March 29, 2024

Economix Blog: A Budget Focus on Inequality

The great economic focus of the White House, the financial crisis and recession aside, has been inequality.

The hollowing out of the middle class, the yawning gap between rich and poor, and the problem of economic mobility were preoccupations of President Obama long before he set foot in the White House. His 2006 book, “The Audacity of Hope,” for instance, contains a whole chapter dedicated to wage polarization, globalization and the plight of blue-collar workers.

The Obama budget proposal released Wednesday, like other White House budgets before it, also emphasizes the problem of inequality and the failure of the American economy to promote a thriving middle class.

“It is our generation’s task to reignite the true engine of America’s economic growth – a rising, thriving middle class,” it says, calling support for the middle class the “North Star” of policy-making. “It is our unfinished task to restore the basic bargain that built this country – the idea that if you work hard and meet your responsibilities, you can get ahead.”

The budget includes several proposals to tackle inequality and wage stagnation.

  • Increasing the federal minimum wage to $9 an hour from its current rate of $7.25, and indexing it to inflation. The White House asserts that this would lift the wages of about 15 million low-wage workers.
  • Creating a “Preschool for All” initiative to provide early childhood education to 4-year-olds from low- and middle-income families. The big idea is that this might improve economic mobility in the future.
  • Increased taxes on wealthy Americans, including taxing carried interest as ordinary income. Hedge-fund managers and the like use the carried interest loophole to pay preferential rates on their earnings.
  • Increased support for manufacturing, which the White House argues might be an important source of middle-class jobs.
  • Making permanent the expansion of the earned income tax credit and child credit, which were due to expire in 2017. The proposal also makes permanent the American Opportunity Tax Credit, which helps families with students pay for college.

So far, the Obama administration has tackled the issue of inequality in two major ways. It has raised taxes on the wealthy, and it has expanded programs to aid lower-income Americans.

You might not think that the Affordable Care Act had much to do with inequality – it is a health care bill, after all – but it did. Rising insurance costs have eaten away at workers’ wages; the law has a number of provisions to try to bend the cost curve. Medical bills are a primary driver of bankruptcy for middle-class families; the law removes the lifetime benefit limit, ends denial of coverage for pre-existing conditions and contains other rules that might help reduce the number of bankruptcies.

Moreover, the law provides free or low-cost access to health coverage to tens of millions of Americans, financed by the government. That might not address the problem of income inequality. But it does address the problem of consumption inequality and perhaps even economic mobility.

Mr. Obama has paid for the Affordable Care Act and other initiatives to push money to lower-income Americans – like an expansion of the earned income tax credit – with higher taxes on the wealthy. He has thus far raised the top marginal tax rate on income to 39.6 percent from 35 percent, reduced deductions for some families and raised taxes on investment income in the January deal to avoid the fiscal cliff, making the tax code more progressive.

But if anything, the plight of the middle class has gotten worse since Mr. Obama took office, a result of long-existing economic trends and the after-effects of the deep recession.

Real median income has continued to decline during the sluggish recovery. It is about 8 percent lower than it was when the recession hit in 2007, and 9 percent lower than it was at its peak in 1999, a period in which economic output has expanded about 24 percent. To translate: the country is getting richer, but the average worker is earning less, and that has been true for well over a decade.

On top of that, the recovery has seen middle-class jobs effectively replaced with low-income jobs. According to research by the National Employment Law Project, low-wage occupations account for 21 percent of job losses during the recession and 58 percent of job growth during the recovery. In contrast, middle-wage occupations account for 60 percent of recession losses and only 20 percent of recovery growth.

But – as always, perhaps – it is not a bad time to be rich. Job growth in high-wage professions has been decent, if not spectacular. And updated research by the economist Emmanuel Saez of the University of California, Berkeley, shows that the real income of the 99 percent has fallen during the recovery, but surged 11 percent for the top 1 percent of earners, led by a stock-market boom.

Thus, Mr. Obama’s policies might not have reduced inequality before taxes and government transfers. But the White House has been aggressive in using taxes and transfers to try to blunt its effects.

Article source: http://economix.blogs.nytimes.com/2013/04/10/a-budget-focus-on-inequality/?partner=rss&emc=rss

Today’s Economist: Nancy Folbre: Minimal Wages, Minimal Families

Nancy Folbre, economist at the University of Massachusetts, Amherst.

