Ryan Streeter
I recently proposed that we should make a goal of increasing middle class income by 7% in seven years. We should aim for this goal without using the tricks of redistribution or public works. In other words incomes should rise through a strengthening marketplace, not from shifting income from one group of Americans to another.
I’m on the lookout for an elected leader who wants to run with this idea, but since big ideas such as this contain all kinds of risk, I might be looking a long time.
So, in the meantime, we should lay out some boundaries and answer some questions.
Is 7% the right number? To be honest, I don’t know. But no one else does either, since “right” in this regard is hard to descry. Surely 7% is both bold and reasonable. In the three decades following 1973, the year that what Tyler Cowen has called the Great Stagnation set in, median family income in America grew at about 0.9% per year, down from the 2.8% in the previous few decades. After 1999 the rate flipped negative. So, growth at 7% over a 7-10 year stretch would take us back to something approximating the 1980s and 1990s, though not the golden years of the 1950s and 1960s.
Increasing median income shouldn’t become an inequality project. If inequality were reduced by explosive growth in the middle, that would be great, but policymakers shouldn’t get distracted with Gini coeffecients and the political popularity of exploiting inequality. What matters is growth and opportunity in the middle of America, not whether the rich keep getting richer. If productivity gains only accrue to those at the top, we have a policy failure, but fighting inequality itself is the wrong battle.
It won’t be tax cuts so much as tax reform that helps us reach our goal. As Robert Stein has argued in National Affairs, tax cuts by themselves will not spur much growth or raise incomes significantly. He goes on to suggest that a combination of lower taxation for parents, a two-tier simplified code, eliminating double taxation of corporations and cutting the tax rate on capital investment would be the better strategy. I would add cutting the corporate tax rate would spur wider growth in the economy that would create jobs. The point here is that we’ll need a more creative approach to taxes than the typically bifurcated “tax cuts vs. tax hikes” debate we fall into.
Higher education needs to be a part of the discussion. Whether the returns to higher education justify the investment is a debatable issue, but there’s no doubt over time that completing college has been an important part of social mobility. Today, the real issue for us is, first, how to validate skills that bring the highest returns in our changing economy, and second, how to overcome deeper, more cultural sources of a lag in skills development (which Brink Lindsey thinks is part of what Cowen should be discussing in his book).
A 7% goal should also be supported by an effort that makes life less expensive, period. That increasing percentages of overall compensation have been going to health insurance benefits doesn’t help anyone get ahead. Every day we don’t find new sources of fuel and energy (by drilling and innovating) is a day middle class families keep less of what they earn. Every day colleges drive up costs through undisciplined spending and pass that along through tuition increases is a day where fewer people struggling to make ends meet will think higher education is worth it. Every day we layer on cost-inflating regulations to housing, the less families have to spend on other things. And so on.
A plan to increase middle class incomes by 7% will no doubt be imperfect and fraught with debatable assumptions. But it’s worth pursuing. It is a helpful framework for helping us remember why we make policy to begin with. It helps us remember that economic growth alone isn’t a complete goal if it doesn’t improve prospects in the middle.
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