Trump’s Tax Plan is Aimed at the 2018 and 2020 Elections, Not U.S. Competitiveness

Trump’s Tax Plan is Aimed at the 2018 and 2020 Elections, Not U.S. Competitiveness

April 26, 2017

President Trump wants to cut the tax rate for all American businesses to 15 percent, and damn the deficit. If you believe him, any damage from higher deficits will be minor compared to the benefits for US competitiveness, economic efficiency, and tax fairness. The truth is, those claims are nonsense; and the real agenda here is the 2018 and 2020 elections. Without substantial new stimulus, the GOP will likely face voters in 2018 with a very weak economy – and tax cuts, especially for business, are the only form of stimulus most Republicans will tolerate. Moreover, if everything falls into place, just right, deep tax cuts for businesses could spur enough additional capital spending to help Trump survive the 2020 election.

Let’s review the economic case for major tax relief for American companies. It’s undeniable that the current corporate tax is inefficient – but does it actually make U.S. businesses less competitive? The truth fact is, there’s no evidence of any such effects. In fact, the post-tax returns on business investments are higher in the United States than in any advanced country except Australia, and the productivity of U.S. businesses is also higher here than in any advanced country except Norway and Luxembourg.

The critics are right that the 35 percent marginal tax rate on corporate profits is higher than in most countries. But as the data on comparative post-tax returns suggest, that marginal tax rate has less impact on investment and jobs than the “effective tax rate,” which is the actual percentage of net profits that businesses pay. On that score, the GAO reports that U.S. businesses pay an average effective tax rate of just 14 percent, which tells us that U.S. businesses get to use special provisions that protect 60 percent of their profits from tax (14 percent = 40 percent of 35 percent).

Tax experts are certainly correct that a corporate tax plan that closed special provisions and used the additional revenues to lower the 35 percent tax rate would make the overall economy a little more efficient. But lowering the rate alone while leaving most of those provisions in place would have almost no impact on the economy’s efficiency – and the political point of Trump’s plan depends on not paying to lower the tax rate.

Finally, would a 15 percent tax rate on hundreds of billions of dollars in business profits help most Americans, as the White House insists, since 52 percent of us own stock in U.S. corporations directly or through mutual funds? The data show that most shareholders would gain very little, because with 91 percent of all U.S. stock held by the top 10 percent, most shareholders own very little stock.

Moreover, the proposed 15 percent tax rate would cover not only public corporations but also all privately-held businesses whose profits are currently taxed at the personal tax rate of their owners. So, Trump’s plan would slash taxes not only for public corporations from Goldman Sachs to McDonald’s, but also for every partnership of doctors or lawyers, every hedge fund and private equity fund, and every huge family business from Koch Industries and Bechtel, to the Trump Organization..

There is no doubt that the President’s tax plan would provide enormous windfalls for the richest people in the country. Beyond that, it may or may not sustain growth through the next two elections, since even the best conservative economists commonly overstate the benefits of cutting tax rates. But the truth is, there aren’t many other options that a Republican Congress would accept.


Halloween Special: How Hillary Can Handle Scary Interest Rate Hikes

October 31, 2016

Looking past this weekend’s kerfuffle over Huma Abedin’s emails, Hillary Clinton’s success in her first term as President will depend in large part on whether the incomes of most Americans keep rising. As readers of this blog know, my studies tracking people’s incomes, year to year as they aged, found that the median household incomes of millennials, Gen Xers and boomers all grew at healthy rates in 2013, 2014 and 2015. Moreover, this income progress reached across gender, race and ethnicity, and educational levels. That’s why consumer confidence and President Obama’s approval ratings are now so high.

The catch is that for most households, these gains came after a decade of income losses from 2001 to 2012. Hillary’s first challenge is to avoid a recession that could overwhelm most people’s recent gains — and her opportunity is to provide four more years of income progress that could well make most Americans optimistic again.

The challenge could start between Hillary’s election and inauguration, in December when the Federal Reserve’s Open Market Committee (FOMC) next votes on raising short-term interest rates. At the FOMC’s last meeting in September, its members voted seven to three not to raise those rates; but most Fed watchers expect the Committee to reverse this stance in December. Based on the Fed’s history, that decision will be followed by a long succession of additional interest rate hikes over the next three years. If that happens, growth and income gains could stall or worse as the costs for businesses to invest, and for consumers to buy a home, a car or a major appliance, all rise.

Traditionally, the Fed raises interest rates when the economy threatens to overheat and pump up inflation. But this time, there is little evidence of such a scenario. Inflation has risen at an annual rate of less than two percent for 51 consecutive months, and growth this year has been modest.  Moreover, based on long-term interest rates, U.S. and global investors expect low weak inflation to persist for years.

