Tuesday, November 11, 2014

Is the tax code the best route to attacking wage stagnation?

David Leonhardt identifies stagnant wages as the political issue of our time and the prime mover of Democrats' current woes, as they've been left holding the bag during a period in which median income has fallen. He runs through a list of measures that in part address the problem, of which some (infrastructure) have been blocked by Republicans, others (investment in education) work slowly (if at all), and still others (health reform) have made some headway -- but without much direct or immediate impact on most middle class voters. He then segues to a short-term solution that he suggests might provide at least political relief:
Truly new ideas don’t come along very often in any field, including economics.

So it goes with lifting middle-class incomes. The best hope for doing so, in the immediate future, is probably the oldest and most obvious play in the book: a tax cut.

A few years ago, a middle-class tax cut would have seemed a silly idea. Both Mr. Bush and Mr. Obama had already cut taxes, and the federal budget deficit was enormous. But the deficit has since fallen sharply, thanks in part to lower health costs. Meanwhile, middle- and lower-income families are reaping a disproportionately small share of economic growth. Having the government try to rectify the situation doesn’t sound so silly now — and probably won’t in the 2016 presidential campaign.
Leonhardt admits that the country as a whole is under-taxed, short of revenue for other economy-building action. Hence he suggests pairing a middle class tax cut with a further hike on the wealthy, which of course Republicans will never allow. It's not entirely clear whether he's touting the tax cut because it helps plug the income gap a bit, or because it may stimulate the economy and thus tighten the labor market enough to generate upward pressure on wages. Most likely both.

But part of the United States' political dysfunction, it seems to me, is that we default to the tax code as the primary means of attacking social problems -- EITC instead of a livable  minimum wage, for example. A middle class tax cut is an indirect way of coping with a fundamental skew in the balance of power between management and labor, or ownership and labor, and historic lows in the share of national income that goes to wages. A tax cut won't undo the results of the Republicans' catastrophically successful thirty years war against labor -- abetted by (or abetting) global wage competition and technology.

Richard Florida has laid out what seems to me the fundamental problem and challenge:
The problem is that on average, service workers earn only half of what factory workers make – and only a third of what professional, technical and knowledge workers are paid. The key is to upgrade these jobs and turn them into adequate replacements for the higher-paying blue-collar jobs that have been destroyed.

It has happened before. Yet the blue-collar jobs we pine for were not always good jobs: we made them good jobs. When my father came back from the second world war, his poorly paid factory job had been transformed. He was able to buy a house, put his two sons through college and participate fully in the American dream. Some of this was due to the power of unions. Most of it was because of the enormous improvements in productivity wrought by improved technologies and management techniques.

The same thing can and must happen in the service sector. It is starting already. Companies such as Wegmans, Whole Foods, the Container Store, Best Buy and Zappos already account for a fifth of the top 100 best places to work in America. A typical hourly worker at the Container Store earns about $30,000 a year, not nearly as much as a GM factory worker but about 50 per cent more than the average for hourly-wage retail workers. Retail outlet Trader Joe’s mandates that full-time workers earn at least their community’s median household income, while its “store captains” can make six-figure salaries. These companies recognise that better conditions lead to better customer experiences – and an improved bottom line.
Companies' enlightened self-interest won't be enough -- it never is. A higher minimum wage, mandatory sick leave, minimum wage and overtime protections for home health workers -- various feasible legislative and executive actions nibble at the edges. Republicans have been rewarded electorally, though, for continuing to hollow out unions -- and perhaps unions as we know them, at least as they function in the US, can play only a limited role in redressing the power imbalance between employers and employees.

A different balance is attainable. As the Times recently reported, fast-food workers in Denmark earn $20/hour, with ample vacation and sick pay, paid parental leave and a pension plan. Franchisees have lower profit margins, and there are consequently fewer of them. Workers get a bigger share of the pie, and they achieve it mainly through union-management agreements rather than through legislation:
Denmark has no minimum-wage law. But Mr. Elofsson’s $20 an hour is the lowest the fast-food industry can pay under an agreement between Denmark’s 3F union, the nation’s largest, and the Danish employers group Horesta, which includes Burger King, McDonald’s, Starbucks and other restaurant and hotel companies...

