Ricochet is the best place on the internet to discuss the issues of the day, either through commenting on posts or writing your own for our active and dynamic community in a fully moderated environment. In addition, the Ricochet Audio Network offers over 50 original podcasts with new episodes released every day.
Two-Percent Growth Is a Loser for the Angry Middle Class. But Where’s the GOP Solution?
The good news is that the economy is growing at 2 percent and that there’s no recession in sight (barring a complete collapse of profits). The bad news is that the economy is growing at 2 percent. It’s been doing so for nearly 15 years under Democratic and Republican administrations.
Coming off a deep recession, real GDP growth is averaging no better than 2 percent. After 25 quarters of so-called recovery under Obama, it has increased a total of only 14.3 percent.
Compare this to earlier periods. After the JFK tax cuts of the early 1960s, the economy grew in total by roughly 40 percent. After the Reagan tax cuts of the 1980s, the economy grew by a total of 34 percent.
And here’s the killer: Real middle-class wages are still flat-lining. These folks get nothing out of 2 percent growth.
As I feared, subpar economic growth never really came up in the Republican debate in Houston. Rather than growth, we got more cat fights. It’s time to get serious.
In a recent essay, John H. Cochrane, a senior fellow at the Hoover Institution, wrote that “sclerotic growth is the overriding economic issue of our time.” He has numbers to back this up.
From 1950 to 2000, the US economy grew at an average rate of 3.5 percent. That generated a massive gain in real GDP per person from $16,000 to over $50,000. A huge win for the middle class.
But as Cochrane noted, if the whole post-WWII period had grown at 2 percent, income per person would have increased from $16,000 to only $23,000 — about half of what actually happened at 3.5 percent growth.
There is a big difference between 2 and 3.5 percent growth. It’s not abstract or theoretical. Essentially, the middle class has not gotten a raise in 15 years. In fact, a new report from Sentier Research finds that median household income of $56,700 (adjusted for inflation) at the end of 2015 is almost exactly where it was at the end of 2000.
Not surprisingly, the middle class is cranky and angry. And they are voting for change. Significant change. As in throw-the-bums-out change. That includes presidents, members of Congress, big-company crony capitalists, and corporate welfarists.
The middle class is saying the system is rigged against them, and they want to change who’s running the system.
Much of this gets to the root of the inequality debate. Democrats like Hillary Clinton and Bernie Sanders want to raise taxes on the rich, saying it will solve inequality. It won’t. All that will do is significantly reduce incentives to work, save, and invest.
But I say inequality is not the problem. The problem is a lack of growth. Middle-class people who haven’t seen a raise in all these years don’t want to punish success, and they’re not jealous of those who have done well. They just want their piece of the pie.
And while the pie itself has stopped growing, the individual slices have gotten smaller.
Can you blame their anger and desire for radical political change? Nope.
Coming out of the caucuses and primaries so far, the economy has been the number-one issue. There’s a message there. And the GOP has to address the issue of growth versus inequality. So far they haven’t done it.
With the GDP report for the fourth quarter ending in December, we know that the inflation-adjusted economy is growing at 1.9 percent over the last year. Business fixed investment — the category that produces good-paying jobs — is growing at 1.6 percent. Low gasoline prices have helped consumer spending rise by 2.6 percent, but even that’s not a wildly optimistic number. The inflation rate, meanwhile, is a measly 1.1 percent.
All this tells me nothing has really changed. But we can change this fast.
Research has shown that middle-income wage earners would benefit most from a large reduction in corporate tax rates. The corporate tax is not a rich-man’s tax. Corporations don’t even pay it. They just pass on the tax in terms of lower wages and benefits, higher consumer prices, and less stockholder value.
So as I’ve written a million times: Slash the corporate tax rate to 15 percent for large C-corps and small S-corps, go to immediate tax deductions for new investment, and make it easy for firms to repatriate their overseas earnings.
This would be the single-most stimulative program for reigniting economic growth. Principally, it’s a middle-class tax cut. If you combine that with regulatory rollbacks and a stable dollar, within less than a year the US economy can break out of its doldrums.
