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
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The tale of Battersea power station shows how affordable housing is lost

Initially, the developers promised 636 affordable homes. Now, they have reduced the number to 386. 

It’s the most predictable trick in the big book of property development. A developer signs an agreement with a local council promising to provide a barely acceptable level of barely affordable housing, then slashes these commitments at the first, second and third signs of trouble. It’s happened all over the country, from Hastings to Cumbria. But it happens most often in London, and most recently of all at Battersea power station, the Thames landmark and long-time London ruin which I wrote about in my 2016 book, Up In Smoke: The Failed Dreams of Battersea Power Station. For decades, the power station was one of London’s most popular buildings but now it represents some of the most depressing aspects of the capital’s attempts at regeneration. Almost in shame, the building itself has started to disappear from view behind a curtain of ugly gold-and-glass apartments aimed squarely at the international rich. The Battersea power station development is costing around £9bn. There will be around 4,200 flats, an office for Apple and a new Tube station. But only 386 of the new flats will be considered affordable

What makes the Battersea power station development worse is the developer’s argument for why there are so few affordable homes, which runs something like this. The bottom is falling out of the luxury homes market because too many are being built, which means developers can no longer afford to build the sort of homes that people actually want. It’s yet another sign of the failure of the housing market to provide what is most needed. But it also highlights the delusion of politicians who still seem to believe that property developers are going to provide the answers to one of the most pressing problems in politics.

A Malaysian consortium acquired the power station in 2012 and initially promised to build 517 affordable units, which then rose to 636. This was pretty meagre, but with four developers having already failed to develop the site, it was enough to satisfy Wandsworth council. By the time I wrote Up In Smoke, this had been reduced back to 565 units – around 15 per cent of the total number of new flats. Now the developers want to build only 386 affordable homes – around 9 per cent of the final residential offering, which includes expensive flats bought by the likes of Sting and Bear Grylls. 

The developers say this is because of escalating costs and the technical challenges of restoring the power station – but it’s also the case that the entire Nine Elms area between Battersea and Vauxhall is experiencing a glut of similar property, which is driving down prices. They want to focus instead on paying for the new Northern Line extension that joins the power station to Kennington. The slashing of affordable housing can be done without need for a new planning application or public consultation by using a “deed of variation”. It also means Mayor Sadiq Khan can’t do much more than write to Wandsworth urging the council to reject the new scheme. There’s little chance of that. Conservative Wandsworth has been committed to a developer-led solution to the power station for three decades and in that time has perfected the art of rolling over, despite several excruciating, and occasionally hilarious, disappointments.

The Battersea power station situation also highlights the sophistry developers will use to excuse any decision. When I interviewed Rob Tincknell, the developer’s chief executive, in 2014, he boasted it was the developer’s commitment to paying for the Northern Line extension (NLE) that was allowing the already limited amount of affordable housing to be built in the first place. Without the NLE, he insisted, they would never be able to build this number of affordable units. “The important point to note is that the NLE project allows the development density in the district of Nine Elms to nearly double,” he said. “Therefore, without the NLE the density at Battersea would be about half and even if there was a higher level of affordable, say 30 per cent, it would be a percentage of a lower figure and therefore the city wouldn’t get any more affordable than they do now.”

Now the argument is reversed. Because the developer has to pay for the transport infrastructure, they can’t afford to build as much affordable housing. Smart hey?

It’s not entirely hopeless. Wandsworth may yet reject the plan, while the developers say they hope to restore the missing 250 units at the end of the build.

But I wouldn’t hold your breath.

This is a version of a blog post which originally appeared here.

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