Trump has maintained a multiple percentage point lead in the state of Ohio, a state that seems to have largely been neglected by the national media outlets based in coastal areas such as California and New York. (The people working for those coastal media outlets have been increasingly seen as out of touch with the realities of wage stagnation, drug epidemics, and deindustrialization that has taken place place in much of America.) Whoever wins Ohio has won the presidency every year since 1964 — a record of over half a century that makes it stand out even among the other swing states.
Much of my own family supports Trump, something that continues to disturb and disappoint me in 2020. That being said, something people don’t always realize is that much of the population is struggling to an absurd degree in what has long been world history’s wealthiest nation. A CNBC article from before the pandemic found that 78 percent of people were living paycheck to paycheck, a number that can only have grown worse with what is essentially now an economic depression during the pandemic. Many people are therefore too stressed and too busy to consistently study politics effectively, and the American formal education overall does a terrible job at giving people a decent political education. It doesn’t help that there is so much disinformation now that it takes a fair amount of intelligence to see through it, and too many people in America have suffered cognitive problems for reasons such as growing up in extreme poverty, being subjected to abuse generated in their family members by America’s flawed society, and even — as seen in Flint, Michigan — drinking lead in their water supply. The Flynn Effect is a phenomenon recounting how average IQ scores have gone up as factors such as nutrition have improved. It’s been apparent for all of us since our days in school that high general intelligence is somewhat rare, but many people are not as smart as they would otherwise be growing up in healthier environments. Since democracy is about making choices based on information, democracy suffers when the general capacity of the population to make intelligent decisions is reduced. America would look different if the average IQ was 10 points higher than what it is today.
One of the worst things that Trump has said is encouraging his supporters to vote twice — once by mail and once at the polls. This is encouraging his supporters to commit voter fraud, a felony punishable by up to 5 years in prison. With so many people in my family that support Trump, I have spent a considerable amount of time thinking about and reading the more scientific reasoning about why they support him. One of the reasons is that Trump speaks with short sentences that are easier to understand, at what was once evaluated as a speaking level lower than many other politicians. In association with that, Trump is an accomplished con man, seen through the history of his fraudulent for-profit college and his casino bankruptcies, and he is good at making his supporters feel good. He’s an incredibly charismatic politician — the people who deny this are delusional to what his supporters and many others feel. In getting a bit more anecdotal here, even people who know me and don’t particularly like me (i.e., some people in my family) admit that I am perceptive and by nature feel certain things many others don’t. This doesn’t mean I am a sensitive snowflake — I am not and I hate the amount of our discourse taken up by identity politics rather than focus on people’s material interest. In any case, I always seem to feel when someone is charismatic, no matter how vile that person is. Trump is charismatic. The other main reasons are that Trump is an authoritarian, something much of the population identifies with, and — my biggest takeaway from seeing so much of my family support Trump — is that support of Trump is something for people to come together on. American society has become broken, divisive, run-down, and incredibly politically polarized for much of the population, and support of Trump presents an opportunity for what is arguably one of the few ways for Trump supporters to have meaningful positive interactions with each other. Politics is not like talking about the weather or other small talk subjects — it presents a much greater opportunity than those subjects to have more valuable and fulfilling conversations, even if the people discussing the politics are wrong about what issues to support to benefit the majority of the population. The desire to have these fulfilling social conversations, I posit, is an integral part of human social contact, and one that was increasingly fading in the device-driven world before the pandemic and the term social distancing became a widely used term.
