The US needs a debate on wages, not tax cuts

Wages have stagnated for 30 years - people just don't have enough money.

President Barack Obama is gleefully awaiting another showdown with Congressional Republicans over the question of whether to allow the Bush-era tax cuts to expire for the richest one per cent of Americans. 

I say "gleefully" for two reasons. One, Obama lost this fight last fall when Republicans forced him to trade extending tax cuts for extending jobless insurance. Yes, the GOP actually said it wouldn't give relief to the unemployed unless Obama agreed to give the rich more money, and Republicans didn't pay a political price for that. The other reason Obama is "gleefully" awaiting another showdown is that Republicans will finally pay that price in the form of their candidate, Mitt Romney.

Obama wants to extend the cuts on incomes under $250,000 a year but let them expire, as they are set to do at year's end, for people like himself who make more than $250,000. The Republicans are saying such a tax hike is going to hurt small business owners, which is what they usually say when they no plausible pretext for protecting the super-rich.

It's going to be fun to watch but we need more than fun in our political discourse. Far more than a debate on tax cuts, we need a debate on wages. We have paid the lowest tax rate in 30 years, according to the Congressional Budget Office. While that has surely mitigated the effects of the recession, it hasn't gotten us out of it, because the fundamental problem with the economy is that people don't have enough money. I'm not being cheeky. Wages have stagnated for 30 years.

More importantly, our conception of the recession is backwards. Lack of demand is what's keeping the economy from thriving, not supply. But we drank the Kool-Aid of supply-side economics back when Reagan was president, so it's no longer possible to see the importance of raising aggregate demand. The debate is so upside down now that a Republican Congressman from Florida, when asked recently if he'd support a bill to raise the minimum wage, actually said: "Get a job." US Rep. Bill Young didn't seem to understand that minimum wage-earners have jobs. They just want a living wage.

Fortunately, another Congressman, Democrat Jesse Jackson Jr. of Chicago, has introduced legislation to raise the federal minimum wage from $7.25 to $10 an hour (some states add to the federal rate for their own minimum wage). It's unlikely Congress will take up debate, not with an election looming, but even if it were to pass the bill by some miracle, it wouldn't be enough for a family of four to live above the poverty line.

It would come close but it could be much better.

In March, the lefty Center for Economic and Policy Research released a report using the three most commonly used benchmarks: inflation, average wages and productivity. If minimum wage kept up with inflation since 1968 (when minimum wage was at its peak value), it would be $10.52 an hour. If it kept up with the average production worker's earnings, it would be at $10.01. Both of these benchmarks have been stable over the years, but productivity has soared.

This means workers are working harder per hour but not being paid more for all that extra productivity. Workers give, bosses take. So if the minimum wage had kept up with labor productivity since 1968, then it would be a staggering $21.72 a hour. The CEPR report notes that if workers received only half the productivity gains, the wage would be $15.34. A quarter would be $12.25, all of which is far higher than today's paltry $7.25.

It's going to be a long time before we shift from a debate on tax cuts to a debate on wages, but it will happen. It's not a question of if. There are too many Americans struggling too hard to get by. And if the minimum wage rose to only $12.25 an hour, the president wouldn't be the only who's gleeful.

 

Workers are working harder per hour but not being paid for their extra productivity. Photograph: Getty Images

A year on from the Spending Review, the coalition's soothsayer has emerged to offer another gloomy economic prognosis. Asked by ITV News whether he could promise that there wouldn't be a double-dip recession, Vince Cable replied: "I can't do that.

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Will Euroscepticism prove an unbeatable advantage in the Conservative leadership race?

Conservative members who are eager for Brexit are still searching for a heavyweight champion - and they could yet inherit the earth.

Put your money on Liam Fox? The former Defence Secretary has been given a boost by the news that ConservativeHome’s rolling survey of party members preferences for the next Conservative leader. Jeremy Wilson at BusinessInsider and James Millar at the Sunday Post have both tipped Fox for the top job.

Are they right? The expectation among Conservative MPs is that there will be several candidates from the Tory right: Dominic Raab, Priti Patel and potentially Owen Paterson could all be candidates, while Boris Johnson, in the words of one: “rides both horses – is he the candidate of the left, of the right, or both?”

MPs will whittle down the field of candidates to a top two, who will then be voted on by the membership.  (As Graham Brady, chair of the 1922 Committee, notes in his interview with my colleague George Eaton, Conservative MPs could choose to offer a wider field if they so desired, but would be unlikely to surrender more power to party activists.)

The extreme likelihood is that that contest will be between two candidates: George Osborne and not-George Osborne.  “We know that the Chancellor has a bye to the final,” one minister observes, “But once you’re in the final – well, then it’s anyone’s game.”

Could “not-George Osborne” be Liam Fox? Well, the difficulty, as one MP observes, is we don’t really know what the Conservative leadership election is about:

“We don’t even know what the questions are to which the candidates will attempt to present themselves as the answer. Usually, that question would be: who can win us the election? But now that Labour have Corbyn, that question is taken care of.”

So what’s the question that MPs will be asking? We simply don’t know – and it may be that they come to a very different conclusion to their members, just as in 2001, when Ken Clarke won among MPs – before being defeated in a landslide by Conservative activists.

Much depends not only on the outcome of the European referendum, but also on its conduct. If the contest is particularly bruising, it may be that MPs are looking for a candidate who will “heal and settle”, in the words of one. That would disadvantage Fox, who will likely be a combative presence in the European referendum, and could benefit Boris Johnson, who, as one MP put it, “rides both horses” and will be less intimately linked with the referendum and its outcome than Osborne.

But equally, it could be that Euroscepticism proves to be a less powerful card than we currently expect. Ignoring the not inconsiderable organisational hurdles that have to be cleared to beat Theresa May, Boris Johnson, and potentially any or all of the “next generation” of Sajid Javid, Nicky Morgan or Stephen Crabb, we simply don’t know what the reaction of Conservative members to the In-Out referendum will be.

Firstly, there’s a non-trivial possibility that Leave could still win, despite its difficulties at centre-forward. The incentive to “reward” an Outer will be smaller. But if Britain votes to Remain – and if that vote is seen by Conservative members as the result of “dirty tricks” by the Conservative leadership – it could be that many members, far from sticking around for another three to four years to vote in the election, simply decide to leave. The last time that Cameron went against the dearest instincts of many of his party grassroots, the result was victory for the Prime Minister – and an activist base that, as the result of defections to Ukip and cancelled membership fees, is more socially liberal and more sympathetic to Cameron than it was before. Don’t forget that, for all the worry about “entryism” in the Labour leadership, it was “exitism” – of Labour members who supported David Miliband and liked the New Labour years  - that shifted that party towards Jeremy Corbyn.

It could be that if – as Brady predicts in this week’s New Statesman – the final two is an Inner and an Outer, the Eurosceptic candidate finds that the members who might have backed them are simply no longer around.

It comes back to the biggest known unknown in the race to succeed Cameron: Conservative members. For the first time in British political history, a Prime Minister will be chosen, not by MPs with an electoral mandate of their own or by voters at a general election but by an entirelyself-selecting group: party members. And we simply don't know enough about what they feel - yet. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog. He usually writes about politics.