Reforming Corporate Behavior

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We have heard for years that the sole purpose of a corporation is to make money for its shareholders, end of story. This notion gained ascendancy after a 1970 article published in the New York Times by economist Milton Friedman, who huffed that the idea that corporations have a broader responsibility to society is “pure and unadulterated socialism.”

Friedman’s article provided intellectual cover for the slash and burn corporate greed in the following two decades. But today Friedman’s article seems like an odd period piece and his ideas out of step. In fact, the Business Roundtable (BRT) recently repudiated Friedman’s view and announced henceforth that satisfying other corporate stakeholders, such as employees and customers, will be given equal importance to producing wealth for shareholders.

The Roundtable, formed in 1972, is a group of about 200 chief executive officers of America’s largest corporations. Chief executives are employees of the corporations they lead, although clearly the most important and influential of them. CEOs are hired by corporate boards of directors and these directors are elected by shareholders. So CEOs lack the power to declare unilaterally that the mission of their corporation will change. The recent statement of the BRT is not binding on anyone, but each CEO certainly sought the approval of his or her directors before signing on to it.

The BRT’s original leadership were bi-partisan business statesmen. But the BRT soon evolved into a forum for chief executives to attack labor unions and the taxation of business. These were the libertarian views of the infamous Koch brothers and their ilk, who spent millions of dollars promoting this “free market, shareholder primacy” concept using an army of captured think-tanks. And the BRT began functioning like a trade association for chief executives, lobbying for compensation tied to corporate share price.

Much blame for today’s lack of corporate social responsibility has been placed on using short term financial results and share price to determine executive compensation. Large, publicly-traded corporations must report quarterly to the Securities and Exchange Commission on their financial and business position. These reports often drive share price. Short-termism encourages a focus solely on the near term results of a particular activity or policy, instead of on the value that can be created by long-term investment in employees, customers and communities.

Writing in the Harvard Business Review, author Andrew Winston neatly sums up the problem this way.

The world faces enormous, thorny challenges that business is feeling: climate change, growing inequality (and awareness that these CEOs make hundreds of times more than their employees), water and resource scarcity, soil degradation and loss of biodiversity and more. These issues require systemic efforts, cooperation, and pricing of those “externalities” (like pollution and carbon emissions) that business has been able to push off on society. The current shareholder-obsessed system is not fit for this purpose.

It is probably most accurate to say that the BRT’s new policy statement is a recognition of the change that has already taken place in the business environment, rather than an exercise in leadership. As The Economist magazine put it, the CEOs “have either seen the light or caved in, depending on whom you ask.” As one example of the change around them, polling among millennials reveals that this important demographic does not want to work for, or patronize, businesses that do not share their more progressive viewpoint.

Of course there are skeptics and opponents of the new policy statement. Some ask how we could expect a corporation like ExxonMobil, which has spent decades questioning climate science and undermining global action, to act responsibly now merely because its CEO has signed the BRT statement. Not likely because the energy giant would have to rethink its entire business. Energy companies have billions of dollars worth of coal, oil and gas still underground. Corporate managers cannot by law intentionally erode the value of the investments of their shareholders, many of whom are retirees, widows and orphans.

Former Treasury Secretary Lawrence Summers notes that most of the Roundtable’s CEOs are sincere and want to do the right thing. “But in a world of fierce competition, good intentions are not enough.” He advocates a program of legislation and regulation to complement and implement the BRT statement. These would include raising the federal minimum wage and penalizing the transfer of jobs overseas.

Assuming that the CEOs have “seen the light,” it may be because important political figures are also calling for better controls on how corporations behave. Businesses have no “right” to operate as a corporation. Corporations are chartered by the states in which they are organized and must follow the legal rules of those states. Theoretically, nothing prevents the state of Delaware, where many large corporations are headquartered, from amending its law to require, say, a ceiling on the difference between a CEOs compensation and that of the average corporate employee in the state.

Massachusetts Senator Elizabeth Warren has a plan for that, as she does for most everything. Recall that the basis of the Citizens United case that opened the floodgates of corporate money into politics was that corporations are to be treated like people under the First Amendment. Warren’s plan turns the tables. If corporations are to have the rights of people, they should have the corresponding obligation to act like good citizens, not like sociopaths whose entire obligation is to make money.

Warren’s proposal is called the Accountable Capitalism Act. It would require any corporation with revenue over $1 billion to obtain a federal charter, which would obligate the corporation to consider the interests of all stakeholders in corporate decisions. Under the bill workers of the corporation would elect 40% of the directors, and corporate political activity would have to be authorized by 75% of the shareholders and 75% of the directors, many of whom would be workers.

Writing in the online journal Vox, Matthew Yglesias says that there is “no getting around the fact that Warren’s proposal would be bad – really bad – for rich people.” So you can expect them and their political allies to marshal every resource at their disposal to oppose it. Warren’s entire proposal might be difficult to enact even if Democrats sweep in 2020. But you can be sure that pressure on corporations to act in more socially responsible ways will be on the political agenda for years to come.

The Value of Increasing the Minimum Wage

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One obvious way to increase the value and attractiveness of working is to increase the minimum wage. The federal minimum wage has been $7.25 per hour since 2009 but Congress does not seem interested in increasing it. Individual states, however, can set a higher minimum wage. West Virginia’s minimum is now $8.75, having been increased in stages over several years. Many other states have done the same. Increasing the minimum wage puts more money in the pockets of low-income people who will spend it in the economy, reduces dependence on public benefits and costs taxpayers nothing. This is seriously good policy.

The Benefits

Raising the minimum wage not only benefits those whose wages were below the new minimum, it benefits most all workers in the economy. Let’s take the example of a hypothetical gas station and convenience store operation open 24 hours, similar to Sheetz. Suppose that before an increase in the minimum wage the store employs a total of four stock clerks paid at the federal minimum of $7.25 to stock shelves and clean up. The store also employs five cashiers at $8.50, two assistant managers at $10 and one manager on salary.