The only evidence that inflation hawks can cite is the recent strength of job creation. From January 2013 to September 2016, U.S. businesses added an average of 204,000 net new jobs per month. That’s nearly the pace last seen under Bill Clinton, when business created an average of 219,000 net new jobs per month from January 1993 to December 2000. Worrying about inflation may make sense once we reach full employment, since when that happens, competition for workers pushes up wages that are passed on in higher prices.

But the United States is not at full employment today, or close to it. Large numbers of people continue to work part time and not by choice, and labor force participation by prime age Americans remains abnormally low.

 The Fed’s only real argument for raising interest rates is strategic — higher rates create the room for the Fed to cut them in the next downturn. But even with 2.9 percent growth in the third quarter, the economy has expanded at a rate of less than two percent this year, and fixed investment has declined four quarters in a row. In this economic environment, a succession of rising interest rates over the next two years could trigger that downturn. And as the Bank of England has noted, if an economy begins to decline while short-term rates remain near zero, central bankers can still use quantitative easing to stimulate demand.

 It’s worth noting that near-zero interest rates carry risks of their own. With yields on government bonds so low, large investors have shifted to riskier investments with higher yields. That’s why commercial real estate is rising, why there’s a bubble in art markets, why prices for agricultural land and junk bonds are historically high, and why the price-to-earnings ratio for U.S. stocks is now 30 percent above its historical average.

These risky investments could pose a threat to the economy and people’s incomes, if a substantial jump in interest rates triggers a large decline in the U.S. stock, real estate and junk bond markets. Moreover, much like the run-up to the 2008-2009 crisis, the big financial institutions may not have paid enough attention to the risks in their high-yield investments. To be safe, Hillary should call on the Treasury and the Fed to audit those institutions through a new round of “stress tests,” and then ensure that any major institution with a shaky portfolio takes steps quickly to reduce its exposure.

If, as now expected, the Fed goes ahead and raises interest rates, the economic fate of most Americans will rest in the new President’s hands. Hillary’s best response will lie in fiscal policy.  Her first budget should call for more spending on infrastructure, new grants to the states to begin their transition to free tuition at public institutions, bigger Obamacare subsidies to offset the fast-rising premiums expected in 2017, and expanded support for research and development. On the tax side, new incentives for business plant and equipment also are in order. Hillary should cast all of these measures as an investment agenda for long-term growth, and not wave the red flag of “stimulus” in the faces of congressional Republicans.

Her first budget also should include measures to directly support income progress by working people, including the increase in the minimum wage, pay equity guarantees, and the expansion of the earned income tax credit. Finally, she can pay for all of these measures, as promised, by ending carried interest, closing corporate loopholes, and raising taxes on wealthy households.  She can also ensure that these tax changes don’t slow a fragile economy by phasing them in starting a year or two down the road.

The Federal Reserve is a very powerful force in the American economy. But so is the President — and a determined President Hillary Clinton can protect the incomes of Americans even if the Fed prematurely raises interest rates.

On Economic Growth, Hillary Delivers and Trump Pretends

September 26, 2016

To prepare for tonight’s debate, I decided to think through Donald Trump’s promise to deliver 4% annual economic growth. First off, if this is Trump’s goal, then his program is as much a fraud as his foundation or university. If anything, his proposals would slow our already modest growth. To be sure, no one has a silver bullet to raise the economy’s underlying growth rate. But that doesn’t mean we’re helpless, and Hillary Clinton’s program will almost certainly raise that growth rate.

Four percent growth is not unprecedented. Under JFK and LBJ, the economy grew an average of 5.2% per year; and Bill Clinton produced 3.8 % average growth over eight years, including five years of 4% growth or more. But they were exceptions: Ronald Reagan and Jimmy Carter each managed 3.4% average annual growth; George H. W. Bush and Barack Obama each achieved 2% annual growth, and George W. Bush eked out just 1.6% annual growth. Moreover, the Federal Reserve forecasts that the U.S. economy will continue to grow an average of 2% annually for the next decade. This forecast and the record under Obama and Bush II all suggest that strong headwinds are hampering America’s economic growth.

By the arithmetic, economic growth measures how much more goods and services the economy has produced in one year, compared to the preceding year. That tells us that two key factors for higher growth are how many more people have jobs producing goods and services, and how productive, on average, everyone is producing those goods and services. By the arithmetic, strong growth rests substantially on increasing the number of people with jobs and the productivity of the entire workforce.

One reason for the disappointing growth of the last 15 years is that the number of net new workers each year slowed sharply. For that, blame the decline in U.S. fertility rates that began 20 years ago, rising rates of retirement by aging baby boomers, the slowdown in immigration sparked by the Great Recession, and steady erosion in the labor participation rate (LPR). All told, the Bureau of Labor Statistics reports that the U.S. workforce is now growing .5% per year, down from 1.25% per year under Bill Clinton.