To all the GOP candidates: Please send this message. To my Democratic friends: Why not revive the legacy of the JFK tax cuts? It would be a whole lot better than punishing success.
Published in Economics
You are half-right. But you neglect the other elements in the betrayal of ordinary Americans. Wages were stagnant from 1960 to 2000 (as they are today). Those of us with stocks did rather well; those who live from paycheck to paycheck did not do at all well. This period coincides with the opening up of legal immigration and, towards the end, with massive illegal immigration. Increase the supply, said the Chamber of Commerce, and keep the wages down, and that is how it worked.
There Larry…fixed it for you. I like your columns, but you got a lot of ‘splainin’ to do, pal.
I really am out in the weeds. I have convinced myself through micro and macro observations that the role that governments play in economic growth is very overblown vis-a-vis taxes. Regulation has more of a brake on economic growth than does tax policy. As example, here in Alaska, oil-field taxes are all the political rage. The regulations on what can and can’t be done and , more importantly, how changeable these permissions are in the future (regs, leases, land ownership) make the economic risk of investment more risky than marginal rate. Shell Oil being jerked around in Seattle and in the Arctic Ocean is an specific example of this. I am not surprised they washed their hands of millions in future plans and past investment. Oil prices and the economy in general are more a victim of bleak outlook or a demand malaise than alternative energies. We don’t build things due to a lack of ambition and imagination, not tax rates or political policy. Global warming avoidance is our national outlook and socialism is the cure to ills.
“So as I’ve written a million times: Slash the corporate tax rate to 15 percent for large C-corps and small S-corps, go to immediate tax deductions for new investment, and make it easy for firms to repatriate their overseas earnings.”
Mr. Kudlow, I don’t necessarily disagree, but please explain how you “[s]lash the corporate tax rate to 15 percent for…small S-corps…”?
I understand how that would work for “large C-corps.” These C-corporations are subject to federal income tax on their net taxable income. The dividends that they pay to shareholders, in turn, are subject to federal income tax as part of each shareholder’s net taxable income on the shareholder’s income tax return.
In contrast, S-corporations file an annual information return reporting their net income from operations and other sources. But these corporations, in general, don’t pay any federal income tax at the corporate level. Instead, each shareholder–and these are companies with no more than 75 shareholders, and ordinarily many less than that–reports on the shareholder’s individual return the shareholder’s proportionate share of the corporation’s net income or net loss.
Flesh this out, please. Are you talking about lowering individual rates to no higher than 15% or are you talking about lowering the tax rate for this particular form of income? If you propose the latter, then what about partners in general partnership or members in limited liability companies. As a practical matter, general partnerships and LLCs and their partners and members are considered the same as S-corporations for federal income tax purposes. And beyond that, aren’t LLCs generally regarded as the small-business entity of choice and formed far more often than S-corporations?
“Two-Percent Growth Is a Loser for the Angry Middle Class. But Where’s the GOP Solution?”
Sadly enough, according to the overwhelming favorite of the GOP establishment (and commenters at this site), the answer lies in granting legal status–which you have to be an idiot to believe it won’t lead to citizenship soon after–to 12M, 15M, 20M, or 30M illegal immigrants, most of whom will promptly begin voting as Democrats. The answer also lies, according to that same favorite, in increasing visa for foreign workers dramatically and in increasing levels of legal immigration dramatically. Marco Rubio says all those illegals will have to learn English, but they probably won’t. He says that they’ll have to pay a fine, but he doesn’t say what amount that fine might be–regardless, they won’t. And laughably, Rubio says that they’ll have to pay back taxes. On what basis? How do we recreate their income for all those years? Are their W-2s or 1099s-MISC to be uncovered? And even if they’re income can be recreated, by the time you offset for exemptions and standard deductions, aren’t illegal immigrants likely going to be in a position to claim an EITC such that when all is said and done, they won’t be paying a dime in income taxes. They’ll be getting an amount of a refundable income tax credit. And that may be on top of an EITC that they’ve previously received in one of the many fraudulent EITC-filing scams that have been perpetrated in the past number of years.
