23 May 2011

The Deficit's Root Cause

The deficit is pretty simple. The federal government spends more than it collects in taxes.

It's worth asking why Americans feel entitled to both low taxes and high levels of government spending. Maybe the root problem is simply one of growth in incomes. Or rather, a lack of growth.

Between 1900 and 1999, wages grew from $4,200 to $33,700. That's a lot. Faster growth than at any time in history. Ever. This allowed for two things: households got a steady growth in take home pay even while paying more in taxes and getting more government programs like public education and social security.

Yet the phenomenal wage growth slowed late in the century. From 1900 to 1980, wages grew 2.2% a year.

In the 1980s, when Reagan's policies supposedly had such a positive impact on the economy, wage growth slowed to 1.8%.

In the 1990s, when Clinton's policies supposedly had such a positive impact on the economy, wage growth slowed further to just 1.6%.

In the first decade of the 21st century, it got worse. Wage growth dropped into negative range, to -.3%.

These might sound like small differences, but percentages have a way of quickly compounding. By 2009 wages were about $44,000. They would have been $62,000 had wages grown at the same rate in the 30 years after 1980 as they had in the 80 years before 1980. 

Slower growth means that wages are about $18,000 a year less. That's a difference of 40%.

What does this have to do with deficits? 

You could make the case that politicians have been giving tax cuts because the work place is no longer giving raises. American workers expect their take home to raise every year. For that to happen when wages don't go up, taxes must go down. 

One big reason for the polarization in politics is the sharp division on how to deal with lower incomes. The left wants to mitigate the pain of lower incomes with government spending; the right wants to do it by lowering taxes. 

As long as wages continue to stagnant or drop, this polarization - and the painful choices - will only get worse. 

It might be worth thinking about how to jump start income growth again. Any other solution will leave Americans feeling poorer for the simple reason that they are. 

For more on wages in the 20th century, look at Donald M. Fisk, American Labor in the 20th Century, http://www.bls.gov/opub/cwc/cm20030124ar02p1.htm

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