In addressing Trump’s perceived strength, the idea that Trump had a significant positive impact on the economy is a joke. The biggest positive factor on the economy in the last decade was probably the appointment of Janet Yellen and her low interest rate policies at the Federal Reserve, and that allowed the unemployment rate to drop low and it therefore also allowed some of the only minor wage growth for low-wage workers in the last 50 years. To his credit, Trump appointed Jerome Powell, who largely continued the policies of Janet Yellen by not raising interest rates and thus allowing the unemployment rate to remain low before the pandemic hit. Trump also refused to go along with the terrible Trans-Pacific Partnership trade agreement, and the tax cuts mainly for the wealthy and corporations that he pressed for did have a slight boost in demand for the economy. If Trump had done well on other major economic things I would give him credit for them, and it’s clear from these points that he did some decent things for the economy while in office. The decent things he did for the economy are heavily outweighed by the flaws of his governing, such as his illogical trade war and his failure on managing the pandemic. The result of his impact on the economy is a net negative effect, one that may prove to be far more net negative later on as the impacts of those policies are felt for years, but many left-wingers don’t admit the very few things he did that were decent. I consider Trump the worst president by far in modern history, but I consider it important to tell the truth about matters such as these and give credit where it’s due. Trump is stunningly ignorant of most important political issues, and he doesn’t talk about it anymore like he did in 2016, but he does seem to understand that trade deficits in America are bad, and that’s part of why in 2016 he won over so many Rust Belt workers who have been screwed by trade policy. The trade deficit increased under Trump however, despite his having the ability to decrease it through policy, and this was before the pandemic. The reason that trade deficits for the U.S. are bad is that it decreases demand in the economy, and we generally have needed more demand to help workers in the last 50 years. On another note, I read an article by a former Republican governor endorsing Joe Biden, and I read it looking for positive things he had to say about Trump. Essentially the most he said that was good about Trump are some regulatory changes. That was all. In conducting surveys of Americans, I would venture a guess that few are fond of the deregulations that allow more coal debris and pollutants to be deposited in streams near residential water supplies and the deregulation that allows imported meat to claim to be made in America. It is rather incredible that so many continue to support Trump despite him not enacting policies that benefit their material interest. The vast majority of the Trump tax cuts go to the richest people in America, not middle-income or low-wage workers. Trump blocked the Post Office from sending out masks to hundreds of millions of Americans because he “didn’t want to create a panic.” There is audio of Trump with Bob Woodward where Trump back in February acknowledges that COVID-19 is far more deadly than the flu, but then he lies to the public in trying to downplay its severity and holds mass gatherings of people close together where many of them don’t wear masks. Trump’s campaign recently had an event in Nebraska where people caught hypothermia and were left out in the cold due to a lack of transportation provided by the campaign. I scanned social media when this happened and I didn’t find any defense of this from the Trump supporters. Trump is a con man that has successfully deceived millions of people, and that includes many things such as his lies about the pandemic, his lies about stopping the wars overseas and his lies about bringing many manufacturing jobs back. If American society was a more rational place, the CNBC program American Greed that focuses on corporate crime would have had an episode on Trump where they focus on his immoral business dealings and damage to much of the population. There’s a long list of how Trump has negatively impacted the public, but I chose to focus more on the economic conditions since that’s more concrete than focus on controversial issues such as abortion and religion.
All of this said, even as a president with an awful track record, Trump may still win the Electoral College. It looks unlikely by polling and the history of presidents losing when they in power during awful economic conditions, but there are variables present in this pandemic election year that normally haven’t been present in past elections. One is that many more Democrats than Republicans will vote by mail, and a considerable percentage of these mail-in ballots won’t be counted. This isn’t a conspiratorial claim — it’s the state of the voter suppression in American politics. In the 2016 election, Greg Palast — author of the book titled “How Trump Won 2020” — found that 141,000 ballots were thrown out after a challenge due to their signatures. He found that there weren’t any voters arrested for forgery because of this. Additionally, Palast said recently that “Once a year, secretaries of state can literally wipe off the voter rolls those voters they think shouldn’t vote. And not surprisingly, these hacks tend to remove people of color where they can, where Republicans control the state. So for example, in Georgia, as you just heard, the Secretary of State [Raffensperger] removed 198,000 voters illegally on false information. Almost all of them [were] black voters, young voters, including Martin Luther King’s 92-year-old cousin.” Palast also said that “In 2016, 5.8 million ballots were cast and never counted. By the way, that’s an official number from the EAC [Election Assistance Commission], from our federal agency; 5.8 million votes cast not counted.” Most disturbingly, Palast mentioned the study finding that “According to MIT [Massachusetts Institute of Technology], 22%, [i.e.,] one in 5 million mail-in ballots, is never counted.”