But keep riding that Rubio wave, commenters.
The Reform Conservatives who control Ricochet and National Review don’t see growth as the top priority. First on their list are more tax credits and entitlement reform.
Keith Preston: “…. and John McCain.” There, fixed it for you.
There is no GOP solution. More of the same is their “solution”. Because as long as they can squeak enough votes out and keep power, they really don’t care about the middle class beyond that point. It’s why we get the same pat answers on economic issues every cycle. “Tax cuts!” “Entrepreneurs!”
Does GDP include government spending? If the federal budget increases, does that figure into GDP somehow or is GDP just private enterprise stuff?
I think the impacts are equally important, although I couldn’t qualify that rash assertion. But the problem with arguing the job-killing results of regulation is that we can’t point to jobs that weren’t created because of this or that reg. If a factory decamps for Mexico, it’s because of Free Trade – so yay for more regulations that would keep them from moving! Pointing out that regulations had a hand in the decision to move, and you’re arguing that the factory should be allowed to maim workers and poison water.
The GOP’s solutions sound theoretical, which makes them difficult to sell when people want Action. Do less doesn’t fly when the mood demands the government do something – higher minimum wage, tariffs, and so on.
Well, I agree, which is why we are stuck wondering why 2% grow is all we can squeeze out when all the gears have sand in them. More sand will not be the answer but it will be employed as the remedy.
I have been on this site listening to the GOP or conservative positions about this issue for the last couple years. The position is to basically ignore it is happening. Then to get some statistics that prove we in the middle class have it better than ever. So our personal experiences can be dismissed and ridiculed. Followed by suggestions that we destroy our families by moving to bigger cities where we can suck off the largess of jobs created by the government and its cronies.
You want to know why Trump and Sanders are popular? This is the reason. Trump and Sanders are talking about making the lower and middle classes to thrive again. The Dems and the GOPseem to only care about making the political and upper class thrive.
If a segment of the population wants simplistic answers to complex problems, then Trump’s their guy. He can fix everything for them just by virtue of his awesomeness, and — poof! — presents appear under the Christmas tree. They aren’t interested in hearing about how various compounds present in broccoli will improve their health when Trump is promising cake — great cake, great cake, really great cake. Terrific cake, no calories. No calories, just terrific great cake.
Good News, Comrades! The Chocolate ration has been increased from thirty grams to twenty, thanks to a bountiful harvest and a booming economy!
@#13: simplest answers? Maybe. But from what I see and hear they are the only ones talking about the problem. The GOP and Dems position seems to be more of the same and “squirrel”
This election should be a cake walk. All they had to do is play the “It’s the economy, stupid” playbook. But no. We are discussing borders and racism. Instead of economy and jobs.
He is right that raising taxes doesn’t address stagnant incomes and slow growth, but neither does cutting them. The tax code is too complex, opaque and should be tossed and made simple enough and difficult to change (because of its simplicity) so business knows what they will be paying in 10 years as well as next year. But more important is the regulatory regime. It too is opaque and impossibly complex and can be tossed and made clear and simple through law. This is especially true of the financial sector which is over regulated with managers facing perverse incentives. The ugly truth is that most of our regulations serve no purpose other than reducing competition and making adjustment more difficult, new business more costly and growth slower. The two percent growth is an exaggeration as we count government spending as output. Most government is not output it is either dead weight loss or overhead.
They talk about it, but everything thing I’ve seen Sanders propose would make all of the problems worse. I have no clue what Trump proposes because he doesn’t say. But it’ll make American great again.
I Walton: A supply side tax cut would address slow growth. The US economy grew at over 7 percent in the quarter after GWB’s 2003 tax cut.
Heritage: “GDP grew at an annual rate of just 1.7 percent in the six quarters before the 2003 tax cuts. In the six quarters following the tax cuts, the growth rate was 4.1 percent.”
Some thoughts:
MichaelC19fan: The top rate was 28 percent when Reagan left office, right?
It was then raised by both HW Bush and Clinton to almost 40 percent.
