How to Achieve Higher Wages for Working People
This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published November 3, 2011 on Forbes.com.
In Chapter 1 of my recent book, America’s Ticking Bankruptcy Bomb, I write, “I fully accept the ‘liberal’ premise that prosperity and opportunity must be available to all Americans. A booming economy that benefits just a few at the top is no success. The American Dream must be for all, or it is inoperative.”
What is needed, I further suggested, is a rising tide that lifts all boats, in President Kennedy’s famous phrase. Kennedy delivered that by sharply cutting tax rates across the board, for everyone. His proposed tax cut, adopted in 1964 after his death, cut the top income tax rate by 23%, from 91% to 70%, with all the lower rates cut by similar magnitudes.
Kennedy explained, in arguing for the tax cut before his death:
It is a paradoxical truth that tax rates are too high today, and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the tax rates….[A]n economy constrained by high tax rates will never produce enough revenue to balance the budget, just as it will never create enough jobs or enough profits.
Our true choice is not between tax reduction, on the one hand, and the avoidance of large federal deficits on the other….It is between two kinds of deficits – a chronic deficit of inertia, as the unwanted result of inadequate revenues and a restricted economy – or a temporary deficit of transition, resulting from a tax cut designed to boost the economy, produce revenues, and achieve a future budget surplus.
Kennedy explained further that the best way to promote economic growth, “is to reduce the burden on private income and the deterrents to private initiative which are imposed by our present tax system – and this administration is pledged to an across-the-board reduction in personal and corporate income tax rates.”
After the Kennedy tax rate cuts were adopted, the next year economic growth soared by 50%, and income tax revenues increased by 41%. By 1966, unemployment had fallen to its lowest peacetime level in almost 40 years. U.S. News and World Report exclaimed, “The unusual budget spectacle of sharply rising revenues following the biggest tax cut in history is beginning to astonish even those who pushed hardest for tax cuts in the first place.” Arthur Okun, the administration’s chief economic adviser, estimated that the tax cuts expanded the economy in just two years by 10% above where it would have been.
President Reagan delivered quite similar results by cutting tax rates even more. He first cut tax rates by 25% across the board through Kemp-Roth in 1981. Then in the 1986 Tax Reform Act, he reduced the top tax rate from 70% when he entered office all the way down to 28%, with only one more rate for the middle class at 15%. (The poor were exempted from income taxes under Reagan’s policies).
But Reagan adopted a broader economic recovery program as well. Equally critical to that recovery program was the anti-inflation, strong dollar monetary policy he and his Administration backed. That promotes economic growth because investors know the value of their investments will be maintained without depreciation due to inflation or a declining value of the dollar, and cyclical recessions that might crash their investments will be minimized. Consequently, capital investment flowed into the American economy not only domestically, but from all over the globe during the Reagan years. That capital investment increases productivity and bids up wages commensurately.
The Reagan recovery started in official records in November, 1982, and lasted 92 months without a recession until July, 1990. That set a new record for the longest peacetime expansion ever, the previous high in peacetime being 58 months.
Nearly 20 million new jobs were created during that recovery, increasing U.S. civilian employment by almost 20%. Unemployment fell by half to 5.3% by 1989. Real per capita disposable income increased by 18% from 1982 to 1989, meaning the American standard of living increased by almost 20%. The decline in income during the Carter years for the bottom 20% of income earners was reversed, with average real household income for this group rising by 12.2% from 1983 to 1989. Incomes rose in fact for every income quintile.
The Reagan recovery grew into the 25-year Reagan boom from 1982 to 2007, what Art Laffer and Steve Moore have rightly called the greatest period of wealth creation in the history of the planet. Wages and incomes for American workers continued to ride upward along with it.
The broadest and most accurate measure of living standards is real per capita consumption. That measure soared by 74 percent from 1980 to 2004, an unprecedented gain in that short of a period. If we measured it just during the 25-year Reagan boom, it would be even higher.
But even this measure suffers from some shortcomings. The official inflation measures used to adjust it overstate inflation. Correcting for that would probably add a percentage point to the growth, which would double the gains after 20 years. Using the more modern chain weighted index for personal consumption expenditures, or PCE deflator, developed by the Commerce Department’s Bureau of Economic Affairs, would raise the gain by nearly 50%.
Alan Reynolds notes as well in his brilliant book Income and Wealth that by 2001 the Census Bureau was reporting that the poor enjoyed as much or more of the indicia of a comfortable, modern standard of living as the middle class 30 years before. The poor enjoyed as many or more cars, trucks, clothes dryers and refrigerators in 2001 as the middle class in 1971. They enjoyed twice the proportion of air conditioners and color TVs, and much more of the modern advances of microwaves, DVDs, VCRs, personal computers, and cell phones, as the middle class 30 years before. This indicates a broad advance of prosperity.
Moreover, throughout the entire economy, whenever an improvement in quality or capability of anything is not reflected commensurately in the price of the product or service, the improvement is almost always undercounted or not counted at all in economic statistics. All these statistics are compiled primarily on the basis of market prices. But the market price of a good or service does not typically rise commensurately with an improvement in quality or capability. More typically, such improvements are accompanied by a decline in price.
Statisticians can try to make adjustments for those effects. But without market prices to define the improvement, their efforts are guesswork that never keeps up with the true utilitarian value of the improvements over time.
Even more difficult is accounting for the value of new inventions and products. Measurement of their contribution to GDP or other statistics begins with their market prices. Typically, the price of a new product or invention declines during the years after introduction, due to improvements in manufacturing and economies of scale, even while their quality and capability typically soars. How to account in the statistics for GDP, income and wealth for the resulting improvement in living standards and quality of life from these technological advances? There is no good answer, which means as a result that they are never nearly truly accounted for.
Probably the best example is the recent history of computers. A desktop computer today retailing for $999 has far more computing power than the mainframes of 30 years ago, which cost many times more. Moreover, that desktop today plugs into a worldwide Internet with probably millions of websites that did not even exist 30 years ago. Our statistics as to growth in GDP, income and wealth do not remotely begin to account for the resulting value created in our lives. Indeed, today we have laptops which mean we can take this resulting value with us wherever we go. Does the retail price of those laptops at Best Buy fully reflect their contribution to GDP, income, or value in our lives?
Another good example is cellphones, which could only be imagined in the 1960s as Agent Maxwell Smart talking into a shoe. Today for a couple of hundred dollars or so, we not only can take with us a portable phone smaller than our hand anywhere we go; that phone is itself a portable computer, which allows us portable internet access everywhere we go, along with email and text messaging capability, and even perhaps video. Does that couple of hundred dollars retail price, along with the monthly service fee, even remotely account for the value contributed to our lives, or to real income or GDP?
So we clearly know what policies to adopt to promote rising wages for working people again: free market policies that remove barriers to production, and the restoration of incentives for its growth. But this is being obscured now by the failures of Obamanomics. Under those Keynesian, anti-market policies, the opposite of Reaganomics and the Kennedy tax rate cuts, real wages and incomes for working people are declining in an accelerating downward spiral. Median family incomes have declined to the levels of the late 1990s, with real wages for males falling back all the way to the late 1970s.
This is being inaccurately reported in the media as no gains for working people since those earlier dates. But what really has been happening is accelerating real wages and incomes for working people during the Reagan boom, now erased by the declines of Obamanomics. To erase those declines, we need to erase Obamanomics. The voters will have their chance to do that in 2012.