So, which candidate has proposed anything that would expand the number of Americans working? Both agree on spending more on infrastructure, but that will have modest effects on long-term growth. Beyond that, one striking feature of Trump’s immigration, healthcare and other proposals is their secondary effect of shrinking the number of people working in the U.S. economy.

 To begin, Trump’s signature pledge to deport 8 to 11 million immigrants would reduce the workforce directly, for those caught and deported; and indirectly, by forcing millions to take cover outside the mainstream economy. Similarly, his promise to repeal Obamacare would increase the time that millions of Americans have to spend out of work for health reasons.

Nor should anyone believe that his $4.4 trillion to $5.7 trillion in tax cuts will somehow induce more people to work — that particular supply-side hokum is refuted by the rising labor participation rate (LPR) after Bill Clinton raised taxes, and the falling LPR after Bush II cut taxes.

By happy contrast, much of Hillary Clinton’s program would have secondary effects that increase the number of people in the labor force and working. Her path to legalization for immigrants will allow an additional eight million adult immigrants to participate fully and openly across the economy. Her plans to broadly expand access to child care and provide universal pre-K education would enable millions of parents to reenter the workforce or move from part-time to full-time jobs.

Moving along, her pledge to achieve universal healthcare coverage, once fulfilled, will lessen the number of people forced to stay home or even give up their jobs for health reasons. Her commitment to pay equity, once met, will encourage more women to enter the workforce or to increase their hours at work, as should her pledge to expand employment for 53 million American adults with disabilities. Finally, Hillary’s plans for expanding access to higher education will raise the labor participation rate, because that rate tends to rise with education.

The arithmetic of growth also depends on how fast productivity increases – and progress in productivity, which grew 2.8% per year in the later 1990s, has collapsed: From 2011 to 2015, productivity increased just 6% per year; and over the first half of this year, productivity actually fell at a rate of .6% per-year.

Three factors are mainly responsible. First, business investment in equipment and other technologies has slumped. In addition, the gap between the skills many workers have and the skills they need has widened. Finally, it appears that the development and use of new technologies, processes, and ways of organizing and running businesses — in a word, innovation — has slowed.

Here, too, Trump offers nothing.  His huge tax cuts would balloon federal deficits, and so raise the cost for business borrowing to invest in new equipment and technologies. Trump also offers nothing to help workers improve their skills, and nothing to stimulate innovation and the broad use of new technologies.

By contrast again, Hillary’s agenda would actively promote progress in productivity. Her plans for tuition-free access to higher education will expand the skills of millions of young people, and her blueprint to reduce budget deficits will ensure that federal borrowing does not raise the cost for business borrowing to invest. Hillary also supports innovation by calling for expanded federal investments in basic R&D and promoting more public-private collaborations to commercialize that R&D. And since innovations often come from young enterprises, her program to expand bank lending for such companies is also well suited to promote innovation.

On economic growth, as on many other issues that will shape America over the next decade, Hillary delivers while Trump blusters.



The Economic Outlook for the Election and Beyond, and How Who Wins Could Change It

September 7, 2016

With nine weeks to go, the economic conditions for the election are set — modest growth, low inflation, and continuing job gains. A few Wall Street forecasters rate the odds of a 2016 recession at one-in-three; but unless a major shock wrenches the economy off its present course, bet with Janet Yellen and Ben Bernanke on the economic expansion continuing into next year.

The tougher question is what economic conditions will confront the new president and the rest of us in 2017 and 2018? Since the fourth quarter of 2015, the economy has grown at an annual rate of less than one percent, and business investment has declined at a three percent annual pace.

Consumer spending and home sales could lift growth and investment next year, if the healthy income growth of the last three years continues. But much of those income gains come from the unusually strong job growth of those years; and with unemployment now below five percent, job creation almost certainly will moderate soon.

If jobs gains lessen next year, healthy income gains will depend on a turnaround in the economy’s disappointing productivity record. A modern economy cannot stay strong indefinitely without strong productivity growth to fuel incomes, demand, profits, and investment. Its recent record explains our slow growth: Productivity gains averaged just .6 percent per year from 2011 to 2015, and even those small gains turned negative in the first half of 2016.

This represents a major change: Productivity increased at an average rate of 2.8 percent per year through Bill Clinton’s second term and remained strong at 2.6 percent per year from 2001 to the financial collapse in 2008. Moreover, it recovered quickly in 2009 and 2010, reaching 3.2 percent per year. Unless productivity recovers again in 2017, wages and incomes could stall and the economy could stagnate in the next President’s first or second year in office.