Now suppose that state raises the minimum to $9. Obviously, the stock clerks who were receiving the previous minimum wage will get an hourly raise of $1.75. In addition, the cashiers’ prior wage would be below the new minimum so they will also receive at least a $.50 raise.  But, more likely, the employer will want to maintain the spread between the wages of the stock clerks and the cashiers so the latter will receive an even bigger bump – let’s say to $10.25.

Now the assistant managers will also have to receive a bump to keep them better compensated than the cashiers. The salaried manager will have to be paid more than the new total compensation of the assistant managers, which would include higher hourly pay plus overtime, so even salaried employees might benefit. In this way an increased minimum wage ripples through the employee ranks and the larger economy.

Raising the minimum wage thus puts more money into the pockets of low and middle income workers who will actually spend the money rather than save it. The more money in circulation, the greater the wealth-creating effect. This wealth creation is also “revenue-neutral” for governments since the increase in wages is not paid for with tax money. In fact, an increase in the minimum wage creates more taxable income for governments and fewer government costs in the form of Medicaid, food stamps and other forms of public assistance.

A 2016 report by the Economic Policy Institute concluded that an increase in the federal minimum wage would “unambiguously” decrease government spending on public assistance:

Among workers in the bottom three wage deciles, every $1 increase in hourly wages reduces the likelihood of receiving means-tested public assistance by 3.1 percentage points. This means that the number of workers receiving public assistance could be reduced by 1 million people with a wage increase of just $1.17 an hour, on average, among the lowest-paid 30 percent of workers.

The Costs

Business groups are the typical opponents of increasing the minimum wage. The reason, of course, is that wages are a significant component of the cost of operating a business, particularly restaurants. But businesses constantly have to deal with increasing costs of all kinds, including labor costs. Successful businesses develop strategies for dealing with these increasing costs.

Rarely will a business go under because of a rise in the minimum wage and if one does it was probably not a viable, long-term business anyway. And an increase in the minimum wage applies to all employers so there is no one who will have a competitive advantage, unless it is one that operates more efficiently.

Perhaps in recognition that their business reasons for opposing a higher minimum wage are a bit selfish and unconvincing, opponents argue that the workers themselves will suffer from an increase in the minimum wage. According to this argument, if employers are required to pay employees more they will hire fewer employees or will give existing employees fewer work hours.

But this has never made sense to me. Assuming the employer has a constant level of work, employees paid at the minimum, whatever that is, will still be the least expensive way of doing that work. Hiring fewer employees at the bottom would simply mean that existing workers will get more hours, not fewer.

Opponents are fond of pointing to one-off studies that show employment loss as a result of increasing the minimum wage. A study after the recent Seattle wage increase did find some employment loss among the lowest-skilled portion of the workforce. There the minimum wage was raised from $9.47 to $13 in two years. But usually employment loss is found only when there is a large increase in the minimum wage like this. 

Meta-studies allow us to put these one-off studies into perspective. Meta-studies use a set of well-defined statistical techniques to pool the results of a large number of separate studies. A comprehensive meta-study in 2013 revealed that there is no statistically significant employment effect created by moderate increases in the minimum wage. In the last decade, influential studies using restaurant industry data in many U.S. counties and regions have concluded that minimum wage increases have “strong earnings effects and no employment effects.”

This conclusion has an explanation, or rather several explanations. The natural impulse of employers to hire fewer or fire more expensive employees is balanced by several “adjustment channels.” Some of these involve reducing other employment costs, such as reducing work hours, non-wage benefits or training costs. While the empirical evidence is not conclusive, it suggests that employers don’t adjust by cutting hours or other forms of compensation. If an employer has a steady volume of output it must generate, cutting hours is not an option – unnecessary hours would have been cut before. 

Another adjustment channel is simply to increase prices to pass along to consumers the added costs of new wage levels. While some of this does happen, employers do not substantially pass on to consumers the higher costs of employment. Studies have shown that a 10% increase in the minimum wage will result in between a .4% and .7% increase in prices. 

An increase in the minimum wage does not result in the termination of existing employees because the cost of recruiting, hiring and training even low-wage workers is so high that employers would rather retain even higher paid current employees. And a worker who is paid more is less likely voluntarily to leave a job. A 2012 study found “striking evidence” that separations and turnover rates for teens and restaurant workers fall substantially following a minimum wage increase.

Some argue that increasing the minimum wage will hasten the replacement of workers by technology. For many types of work automation is inevitable. This is no argument to underpay workers in the meantime.

Congress does not seem in any shape to increase the federal minimum wage, although the new Democratic majority in the House may take a run at it. Instead, the progress is being made in the states. In early November 2018, voters in two red states approved ballot initiatives raising the minimum wage – to $11 in Arkansas and $12 in Missouri. Perhaps the West Virginia Legislature will see the wisdom of making a similar change. Doing so will cost taxpayers nothing and the benefits to working people and the economy are clear.  

 

Immigration and Our Prosperity

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With so much heated rhetoric about building a wall at our Southern border and the cruel separation of families who seek asylum, it is easy to overlook what is perhaps the fundamental question in the immigration debate. That is whether immigration has a positive or negative effect on our collective prosperity.  Are we are better off with more immigration or less?

No foreign national has a right to enter the United States. The law and policy in effect at the time determine who will be permitted to enter for visits and who will be permitted to immigrate. That law and policy has changed over the years, but always in line with what is regarded as the national interest at the time.  Now the Trump Administration proposes to scale back immigration in a dramatic way. If the overall effect of immigration on our economy at current levels is negative, then there may be merit to Trump’s immigration policy, if not his inhumane implementation of it. If the effect is positive then more immigration is the answer.

There are several categories of lawful entry into the U.S., for example visitors who seek to immigrate, temporary non-immigrant visitors, and asylum seekers. Temporary non-immigrant visitors are people like tourists, business visitors, students, and temporary workers. One category of non-immigrant is called H-1B and is used for highly skilled technical or professional workers frequently in short supply. Part of the admission process for all non-immigrants is that they declare their intention to depart the U.S. at the end of their temporary stay.