If 22 percent of mail-in ballots aren’t counted in 2020, that combined with the voter suppression of other people likely to vote for Joe Biden may hand Trump another Electoral College victory. Again, there is a far higher percentage of Republicans going to the polls to vote for Trump than there is Democrats going to the polls to vote for Biden, and this may culminate in not only Trump eventually winning the Electoral College yet again but it may make Trump have an overall lead today on election day before more mail-in ballots are counted. This may then devolve into a scenario where the contested election is taken to the 6-3 conservative majority on the Supreme Court, where the results of the election that are not favorable to Trump may be thrown out.
America will suffer further harm from another four years of Trump. I dislike Biden and consider him to be a politician with a long record of terrible policies, but after years of Trump, it’s apparent that another four years of Trump will continue to have the sort of vast consequences and immense damage seen during the pandemic. In any case, with either person winning the presidency, I would encourage people to try to make the most of what they have even if it’s not that good. A year from now may be an even worse time than today, and now is already bad for so many of us. That’s just the realistic view of things. Exercise and a healthy diet (including plenty of vitamin D to protect against COVID-19 problems) will help us stay strong, and staying strong will remain important when life is tough.
The current world is one in which lenders are actually paying large amounts of people to borrow money from them. On first glance this use of negative interest rates sounds like a terrific thing — debt caused by high interest rates remains a crushing force and notable source of human suffering. Upon closer look, however, the reason that lenders are actually paying people to borrow their money for a return is due to economic weakness and some pessimistic expectations that it’ll continue into the future. It is in some sense a major anticipation of a bleak future, and it’s related to what’s known as an inverted yield curve, a term that’s being used much more frequently in the news these days.
An inverted yield curve basically means that a long-term return (yield) on a bond is less than the short-term return. (This turns the supposed logic of the system on its head since we’d naturally expect someone who puts their money away for a longer period of time to be rewarded more.) It has long been a signal that a recession is coming, although the annual revision to the monthly jobs data by the Bureau of Labor Statistics has historically tended to be a more reliable indicator of recession or economic weakness, and many news outlets don’t mention that historically an inverted yield curve has preceded a recession by about 22 months.
A recession is what many people rightfully understand as bad or at least not so good economic times, but the more technical definition is at least two consecutive quarters where the economy contracts rather than grows. More sensibly, a recession is a lack of demand (where demand is people’s ability to purchase goods and services), and the sensible governmental officials among us have for decades understood this and how to escape or mitigate recessions. It’s simple enough — if a recession is a lack of demand, demand must be boosted, such as through increasing government spending and/or cutting taxes. This creates more ability for people to make purchases, which has a positive effect on important economic indicators such as employment.
Accompanying the inverted yield curves of today is negative interest rates, something that has gone from — in the words of one commentator — a curiosity to a market mainstay. As even university business professors are admitting, this is a sign of something seriously wrong with the economies of the world. They are basically dysfunctional in some sense and seriously flawed to create such a structure. To keep economies moving along decently, interest rates now often have to be negative to keep enough money flowing in the system (in people’s pockets) and demand at somewhat acceptable levels. High interest rates are of course a problem for the burden they tend to cause the vast majority of people, but negative interest rates are an indication that the economies of the world have very fundamental problems.
The market structures of many world economies has been deliberately structured in ways that benefit the upper class at the expense of everyone else. The propaganda is regularly that inequality was caused by a natural outcome of the market, but that is the opposite of the truth. Policies such as rules on copyrights and patents aren’t the free market at work — they’re government intervention, aka structuring of the market. It is simple enough to prove in example after example how the markets were rigged to redistribute income upward and create unjust outcomes. Patents on goods such as prescription drugs increase their prices significantly, which takes too much money from the pockets of many people and redistributes it to the the upper class people who own stock in pharmaceutical companies. There is an immense barrier to entry for foreign doctors in the U.S. (one has to complete a U.S. residency program to practice medicine there), which pushes the wages of U.S. doctors to twice what doctors make in other countries and adds up to over $500 per family annually (while there is a shortage of doctors). Public pension funds in the U.S. have been structured to provide too many fees to high class managers. The list goes on — there are lots of ways that markets were deliberately structured against the benefit of the majority of the population.
