Solution to Income Stagnation

For Solution to Income Stagnation, Republicans and Democrats Revise Their Playbooks

By JOHN HARWOOD

For average American families, the United States economy is like a football team that cannot move the ball, and has not been able to for 30 years.

That is why frustrated economists in both parties are scrambling for a new playbook. Increasingly, they are looking away from grinding runs up the middle toward more freewheeling, long-yardage plays.

Among Democrats, that means greater government spending on education, infrastructure and even direct job creation. Among Republicans, it means far-reaching shifts in taxation and regulation. Those debates will help shape economic policy for the rest of President Obama’s term and during the 2016 campaign.

The economy has finally emerged from the financial crisis and Great Recession of 2007-9. Employers added 314,000 jobs in November, and third-quarter output grew at a strong 5 percent annual rate with no signs of resurgent inflation.

But the generation-long stagnation of middle-class incomes continues.

From 1947 to 1979, the postwar economic boom more than doubled median family income to $58,573 in 2013 dollars. Had earnings growth kept that pace through the careers of baby boomers, median family income would have topped $124,000 by 2013. Instead, it was $63,815.

The magnitude of that lengthy slowdown makes many government policy responses look small. The Bush tax cuts saved a median-income family of four about $2,000 per year. If such a family contained one full-time worker making the federal minimum wage of $7.25 per hour, Mr. Obama’s proposed wage hike to $10.10 would add about $6,000 a year.

In a competitive global economy, Democratic strategy starts with improved education and training to enhance workers’ skills and productivity. Mr. Obama has unsuccessfully asked Congress to spend $75 billion more annually on early childhood education, but some allies advocate much more.

“My long bomb would be enacting a very large human capital strategy,” said Austan Goolsbee, the University of Chicago professor who once chaired Mr. Obama’s Council of Economic Advisers. For such a plan, Professor Goolsbee would allocate as much as 3 percent of gross domestic product, or more than $500 billion per year “across as many different dimensions as you could,” from early education to community colleges to vocational training matching worker skills to employers’ needs.

Yet, even in the best case scenario, big gains would take years. “If you think that’s going to solve everything you’re kidding yourself,” said Jared Bernstein, the former chief economic adviser to Vice President Joseph R. Biden Jr.

In an era of Tea Party backlash against Washington, Mr. Bernstein backs the politically risky idea of direct government job creation to tighten labor markets, bid up wages, and enhance prospects for the long-term unemployed. Every $1 billion in government spending, a recent analysis concluded, would create 100,000 “subsidized jobs” paying $10 per hour for six months.

More Democrats support infrastructure spending to create short-term jobs and boost long-term economic potential with better seaports, airports and highways. Mr. Obama, unsuccessfully, has proposed $10 billion for a new “infrastructure bank” and another $22.5 billion annually in new highway spending.

Lawrence H. Summers, a former director of the National Economic Council, advocates something far grander: $200 billion annually in new public and private infrastructure spending for 10 years. He calculates that low borrowing costs mean the investment would produce handsome returns.

For Democrats especially, boosting economic growth represents only part of the solution. Another part is countering economic trends that have most benefited the highest-earning families.

Len Burman, director of the Tax Policy Center, offers one “radical” idea that would not cost a dime. Under current law, tax brackets rise each year to protect everyone from the effects of inflation. Mr. Burman would target those adjustments to people with stagnant incomes.

Reallocating inflation protections each year, projected to reach $200 billion by 2025, “would push gently against the winds of rising economic inequality,” Mr. Burman wrote recently.

Richard Freeman, a Harvard labor economist, would push harder. In an economy producing big gains for businesses but not for workers, he proposes turning more workers into owners.

That would involve expanding incentives for workers to acquire stock in their employers, and for employers to offer workers incentive pay tied to the firm’s profitability. “We presented some of these things to the Obama administration and the Wall Street guys just killed them,” said Professor Freeman, a co-author of “The Citizen’s Share: Putting Ownership Back into Democracy.”

The Republican debate consists largely of getting government out of the way. Support by Jeb Bush, a prospective Republican presidential candidate, for Common Core educational standards cuts against the grain of his party.

In a recent manifesto by the conservative YG Network, Michael Strain proposed reducing occupational licensing for some industries, like cosmetology. James Pethokoukis, a fellow at the American Enterprise Institute said shorter copyright terms for books, movies and other intellectual property would spur fresh innovation and job creation.

Others promote overhauling energy policy. Douglas Holtz-Eakin, a former director of the Congressional Budget Office, backs capitalizing on this “most important economic event of the last decade” by lifting the longstanding ban on United States oil exports and relaxing restrictions on liquefied natural gas exports.

Others envision transformational effects from seizing on energy shifts to revamp the tax code. By moving away from taxing income toward taxing energy sources, said Steve Bell, a longtime Senate Republican aide now at the Bipartisan Policy Center, the United States could boost investment and growth, curb climate change and generate revenue to finance a currently insolvent entitlement system.

Senator Mike Lee, Republican of Utah, proposes a new $2,500 tax credit for families with children. But the most popular conservative idea for boosting incomes is overhauling corporate taxation. Mr. Obama has embraced that goal if Congress closes enough loopholes while lowering the 35 percent top rate to ensure the government will not lose revenue.

Because loophole beneficiaries do not want to give them up, “revenue neutrality” makes cutting rates much harder. Casting off this constraint and simply lowering rates, said Kevin Hassett, an economist at A.E.I, would cause corporations to rapidly bring overseas jobs home.

“It would really help blue-collar workers,” Mr. Hassett said. “This is not a Hail Mary. It’s Tom Brady to Randy Moss.”

Some Democrats dismiss his enthusiasm — but not all of them. “An intriguing proposition,” said Professor Freeman of Harvard.

To be sure, replicating America’s postwar gains may prove impossible. “I don’t think there are long passes,” said Robert Reischauer, another former director of the Congressional Budget Office. “We’re in a ground game that will take many years.”