“Mustang II”
“If I hadn’t entered this race, no one would be talking about immigration!” -The Donald
@#13: simplest answers? Maybe. But from what I see and hear they are the only ones talking about the problem. The GOP and Dems position seems to be more of the same and “squirrel”
My point was that there are a number of factors contributing to the stagnation in middle class. Effective solutions are not necessarily going to be simple and reducible to a slogan. But Trump supporters like to hear that it is simple. He gives them the simple solution they want to believe. So, instead of difficult concepts, he gives them a real, living target — real live Mexicans coming here illegally. Never mind the almost half who come here illegally via overstayed visas (that’s not as easily “solved” — anyone can visualize a big wall, but who can visualize easy solutions to overstayed visas?), so Trump doesn’t bother telling them how he is going to fix that. And it’s not just immigration — on any issue, he gives people the simple answers they want to hear. Concerned about rising health care? He’s got a great plan!! It’s going to be great, really great!
Trump supporters have demonstrated to me just how the Hitlers and Mussolinis of the world get elected. They offer easy-to-understand solutions to problems faced by people, problems often due to circumstances largely beyond their control. They are encouraged to feel like they will win, win, win again, if they just put the strong man in charge.
One thing I note about the Laffer Curve. It is a curve and not a straight line. As tax rate approaches 0%, recipes eventually do come back down to $0 and not continue up to infinity. Adjusting the current rate within the current structure will have less impact on boosting GDP then clearing the regulations hindering business development and clarifying the tax code. But I admit that clearing regulation is a harder political sell.
Instead of “tax-cuts” as the solution I prefer “Recession in Washington.”
I want to see foreclosure notices on every street of private homes in the DC area, “for lease” signs on many office buildings in and around Washington, and “store for rent” posters on the windows of most of the fashionable restaurants, shops and car dealerships in the five counties that ring the nation’s capital.
Certainly these changes will indicate real pain and hardship for the people who live near DC. Families will be put under stress, marriages may shatter and the other indices of social dysfunction – alcoholism, crime, drug use, random violence, and a general atmosphere of estrangement and meaninglessness – will probably increase. I feel for the folks who will be left in the wake of powerful economic and political currents that they can’t control. Truly I do.
But the country as a whole will prosper from the decline of political influence-peddling as an industry. Rather than dwelling on the victims and their whining, I will urge the laid-off lobbyists, bureaucrats, think tank fellows, publicists, wordsmiths and public trough-feeders to do what they have long recommended to their fellow citizens in the Rust Belt and mill towns of America – pull yourself up, get some training and adjust to the rigors of the new reality. So what if you have no marketable skills and you’re 45? There are fortunes to be made out there. All you have to do is seek them out.
People who work for a living, and who do not have extremely scarce skill sets (or credentials & connections which allow them to simulate such scarce skill sets) have been hit more or less simultaneously by 5 factors:
It is the *combination* of all these things that is creating such a problematic situation: automation by itself, for example, is a *good* thing, driving productivity and increased living standards. But consider, for example someone who is a server system administrator: not exactly something that would be considered an unskilled job. The company he works for may offshore his whole business unit to another country, and his job along with it. They may hire cheap H-1B workers for the server admin. They may move the internal IT functioning to Amazon Web Services, which surely requires a lot less server admins per unit work. Or the EPA and other agencies may strangle the business he works for altogether.
Republicans tend to talk much more about Issue #5 than the others, but this is the hardest for people to grasp unless they are themselves businesspeople.
8 years since the political elites playing their power games wiped out the economy and took the middle class with it. 8 years of nothing. 8 years of promises to “focus like a laser on jobs” which looked less like a lazer and more like a pin light. 8 years of Democrat and Republican ignoring the middle classes plight. So you wonder why Trump or Sanders? Because the Dems and GOP have PROVED that they care for nothing but themselves. They have sowed this wind so now they get to reaped this whirlwind.
Yes, you get strong men when the weak will do nothing for the people and everything for themselves. Hitlers and Mussolinis are not unique nor is the US immune to them. I never understood why anybody thought we were.