Yet, the economic debate this year has mainly focused on overall growth rather than productivity. Most economists — Ben Bernanke, Paul Krugman, Larry Summers and Kenneth Rogoff, among others — pin the slowdown in GDP growth on higher savings and the associated weaker spending. So, most economists have called for renewed fiscal stimulus here and for much of the world. They’re right; but the outlook for incomes and investment would be more encouraging if the fiscal stimulus focuses on recent meager, or even negative, productivity gains — and their impact on growth.

Americans are in luck — assuming the pollsters are right that Hillary Rodham Clinton will vanquish Donald Trump. While Clinton has not offered an explicit program to boost productivity, her economic and social policy proposals include the three essential elements of such a program. First, improve overall market conditions for all industries; second, promote innovation through the development and broad use of new technologies, materials, and ways of doing business; and third, give workers access to the skills they need to operate effectively in a more innovative economy.

The big play to improve the efficiency of all U.S. industries and businesses is Clinton’s commitment to expand public investments in infrastructure by $275 billion over five years. Unsurprisingly for Hillary, her program covers every conceivable form of infrastructure. There are new investments not only for roads, bridges, public transit, rail freight, airports, seaports, waterways, dams, and wastewater systems.

Her proposals also cover 21st century infrastructure networks, including a smart electric grid, advanced oil and gas pipeline systems, and universal access to 5G broadband and Next Generation wireless. Since virtually every enterprise and employee depends on these systems every day, her proposals should enable most firms and workers to carry out their business more efficiently.

As stimulus, these infrastructure improvements amount to $55 billion per year, or just three-tenths of one percent of GDP. Fortunately, Clinton’s program includes other measures that also should bolster productivity. To promote innovation, she pledges to scale up federal investments in basic research and development through the NSF, the NIH, the Energy Department and DARPA, across areas from high performance computing and green energy, to machine learning and genomics.

Always a pragmatist, Clinton also has plans to promote the commercialization of advances in R&D through grants for private accelerators and reforms to expand access to capital by the young businesses that play a prominent role in innovation.

Finally, Clinton has a serious program to help Americans upgrade their skills. Computer science training would be available for all high school students, and foreign-born students who complete a U.S. masters or Ph.D. degree in a STEM field would automatically receive green cards to stay and work in the United States.

However, the cornerstone is tuition-free access to public colleges and universities for all young people from families earning $125,000 or less, and tuition-free access to community colleges for anyone. To complete her productivity agenda, Clinton should expand her community college program and give all working adults the real ability to improve their skills, through no-cost access to two training courses per year at community colleges.

From the other side, Trump offers virtually nothing. He says that he, too, would increase federal spending on infrastructure. But his tax promises would balloon federal deficits by upwards of $700 billion per year, leaving no room to upgrade infrastructure, much less promote basic R&D or expand access to higher education and worker training.

His massive deficits also would crowd out business investments in new technologies and new enterprises. Trump’s program, in short, would virtually guarantee that the American economy stagnates, or worse.

Rising Incomes Are a Key to Winning in 2016 — But Not Enough

June 2, 2016


Even if we accept that the 2016 campaign is a fact-free zone, what precisely are Donald Trump and Bernie Sanders talking about when they rant on about incomes cratering for most Americans? It’s true, as I’ve documented, that a majority of Americans saw their incomes stagnate or decline throughout the Bush expansion (2002–2007), and the financial crisis and ensuing recession aggravated those losses. But that dynamic ended more than three years ago.  Since 2013, the household incomes of most Americans have risen steadily and substantially.

The only candidate who seems to get this is Hillary Clinton, judging by her pledge to preserve and extend the economic gains achieved under President Obama. But Trump and Sanders’s appeal should tell us that, politically, those gains are not enough; and that a wining economic platform for this year’s election has to address the entire picture of the last 15 years. Yes, voters want measures to ensure that their recent progress will continue, a challenge Clinton has met better than her Democratic rival or Republican opponent. They also want a credible pledge that they will never have to endure another housing collapse or muddle through an expansion that leaves them on the sidelines.

Nevertheless, there’s no doubt that most Americans are doing much better than they did four or eight years ago.  Last month, the Federal Reserve’s “Report on the Economic Well-Being of U.S. Households in 2015” found that nearly 70 percent of Americans say they’re “doing okay” or “living comfortably,” versus 18.5 percent who say they’re “worse off.”  Behind those positive views, the Bureau of Economic Analysis reports that Americans’ real personal income grew 1.9 percent from February to December 2013, followed by 3 percent gains in 2014 and another 4  percent gains in 2015.

To be sure, aggregate economic data does not always capture most people’s real experience. To track people’s actual experience, I sorted and collated the Census Bureau data on household incomes from 2009 to 2014. I focused on the incomes of American households headed by people who, in 2009, were 25-to-29 years old (millennials), 35-to-39 years old (Generation X), and 45-to-49 years old (late baby boomers). I tracked their incomes as they aged from 2009 to 2014, and analyzed the results by gender, race or ethnicity, and education.