What happens when too much money flows to the top is that the upper class — the now famous 1 percent — tend to spend much less of it as a percentage than the average person would. Saving money is to a significant extent a virtue, but what happens when the 1 percent (who spend less as a percentage of their income than working-class people) don’t spend all that money is that much of the money then sits idly, not purchasing goods or services and therefore not creating jobs. There is less demand in the economy this way, and the 1 percent benefiting from a market rigged in their favor means less money for everyone else to spend, and it of course creates the curious to mainstay phenomena such as negative interest rates.
It’s becoming more well-known all the time that the system isn’t right, and there are those that argue to reform it and those who argue that fundamental change is needed. The lack of real democracy in the economic system is an interesting note for countries such as the United States that supposedly value democracy so much. The economy is valuable to discuss in politics because it is fundamental and covers much of life, and its current indicators are revealing that it needs change that’s truly fundamental.
Austerity is where governments refuse to pursue policies that boost consumer demand. Austerity really has hurt a lot of people and there’s even evidence that the poverty it caused has ruined millions of lives.
Last week the Washington Post ran a column by Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, one of the many pro-austerity organizations that received generous funding from the late Peter Peterson. The immediate target of the column was the standoff over the debt ceiling, but the usual complaints about debt and deficits were right up front in the first two paragraphs.
“At the same time, the federal debt as a share of the economy is the highest it has ever been other than just after World War II. ….”
“So our plan is to borrow a jaw-dropping roughly $900 billion in each of those years — much of it from foreign countries — without a strategy or even an acknowledgment of the choices being made because no one wants to be held accountable.”
This passes for wisdom at the Washington Post, but it is actually dangerously wrong-headed thinking that rich people (like the owner of the Washington Post) use their power to endlessly barrage the public with.
The basic story of the twelve years since the collapse of the housing bubble is that the U.S. economy has suffered from a lack of demand. We need actors in the economy to spend more money. The lack of spending over this period has cost us trillions of dollars in lost output.
This should not just be an abstraction. Millions of people who wanted jobs in the decade from 2008 to 2018 did not have them because the Washington Post and its clique of “responsible” budget types joined in calls for austerity. This meant millions of families took a whack to their income, throwing some into poverty, leading many to lose houses, and some to become homeless.
At this point, the evidence from the harm from austerity in the United States (it’s worse in Europe) is overwhelming, but just like the Pravda in the days of the Soviet Union, we never see the Washington Post, or most other major news outlets, acknowledge the horrible cost of unnecessary austerity. We just get more of the same, as though the paper is hoping its readers will simply ignore the damage done by austerity.
And it is not just an occasion column from a Peter Peterson funded group, the Post’s regular economic columnist, Robert Samuelson, routinely complains about budget deficits, as do the Post editorial writers. We get the same story in the news section as well, for example, this piece last week telling us about the need to “fix” the budget. The Post is effectively implying that a lower budget deficit, which results in lower output and higher unemployment is “fixed.”
If the Post cared about the logic of its argument, instead of just repeating platitudes about the evils of budget deficits, it should quickly recognize that its push for austerity makes no economic sense. The argument of the evils of a budget deficit is that it is supposed to lead to high interest rates and crowd out investment.
That leaves the economy poorer in the future, since less investment leads to less productivity growth, so the economy will be able to produce fewer goods and services in future years. (The implicit assumption is that the economy is near its full employment level of output so that efforts by the Fed to keep interest rates down by printing money would lead to inflation.)