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst. She recently edited and contributed to “For Love and Money: Care Provision in the United States.

Announcing his support for an increase in the federal minimum wage to $9 an hour, President Obama called attention to the needs of children: “Even with the tax relief we’ve put in place, a family with two kids that earns the minimum wage still lives below the poverty line. That’s wrong.”

Today’s Economist

Perspectives from expert contributors.

Many Americans share his concerns: 71 percent of Americans polled in mid-February by the Pew Research Center for the People and the Press support the proposed increase, including 50 percent of Republicans.

Influential economists have announced their support as well, including many affiliated with the Initiative on Global Markets at the Booth School of Business at the University of Chicago. Of 38 economists in the group, 18 agreed, 4 disagreed, 12 were uncertain and 4 had no opinion or didn’t answer.

Every time increases in the minimum wage are proposed, a centuries-long history of concerns about the impact of the labor market on family life comes into play, setting the stage for fierce debates over regulation.

The classical political economists of the late 18th and early 19th centuries believed that the forces of supply and demand would always be constrained by the cost of subsistence, setting a floor under wages. After all, if the wages that workers received were not sufficient to keep them alive, the supply of labor would be reduced, driving wages back up again.

Because people don’t live forever, the costs of subsistence should include the costs of producing replacement workers, namely, raising children. But as many young children and unmarried women began entering wage employment in the 19th century, it became apparent that an increase in the supply of workers without family responsibilities could potentially drive average wages well below the level adequate to support children.

Market forces, in other words, could discourage, even penalize, family commitments.

In the United States, the “family values” argument for a minimum wage gained political traction on the state level long before federal legislation was passed in 1938. As the historian Alice Kessler-Harris explains, this argument bolstered efforts to reinforce traditional gender roles by discouraging the employment of married women. At the same time, it called attention to the difficulties wage earners faced in supporting dependents.

This historical legacy shows up in calculations, like the one President Obama offered above, that seem to presume that a minimum wage for one parent working full-time should be able to support not only two children but also a spouse who stays home to take care of them. Similar assumptions are often used in state-level estimates of the hourly wage required to bring a working family over the poverty line or a higher standard such as a locally designated living wage. On the other hand, these same estimates show that the costs of child care largely wipe out the net contribution of a second earner’s wage income.

As I emphasized in a previous post, conventional measures of poverty are seriously out of date. Application of the Census Bureau’s new Supplemental Poverty Measure suggests that a $9 minimum wage would not necessarily bring working families over the threshold.

Any way you look at it, adults taking responsibility for young children need considerably higher earnings than those who don’t, even taking into account the tax relief President Obama referred to (primarily the earned income tax credit).

As Lawrence Mishel of the Economic Policy Institute points out, the median worker’s real hourly compensation (real earnings plus benefits) has stagnated over the last 10 years, and the declining real value of the minimum wage has contributed to increased income inequality.

The resulting economic stresses are bad for children, bad for working parents and bad for family formation and stability. In 2010, children represented 24 percent of the United States population, but 34 percent of all those living in poverty.

Critics of the proposed increase in the minimum wage object that it would increase unemployment. But proponents point to considerable evidence, nicely summarized by Brad Plumer at The Washington Post’s Wonkblog, that this potential effect would be small or nonexistent,

Critics like the economist David Neumark also insist that the policy is not effectively aimed at poor families, because many individuals earning the minimum are young people living with their parents. But proponents like Natalie Sabadish and Doug Hall of the Economic Policy Institute emphasize that about 80 percent of workers who will be directly affected are over age 20.

Many young people earning the minimum wage are living at home. Some can’t afford to do otherwise. And while their parents may be helping them out with living expenses, the wages they earn will determine their opportunity to enroll in college, pay off their debts, save money and start a family of their own.

So, the debate circles back to the dilemma acknowledged by classical political economy in the 19th century. The forces of supply and demand, left to themselves, treat labor like any other commodity. But labor itself is produced outside the market, by families and communities who must struggle to find ways to support their contributions to the future.

Article source: http://economix.blogs.nytimes.com/2013/03/04/minimal-wages-minimal-families/?partner=rss&emc=rss