The results show that most Americans saw their incomes continue to stagnate or decline from 2009 to 2012, with the exception of millennials.  For economic and statistical reasons, young households always make greater progress than older households, and millennial households were the only age group whose income rose from 2009 to 2012.  Moreover, household incomes have risen significantly since 2013 for Gen X and baby boomers, as well as millennials.


Average Annual Household Income Gains

  2009 – 2012 2013 – 2014
Millennials 3.2% 4.3%
Generation X – 0.4% 2.3%
Late Baby Boomers -1.1% 0.5%

The results also show that gender and race matter. While the income dynamics of the last decade didn’t create today’s partisan divisions based on gender and race, they probably have reinforced them. For example, while households headed by men generally fared better than those headed by women in the lean years from 2009 to 2012, women turned the tables in 2013 and have made more progress than their male counterparts since the turnaround.

Average Annual Household Income Gains by Gender

  2009 – 2012 2013 – 2014
Men Women Men Women
Millennials 3.5% 2.5% 2.7% 3.0%
Generation X –   0.2% – 0.6% 0.9% 2.8%
Late Boomers – 0.5% -1.1% 0.2% 0.2%

The results based on race and ethnicity also may help explain Hillary Clinton’s strength among minorities, as compared to Trump and Sander’s connections to angry white voters. In particular, the incomes of Hispanic and African-American households across all three age groups have grown faster than their white counterparts since 2013, under Obama’s policies.

Average Annual Household Income Gains by Race and Ethnicity

  2009 – 2012 2013 – 2014
White Black Hispanic White Black Hispanic
Millennials 3.7% 0.0% 1.8% 2.9% 3.0% 3.2
Gen X 0.1% 1.7% – 1.5% 1.6% 2.0% 5.0%
Late Boomers – 0.9% – 4.9% 1.8% – 0.1% 2.0% 2.8%

Finally, the results also show that after the tough times from 2009 to 2012, when Gen X and baby boomer households at every educational level lost ground, every age and educational group but high-school educated baby-boomers have made significant income progress since 2013. These gains even include households headed by high-school dropouts, lifted by very strong job growth since 2013 and the new cash subsidies under Obamacare.

Average Annual Household Income Gains by Education

  2009 – 2012 2013 – 2014
No Diploma HS College No Diploma HS College
Millennials -0.6% 1.1% 4.2% 4.4% 3.0% 5.1%
Gen X -2.2% -1.3% -0.1% 6.2% 4.0% 1.5%
Late Boomers -4.8% -1.7% -0.6% 9.5% 0.0% 0.4%

Incomes do not explain everything. The incomes of white millennials have risen rather strongly throughout this entire period. Yet, they’ve responded to Trump’s and Sanders’s cases that political and economic elites have denied them their hard-earned gains. Maybe they’re angry that their parents lost much of their home equity, or maybe they’re turned off rather than reassured by Clinton’s dispassionate demeanor.  To win them over, she will have offer a credible path to both maintain everyone’s recent income progress and preclude another housing collapse and joyless expansion.


Whatever Some Candidates Tell You, the Incomes of Most Americans Have Been Rising

April 4, 2016

After a decade when most Americans saw their incomes decline, the latest Census Bureau income data contain very good news: A majority of U.S. households racked up healthy income gains in 2013 and 2014. The facts may not fit the narratives of Donald Trump, Ted Cruz, or Bernie Sanders.  But they do help explain why President Obama’s job approval and favorability ratings have passed 50 percent.

They also show that Hispanic households made more income progress in 2013 and 2014 than any other group, which may be one reason for their growing support for Demovrats.  A third surprise: Households headed by Americans without high school diplomas racked up their first meaningful income gains since the 1990s, thanks to the large job gains in 2013 and 2014 and the Obamacare cash subsidies beginning in those years.

These findings come from using the Census data on the median incomes of American households by the age, gender, race and education of their household heads, to track their income progress as they aged from 2009 to 2012. I focused first on millennial households headed by young women and men who were 20- to 29-years-old in 2009, which makes them 27- to 36-year-old voters today.

For decades, younger households have been the group with the fastest-rising incomes, and the recent period is no exception. Despite colorful stories of millions of young people living in their parents’ basements, the data show that the household incomes of these millennials (adjusted for inflation) grew 3.6 percent per year from 2009 to 2012, and those gains accelerated to 4.5 percent per year in 2013 and 2014.