Visitors who intend to immigrate are subject to a much more rigorous evaluation than non-immigrants. Some seek immigrant status, signified by the “green card,” on the basis of a relationship to a close family member already here. This has recently been referred to as “chain migration.” Roughly 850,000 people enter lawfully each year in this category.  Others apply based on a sponsorship by a U.S. employer that can demonstrate a need for the person’s skills and an inability to find that skill in the U.S. labor market. Roughly 140,000 people enter each year in this category.  Most of these are highly trained scientists, technicians or professionals.

Unlawful, or “undocumented,” foreigners are mostly people who come here as non-immigrant visitors and who simply fail to leave when their temporary stay runs out. But most of the publicity about illegal immigration centers on those who cross the border without papers and melt into our society. People who are unlawfully in the U.S. are not entitled to work but frequently do. It is unlawful for a U.S. employer to hire a foreigner who is not authorized to work, but this rule is largely ignored in many industries, such as landscaping and restaurants.

The Trump Administration is determined to reduce the number of immigrants coming to the U.S. under any circumstances, lawful or unlawful. Last year Trump announced his support for legislation to reduce legal immigration by half over ten years. The reductions would come from migrants entering on the basis of family connection.  The number entering on the basis of job skills would remain the same. The legislation would institute a merit-based system to determine who is admitted to the country similar to those in effect in Canada and Australia. President Trump also plans to admit no more than 45,000 refugees from around the world in fiscal year 2018, a significant drop from the cap of 110,000 set for 2017 by President Obama.

What is the rationale for these policies?  In his original immigration plan, Trump declared that the influx of foreign workers “holds down salaries, keeps unemployment high, and makes it difficult for poor and working class Americans – including immigrants themselves and their children – to earn a middle class wage.” But as we have seen over the last two years, this country is at close to full employment.  Our unemployment rates are at historic lows. Some industries, like the Maryland seafood industry on the Eastern Shore, can’t operate for lack of workers, native or immigrant. The level of employment in this country seems to rise and fall in response to larger forces than the relatively small number of immigrants coming to the country.

But what about the effect of immigration on employment opportunities and wage rates for native Americans?  Here the answer is mixed and there is some evidence that immigrants do create a negative effect on some segments of the economy. In 2016, the National Academy of Sciences published a 300,000 word report on the economic consequences of immigration. It found that unskilled immigrants (both lawful and unlawful) compete with those most similar to themselves in the U.S. economy – immigrants who arrived just before them and unskilled, undereducated natives. Immigrants may reduce employment opportunities and slightly lower wage rates for these groups. But the report says “When measured over a period of 10 years or more, the impact of immigration on the overall native wage may be small and close to zero.”

Foreigners who lawfully enter the U.S. pay taxes. Lawful permanent residents — those who hold a green card and intend to stay here permanently — are subject to Social Security/Medicare taxes and income taxes just as U.S. citizens. Lawful temporary non-immigrants who are authorized to work here for temporary periods also pay these taxes, although there are some exceptions. But there are costs of providing public services to immigrants and the NAS report concluded that in the first generation or two after immigration the costs for immigrants are somewhat higher than the taxes they pay. This negative effect is reversed in the longer term when the children of immigrants become productive citizens. Immigration then becomes a net positive for the American economy.

But the NAS report also showed that the negative effects of immigration are not present with respect to highly educated immigrants.  Those with a college degree who emigrate to the U.S. at age 25 pay $500,000 more in taxes than they collect in benefits over a lifetime.  Those with a graduate degree create a surplus of over $1,000,000.

The net positive long-term effect of immigration is likely to become more pronounced. The working age population of the U.S. is declining, reflecting the retirement of the baby-boomer generation. As there will be fewer workers in the future to support the Social Security benefits of retirees, the solvency of the Social Security system is in jeopardy.  In 1960, there were five workers for every person receiving Social Security benefits.  Now the worker-to-beneficiary ratio is 2.8 and projected to fall even lower. Increased immigration is clearly called for on this basis alone. Lawful immigrants to the U.S. tend to be younger than their U.S. counterparts and are more inclined to participate in the labor force.

The Wall Street Journal recently published an opinion piece by Sol Trujillo, President of the Latino Donor Collective, in which he enumerated the contributions of Latino immigrants to the economy. He noted that

Latinos are the new face of the U.S. workforce, making up 70% of the recent growth in the labor market, and accounting for a whopping $2.13 trillion in gross domestic product as of the end of 2015. Today, this single demographic cohort would be the eighth-largest economy in the world—larger than Brazil, Italy or Canada.

There is also considerable anecdotal evidence that immigration is beneficial for prosperity in the U.S. Individuals who are prepared to leave their home countries and their family support systems for better opportunities are very likely to take advantage of those opportunities.  Inc. Magazine called immigrants “the most entrepreneurial group in America.” It said that “from 1996 to 2011, the business startup rate of immigrants increased by more than 50 percent, while the native-born startup rate declined by 10 percent, to a 30-year low.” Despite accounting for only about 13 percent of the population, immigrants now start more than a quarter of new businesses in this country.

Those of us in West Virginia and other states with rural populations must have noticed the very substantial number of foreign-born physicians who are happy to staff rural hospitals and clinics. Take, for example, the staff at Grant Memorial Hospital in Petersburg, West Virginia here in the Eastern Panhandle. When we assess the effects of immigration on our prosperity, these immigrants cannot be overlooked.

The Washington Post just reported that for the third time in four years the U.S. has won the International Math Olympiad. The Math Olympiad is the hardest and most prestigious math competition for high school students in the world. Many on the U.S. team were second or third generation Americans.  Their surnames were Lin, Gu, Huang, Ren, Singhal and Ardeishar. Immigrants are often high achievers in challenging fields, such as mathematics, physics and computer science.

