The Anti-Economist — From the December 2012 issue

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The American dream has never been the rags-to-riches fable of the Horatio Alger stories. But there once was a real American dream, and it went like this: If you work hard, your income will rise consistently and will enable you and your family to have a decent life, a good life—even a secure life.

No more. For at least half of all Americans—those on the bottom rungs of the economic ladder—that dream has been dead for more than thirty years. Their household incomes have hardly risen since the glory decades after World War II. In many cases, their incomes have actually fallen. The only protection these Americans have had from a complete collapse in their standard of living has been government social programs.

This bears repeating: the only reason incomes for the lower half have risen more than marginally since the 1970s is that such federal programs as Social Security, unemployment insurance, the earned-income tax credit, and food stamps have provided support. “Without America’s net of social programs,” political scientist Lane Kenworthy argues, “income inequality would be much worse than it already is.”

It wasn’t always that way, says Kenworthy, who teaches at the University of Arizona. In the 1950s and 1960s, and through much of the 1970s, the American economy itself produced considerable wage growth for workers up and down the income scale. Since the late 1970s, however, the wages paid to the lower half have fallen far behind the growth of gross domestic product.

For households whose income places them in the bottom 25 percent in America, only twenty cents of every dollar of new income over the past thirty-plus years came from earnings on a job. The remaining eighty cents, as Kenworthy demonstrates, came from the social programs mentioned above. Those in the next quartile up did slightly better, but two thirds of their new income still came directly from the federal government.

This isn’t, of course, a uniquely American problem. The free market is failing the bottom half of the population in Europe as well, where lower-income people also depend on government programs for most of their monetary gains. In their case, however, the damage is lessened by the fact that most European social programs are considerably more generous than those in the United States.

Doesn’t this simply confirm Mitt Romney’s argument that 47 percent of Americans are parasitical loafers, who think of themselves as victims, entitled to help for just about everything? Of course it doesn’t. Maligning these people is particularly offensive given their paltry income gains in the past few decades. These supposed good-for-nothings have jobs in factories, hospitals, malls, restaurants, and supermarkets. Try getting along without them.

More to the point, these people have never stopped working hard. The problem is that wages stopped growing—and that good jobs became harder to find. A lot of attention has been paid to the lack of good jobs created in the recent economic recovery. But economists John Schmitt and Janelle Jones of the Center for Economic and Policy Research in Washington have published striking studies showing that high-quality jobs began to dry up long before the financial crisis of 2008.

Schmitt and Jones wanted to find out whether the economy was producing more bad jobs than it once did. They defined a bad job as one that paid less than $37,000 a year—the 2010 equivalent, in inflation-adjusted dollars, of the median male income in 1979—and offered neither employer-paid health insurance nor a company retirement plan. (I’d call these really bad jobs.) In 1979, some 18 percent of jobs fell into this category. By 2010, the proportion had risen to 24 percent.

The current working population is more educated, more experienced, and older than the working population in 1979, and the economy itself has grown since then. Logically speaking, there should be far more good jobs. Instead there are fewer. Here is another demonstration (as if we needed it) that the free market is not working as promised.

There are several conventional explanations for the rise in bad jobs and the general stagnation of low- to mid-level incomes. One is globalization: Americans buy imports from low-wage nations and essentially ship jobs overseas. Another is a lack of adequate education, which makes Americans ill prepared for today’s sophisticated, skill-intensive jobs. Yet as Schmitt and Jones point out, one out of three workers had a four-year college education or better in 2010, compared with only one out of five in 1979. The increase in educational attainment certainly didn’t lead the market to create a glut of high-tech, high-wage positions.

Another factor that is often neglected is pressure from Wall Street, and in particular from private-equity firms like Bain Capital, to restrain wages in order to raise stock prices and pay down the high levels of debt needed for corporate acquisitions. Nor should we overlook the reduced clout of unions—only 7 percent of private workers today belong to unions, compared with more than 24 percent in 1973—and Congress’s failure to raise the minimum wage enough to keep up with inflation. No matter who occupies the White House on January 22, 2013, none of these factors is likely to change in any substantial way.

In his callous but calculated talk to wealthy donors back in May, Mitt Romney lodged yet another perennial complaint about the shiftless 47 percent: They pay no income taxes. This was hardly a novel talking point for the candidate. Indeed, it has been a favorite of one Republican presidential hopeful after another—and one Fox News host after another—as far back as 2010. It was as ludicrous then as it is now.