The data also show that the incomes of millennial Hispanic households grew 5.4 percent per year in 2013 and 2014, outpacing the progress of white and African American millennial households of the same ages. To be sure, not all millennials did nearly so well: The household incomes of those without high-school diplomas, which had declined an average of 1 percent per year from 2009 to 2012, rose 3.1 percent in 2013 and 2014 — while the incomes of households headed by millennials with high school diplomas or college degrees grew 5 percent per year.

Two main factors are at work here, as well as in the big gains by Hispanic households, First, businesses created almost 2.5 million net new jobs in 2013 and 3 million more in 2014, and such strong job growth disproportionately helps those at the economy’s margin. Second, Obamacare’s cash subsidies for lower-income households kicked in the same years, and Census counts government cash subsidies as a form of income.

The years 2013 and 2014 also were good for most of Generation X. My analysis here focused on households headed by people who were 35 to 39 in 2009, which means they are 42- to 46-year-old voters today. In those two years, the median income of those Gen X households rose 2.3 percent per year — a major turnaround from 2009 to 2012, when their incomes had declined 4 percent per year.

As with the millennials, Gen X households headed by Hispanics made more income progress in 2013 and 2014 than did their white or African American counterparts. And thanks once again to the robust job growth and the Obamacare cash subsidies, Gen X households headed by people without high school diplomas made substantial income progress in 2013 and 2014 — in fact, more progress than Gen X households headed by high school or college graduates.

For many decades, the income gains of most Americans have slowed as they aged. Nevertheless, the new income data contain moderately good news for households headed by late baby boomers, those who were 45- to 49-years-old in 2009 and today are voters ages 52 to 56.  Their median household incomes rose in 2013 and 2014 by an average of .5 percent per year; but even that was a big improvement from 2009 to 2012, when their incomes fell 1.1 percent per year.

As with the millennials and Gen Xers, the Hispanic boomer households again fared better than their white and African American counterparts in 2013 and 2014: The median incomes of these Hispanic households grew 2.8 percent per year in 2013 and 2014, compared to gains of 2 percent per year by African American boomers and .1 percent per year by white boomers. Also, once again, the data show that the incomes of households headed by boomers without high school diplomas grew faster in 2013 and 2014 than the incomes of boomer households headed by high school or college graduates.

The Census Bureau will release the 2015 incomes data in a few months. We already know that the economy created another 2.65 million new jobs in 2015. If, as expected, the broad income progress seen in 2013 and 2014 persists in 2015, it will rebut much of the economic message touted by Trump, and badly weaken Sander’s critique of Hillary Clinton. These data may not penetrate those campaigns and the media that surround them, but American voters know when their own incomes have improved — and that will alter the landscape for next November in ways almost certain to favor Democrats and their nominee.

The Surprising Good News about American Incomes

October 26, 2015

For a change, the latest Census Bureau data on what’s happened to the incomes of Americans is good news. For the first time since the 1990s and 1980s, household incomes rose substantially in 2014, and did so across all demographic groups. You might miss the good news if you looked simply at everyone’s median income or median wage. What’s actually happening becomes clear only when you track, as I have, the income paths of various “age cohorts,” year after year as they grow older. Using this approach, the new data show that across households headed by people in their late 20s, their late 30s and their late 40s in 2013, median household income grew an average of nearly 2.7 percent in 2014.

This is a big and important change: As documented in my recent Brookings Institution report on income progress since 1980, the median income of households headed by people of comparable ages in 2001 declined an average of 0.1 percent per year from 2002 to 2013.

Drilling into the new data, we also see that households headed by minorities made considerably greater progress in 2014 than their counterparts headed by whites; and households headed by men had larger income gains than those headed by women. Yet, all of those groups saw significant income growth. Most striking, households headed by high school graduates, as well as those headed by college grads made substantial income progress in 2014; and even those households headed by people without high school diplomas had significant gains. While all of these happy developments reflect just one year’s data, they nevertheless bear watching.

Let’s step back and put these new data in their larger context. The Brookings study covered the period 1980 to 2013. I followed the incomes of households headed by people who were 25 to 29 years-old in 1975, until they reached age 59; and then repeated that process for households headed by people who were 25 to 29 in 1982; as well as 25 to 29 in 1991, and 25 to 29 in 2001. The analysis showed that across age groups and across gender, race and ethnicity, and education, Americans made strong, steady income progress as they aged through the 1980s and 1990s. Since 2002, however, the median household incomes of the same groups have declined, stagnated or grown much more slowly, depending on their demographics.

I also examined the income progress of three age cohorts under each of the last five presidents, tracing the income paths of households headed by people who were 25 to 29, 35 to 39, and 45 to 49 at the beginning of each president’s administration. (For these income records by president, I began in year two of each administration and ended in year one of the following administration, because economic conditions and income results in the first year of any presidency are set by the preceding administration.)