If we can put aside the nativist impulses that fuel President Trump’s “base” and much of his immigration policy, the picture becomes clearer. Overall higher rates of immigration are healthy for our country on many levels. But higher overall immigration should consist of increases in skilled workers and decreases in unskilled workers. To that extent, reducing family-based immigration where low skills are involved is appropriate.  Furthermore, the number of unlawful low-skilled workers who come here seeking employment should be reduced, not by building an expensive and ineffective wall, but by actually enforcing or strengthening the law now on the books that prohibits hiring them. As Francis Fukuyama recently wrote in the journal Foreign Affairs

What is needed is a better system of sanctioning companies and people who hire illegal immigrants, which would require a national identification system that could help employers figure out who can legally work for them. Such a system has not been established because too many employers benefit from the cheap labor that illegal immigrants provide.

American businesses were recently handed a $1.5 trillion tax break thanks to President Trump’s Tax Cuts and Jobs Act.  But handing business lots of cash with no strings attached is not smart policy. Making it easier for them to find and employ talented workers is. So the number of H-1B and other temporary work visas should be at least doubled.  Ensuring that U.S. workers are not displaced is already a part of the application process for these visas. And a method should be found to admit increased numbers of seasonal agricultural workers in situations where no U.S. workers can be found and the wage rates can be kept high enough not to undermine the larger labor market.

In the final analysis, immigration can be a tremendous boon to our prosperity. In his Wall Street Journal opinion piece, Sol Trujillo proposed a basic IQ test for America. We flunk if we do not recognize that radically limiting immigration would be like shooting ourselves in the foot.

The Rich Benefit Bigly From Trump’s Tax Reform

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The Tax Cuts and Jobs Act (TCJA) has added mightily to the already serious income and wealth inequality in America. Yet our state’s Republican representatives in Congress seem oblivious that most people in this state are poor relative to the rest of the country. They have boasted about what amounts to the crumbs on the table that middle and lower income West Virginians gain from this Act. For example, Rep. Alex Mooney, who represents much of the Panhandle in Congress, announced that he voted for “tax cuts for all West Virginians.” Always obsequious when it comes to the White House, Mooney said “President Donald Trump has been a true leader on delivering tax relief for all Americans and I am looking forward to continuing to work with him to create more jobs and to keep our economy growing.” There is no other way to put it — this emphasis on the illusory benefits enjoyed by the broad middle of our society is just willfully deceptive. The true winners under the TCJA are the rich, who will benefit at the expense of the rest of us.

Even the frequently touted tax reductions for lower and middle income taxpayers are not intended to be permanent. These will decline over the next eight years and ultimately expire. Sen. Shelley Moore Capito argued in the December 27, 2017, Spirit of Jefferson that the new law doubles the standard deduction to $24,000 for couples. But she failed to mention that this increase also expires in 2025. Furthermore, she didn’t even try to defend some of the law’s permanent features, which benefit the wealthy. These are the $1.5 trillion tax cuts for corporations, which will do nothing but increase the value of corporate stock in the hands of the wealthy, and the repeal of the Affordable Care Act’s individual mandate. The repeal of the mandate will generate $53 billion in annual savings by 2027, paying for about one-third (about 4.7 percentage points) of the bill’s 14-percentage-point permanent cut in the corporate rate. But it will leave millions more uninsured and raise premium rates for many others.

Here are three additional key ways in which the TCJA benefits the rich at the expense of the rest of us:

Distributing Tax Cuts Disproportionately to the Rich. The Tax Policy Center, a joint effort by the Brookings Institution and the Urban Institute, put it this way: “In general, higher income households receive larger average tax cuts as a percentage of after-tax income, with the largest cuts as a share of income going to taxpayers in the 95th to 99th percentiles of the income distribution.” This result will clearly play out in West Virginia.

Tax Benefits

Doubling the Estate Tax Exemption. The TCJA doubles the exemption from tax on estates valued from $11 million per couple to $22 million per couple. Doubling the exemption reduces the share of estates facing tax from 0.2 percent to 0.07 percent, leaving only 1,800 taxable estates nationwide. It is hard to understand why this tax change was so important — unless satisfying rich donors is considered. The estate tax rate is only 17%, far less than on ordinary income for this group of taxpayers. Still the tax exemption will be worth on average $4.4 million to those upper-end estates who will now be exempt. To put this in perspective, $4.4 million is about what it would cost to give 1,100 Pell grants to low income students.

Creating a Tax Break for “Pass-Through” Income. Although the corporate tax rate is reduced by 14 points, this benefit mainly applies to large corporations.  Many small corporations and limited liability entities account for business income by passing it through to the individual owner. Trust me on this, most of these business owners are not among the struggling taxpayers in this country. The corporate tax rate doesn’t apply to passed-through business income. Instead, the individual tax rate for that taxpayer would apply. It was not enough that the individual tax rates will be reduced, the TCJA also creates a special new tax benefit for pass-through business income. The final TCJA allows small business owners to deduct 20% of their passed-through business income.

I get it that current Republican ideology is interested in directing policy benefits to those in society they call the “makers,” while being far less concerned about everyone else whom they label the “takers.” The TCJA is a perfect example of how this works, even though Republican politicians continue to argue falsely that the beneficiaries of this law are the middle class. To some extent, the horse is out of the barn — this bad tax law passed warts and all. But we cannot let this go. At every opportunity in the run-up to the 2018 mid-term elections and then on to 2020, we need to keep this issue at the front of the debate.

Government by the Rich, for the Rich

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The much maligned Tax Cuts and Jobs Act (TCJA) is regarded by most Americans as a naked effort by the Republican Party to reward its key donors, among them the wealthiest of Americans. Public polling has consistently been negative for this “reform” legislation. The law’s modest temporary tax relief for the middle class is just window dressing. The public has simply disregarded this window dressing and correctly assessed the stink from what has been served up to them.

