Our Dickensian Economy

Season's greetings. And while I'm on the subject, this is a good time for us "haves" to start thinking more about America's "have nots."

The national unemployment rate stands at a horrifying 9.8%. But unemployment is 15.7% among high-school dropouts, and an astonishing 42% of all unemployed workers have been jobless for more than six months. At press time, Congress appeared poised to pass a package of tax cuts that offers 19% of its benefits to the richest 1% of taxpayers. Earlier this month, the president's deficit commission proposed a comprehensive deficit-reduction plan with many virtues. But it included, among other things, a corporate income-tax cut for the haves and Social Security benefit cuts for the middle class.

There is a pattern here. Those of us who live near the top of the income pyramid are doing very nicely, thank you. Yet our government keeps showering us with Christmas presents. Meanwhile, economic life is pretty miserable for those near the bottom and is getting worse for those in the middle. Does this strike you as fair?

The main story line of the U.S. economy over the last third of a century evokes Charles Dickens's classic "A Christmas Carol." Starting in the late 1970s, the labor market turned ferociously against those with less education and in favor of those with more. This was not Ronald Reagan's fault, nor George Bush's (either one), nor Mitch McConnell's. It just happened. And except for a brief shining moment during the Clinton boom, the Great Disequalization has continued unabated to this day.

You might have thought that the government would push back against this trend, but you'd have been wrong. Instead, our government has opted for lavish tax cuts for the haves and crumbs (or worse) for the have nots. In consequence, America may now be the greatest place on earth to be rich but an awful place to be poor. Consider:

• Jobs. Our biggest problem today is the shortage of jobs. Payroll employment fell an astonishing 8.4 million from its December 2007 peak to its December 2009 trough and has gained back less than a million of those jobs so far. With the working-age population increasing by almost 8 million over that period, the unemployed today number almost 15 million.

The Federal Reserve is trying to do something about it. But having fired so much ammunition already, it is down to pretty weak weaponry. Yet the Fed's announcement that it would purchase $600 billion worth of Treasury bonds was greeted by thunderous protest from the right, which frets over inflation even as we teeter on the brink of deflation.

The administration and many members of Congress also want to spur job creation. But they are constrained by the humongous budget deficit and hamstrung by a filibuster-happy Senate. So President Obama reluctantly agreed to pay ransom to what he called "hostage takers" by providing yet more tax cuts for the rich. Does anyone really think that limiting the estate tax to the top one-seventh of 1% of estates is a good way to create jobs?

• Wages. When it comes to wages, the basic story of recent decades is redolent of Scrooge. Real average hourly earnings (excluding fringe benefits) now stand roughly at 1974 levels. Yes, that's right, no real increase in over 35 years. That is an astounding, dismaying and profoundly ahistorical development. The American story for two centuries was one of real wages advancing more or less in line with productivity. But not lately. Since 1978, productivity in the nonfarm business sector is up 86%, but real compensation per hour (which includes fringe benefits) is up just 37%. Does that seem fair?

• Taxes. We often hear that the top 1% of income-tax payers pay about 40% of all the income taxes. Sounds like Robin Hood is on the job. But that's just income taxes. Did you know that the payroll tax (the people's tax) now brings in about 96% as much revenue as the personal income tax (the rich man's tax)? As recently as 2000, it brought in just 65% as much. Yes, taxpaying has been radically democratized. Yet the drumbeat from the right continues: We must remove the oppressive yoke of taxation from the backs of the haves, and put it on the backs of the . . . Well, they usually don't finish the sentence. But someone must pay the bills.

• The federal budget deficit. American budget history from the end of World War II until the Reagan presidency was simple: The federal government ran modest deficits in a growing economy, and the debt-to-GDP ratio fell and fell. President Reagan's huge income tax cuts, which were heavily skewed toward the rich, changed all that. And it took 15 years—and politically courageous actions by Presidents Bush 41 and Clinton—to set things right.

But the nation took leave of its fiscal senses, and simply stopped paying for anything, during President Bush 43's eight years. Not for huge tax cuts—once again skewed toward the rich. Not for the Medicare drug benefit—which, in fairness, is skewed toward the poor. Not for two wars. That spree was followed by the financial crisis, the Great Recession, and the policy responses thereto—all of which blew up the deficit massively under President Obama.

So here we are today, with a large structural deficit slated to increase further. Until the recent agreement on $858 billion of new tax cuts, the whiff of fiscal responsibility was in the air. The Bowles-Simpson deficit- reduction proposal garnered the most attention. It asked Americans to eat a lot of spinach, which was probably inevitable. But a number of critics have pointed out that the plan as a whole looks a bit regressive. Since so much of the deficit (though not all of it) stems from the Reagan and Bush tax cuts, does that strike you as fair?

Well, fairness is in the eye of the beholder. But here's a stunning coincidence. The entire Bowles-Simpson plan would reduce federal borrowing by $3.9 trillion over 10 years, including interest savings. That's a lot of money. In fact, it's almost enough to cover the cost of extending all the Bush tax cuts for 10 years.

So here's a choice: We can achieve nearly $4 trillion in budgetary savings by accepting everything on the Bowles-Simpson list—spinach, broccoli and all. Or we can get a bit more than $4 trillion simply by letting all the Bush tax cuts expire in 2012. Of course, ending those tax cuts would mean returning to the tax rates of the Clinton years—when, as I'm sure you recall, high tax rates killed incentives and left our economy dead in the water.

Pick your poison. And, by the way, Merry Christmas.