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  • Writer's pictureOren Levin-Waldman

The Economy isn't Nearly as Strong as Some Would Have Us Believe

By certain objective measures the economy is doing well. Unemployment is low at 3.7 percent, or so that is the official unemployment rate. That means the jobless rate is about 7.0 percent, which arguably is better than 14 percent. Of course, the stock market is riding high, with the Dow Jones having broken 28,000 points. Republicans would have us believe that in no way can the President be assailed on the economy. Given the Democrats’ obsession with impeachment, one might think they are right. But is the economy really doing that well?

Is there not room for improvement that goes beyond the calls from the political left for Medicare for All, free college tuition, and student debt forgiveness? Well, I beg to differ. There are still issues that really aren’t being adequately addressed. Let’s start with an unemployment rate of only 3.7 percent, which tells us little about the health of the labor market.

It doesn’t account for those who simply gave up and dropped out of the market or those who could only find part-time work. Even those working in the gig economy from project to project but would rather have a full-time job aren’t counted among the unemployed. Moreover, it doesn’t account for those who took a job beneath their skills level.

Contrary to the expectation of Tax reform, wages have not really grown. Remember that by lowering the corporate tax rate to 21 percent, employers would have additional money from the savings that they could theoretically share with their workers in the form of higher wages. Instead, employers pocketed the savings and did not raise workers’ wages. On the contrary, they assumed the increased net pay they had because their taxes were reduced was enough.

Here is where Democrats have truly missed an opportunity. Instead of talking about restoring the higher tax rate in order to pay for expanded social programs, they really could make a moral argument based on true reciprocity. How about: “because we lowered the corporate tax rate we expect you to respond in kind by raising wages. After all, were it not for the efforts of workers, you wouldn’t really have any profits all. Share the wealth does not mean raising taxes to redistribute, but that employers should share profits with workers in the form of higher wages. Therefore, we are prepared to raise the corporate tax rate unless you raise your workers’ wages.”

It is a pity that the Democrats sound like a broken record with the common refrain of expanding programs. And yet, it is ironic that the party that brought us social engineering through the use, and misuse, of the tax code hasn’t figured out how to use it as leverage to force employers to raise wages. It would be nice if the party of the working class would really speak on behalf of the working class.

Although some scant mention has been made among some of the contenders for the Democratic party nomination about income inequality, it follows the standard script of policy proposals for redistribution generally, and redistribution specifically in the form of wealth taxes. And yet, Democrats have again missed an opportunity to truly address the significance of rising income inequality.

Conservatives who argue that inequality may encourage those at the bottom to work harder aren’t completely wrong. But their assumption that inequality is purely a function of an oversupply of low-skilled workers also miss the point. Yes, an oversupply of low-skilled workers will work to suppress wages at the bottom, but it doesn’t explain the top pulling away from everybody else. The so-called natural forces, as conservatives and free market stalwarts like to refer to them, have only been exacerbated by public policies that have resulted in wage stagnation.

The reason why income inequality is an important issue is because it truly signifies the disappearance of the middle class. Wages have been stagnant because of the deterioration of labor market institutions. First, past administrations packed the National Labor Relations Board (NLRB) with people who were hostile to unions. Second, by doing nothing to keep the minimum wage up with inflation, public policy has allowed a labor market institution that could have bolstered the middle class to deteriorate as well.

Moreover, by not enforcing anti-trust laws, government has allowed wages to stagnate as larger mega--companies could similarly suppress wages. And by not adequately addressing the issue of healthcare reform, rising healthcare costs ate into funds that could have gone to workers in the form of higher wages.

The problem is that neither party really speaks about the middle class. If they did, then in addition to the moral arguments for reforming the system, they would also address the labor market value of alleviating employers of the responsibility of providing health insurance. For Republicans who stress the need to improve the competitiveness of American industry by lowering costs, separating the provision of health insurance from employment ought to be a winning argument. And for Democrats who claim to want to give workers greater autonomy, separating employment from health insurance provision eliminates “job lock.”

There are times that it appears that the Democrats really want to keep workers dependent on government. After all, according to some electoral models, most notably Anthony Downs’s public choice theory in An Economic Theory of Democracy, it is a way to purchase votes and maintain a vote plantation. Were Democrats to really be concerned with enhancing worker autonomy, they would focus on how rising wages, beginning with the minimum wage, will do more to reduce income inequality than simply redistributing income by overtaxing the wealthy to pay for programs for the poor. The answer here is not taking away from one group, rather lifting all boats because tides are rising.

At the same time, Republicans would do well to consider this approach as well. For a party that speaks the language of freedom and individual liberty, it is a bit peculiar that it opposes policies that could lead to greater autonomy and independence. A rising minimum wage, which through its contour effects, would raise wages further through the distribution would certainly achieve that objective.

It is really hard not to believe that given that there really has been no serious debate about these issues, that nobody really cares about the middle class. It is clear from the debate so far and much of what the candidates are saying, or not saying, that the middle class really is not a concern. So let’s set the record straight: for those obsessed with the politics of resistence and now impeachment, the economy is still there and needs to be addressed. And for those who assume that the president will win reelection because the economy is so strong, they just may be too complacent here. Indeed, there are issues that need to be addressed. It is a pity that the Democrats’ obsession prevents them from having a serious policy discussion.

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