The TCJA is an enormously complex law, with poorly understood provisions the effect of which won’t be known until well after the law takes effect. Since the tax code has a profound effect on the behavior of individuals and businesses, and hasn’t been revised since 1986, a major revision should be thoroughly debated in the light of day. But to do that would have permitted the TCJA’s ugly flaws to be exposed and for opposition to solidify. So in adopting the TCJA Republicans jettisoned any pretense of democracy.

There were no public hearings. Some of the law’s provisions were added at the very last minute. The Congressional Budget Office had no time to evaluate the Republicans’ flimsy claim that increased business activity spurred by the tax cuts would raise substantial new tax revenues. The Bill was available for review roughly three days before the final Senate vote. The Democrats, who were not opposed to revisions to the corporate tax structure and might have made reasonable suggestions, were shut out of the process. This is how the Republicans govern.

One wonders why a massive tax cut was so important for Republicans in the first place, particularly in the face of negative public polling. The Trump Administration is riding the wave of economic recovery that began well before Trump took office. National unemployment is hovering around 4%, generally regarded as full employment. Corporations are already sitting on $2.3 trillion in cash reserves. They do not need massive tax cuts to free up cash for investment. The answer is that big donors are furious about not receiving the big tax cuts that were promised when the Republicans repealed Obamacare, which they failed to do.

Nobel-prize winning economist Paul Krugman has argued in the New York Times:

A large part of the answer [for why a huge tax cut was so important] is that many Republicans now see themselves and/or their party in such dire straits that they’re no longer even trying to improve their future electoral position; instead, it’s all about grabbing as much for their big donors while they still can. Freedom’s just another word for nothing left to lose; in the GOP’s case, that means the freedom to be the party of, by, and for oligarchs they always wanted to be.

Krugman can be intemperate at times, but he seems to be on to something. At all the key forks in the policy road, the Republicans have rewarded themselves and their rich friends. The TCJA represents a huge redistribution of wealth from the poor and middle class to those in the upper income brackets who hardly need it.

By far the largest impact of the TCJA will be the reduction of corporate tax rates. These reductions will themselves be responsible for nearly $1.5 trillion in reduced tax revenues. The Republican argument is that corporations will use this new cash to increase business capital investment, hire new workers and raise wages. But there is nothing in the TCJA that requires a business to use the tax cuts in this way. Many businesses have said they will use the money for non-productive uses like increased dividends and share repurchases. These uses only serve to increase the value of the corporation’s stock in the hands of those who own it.

Who benefits when the value of corporate stock goes up? Only 52% of the American public owns any stock whatever, even in retirement accounts, and those owners surely won’t be found in the bottom half in wealth and income. President Trump is fond of bragging about how the stock market is breaking records. Can’t you just hear the Champagne corks popping in all the nation’s homeless shelters?

In my next post, I will detail how the rich will directly benefit from the TCJA at the expense of the rest of us. Certainly, this statute ought to be one of the first things on the agenda of any new Democratic majority in Congress to reverse. In fact, instead of just undoing this bad law, the TCRA may unleash the Democrats to make substantial changes to the tax code to benefit affirmatively those whom the Republicans have, for now, shut out.

Imagining A Fair Distribution of Wealth and Income

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Many have said that wealth and income inequality is the most serious long-term problem facing our country. So I invite you to play this thought game. Imagine that you are in a position to decide how wealth should be distributed and, further, that you can decide what rules will apply to the distribution of future income. Your objective is to devise the fairest system that will allow our economy to prosper and best ensure the long-term stability of our democracy.

Three general approaches to this game come to mind. First, there is the “Candide” approach in which we would conclude that this is the best of all possible worlds and that the wealth and income distribution we now have is superior to any other. A second approach might be called the utopian socialist approach where all wealth and income would be distributed equally among everyone. A third approach might be to devise some system, either moral or economic or both, that values the contribution made to society by each person and then distributes wealth and income accordingly.

Despite the huffing and puffing of conservatives (I can hear them now) redistribution of wealth and income is not a radical idea. We already do it regularly. Almost any taxation system imaginable takes wealth from one class of person and spends it in ways that benefit another class. This is especially true of the progressive income tax, which taxes the wealthy more heavily and spends on programs that either benefit everyone equally (national parks) or benefit only the poor (food stamps). Our Social Security and Medicare programs are well-loved income transfer devices. Even public schools have a redistributive effect – property owners pay tax that is spent educating the children of some parents who own little or no property. So in our game let us not be afraid to imagine that we can shuffle the deck.

Most of us will reject the Candide approach because it would be manifestly unfair, unstable and will lead to disaster. Anyone with a pulse has heard the statistics about how unequally distributed American wealth and income have become. Take this example: the six heirs to the Wal-Mart fortune command wealth of $69.7 billion, which is equivalent to the wealth of the entire bottom 30% of U.S. society. This inequality is getting worse. Some scholars like Thomas Picketty have advanced a theory for why this is happening.

In his 2013 book Capital in the Twenty-First Century, Picketty summarizes mountains of data by offering a simple maxim: over time income from capital grows faster than income from wages and salaries. Let’s say you start with an inherited nest egg. Your interest, dividends and capital gains make you better off today than the average Joe who works for a living. Picketty says that by normal operation of the economy you will be even better off than Joe next year, and then better the next, and so on. Add to this the fact that the wealthy have political power to protect their favored position and are shameless in exercising that power.

Wealth and income inequality is not just an abstract numbers game – it is a life and death matter. Take, for example, infant mortality and life expectancy. Out of 34 industrialized nations, life expectancy for newborn girls in America ranks 29th. While American babies born to white, college-educated mothers survive at normal levels, what drags our statistics down is the high mortality rate of infants born to non-white, unmarried, poor women. Infant mortality is not the only threat to life created by skewed wealth distribution in this country. Recent studies have shown an increase in “deaths of desperation” among middle-aged, uneducated whites.

