Piotr Brzezinski is a freelance writer and former Conservative Party policy analyst.
As employment hits 9.8%, it’s easy for Republicans simply to blame Obama for the suffering on Main Street. But let’s not forget that even the go-go years weren’t great for middle America: Inflation-adjusted median weekly wages for both college and high school graduates fell from 2000 to 2009 (respectively from $1,030 to $1,025 and $629 to $626). How Republicans manage to bolster middle class earnings while simultaneously tackling America’s unprecedented fiscal crisis will be critical to the country’s future.
Wage stagnation for most Americans set in long before the Great Recession –median household income fell by 4% in the decade up to 2008. Of course, these problems shouldn’t be overstated – Americans are living healthier, longer lives – but the fact is that even in the boom years most people were suffering from economic stagnation, masked (for some) by rising housing prices.
Given America’s ballooning debt – set to increase by 42% over the next few years – it’s easy to see that more government spending isn’t the answer. The government expanded massively under both Presidents Bush and Obama without benefiting middle America’s earnings, and, even if we wanted to go on spending, international bond markets won’t support it.
The risk, however, is that these deficits will give rise to future taxes that compound the middle class pain. The costs of debt interest, social security and healthcare alone will consume an estimated 20% of GDP by 2030. Taxing higher income workers can raise some revenue, but squeezing the rich will hit diminishing returns long before covering the deficit, leaving the middle class will be next in line. So spending reductions hold the key to shielding Middle America’s earnings from the cost of reducing the deficit.
The single most important thing Republicans can do for both wage stagnation and deficit reduction is cutting healthcare costs. Skyrocketing employer costs have held down wages by diverting money from workers to the healthcare sector, but reversing this process requires more than just the repealing unpopular elements of Obamacare. Yes, ending the tax penalty for individually owned health insurance and reducing state barriers to entry should help reduce costs by promoting a competitive national healthcare market. But reducing Medicare reimbursement rates – which will cascade throughout the healthcare system as many private payments are pegged to Medicare – and raising copayments will also be necessary to manage demand and get costs down.
And fiscal consolidation will require addressing the cost of other entitlements like Social Security and state pensions. This could come from a move toward defined contribution-based systems, direct benefit cuts, and an increase in the minimum retirement age.
Of course, a serious approach to deficit cutting will also demand discretionary spending cuts – eliminating earmarks, reducing corporate tax subsidies, shrinking and privatising government services, and cutting defence spending. But these are less important than entitlement changes; although discretionary spending gets most of the media coverage, entitlements form the bulk of future burdens.
It makes for a politically unpalatable agenda but, unfortunately, there’s no painless alternative. And, indeed, these reforms will place some pressure on middle America, but it can be minimized by focusing on the ‘cost-free’ elements of entitlement reform, like encouraging Medicare competition and raising the retirement age. And it’s less painful than the alternative: raising taxes.
More importantly, the combination of fiscal consolidation and deficit reduction can break the logjam of wage stagnation. It will promote economic growth by addressing the real uncertainty over future taxes hanging over business investment – until the government cuts spending potential investors won’t believe politicians’ “no new taxes” promises. And, by alleviating healthcare cost pressure, getting the deficit under control will help ensure that wages take a greater share of future employer spending.
Furthermore, boosting GDP growth will, on its own, reduce the burden of America’s debts. Regulatory reforms – rolling back everything from absurd state-based licensing restrictions to over-zealous safety and environmental laws – can complement spending cuts by making America more competitive. Without productivity increases, global competition will keep downward pressure on American wages.
Ultimately, America’s politicians face a series of very difficult challenges over the coming decade. Fiscal austerity can play a critical role in restoring the American economy as an engine of growth for middle America; the risk, however, is that spending cuts will be seen as a threat to the middle class – taking away small goodies – and instead the US will get an ineffectual mixture of tax rises and Know-Nothing nativism. So both for their electoral chances and for the prospects of healthy fiscal consolidation, let’s hope that conservatives can put together a program that cuts the deficit while addressing wage stagnation.