The nice part of this story is that there is a clear prediction which we can examine; high budget deficits lead to high interest rates. Or, if the Fed is asleep on the job, high budget deficits will lead to high inflation.
The interest rate on 10-year Treasury bonds at the end of last week was just over 2.0 percent. That is incredibly low by historic standards and far lower than the rates of over 5.0 percent that we saw when the government was running a surplus in the late 1990s. The inflation rate is hovering near 2.0 percent and has actually been trending slightly downward in recent months. So where is the bad story of the budget deficit?
In the classic deficit crowding out investment story, if we cut the budget deficit, investment rises to replace any lost demand associated with lower government spending or higher taxes. We can also see some increased consumption, mostly due to mortgage refinancing, and some increase in net exports due to a lower valued dollar.
But what area of spending does the Washington Post and its gang of deficit hawks think will fill the gap if it could find politicians willing to carry through the austerity it continually demands? It shouldn’t be too much to ask a newspaper that endlessly harps on the need for lower deficits to have a remotely coherent story on how lower deficits could help the economy.
There is also the burden on our children story that the Peter Peterson gang and the Post likes to harangue readers with. Our children will inherit this horrible $20 trillion debt that they will have to pay off over their lifetimes.
This story makes even less sense than the crowding out story. The burden of the debt is measured by the interest paid to bondholders, which is actually at a historically low level relative to GDP. It’s around 1.5 percent, after we subtract the interest rebated by the Fed to the Treasury. It had been over 3.0 percent of GDP in the early and mid-1990s.
And, even this is not a generational burden. It is a payment within generations from taxpayers as a whole to the people who own bonds, who are disproportionately wealthy. Much of this money is recaptured with progressive income taxes. More could be captured with more progressive taxes.
But this is actually the less important issue with this sort of accounting. Direct government spending is only one way the government pays for things. It also provides patent and copyright monopolies to provide incentives for innovation and creative work. These are alternatives to direct government payments.
To be specific, if the government wants Pfizer to do research developing new drugs, it can pay the company $5-$10 billion a year to do research developing new drugs. Alternatively, it can tell Pfizer that it will give it a patent monopoly on the drugs its develops and arrest anyone who tries to compete with it.
Generally, the government takes the latter route with innovation. This can lead to a situation where Pfizer is charging prices that are tens of billions of dollars above the free market price. This monopoly price is equivalent to a privately imposed tax that the government has authorized the company to collect.
Anyone seriously interested in calculating the future burdens created by the government would have to include the rents from patent and copyright monopolies, which run into the hundreds of billions of dollars annually, and possibly more than $1 trillion. (They are close to $400 billion with prescription drugs alone.) The fact that the deficit hawks never mention the cost of patent and copyright monopolies, shows their lack of seriousness. They are pushing propaganda, not serious analysis.
Working with Jared Bernstein, Larry Mishel is the originator of the famous graph that shows the split between productivity and wages. Mishel is also notable for helping some important and good economists early in their careers. He’s therefore one of the people I am willing to give a tribute to on this site.
WHEN LAWRENCE MISHEL came to Washington during the height of the Reagan revolution, the options for a young leftist economist looking to make a difference were nearly non-existent.
“The liberal position was represented by the Brookings Institution,” Mishel told The Intercept, “which at the time was very free trade uber alles, hostile to industrial policy, not interested in workers and unions. The debate was between Brookings on the left, and [the American Enterprise Institute] and the Heritage Foundation on the right.”
And then there was the Economic Policy Institute, a new think tank designed to fill the ideological gap and shift America’s economic debate to the left. In 1987, Mishel joined EPI as a research director, later becoming vice president and eventually president in 2002. As his thirtieth year at EPI winds down, Mishel gets to see the Democratic Party finally move closer to the positions the think tank has always had. Now, he is stepping aside.
“The hallmark has been to center that an economy is only working if it’s working for the benefit of the vast majority,” Mishel said. “We hammered that every day.”