If our social conscience is somehow blind to all this, consider the following wake-up call. Every society that has allowed itself to become seriously unequal has suffered a catastrophic redistribution of wealth and income. Some of this was the result of plague-related population decreases. But more often than not, it was the result of war or violent revolution. Those are the findings of a new book The Great Leveler, by Walter Scheidel:

Violent shocks were of paramount importance in disrupting the established order, in compressing the distribution of income and wealth, in narrowing the gap between rich and poor. Throughout recorded history, the most powerful leveling invariably resulted from the most powerful shocks . . . mass mobilization warfare, transformative revolution, state failure and lethal pandemics.

So if the best solution isn’t to leave things as they are, is it instead a utopian equality of wealth and income? There has never been such a system, except on a scale too small to be a reliable guide. The communist expropriation of wealth in the Soviet Union followed by forced collectivization didn’t work out so well. A complete redistribution of income in America, even in a thought game, is hard to imagine.

Putting aside that it would be politically impossible, a completely equal distribution of wealth and income would itself be unstable. Most people don’t see complete equality of wealth as necessary or even desirable. Recent research has shown that people are less concerned with inequality of wealth and income than with the negative consequences of that inequality and the unfairness of how the inequality developed. In other words, most people are willing to tolerate a modest level of inequality if it has not been unfairly achieved.

If we reject the two extreme approaches, we must imagine a wealth and income distribution based on social and economic values. But it must be a sustainable system that produces economic prosperity. At a minimum, such a redistribution would involve a shift of wealth and income from the super-wealthy to everyone else. We know how to do this – an effective progressive income tax with high marginal rates, a corporate income tax with no loopholes and an estate tax that prevents the inheritance of obscene fortunes. Such a regime would produce more money to put in the hands of people who will spend it rather than save it, increasing demand for the products and services offered by businesses and spurring growth.

But how would we make fair distinctions among the recipients of the new tax revenues? One idea now in vogue leap-frogs that problem by providing a universal basic income. Alaska does this now with its oil wealth, distributing around $2,000 per year to every man, woman and child in the state. In his 2006 book In Our Hands: A Plan to End the Welfare State, the conservative intellectual Charles Murray proposes a $10,000 payment per year to every citizen beginning at age 21, funded by the complete dismantling of welfare programs that grant benefits to some but not all citizens. The key would be to distribute a like amount to everyone that would raise the floor of income but not be so large as to create a disincentive to work. Universal basic income is an idea we will be hearing more about.

Finally, should we readjust the wealth and income benefits of people who contribute to society through public service but who are now underpaid? In this group would be teachers, police, fire fighters, country doctors and others. We could achieve this through tax credits. We do something similar to this now by forgiving the loan debt of people who enter public service careers. Why not get serious about it and through favorable tax treatment raise the income and status of these professions so they attract the best?

In this article I have suggested some action we should probably avoid and some we might pursue. Now the game is up to you. What would you do?

 

 

How We Talk About Economic Growth

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In the last few years of the Obama administration, The Wall Street Journal relentlessly criticized the administration’s failure to achieve sufficient economic growth. That newspaper complained that Obama’s over-regulated economy was to blame for a GDP growth rate of 2.1% — tepid compared to recoveries in the past.

The Journal is, of course, the voice of business people who often favor the conservative agenda of low taxes and lower regulation. But the Journal was on to something. The need for economic growth is hugely important and one thing both conservative business people and progressives should be able to agree on.

Progressives can rally behind strong economic growth because material prosperity improves the quality of life and opportunity for everyone. Unfortunately, as with so many other things, conservatives and progressives are each mired in their own rhetoric. Every issue seems to have its predictable arguments. A proposal for raising the minimum wage will inevitably be met with the argument that employers will have to cut jobs. A proposed international trade deal will be opposed by arguments that globalization harms the little guy.

But neither side talks about the social and political benefits that accrue to a country with a steadily growing economy. These non-economic benefits must be counted along with the hard financial and environmental factors when we evaluate any serious policy question. Doing so may actually tip the scale in favor of some policies that will promote growth versus the predictable counter arguments.

In his 2005 book The Moral Consequences of Economic Growth, Benjamin Friedman catalogues the social and political benefits of growth: openness, tolerance of different ethnicities and points of view, philanthropy, and a satisfaction with the democratic process, if not always its results. A stagnating economy, on the other hand, leads to rising intolerance and incivility, defensiveness, eroding generosity, rigidity of institutions, and a disrespect for the democratic process.

The mechanism for this effect is psychological. Economic growth, or the lack of it, drives a person’s perception of whether he is getting ahead or falling behind. There are two benchmarks for this. One is a person’s current economic situation compared to his past situation. The other is a person’s current economic situation versus the current situation of other people. These two benchmarks can be substitutes for each other. In a steadily growing economy, a person’s satisfaction with being better off than he was in the past can mitigate his impulse to be better off than his neighbors.

On the other hand, when an economy stagnates and a person is not better off than he was in the past, his need to be better off than his neighbor (or people of color, or immigrants) intensifies. His view of the economic pie becomes zero sum – his situation can only improve if someone else’s declines. If someone else seems to be getting ahead, he assumes it must be at his expense. Both the positive effects of a growing economy and the negative ones of a stagnating economy are magnified when people consider the opportunities available for their children.

This is not some pop social theory. American history provides many examples to confirm its accuracy. Between 1880 and 1895, real income per capita grew by only .7% per annum. In the same period Jim Crow laws, segregation in every aspect of life and appalling violence became the norm in the South. In rural America populism led to nativism, ethnic intolerance and open religious bigotry. In the West, riots protested the use of Chinese labor for railroad construction and immigration laws were tightened.

Contrast this with the post-WW II expansion. With the exception of several brief but painless recessions in the Eisenhower years, Americans enjoyed uninterrupted economic growth from the end of the war to 1973. Over the prolonged period from 1948 to 1970 real income growth per capita averaged 2.4% per annum. Home ownership became a realistic possibility for most Americans and white collar jobs opened to many. It is no coincidence that during this period political and economic democracy was extended to non-whites. Brown v. Board of Education mandated school desegregation and a decade later the Civil Rights Act of 1964 outlawed discrimination in employment, public accommodations and housing.