As expected, the new 2014 data improve Barack Obama’s record. Over his presidency thus far, income growth across the three age cohorts has averaged 1.2 percent per year, as people aged from 2010 to 2014. That’s a big step up from George H.W. Bush and George W. Bush: Income progress across comparable age groups averaged 0.2 percent per year under Bush I and 0.3 percent per year under Bush II. The income progress under Obama is also a big step back from annual gains averaging 2.6 percent under Bill Clinton and 2.4 percent under Ronald Reagan. Nonetheless, income growth in 2014 roughly equaled the strong, sustained gains under Clinton and Reagan.

The question is, why did this happen? First and probably foremost, employment accelerated sharply last year: The United States created 2.95 million net new jobs in 2014, compared to an average of 528,000 net job gains per year from 2002 to 2013; and 1.78 million per year from 2010 to 2013.

Strong job creation can have powerful effects on incomes, especially for people working near the margins of the economy. This effect is evident in the 2014 income progress by people without college degrees. Across the three age cohorts, incomes increased 4.8 percent among households headed by high school educated graduates and by 2.6 percent among those headed by people without any diplomas. In stark contrast, the median incomes of comparable households decline substantially from 2002 to 2013.

Beyond jobs, U.S. businesses also enjoyed relief in 2014 from fast-rising health care and energy costs, which allowed them to attract and retain employees by raising wages and salaries. Spending by employers on health insurance for family medical coverage, for example, rose less than 2 percent in 2014, as compared to increases averaging nearly 7 percent per year from 2002 to 2013 and nearly 5 percent per year from 2010 to 2013. Similarly, energy costs for industrial and commercial businesses, which rose by an average of more than 6 percent per year from 2002 to 2008, virtually flat-lined in 2014.

Yet, even with 2014’s strong gains, years of flat or falling incomes for many Americans have left us with stark inequalities within the middle class. Across our three age cohorts, the median income of households headed by men averaged $71,382 in 2014 — 25 percent greater than the $56,946 median income of households headed by women.

Inequalities based on race and ethnicity are much larger, even though 2014 was a very good year for minorities. In 2014, the median income of households headed by whites across the three age cohorts averaged $74,149, or 85 percent greater than the $40,049 level for the households headed by African-Americans and 56 percent greater than the $47,440 average for those headed by Hispanics.

Finally, the vast income disparities based on education keep expanding. Across the three age cohorts, the median income of households headed by college graduates averaged $101,298 in 2014 — 113 percent greater than the $47,560 average for households headed by high school graduates and 269 percent more than the $30,146 average for households headed by people without any diploma. With such gaping differences, it is no surprise that many of this year’s would-be presidents, especially among the Democrats, have plans to reduce or eliminate tuition burdens at public colleges and universities.

What the New Jobless Report Means

January 10, 2014

The jobless rate fell sharply again — from 7.0 percent to 6.7 percent — but the reason wasn’t a burst of new job creation. In fact, total employment was up by just 74,000. What changed in December was that new layoffs fell sharply, which we usually see in the first two years of an expansion.  It’s some two years behind schedule, but the number of newly unemployed people was down by 365,000 in December. The rest of it was mainly demographics, not economics. Yes, the labor participation rate fell 0.2 percentage points — but it had risen by as much the month before. Moreover, the number of “discouraged workers” (those no longer looking for work) and those “marginally attached” to the labor force (who haven’t tried to get hired for a month) did not go up. What continues to rise are the numbers of baby boomers retiring, because the numbers of boomers reaching ages 60, 62 or 65 continues to accelerate.


Statement on the November Employment Report

December 6, 2013

Today’s upbeat jobs news is, simply put, really good news. Yes, the sharp dip in unemployment from 7.3 percent in October to 7.0 percent in November, with gains of 203,000 nonfarm jobs, reflects in part the return of furloughed federal workers and those whose jobs depend on them. But the November gains were so substantial, because the government shutdown obscured steady improvements in the jobs market through both October and November. That’s why the jobless rate dropped three-tenths of a percent even as labor force participation rose, average working hours increased, and the number of part-time workers who want full-time work declined steeply. And this is the second encouraging report in two days—we found out yesterday that GDP grew at a 3.6 percent rate in the third quarter. All of this helps explain why the largest employment gains last month came not in government, but in consumer-sensitive areas including manufacturing, health care and transportation and warehousing.

Why Job Gains Are Still So Modest — and It Could Get Much Worse

July 17, 2013

The economic recovery is now four years old — the anniversary comes this month — yet job growth remains a big problem. Since the recession technically ended in June 2009, American businesses have expanded their workforces at an average annual rate of 1.4 percent, creating some 6.1 million new jobs. The good news is that we’re creating new jobs at twice the rate seen in the first four years of the last expansion. Nevertheless, the job gains are much smaller than those seen in the early years of the expansions of the 1980s and 1990s. So, is this ongoing problem simply a feature of the slower economic growth of this cycle, or have American businesses lost some of their storied capacity for generating new jobs? The answer is, some of both — and over the next decade, new technologies could further aggravate the problem.