From the beginning, EPI elevated the daily struggle of those on the economy’s margins. Starting in 1988, Mishel and colleagues produced a biennial report, The State of Working America, with comprehensive data on wages, incomes, jobs, and wealth. The reports found a discordant trend in the economy: wage stagnation amid increasing productivity. Prior to the late 1970s, these two measures followed one another: as workers produced more goods, they made more money. When that changed, others made excuses for this bifurcation while EPI insisted that conscious policy choices shortchanged workers and funneled the gains to the very top, as evidenced by rising CEO compensation and the erosion of living wages. In other words, EPI argued, natural forces didn’t lead workers to their plight — those in power pushed them there.
If these themes of rising income inequality sound familiar today, they were practically a foreign concept at the outset. In 1994, Mishel and Jared Bernstein created a now-famous chart showing the split between productivity and the median hourly wage.
Much of EPI’s work under Mishel served to reject pernicious myths about the economy, hardened into perceived wisdom by self-interested forces. EPI’s research found that social and economic disadvantage, not failing teachers or schools, depressed student achievement. It refuted that high school graduation rates were collapsing, an alternative fact used to push vouchers or charter schools. It proved that automation played little role in inequality. It laughed off the idea that CEOs were paid nearly 300 times more than the average worker based on a competitive race for talent.
As Mishel steps aside, he believes America needs a broad set of policies to rebuild worker power, things like raising the minimum wage to $15 an hour, empowering union organizing, ending worker misclassification in the “gig economy” to deny benefits and overtime pay, preventing arbitration agreements that limit worker options in a dispute, and banning non-compete clauses that stop workers from moving to similarly situated employers. These moves to strengthen worker bargaining power, collectively and individually, cut a path to robust wage growth for the 99 percent. “It will take bold proposals,” Mishel said. “If not, we won’t have a vibrant middle class, or a democracy.”
Mishel’s mission in 30 years at EPI was not only to identify the economy’s problems, but to demonstrate how to fix it. And he consistently brought complex insights down to a level of popular understanding, striving to reach the ordinary worker rather than the academy. The way he talked about the economy mirrored who he fought for. A garrulous man with a shock of white hair, Mishel cherishes that EPI has become a fixture in Washington, and that the poles of the economic debate have finally trended in his direction.
Arguably the main problem with American Social Security is that the payroll tax is capped at about $128,000. This means that someone who makes millions of dollars per year pays the same amount into Social Security as someone who makes about $128,000. That means that the maximum cap is a regressive part of the tax code, similar to how the carried interest loophole allows hedge fund managers to treat income as capital gains rather than regular income, which reduces their tax contributions. But significantly raising the cap on the payroll tax would solve the problem of Social Security lacking adequate funds, and then outlets such as The Atlantic would hopefully focus on more important issues.
With the Republicans having just passed a $1.5 trillion tax cut, the bulk of which goes to the richest one percent, it was inevitable that the generational warriors would come out of the woodwork and resume the attack on Social Security and Medicare. Generational warriors try to divert attention away from how our economy has redistributed income upwards over the last four decades, and convince a large portion of today’s workers that their real problems stem from their parents’ and grandparents’ overly generous retirement benefits.
The opening shot in this new round of generational warfare showed up earlier this month in The Atlantic Magazine. It told the classic story about how seniors are getting too much money back from Social Security and Medicare, the same thing we’ve been seeing for decades. (There is little expectation of originality if you’re in the business of promoting generational warfare.)
In fact, middle-income seniors will get somewhat less back from Social Security than they paid into the system. The cost of Medicare benefits does exceed their taxes, but this is because Americans pay twice as much for our doctors, drugs, medical equipment and other health care items than people in other wealthy countries.
The real problem is high-income people in the health care sector making too much money, not the country being too generous to its seniors. But, the folks promoting generational warfare aren’t interested in clamping down on the rich doctors and drug companies; they want us to go after retired school teachers and retail clerks.
Even if Social Security and Medicare were more generous, it would still say almost nothing about generational equity. While the generational warriors would like to have everyone focus on the cost of programs that primarily serve the elderly, paying for these programs has a trivial impact on the well-being of the working population. Policies that affect the distribution of income within generations are vastly more important.