Danish law does not require fast-food companies or their franchisees to adhere to the wages required by the agreement with the 3F union. But they do, because employees and unions pledge in exchange not to engage in strikes, demonstrations or boycotts. “What employers get is peace,” said Peter Lykke Nielsen, the 3F union’s chief negotiator with McDonald’s.
The benefits of converting retail jobs to "good" jobs in the sense that manufacturing jobs used to be (and sometimes still are) "good" might extend into family structure, as Tyler Cowen recently highlighted, flagging this abstract:
Over the past five decades, marriage has changed dramatically, as young people began marrying later or never getting married at all. Scholars have shown how this decline is less a result of changing cultural definitions of marriage, and more a result of men’s changing access to social and economic prerequisites for marriage. Specifically, men’s current economic standing and men’s future economic security have been shown to affect their marriageability. Traditionally, labor unions provided economic standing and security to male workers. Yet during the same period that marriage has declined among young people, membership in labor unions has declined precipitously, particularly for men. In this article, we examine the relationship between union membership and first marriage and discuss the possible mechanisms by which union membership might lead to first marriage..
 - David Schneider and Adam Reich,Marrying Ain’t Hard When You Got A Union Card? Labor Union Membership and First Marriage
Tacking back to Leonhardt's proposed middle class tax cut paired with high income tax increase: It's true that Piketty credits the Reagan cuts on top marginal income tax rates and investment income taxes with ripping the lid off CEO and financial industry pay, and thus turbo-charging the surge in income inequality since the early 1980s:
Of course changes in tax laws are themselves linked to changes in social norms pertaining to inequality, but once set in motion they proceed according to a logic of their own . Specifically, the very large decrease in the top marginal income tax rate in the English-speaking countries after 1980 (despite the fact that Britain and the United States had pioneered nearly confiscatory taxes on incomes deemed to be indecent in earlier decades) seems to have totally transformed the way top executive pay is set, since top executives now had much stronger incentives than in the past to seek large raises. I also analyze the way this amplifying mechanism can give rise to another force for divergence that is more political in nature: the decrease in the top marginal income tax rate led to an explosion of very high incomes, which then increased the political influence of the beneficiaries of the change in the tax laws, who had an interest in keeping top tax rates low or even decreasing them further and who could use their windfall to finance political parties, pressure groups, and think tanks (Capital in the Twenty-First Century, p. 335).
Could tax policy ultimately reverse-engineer those  "much stronger incentives than in the past to seek large raises"?  They did once before...


  1. Thomas Edsall argued yesterday in the Times http://nyti.ms/1yxg6R5 that the benefits of the ACA are "disproportionate" racially - that it cuts Medicare (beneficiaries 77% white) and shifts that money to Medicaid (59% minority). So whites are voting Republican in their self-interest.
    What is your assessment of the costs and benefits of the ACA?

  2. Thomas Edsall argues in the times yesterday http://nyti.ms/1yxg6R5 that the costs and benefits of the ACA fall disproportionately - burdening white Medicare recipients to benefit minority Medicaid recipients. This explains white hostility to the ACA, and white voting, he asserts. What is your view?

  3. thanks for a thoughtful post.
    It is kind of pathetic that we need tax cuts to get higher incomes. In countries with strong labor movements, the workers demand higher incomes, and there is no peace until they get higher incomes.
    In America there is precious little demand for higher incomes, just a wistful hope. So we essentially have to increase the national debt in order get a fee percentage points off our taxes.

  4. If you read carefully the history of the ACA, you find that the original bill did have reforms that would have raised Medicare Advantage premiums about $300 a year. This is not the end of the world for America's pampered senior citizens, but it would be a reason for opposition.
    However the CMS quietly cancelled this penalty to Medicare Advantage plans, or at least postponed it.
    I work for a firm that sells Medicare Advantage. Believe me, in 2014 the seniors in America have zero negative effect from the ACA.

    And to be honest, I bristle when a well-cared for senior goes off in opposition to the ACA. Most of those over 65 are recipients of vast federal subsidies, and yet when a poor working person gets a few hundred dollars in subsidies the drawbridge goes up. Yuck.