The Great Wage Slowdown, Looming Over Politics

The New York Times has the article The Great Wage Slowdown, Looming Over Politics.

Since I know that very few if any of you will click through to read the article, I am forced to copy the graph, and show it here.  My appologies to the copyright police who may be lurking, but I claim it is  fair use.

wage stagnation graph

Now that the proof of the premise is in front of you, I can go on to comment on the article itself.  This is an interesting article because it goes from solid identification of the problem, to crazy solution, to sanity rescuing detail.

Here is the solid identification of the problem.

A quiz: How does the Democratic Party plan to lift stagnant middle-class incomes?

The fact remains that incomes for most Americans aren’t growing very fast and haven’t been for years. Median inflation-adjusted income last year was still $2,100 lower than when President Obama took office in 2009 — and $3,600 lower than when President George W. Bush took office in 2001. That’s not just because of the financial crisis, either: Last month was another solid one for job growth and another weak one for average wage growth, the latest jobs report showed.

We’re living through the great wage slowdown of the 21st century, and nothing presents a larger threat to the Democrats’ electoral fortunes than that slowdown.

Here is the seemingly insane proposal for a solution.

The best hope for doing so, in the immediate future, is probably the oldest and most obvious play in the book: a tax cut.

Here is a sanity rescuing detail.

Because the long-term budget deficit remains a problem, any such tax cut could be paired with a tax increase for top earners, who — even after the expiration of some Bush-era tax cuts — still face lower rates than they have for most of recent history. “Taxes for high-earning Americans are too low,” argues Roger Altman, the Wall Street executive and Democratic adviser. Most Americans favor tax increases on the well-off, polls show.

A sane solution is not nearly the same as a good solution.  Cutting the taxes on a too meager income is not enough.  Sure you get to keep a little more, but the income for many would still be too meager.

What about the people who are working multiple jobs, and long hours at minimum wage, and still don’t make enough money to owe any income taxes?  A huge boost on the earned income tax credit would help those people.

Yes, huge marginal rates of income tax for the wealthy with very constrained loopholes would reduce the incentives for the ultra-wealthy to grab all the income there is.  Using the money collected to invest in all the needed public services that we have been deferring would employ people, boost wages, and make the economy run better.

Eliminating tuition and fees for higher education would lift a huge strain on many in the middle and lower classes.

Increasing the Social Security benefit would diminish the need for people to have so much private savings to cover their retirement.

I leave it up to your imagination to think of other parts of a plan that would answer the initial question, “How does the Democratic Party plan to lift stagnant middle-class incomes?”

Let me explain that one about Social Security.  Supposing that you could find a safe investment that would pay you a 5% rate of return above inflation.  (For the sake of simplicity, let us assume the inflation rate is zero.)

If you were getting $28,000 per year in Social Security today (that is an actual example), you would need a $560,000 nest egg to produce that income stream a 5% rate of return.  ($560,000 * 5% = $28,000).

Suppose that you could only get a 3% rate of return such as in the current environment.  That would require a nest egg of over $933,000. ($933,000 * 3% = $27,990)

Depending on how much income you think you need in retirement, you can scale up or down the amount of nest egg that is needed to back your retirement.  One way or another, through a combination of private savings and publicly funded pensions, this is the amount that is needed.

If this were wholly publicly funded, the government would need a nest egg large enough to fund the current (and expected maximum) of retired people at any one time.  Since the public nest egg is left behind when a person dies, that nest egg could fund the retirement of the next person to come into the retirement pool.  Contrast this with private savings backed retirements.  Unless you had relatives that you knew would pass on their nest egg to you at the moment of your retirement, you would have to be saving up for your retirement throughout your whole working life.

The private savings for investment would be less onerous if your retired people would die, or be dead when you were ready to retire.  These people could not have used up their nest egg to live the really good life during retirement.

In any case, the private system seems to require savings for retired people and for non-retired people.  The public pension plan would only need savings for the retired people (and enough to support expected population growth).

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