To make this point as simple as possible, suppose that we had a huge increase in payroll taxes to cover projected shortfalls in Social Security and Medicare. Imagine a combined increase of 4.0 percentage points, which would be more than sufficient to leave both programs fully funded throughout their 75-year planning horizon.
This would undoubtedly be a big hit to working people who have to pay this tax. But, let’s compare this to the upward redistribution of income over the last four decades. This has primarily been an upward redistribution within the wage distribution, from ordinary workers to CEOs, Wall Street trader-types, and highly paid professionals like doctors and dentists. In the last decade there has also been a substantial redistribution from wages to profits.
The result of this upward redistribution has carved a large gap between productivity growth and wage growth. The hourly pay of a typical worker has risen by roughly 6.0 percent from 1979 to 2017. Even if we take a broader measure of compensation that includes health care and other benefits, the increase would be less than 20 percent.
By comparison, productivity has risen by more than 60 percent, even after making adjustments for technical factors like differences in deflators and net versus gross measures of output. This means that the upward redistribution over this period has reduced wage growth by more than 40 percentage points. In short, our children are 40 percent poorer than they would otherwise be because of the money going to people like Bill Gates and Mark Zuckerberg rather than ordinary workers.
So by very conservative estimates, a typical person in their twenties or thirties has seen their income reduced by more than 40 percent because of all the money redistributed to those at the top. However, the generational warriors want young people to be upset about the possibility that a bit more than one-tenth of this amount could be used to pay for their parents’ and their own Social Security and Medicare. (This upward redistribution is also responsible for about half of the projected shortfall in Social Security, as more income going to profits and high-income workers escapes the Social Security tax.)
We spent over $450 billion on prescription drugs in 2017. Without government-granted patent monopolies we would probably have spent less than $80 billion. The difference of $370 billion is equal to an increase of a 5.0 percentage point increase in the Social Security payroll tax. But the generational warriors don’t want anyone talking about how much money our children to pay drug companies with government-granted patent monopolies.
In fact, the generational warriors have directly cost our children more than 10 percent of their paychecks with their harebrained fiscal policies. They insisted on a smaller stimulus and austerity following the collapse of the housing bubble in 2007 to 2009. This slowed the recovery, reducing both employment and investment, leaving the economy permanently poorer.
This segment on The Real News Network covers the Trump regime’s absurd tax proposals that would benefit the richest people in the country at the expense of most of the population.
What is your response to these two things, two reductions, the corporate tax rate and the pass through business tax?
Dean Baker: These are likely to be big tax breaks for high-end individuals. The corporate tax rate, they have justified lowering the tax rate by saying that we have among the highest in the world, which is true, the statutory rate. In terms of what we actually collected, it was somewhere around 22% of corporate profits, which put us right around the middle of the pack.
Now, if we make the statutory rate 20%, presumably they’ll get rid of some deductions but surely the statutory rate will fall two, three, four percentage points below that, which means we’ll be collecting substantially less money in corporate income tax.
Now, one of the important deductions is for interest. Here is one of the bizarre things. They say, “Oh, we’re going to limit the corporate interest deduction,” but it doesn’t say how. That, in principle, would be a very good thing if they sharply limited it, but they didn’t care enough to put in a rate.
Now, the pass through corporation, this is potentially a huge bonanza for very wealthy people, I should point out, including Donald Trump who has most of his businesses as pass-through corporations. What a pass-through corporation means, it pays zero tax. The corporation itself pays zero tax. It goes back to the individual and where that individual is a very wealthy person, like Donald trump, they’d be paying tax at the high individual income tax rate or higher, which in his case, say this goes through, that’s 35%. Instead, he’ll just pay 25%, and what that means is you give people a very big incentive to become corporations to have their doctors, lawyers, other professionals will have most, or all their income as corporate pass through and they’ll just pay a 25% tax rate.