There are two reasons these Americans don’t pay federal income taxes. One is that they don’t make enough money. The other is that their tax loads have been reduced or eliminated by two valuable social programs widely praised by Republicans, the earned-income tax credit (EITC) and the child tax credit (CTC). Ronald Reagan expanded the former, George W. Bush expanded both. (One of Reagan’s mentors, the conservative economist Milton Friedman, was a leading proponent of EITC-type plans.)

Of course, the vast majority of Americans do pay federal taxes of one kind or another. Of those Americans not required to pay income taxes, about two thirds still contribute to Social Security and Medicare through their payroll taxes. And let’s keep in mind that these taxes are regressive. All workers pay the same rate up to an income of $110,000, beyond which no further taxes are collected. The rate for the very wealthy, in other words, is low. These taxes, which hit working people pretty hard, were raised under Reagan. Progressive income taxes, which take more from the rich by pegging rates to income level, were sharply lowered by the same administration.

That leaves the relatively small group that pays no federal taxes whatsoever: basically students, the elderly, and the very poor. In many cases, these people have hardly any income to speak of. Yet even they enrich the public till in their modest way by paying state and local sales taxes, which are currently creeping as high as 9 percent. One Arizona municipality dings consumers for 13.725 percent, a rate considerably higher than the lowest federal income-tax bracket—and only slightly less than the rate paid on personal income by candidate Romney.

Clearly something is amiss in our faith that free-market economies distribute income fairly. And clearly social programs are the last thing keeping many Americans out of poverty. But do these programs themselves nourish the sort of dependence that Republicans, from Ronald Reagan to Paul Ryan, so love to disparage? To put it another way: Are the programs themselves the cause of reduced earnings for the lower half, because they enable them to work less hard?

A big flaw in this popular right-wing supposition is that to qualify for the earned-income and child tax credits from which such a large portion of government benefits are derived, you have to have a job. In other words, they encourage work rather than dependence.

What about programs like unemployment insurance? No doubt some unemployed workers are less motivated to take a job because they have a weekly check to support them—at least for a while. But those who condemn the “disincentive” aspect of such programs vastly underestimate their long-term effects. By sharply lowering the poverty rate, these payments result in far better opportunities for the children of the poor.

Jared Bernstein, a former economic adviser to Joe Biden who is now with the Center on Budget and Policy Priorities, explained in recent testimony before Congress how reductions in poverty improve children’s performance in school, ultimately boosting their prospects for better pay and sustainable jobs. One piece of research cited in his testimony: an analysis of ten antipoverty programs has demonstrated that consistently increasing a poor family’s annual income by $1,000—which is about the equivalent of a single CTC—results in measurably improved test scores for their children. Raising a family’s annual income by $3,000, roughly equal to the amount received from the EITC and a CTC together, leads to a 17 percent increase in future income for the children once they enter the workforce.

Denied their cherished argument about disincentives, many on the right will revive an even older objection to antipoverty programs: they will insist that poverty in America, and in the rich countries of Europe, isn’t all that bad. Even the poor can scrape together enough cash to buy cutting-edge consumer products, from cell phones to flatscreen TVs. And McDonald’s, of course, is always affordable.

Surveys show otherwise. A few years ago, the Pew Research Center gathered information about home heating, mortgage arrears, diet, and access to health care. Pew posed the following question in its survey: “Have there been times during the last year when you did not have enough money (a) to buy food your family needed, (b) to pay for medical and health care your family needed, (c) to buy clothes your family needed?” The study covered seven wealthy nations, and the United States ranked worst among them.

The reason is unambiguous: our nation has the least generous social programs of those surveyed. Yet we are now likely to cut these programs even more significantly. Material deprivation, reduced prospects for children, high levels of inequality, and political polarization will result.

Can we change this? The best antidote to low wages is fast economic growth. In the late 1990s, when the Clinton boom was under way and unemployment crept down to around 4 percent, incomes rose substantially for all. For the lower half of wage earners, however, the good times lasted only a few years.

The debate about how to achieve that kind of growth again goes on. But the outlook is hardly optimistic. Congress will likely reduce government spending next year, and the pressure to cut the deficit may handicap government policy for years to come. Add to that the weight of global economic pressures, and slow wage growth will likely be with us for a long time.

In that case, a nation truly concerned with social justice will be forced to adopt policies that directly address low wages and the scarcity of jobs. We will need higher minimum wages—and a willingness to enforce them. As the number of involuntary part-time employees grows, we should expand medical coverage for them, and perhaps even require company retirement programs. We may also need to consider government-paid jobs in areas like teaching and construction.

Is there any prospect for a renewed commitment to social programs and job-creating rules and regulations? The nation seems to have too little faith in government to do what will be necessary. And as we enter the fifth year of brutally high unemployment, this failure of imagination and national will is nothing short of tragic.

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