The American Dream means any person can achieve prosperity through hard work and ingenuity because there are no inherent barriers in our society. However, a combination of global economic forces and poor domestic policy has rendered upward mobility a pipe dream for most Americans.
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Repairing this shared national ethos requires urgent adoption of intelligent tax, regulatory and education reform. Who wants to live in a McMansion behind a barbed-wire fence? We need a “help your neighbor” policy that conforms to our free market heritage in order to resuscitate American Labor.
Labor’s share of US national income (as opposed to capital’s share) has steadily declined over the last 35 years, and the trend shows no signs of abating, according to a National Bureau of Economic Research paper. From 1940 to 1980 labor’s slice of the pie held steady at around 65%, while a growing pie led to improved living standards. Since 1980, however, labor’s share has steadily declined to around 60%.
The decrease in labor’s share has disproportionately hurt the middle and lower classes, creating social unrest, political turmoil and an era of bad feelings. A Pew Research Center survey in June 2014 found that 62 percent of Americans believe this country’s economic system “unfairly favors powerful interests” and only 34 percent think it’s “generally fair to most Americans.” But you don’t have to be a pollster to know people are losing trust in the system. As Yogi Berra said, “You can observe a lot just by watching.”
Labor share loss reflects a number of factors: increased automation, China’s unfair free trade practices that artificially suppress its currency, lack of political will to repair our nation’s crumbling infrastructure and a faulty public education system. Misguided government policies have only made things worse. Poor health care legislation and labor regulation, for example, has incentivized businesses to hire part-time workers and outsource more jobs.
On a recent “Wall Street Week,” Fortress Investment Group President Michael Novogratz related how Uber executives told him the company, which links drivers with riders, could raise its valuation by $15 billion simply by paring drivers’ share of each fare by 5 percent. Why would they do that? Uber’s response: “Because we can.” While we can’t begrudge companies for maximizing cost efficiency, we need to empower and properly train our workforce for the skilled jobs demanded in the 21st century.
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It took 35 years for us to get us here, so changes to reverse labor’s shrinking share won’t happen overnight. But there are a few steps we can immediately take to get back on the right course.
For starters, current government policy and tax code significantly inhibits growth in the private sector. While many Americans have grown cynical about our do-nothing government, there are examples of successful policy. When dividend taxes were cut in 2003, guess what happened? Companies started paying more in dividends and high-yield dividend stocks went up. The mortgage deduction led to greater investment in housing. These policies matter.
What if a business received a tax break if it limited the executive-to-entry-level employee compensation ratio to 65-to-1? That ratio now stands at an average of around 350-to-1. Better-paid workers buy more goods and services, increasing aggregate demand and baking a bigger economic pie for everyone.
Or, what if companies got tax incentives for investing in local communities, perhaps by sponsoring a charter school or adopting a park, among other possibilities. Here’s the point: With the right long-term thinking and a simplified tax code, behaviors would change.
The irony is no political mandate will cause real wages to rise. Warren Buffett recently shared an idea to expand the earned income tax credit rather than raising the minimum wage. Benefits of a higher minimum wage, he contends, would be offset by a corresponding loss in jobs.
Further, why not exploit today’s low interest rates to finance roughly $10 trillion worth of improvements to our nation’s crumbling infrastructure? Yes, it would boost national debt in the short-term, but there are good and bad forms of debt. Good debt accrues assets that generate positive returns and externalities.
Take Boston’s Big Dig project, for instance. The massive 25-year-long transportation tunnel incurred construction delays and cost four times the original budget, but created new neighborhoods, shored up the urban tax base and yielded tremendous tangible and intangible long-term returns to the New England area. This kind of intelligent spending will have the dual outcome of putting people to work in real full-time jobs and leaving the country better off for our children.
Failing to act – and soon – will only widen societal disparities and make them harder to correct. America’s economic strength has become limited by our new-found rigidity and lack of creativity, but there is a better way forward. We require bold new ideas and leaders today in order to dream big about tomorrow.