Here, too, we get a magic asterisk. They say they’re going to have the IRS police this to make sure it’s not abused. Well, the republicans have spent two decades weakening the IRS’s enforcement power. This would be extremely difficult thing to enforce, even if you had a very effective IRS, which they’ve done a lot to make sure we do not have.
Gregory Wilpert: Then, another related aspect is the whole thing about the repatriation of corporate taxes. It’s estimated that something around $700 to $800 billion are being held offshore by U.S. companies because their corporate tax is made abroad. They’re keeping them there, so they don’t have to pay the corporate taxes. Trump wants to provide a tax incentive, basically a lower tax rate for temporarily, so they repatriate their profits. What do you think of that plan?
Dean Baker: Let me clarify that. He’s talking about actually making that permanent. We would switch to a territorial tax system, so that they would never have to pay taxes on foreign profits. This is a big bonanza. You have a lot of companies, maybe the most successful companies in the country that declare a lot of profits overseas precisely so that they don’t have to pay taxes here, and at least as an accounting convention they keep the profits over there in many cases, The Wall Street Journal did a piece on this a few years back. The money is literally here in the United States. It’s kept in banks in the Unites States, but at least as an accounting matter, it’s still with their Irish subsidiary, or Cayman Island, or wherever they’re booking it, so they don’t have to pay taxes on it.
Dean Baker: The alternative minimum tax was a catch-all. Basically it says no matter how many games you played that at the end of the day, you still had to pay, I think it was set at 20%. It only applied to a relatively small number of people. Donald Trump, actually ended up the one tax return that was released, or leaked out 2005, he paid the alternative minimum tax because he had enough deductions of different sorts, he would have paid less, so he still had to pay the 20% alternative minimum tax.
I don’t see a good reason for eliminating that. It applies to a very small number of people. Basically by definition, they’re wealthy because there’s a very big floor to it. Unless you’re earning a lot of money, you don’t have to worry about it. Again, unless you’re playing a lot of games, it’s moot. I don’t really see a downside to it. I don’t see anything whatsoever gained by eliminating the alternative minimum tax.
The estate tax, this too, applies only to very wealthy people. People are allowed to exempt 4 million per a person, so a married couple could pass on $8 million totally tax free. It applies to, I think it was two-tenths of 1% of estates. A very tiny number and I just don’t see a good argument as to why we shouldn’t be taxing these people. We’re going to get the money from lower income people instead? I really don’t see a downside to the estate tax, and it’s just unfortunate if we give up that revenue.
Gregory Wilpert: As I mentioned, one of the main Republican arguments, of course, in favor of lowering taxes more generally and it’s an argument that’s been around since President Reagan, is that lower taxes for both corporations and households would mean more money for spending and for reinvestment and therefore more economic growth and, of course, that this would pay for itself. What’s your response to that relatively old argument?
Dean Baker: This is one of the rare cases where we actually had the opportunity to test it. Economists, we can come up with all sorts of theories and we try to find a way to, what looks like that. In this case, we actually did it. They did it under Reagan, they did it under George W. Bush. There’s basically, zero evidence that led to any increase in growth. The growth was okay in the 80s, was not particularly strong, growth was very weak after the tax cuts that Bush put in place in 2001 and 2002. I wouldn’t necessarily blame the tax cuts for the weak growth but you’re pretty hard pressed to argue the opposite that somehow we had very strong growth but something happened and that prevented us from having good growth.
The one thing I will say for reducing complications in the systems, loopholes, basically, that is a way. That’s why I have, actually been sympathetic to the idea of lowering the corporate tax rate coupled with reducing the deductions, because the tax avoidance system is a major source of inequality. You have a lot of people on Wall Street who come up with clever tax avoidance schemes and they get very rich that way. I can’t see any reason we want people to get rich designing tax avoidance schemes. We could argue how much money we should make from designing a good product or whatever, but I can’t see any rationale for saying, “Oh, we want people to get real rich ’cause they’re clever at avoiding income taxes.” I think there’s something to be said for that, but it’s not clear how much we’re doing to combat tax avoidance with this reform plan.