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Monday, September 18, 2006

Time To Re-connect Growth, Living Standards - by Jared Bernstein

Last month's release of U.S. household income and poverty data for 2005 confirmed what we already knew: The five-year-old American economic expansion continues to bypass most working families.

What we didn't learn -- what no data release can tell us -- is what to do about it.

After reviewing the findings from the Census report, including another down year for middle-class, working-age households (their inflation-adjusted median income is down 5.4 percent since 2000, the worst such pattern on record) and falling earnings for full-time workers, a New York Times editorial concluded: "the economic agenda for the next president couldn't be clearer."

True, but what comprises that agenda? As politicians head out in earnest for the '06 stump and presidential hopefuls test the waters, this is a good time to start answering that question.

Continued on "Print Article and/or Read More" below >>>
The right treatment flows from an accurate diagnosis. Fortunately, the facts are unequivocally clear: We've had stellar productivity growth over this recovery, but the economist's mantra -- that such growth automatically translates into improved living standards -- no longer holds. Too many forces are wedged between overall growth and paychecks.

Identifying the forces at play is not that hard. Union power is greatly diminished, inflation-adjusted minimum wages are at a 50-year low, and globalization is tilting against the bargaining power of blue and white-collar workers alike.

Note that these problems alter what economists call the "primary income distribution" -- the distribution of income driven solely by market outcomes, not by taxes or government transfers of wealth.

Why does this matter? Because the discussion of solutions has mostly argued that the way to fix the problem is through redistributive tax policy, like expanding child tax credits for middle-class families or wage subsidies for low-income workers.

These are worthy ideas, but since they don't strike at the heart of the problem, they are stopgap measures. In other words, if we fail to target the primary distribution, we'll find ourselves repeatedly asking Congress to fix the problem with progressive tax changes. More accurately, we'll keep asking taxpayers to offset the unequal outcomes that the economy keeps generating.

Here, on the other hand, are some ways to fix the structural imbalances driving the inequality of market outcomes.

-- Raise the minimum wage: it's a small part of the solution, because you only reach those at the bottom of the pay scale, but it's a proven way to reconnect our most disadvantaged workers with overall growth without distorting economic outcomes.

-- Level the playing field for union organizing: it should come as no surprise that more than half of the non-union workforce tells pollsters they'd like to be represented by some type of collective-bargaining arrangement, but the organizing playing field is titled against them. Policy makers should take a close look at the Employee Free Choice Act, an active piece of legislation designed to reset the balance of power. Interestingly, the act was recently endorsed by the aggressively centrist Democratic Leadership Council.

-- Universalize access to health care coverage: The Census data revealed the continuing and alarming erosion of the employer-based system. Follow the lead of every other advanced economy and take this basic human need out of the marketplace. Medicare for All is a useful framework.

-- Achieve truly full employment. For a brief period in the late 1990s, historically tight job markets meant employers had to bid wages up to get and keep the workers they need. Even with supposedly low unemployment in this recovery, that hasn't happened. The Federal Reserve plays a role here, by keeping interest rates as low as possible, but if we're serious about job creation, we have to create jobs: direct public-sector job creation to employ surplus labor.

I've left education off the list because a) unlike these ideas, it already has enough boosters, and b) even college-educated workers are losing ground: their real earnings are down 3 percent since 2000.

These ideas will be resisted by those who worry that tampering with the primary distribution will do more harm than good. Like other economists, I'm mindful of these concerns. But there is compelling evidence to allay them. These ideas won't diminish our competitiveness; to the contrary, they'll enhance it. Imagine the efficiencies we could tap by taking the health care albatross off the neck of American businesses.

This unprecedented split between growth and living standards is the defining economic challenge of our day, and it is begging for an activist agenda. Our current agenda ranges from ignoring the problem to exacerbating it with regressive tax cuts. It's time for a new approach.

Jared Bernstein, an occasional contributor, is a senior economist at the Economic Policy Institute and author of All Together Now: Common Sense for a Fair Economy.

© 2006 The Providence Journal
Time To Re-connect Growth, Living Standards


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