To get at why this is happening, you have to first take account of the character and basic features of these economic cycles. For example, job creation bounces back more sharply after a deep recession than following a milder downturn. So, we start by comparing the job gains seen over the last four years, following the Great Recession of 2007–2009, with those following the deep downturn of 1981–1982. The gap is very large: The 1.4 percent annual growth in private employment over the last four years is 61 percent less than the 3.6 percent annual job gains seen during the first four years of the 1982–1989 expansion. We see a similar disparity between job creation in the first four of the two most recent expansions that followed more moderate recessions. The 0.7 percent annual rate of job growth over the first four years of the 2002–2007 expansion was 68 percent less than the 2.2 percent annual job gains seen in the first four years of the 1991–2000 expansion. Something has changed.

The most obvious change is that every successive expansion since the 1980s has seen progressively lower rates of economic growth, especially in the early years. U.S. GDP grew by an average of 5 percent per-year in the first four years of the 1980s expansion, followed by 3.4 percent annual gains in the first four years of the 1990s expansion, 3.0 percent growth per-year in the early years of the 2002–2007 expansion, and just 2.3 percent average annual growth over the last four years. As Keynesians have insisted, the slower economy should explain much of the recent slowdown in job gains — although not all of it.

We can calculate roughly how much of the slowdown in job gains can be traced to the slower economy by adjusting the rates of job creation for the rates of overall growth. Those calculations suggest that if the economy had grown as fast over the last four years as it did in the first four years of the 1980s expansion, we could have seen 3.0 percent annual job gains instead of just 1.4 percent average job growth. Since jobs actually grew in the early 1980s by an average of 3.6 percent per-year, as much as 80 percent of the current slowdown in job creation may simply reflect slower economic growth. So, while recent austerity measures — the sequester, increases in payroll and income tax rates, and so on — do not explain all of the slowdown in growth, their apparent impact on jobs is powerful testimony to how misguided those measures have been.

Thinking through job creation in this way, then, tells us that some 20 percent of our current employment problem, and perhaps more, is “structural.”  Put another way, U.S. businesses now respond to economic growth by creating fewer jobs than they used to.

Technological advances, of course, are one of the driving forces at play here. The countless applications of information technologies (IT) across every industry and economic activity have created considerable wealth, but they also displace more jobs than they create. Consider our manufacturing workforce, which contracted nearly 28 percent over the last two decades, falling from 16,480,000 positions in 1992 to 11,951,000 in 2012. All of these job losses can be accounted for by workers with high school diplomas or less, whose number in manufacturing declined by more than 40 percent. The picture is different for workers with the skills to operate in an IT-dense workplace:  Over the same 20 years, manufacturing jobs held by college graduates increased by 2.4 percent and the number with graduate degrees jumped 44 percent.

The latest threat to jobs, according to many technologists, is coming from robotics, the application of information technologies to new forms of kinetic hardware. Today, businesses worldwide employ some 1.4 million industrial robots, mainly in automobile and electronics assembly. Those numbers appear to be rising quickly. For example, FOXCONN, the Taiwan-based giant that assembles 40 percent of the world’s consumer electronics — and employs 1.2 million workers around the world — has announced plans to purchase 1 million new robots over the next three years.

A new report from the Atlantic Council  catalogues the growing number of large-scale, public-private R&D programs underway. The U.S. effort is led by DARPA, NASA and firms such as Raytheon and iRobot, with grants from the NSF National Robotics Initiative playing a venture capital role. In Japan, the FANUC Corporation and the Ministry of Economy, Trade and Industry have taken the lead. In Korea, the Ministry of the Knowledge Economy is working with LG and Samsung. And in Europe, the European Network of Robotic Research is collaborating with companies such as Philips and the ABB Group.

No one can predict the direction or dimensions of robotics a decade from now. Nevertheless, the next generation of the technology will be able to draw on important recent developments, such as the first, open source Robot Operating System as well as advances that allow robots to retrieve and manipulate objects outside the structured environment of an assembly line. In the last year, for example, Willow Garage released a new personal robot that can fold laundry and pour beer, the French firm Robotsoft showcased robots that monitor elderly patients, Italian and Swedish firms offered robotic landscapers, a Japanese company unveiled its new robot teachers, and South Koreans developed robots to assist firefighters and provide basic child care. The first large-scale application of the technology may well involve transportation. Drone technology could force early retirement on thousands of pilots, and future variations of Google’s driverless car could displace tens of thousands of teamsters, cabbies and bus drivers. In any case, our structural problems with job growth are likely to worsen.