While none of the foregoing changes – good or bad – happened overnight, political change is possible when only a small number of voters change their minds. The recent shift in public sentiment about gay marriage comes to mind. Likewise, a stagnating economy need only influence a small segment of the populace to produce unfortunate results. Many political analysts have said that fewer than 20,000 economically frustrated voters in Michigan and Wisconsin elected the incompetent Donald Trump with his agenda of anti-Muslim animus and disregard for environmental and social justice.

Economic growth is a good thing. It strengthens not only our material prosperity but it permits the kind of positive social and political behavior we all want to see in our country. This is not to say that bad policies – ones that would irreparably harm the environment, for example – should be adopted simply because they are said to promote growth. What it does mean is that we should evaluate our economic policy choices by also considering the indirect non-economic benefits of growth. In the end, this may lead progressives to be less instinctively critical of pro-growth policies and bring the left and the right together toward a common economic agenda.

Those Who Work, Those Who Don’t

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After the 2016 election results we are struggling to understand what hit us. One common view is that Democrats have become tone deaf to the working class, advancing policies that cater to other key constituencies of the party but failing to do much about bettering the economic lives of those in the middle and lower middle. Why, we ask, did Wisconsin, Michigan and Pennsylvania forsake Hillary Clinton in favor of a bombastic outsider who made huge promises, but apparently hasn’t a clue how to govern to deliver on them?

Several thoughtful books can help us find the answer. The best of these is Those Who Work, Those Who Don’t, a sociological study written by Jennifer Sherman in 2009. Sherman sought out a small town in rural America where industry and jobs had been decimated and widespread poverty made the normal social pecking order collapse. This should sound familiar in West Virginia. She wanted to learn what factors provided status and capital in a community where economic distinctions were no longer possible. What she learned is an eye-opener.

Sherman’s town is located in the rural Northern California forest area. She gave it the fictitious name Golden Valley. Golden Valley’s economy was wrecked by the environmental decision to protect the spotted owl at the expense of local industry. All logging activity and most sawmilling in the area ceased and many layoffs occurred. Golden Valley residents viewed this economic devastation as the handiwork of bi-coastal liberals who cared nothing about working class people. But they also recognized that Rebublicans cater to big corporate interests and were not concerned about their plight either.

In Golden Valley nearly everyone was poor. In the absence of economic wealth and distinctions, moral capital was the source of self-esteem and community standing. Those who had moral capital were often able to exchange it for economic capital in the form of job opportunities and assistance from other community members in time of need.

There were two main sources of moral capital. The first was connection to work. Work ethics were highly valued. Those who had a steady full time job were at the top of the hierarchy, followed by those with part time jobs, those on unemployment compensation, and those with a work-related disability. Receiving state or federal benefits because of unemployment or disability was not a negative because these benefits had a connection to past work. Even those who worked to support their families by hunting, cutting wood for fuel or gardening had moral capital from these activities.

Those who did not work, but instead received government welfare assistance, had negative moral capital and lost standing in the community. This effect was felt powerfully by those in that category. Many drove forty miles to the nearest town to use food stamps for fear that they would be recognized by their neighbors. At the bottom were those who were addicted to drugs or abused alcohol, and those who survived through illegal activity. These people were shunned as having no work ethic and were effectively shut out of job opportunities.

The second source of moral capital was “family values.” A person high on the family values scale was usually in a stable marriage, and was a parent or foster parent. But as in most poor communities the traditional family didn’t exist. Children were often raised by grandparents, distant relatives or complete strangers. An individual or couple could gain moral capital if they provided a safe home for any child in the community who needed one. Parents in Golden Valley did not behave as middle class parents frequently do by planning for and becoming involved in the child’s future. Instead parents gained self-esteem and community standing merely by sheltering children in an environment free from abuse that allowed them to develop in their own manner and direction.

What can those interested in regaining the votes of working class people learn from all this?

  • Working class people value hard work, so policies that are designed to provide jobs will be supported by working class voters;
  • working class people are not lazy, do not want public assistance, and will mostly avoid using even well-intentioned benefits that do not somehow recognize recipients as having been connected to the working economy;
  • working class people believe that their moral values of hard work and family are the true American values. Republican rhetoric about morality and values resonates with them;
  • guns, particularly those associated with hunting and providing food, are a strong tradition in rural America and are sometimes essential for family survival; and
  • working class people will reward politicians and political parties that speak to them in a sympathetic, understanding manner and couple this with policies that attempt to deal with the hardships in their lives.

Working class people do not vote against their “interests” when they vote for the Republican agenda, even if that agenda worsens their economic plight. In fact, it is condescending to suggest this. Instead they vote in line with their values. It’s just that Republicans have been more successful addressing those values. But there is nothing inevitable about working class support for the Republican agenda. A progressive agenda that seeks to level the economic playing field through tax reform and job creation can reverse this trend.

The West Virginia Workplace Freedom Act

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In early February 2016, West Virginia became the 26th state to adopt a “right to work” law, called the Workplace Freedom Act. The new law does not simply prohibit an employer and a labor union from requiring membership in the union as a condition of employment. It goes further and also forbids requiring an employee to pay any dues or fees to a labor union as a condition of employment. The law was vetoed by Governor Tomblin on February 12, 2016 but that veto was overridden by the Legislature on the same day. The new law was to take effect July 1, 2016.

Outlawing any required fee payment to a union is a significant step for West Virginia to take. It reveals that our Legislature was not so much interested in protecting employees from compulsory membership in an organization they might not support, as it was in financially crippling labor unions. In so doing the Legislature advanced a conservative political agenda of long standing. It is the financial harm created by the new law that led the West Virginia AFL-CIO and a number of individual unions to seek an injunction in Kanawha County Circuit Court. The injunction was granted on August 11, 2016 and the implementation of the law postponed until a full decision can be rendered.

