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Want to make America less unequal? Here are some suggestions
Mar 1st 2014 | From the print edition
Memo To: Barack Obama, President of the United States
From: Your Shadow Council of Economic Advisers
Subject: Mobility
Dear Mr President,
You and John Boehner, the Republican House Speaker, don t agree on much these
days. Yet for a few sentimental seconds during your state-of-the-union message,
you were in harmony. That was when you described America as the country where
the son of a barkeeper is Speaker of the House and the son of a single mom
can be President of the greatest nation on Earth. If Democrats and Republicans
agree on one thing, it is that America is the land of opportunity, where the
humblest child can grow up to fame and fortune.
Sadly, the numbers tell a drearier story. America is not a particularly mobile
place; a child born in the poorest fifth of society has only a 9% chance of
making it to the top fifth. And because incomes have become much more unequal,
it is much worse now to be stuck at the bottom.
Inequality is driven by technology and globalisation. It is therefore hard to
fix. Your preferred solution taxing the rich more is a blunt-edged response to
inequality and in any case anathema to Republicans. Mobility and opportunity,
on the other hand, get their hearts pounding.
In your budget next week you ll have a chance to offer concrete proposals for
improving mobility. There are plenty out there; here, we highlight the best.
Caught in the safety net
Employment is essential to mobility. You know that; but while you have rightly
tried to bolster the demand for labour, you ve neglected the supply. The
Congressional Budget Office (CBO) says that, by 2024, 2.5m fewer people will
work because of the disincentives embedded in Obamacare. The fact is that all
means-tested transfers, including Obamacare, discourage work, which can worsen
mobility. Conversely, time spent on the job makes men and women more productive
and valuable to their employers, leading to higher salaries later in life.
The solution is not to do away with means-testing or transfers, but to
incentivise work in other ways. This is where the Earned Income Tax Credit
(EITC) comes in. It costs $63 billion a year, but it is one of America s most
potent anti-poverty tools. Unlike most other parts of the safety net, it is
contingent on work, and ample research shows that it boosts employment for
those who get it.
But while a family can qualify for an EITC of up to $6,143, a childless adult s
benefits stop at a paltry $496: a poor incentive to work. It needs expanding,
as you ve said yourself. Marco Rubio, a Republican senator, suggests converting
the credit to a wage subsidy, so that beneficiaries get the money regularly in
their pay-cheque instead of once a year as a tax refund. A universal wage
subsidy would be very expensive, but proponents describe it as a reverse
payroll tax that would strengthen the connection to work. Mr Rubio has also
proposed rolling all safety-net programmes into a single state-administered
grant, similar to Britain s universal credit . Simpler is usually better.
The minimally invasive wage
The centrepiece of your attack on inequality is your plan to raise the federal
minimum wage from $7.25 an hour to $10.10 in stages, and then index it to
inflation. The CBO has found that this will benefit 16.5m workers earning at or
near the minimum wage, and will lift some 900,000 out of poverty.
The impact of the minimum wage on employment is usually said to be tiny. But
the CBO says that your proposal would cost around 500,000 jobs, especially
among teenagers; and teenage joblessness can crimp mobility later in life. So
take the minimum wage out of politics and entrust it to a panel of technocrats,
as Britain has done. They would set the timing, size and differentials, and
thus reduce the risks.
Any negative effects of the minimum wage can be counteracted through the EITC.
Isabel Sawhill and Quentin Karpilow of the Brookings Institution recommend
coupling the higher minimum wage with a tripling of the childless EITC to
$1,625, while requiring recipients to work more hours to qualify. They reckon
this will reduce welfare payments and raise taxes enough to pay for the
expanded EITC.
Between the dole and a hard place
America has traditionally offered skimpy unemployment insurance because it was
quick to put the jobless back to work. No longer. At present a third of the
unemployed, 3.7m, have been without a job for six or more months. Each month a
quarter of the long-term unemployed drop out of the labour force altogether.
Much more needs to be done, especially for the hard to hire. A decade ago,
Britain experimented with a new scheme that offered intensive counselling and
training to the long-term unemployed, plus cash bonuses for those holding
steady full-time work for two years. Five years later, beneficiaries were 11%
more likely to be employed than the control group. Savings on UI and other
benefits exceeded the programme s cost by four to one.
To the best of their ability
Disability insurance (DI) was added to Social Security in 1954. Since then, it
has become more generous and its eligibility has been relaxed. The number of
beneficiaries has climbed from 1.5m in 1970 to 8.9m in 2013; the disability
trust fund is scheduled to go bust in 2016.
Since people who end up on DI seldom leave, the key is to persuade them not to
apply. Anyone who can work a bit should be classified as unemployed rather than
disabled. In Denmark, for example, only the permanently incapacitated receive a
benefit. When the Netherlands required employers to pay the first two years
benefits for disabled employees, and to pay higher premiums if they put more
workers in the programme, caseloads fell.
Training and gaining
Practical, vocational training is where America is weakest. There are plenty of
training programmes: 47 spread across nine agencies, many targeting the same
people. The real problem, though, is not duplication but lack of money and
ineffectiveness. In 2011 America spent a paltry 0.1% of GDP on active labour
measures designed to put the unemployed back to work; the OECD average was 0.6%
(see chart 1). Federal spending per head on retraining has fallen by a third in
the past 20 years (see chart 2).
We know what works: listening to what local employers want. In New York, Boston
and Milwaukee non-profit organisations did this, in some cases extracting
commitments to hire. A two-year evaluation found that participants were earning
$4,000 more in the second year than the control group. The labour department is
now offering grants to community colleges that train students for jobs
identified by local employers. You can build on this.
Moving up by moving out
Americans are usually quick to up sticks in search of a better life. But the
share of Americans who move counties each year has been declining for nearly 30
years. Blame demography (older people change jobs less often), dual-earner
couples (he wants to move; she doesn t) and, recently, inability to sell a
house.
But employment was 12 percentage points higher among people who moved than
people who didn t, according to a Hamilton Project study covering 2005 to 2008.
Michael Strain of the American Enterprise Institute recommends cash assistance
for those who move if a new job is at least a two-hour drive away.
Get em while they re young
So far we have focused on Americans of working age; but the very young need
your attention, too. Research shows that poverty can damage learning (and hence
prospects) in children as young as five. This is why everyone wants to expand
pre-school education. But the most successful interventions start very early;
are intensive, also involving home visits, health and nutrition care; and cost
a bundle. You need to rethink your proposal for universal high-quality
pre-school for four-year-olds. Better to concentrate the money on a smaller,
younger, truly disadvantaged group of children.
Coming up with ideas is easier than paying for them. But it can be done. We
spend vast sums on entitlements for the rich elderly that do nothing to help
mobility or narrow inequality. If you can persuade your fellow Democrats to
rein in entitlements, Mr Boehner may convince Republicans to relent on taxes.
America would get its grand bargain and the promise of a more mobile society.
http://www.economist.com/news/united-states/
21597925-want-make-america-less-unequal-here-are-some-suggestions-memo-obama