To understand this legal and political struggle, a little background is necessary. Unions can gain the right to represent employees only within a bargaining unit — a plant or department. Being an employee in a bargaining unit is not the same as being a dues-paying member of the union. But once a union becomes the bargaining representative of employees in a unit, it has the right and obligation to bargain for and prosecute grievances for all of them, whether or not they are dues-paying members. This frequently involves large sums for trained staff, arbitrators, meeting halls, offices, libraries, and more.

Over time, union security contract clauses were developed requiring an employee to become a dues-paying member of the union within a certain period after employment. If he refused, the employer was contractually bound to terminate him. But because unions engage in political as well as bargaining activity, federal courts refashioned the deal so that no employee is obligated to pay dues for political activity to which he does not subscribe, but can be required to pay a “fair share fee” to cover the collective bargaining and grievance activity the union must provide him. This was the status of the law in West Virginia until last year.

In 1947, Congress allowed individual states to forbid union security clauses altogether. Almost immediately, states in the south and west passed “right to work” laws. Recently as the strength of Republicans grew in state legislatures, RTW laws passed even in industrialized states like Wisconsin and Michigan. Not wanting to be outdone by their conservative brethren elsewhere, the West Virginia Legislature took up the issue in January 2016. The Legislature commissioned a study by WVU predicting the effect of a RTW law on union membership, job growth, GDP growth and wage growth in West Virginia.

The method used in the WVU study was to compare the group of states with RTW laws to the group without them on these various economic factors for the period 1990 to 2012. To determine whether the RTW laws actually caused any of the observed differences, a complicated regression analysis was used. The WVU study predicted that the rate of union membership in West Virginia would fall by around 20% as a result of the adoption of an RTW law. The study also predicted a long term .4% employment growth benefit and a .5% annual increase in GDP growth.

But the WVU study found no causal relationship between RTW laws and wage growth, even though nearly all other studies like this have found a robust negative effect created by RTW laws on state-wide wage growth. For example, a 2015 study by the Economic Policy Institute found workers in RTW states earned $1,558 less per year than similar workers in non-RTW states. These results did not apply just to employees covered by a union contract but to all employees. “Where unions are strong, compensation increases even for workers not covered by any union contract, as nonunion employers face competitive pressure to match union standards.”

Behaving as if the modest coercion involved in requiring an employee to pay a fair share fee was an outrageous affront to liberty, the Legislature blew past the economic benefit to all workers that exists in non-RTW states. The Workplace Freedom Act states that a person may not be required to “pay any dues fees, assessments or other similar charges . . . of any kind or amount to any labor organization.”

The legal attack by the AFL-CIO on this law is that the state has unconstitutionally deprived unions of their property without just compensation by prohibiting them from charging nonmembers the proper fee for the services unions are required to provide. Ken Hall, President of Teamsters Local 175, testified that members would end up paying an extra $172 in union dues to cover services provided to employees who benefitted from them but refused to pay. These arguments were enough to convince Judge Jennifer Bailey of the Kanawha County Circuit Court to enjoin implementation of the law until a full decision could be made in the next few months.

It is hard to predict how this legal battle will be resolved. Like any human institution, labor unions have had their share of bureaucracy, incompetence and corruption. They have also had their share of success in advancing the interests of working people. Unions improve the economic lives of members and non-members alike. Progressives don’t generally support coercion, but requiring a fair share fee from non-members who benefit from union representation seems appropriate. What is really at stake is not some grand concept of freedom and liberty. It is instead the economic viability of unions and the Republicans in the Legislature know this. Without viable unions, corporate power to set compensation will be virtually unchallenged and working class compensation will continue to stagnate.

Hillbilly Elegy

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Hillbilly Elegy, by J.D. Vance, has received a lot of attention recently. It is the story of a young man with Appalachian roots whose immediate family moved to Middletown, Ohio. The family was rife with domestic violence, divorce, drug abuse and stress. It was also full of love. Vance eventually succeeded beyond the wildest dreams of his “hillbilly” friends and family, graduating from Yale law school, landing a well-paying job, and having a loving stable marriage.

The book is a canvas upon which you can paint your own conclusions. The Wall Street Journal lauded it for demonstrating how folks can overcome social and economic liabilities through mentoring and a large dose of personal responsibility. Vance does attribute much of his success to his grandparents who guided and protected him. But he also acknowledges that government programs, such as Pell grants and low-interest student loans, were important. Vance says that while the social problems and destructive behaviors of the working class cannot be solved by government alone, government policies can act like a thumb on the scale in favor of the working poor.

But another force took over later. At Ohio State, where Vance attended as an undergraduate, and at Yale he was the beneficiary of connections. Connections helped him get into an Ivy League law school; connections helped him get interviewed and hired by a prestigious law firm. He realized that using connections is how the upper middle class and very wealthy routinely succeed. Lack of connections is a big reason why the poor and working class cannot flourish with the same regularity.

In the current debates about economic growth and tax policy, we often hear arguments that suggest a person’s economic status is a measure of his or her virtue. As Robert Reich put it in his book Reason, “If you’re rich you must somehow deserve it. If you’re poor, you deserve that, too.” But many of the super-wealthy inherited their wealth and added nothing to society to get it. Think Paris Hilton. More to Vance’s experience, Reich notes that the false connection between wealth and virtue fails to recognize that

the rich were lucky to be born into families that gave them access to excellent primary and secondary schools, talented teachers and tutors, summer “enrichment” programs, prestigious universities, and all the contacts and connections that come from wealthy parents and classmates and membership in exclusive clubs.

So our current unequal society is not “the way it was meant to be” or some market-driven judgment on which of us are worthy of financial reward. Instead it is structured from the beginning to favor those who are already wealthy, in many cases through nothing but the luck to be born to the right parents.

This inequality is not inevitable. J.D. Vance noted that within two generations after his hillbilly family moved to Middletown, Ohio and got good jobs with Armco Steel “they had caught up to the native population in terms of income and poverty level.” Thoughtful and effective government policies can provide the needed thumb on the scale in favor of the working class to create jobs, income and a hopeful future. The cultural change and the connections will follow.