In the Nation's Interest

State of the Union

By Joseph Minarik

To expectations, President Obama focused his State of the Union address on the economy in general, and “inequality” in particular.  Also in keeping with the leaks, the President set a more-muscular tone by saying that he would act if the Congress would not.  Both of these lines of thought are worth some exploration.

Let’s start with the second, because it cuts across all of the President’s agenda.

Probably twice in every Administration, on average, the President’s staff explores options for executive orders and other actions that the President can take without approval by the Congress.  The first exploration comes during the transition, when the team wants to find ways for the President to show leadership and “hit the ground running.”  The second occurs at some later hour when relationships with the Congress have soured and the President wants to “do something.”  Each time, the question is re-litigated with new litigators.  And that is why the question repeats itself.

The weaknesses of the executive order are that the President, by himself, cannot appropriate funds, and that he can order only those who work for him.  So take the “inequality” issue as an example.  The President by himself cannot give to or spend money on behalf of people at the bottom of the income scale; nor can he tax more heavily those at the top end of the income scale.  Therefore, his power to address that issue is strictly limited.

Likewise, the President cannot order rank-and-file private employers to increase the minimum wage (which is set by statute).  He can increase wages, as he announced in his address, only for those who do business with the government – affecting only a few thousand people in a workforce of about 155 million, thereby having only limited effect while creating inequities and distortions across employers and jobs.

The President conceivably can move money from programs he does not like to his preferred priorities.  But the amount of such transfers or reprogrammings is strictly constrained in appropriations bills, and on the scale of the inequality issue is de minimis.  And such transfers may never extend beyond agency boundaries – so the President cannot use money appropriated to the Department of Defense to advance a new priority in the Departments of Labor or Health and Human Services.

There can be narrow openings for a President.  For example, in December of 2009, the Environmental Protection Agency ruled that pre-existing law protecting the public health and welfare applied to emissions of carbon.  EPA therefore could use funds appropriated for that broad function to issue and enforce regulations restricting carbon emissions.  But such openings are few and far between, and attempts to stretch a case can wind up in court or can motivate changes to future appropriations laws to restore the Congress’s original priorities.  And even if the Congress fails to take restrictive action, such assertions of authority by a President can cost him or her good will in working with the Congress in the future (if there is any good will to dissipate).

So don’t hold your breath waiting for changes in your life that will come from any unilateral action by the President.  There will be more hype than hope on this front.

But with that broad framework established, the President did speak at length about all manner of action on the state of the economy, and “inequality” more specifically.

There are different related flavors of the inequality concern.  One is the snapshot view that finds a gap between the rich and poor at one instant in time.  Another – usually referred to as “mobility,” often between generations – is the motion picture that reveals people changing places in that unequal ranking over a period of time.  A third perspective, somewhat distant but highly relevant, is whether all incomes are growing over the time covered by that motion picture.  To switch metaphors, imagine an escalator where some people are near the top and others are near the bottom.  If the escalator is very long, the gaps between those persons could be longer or shorter.  And switching places on the escalator – whatever its size – could be an exercise in frustration if the escalator itself is broken down, and in the end none of the riders is getting anywhere.  The escalator’s motion – as opposed to the placement of the different individuals on it – is what in this context we call economic growth.

Some have criticized the President for presenting a rather thin policy agenda for attacking inequality.  To be fair, that is mostly because there is not a very robust list of potential policies from which to choose.  It might be relatively easy to reduce inequality solely by dragging down people at the top of the scale, leaving society’s total incomes lower (and every individual’s income either lower or unchanged).  But that is not what the American people want, and there is little or no risk of action explicitly to pursue that path.

With that fairly simple principle established, then one can say that reducing inequality – by moving people up the scale – is pretty much an unambiguous good thing.  People with higher incomes are certainly better customers, and probably better suppliers and employees, for everyone else. But how to achieve such an income-increasing reduction of inequality?  That is not an easy trick.

Move (pardon the pun) to “mobility.”  The same simplistic principle applies – economic mobility achieved solely because people with high incomes lost them would be a pretty dismal phenomenon for everyone.  That established, then greater mobility unambiguously is a good thing.  It would provide people with the incentive to work to surpass the rewards of others, and thereby to make the entire economy bigger.  But again, increasing mobility is no mean feat.  How do you empower individuals to achieve, and to achieve more?

In the end (my opinion), this all boils down to the third flavor: economic growth.  But I haven’t done you any favors; achieving economic growth is the economist’s mystery of life.  We members of the fraternity / sorority refer to productivity growth as the ultimate free lunch, because it can increase both wages and profits at the same time.  But productivity growth isn’t really a free lunch – because it isn’t free.  You have to work for it, and it is hard work.  Still, if you achieve robust productivity growth, the odds are that, over time, you will achieve both greater equality and mobility, through widely shared increases in incomes.

These days, some disparage the notion that productivity growth (and economic growth) reduce inequality and increase standards of living, because of recent slow wage growth and widening earnings differentials.  But seasoned data watchers have seen this play several times before.  Economic downturns lengthen the queue of unemployed workers seeking jobs.  That bids down wages.  But when, eventually, the economy recovers solidly, wages begin to rise.

Some today say that “this time is different” – although some of those critics have so little historical perspective that they believe that they are saying something new.  Their hypothesis is that suddenly technology has begun destroying jobs, and that the labor market is in a “jobless recovery” and never will rebound fully.  But in fact, concerns today about robots and technological change destroying jobs echo multiple economic cycles and generations of workers past.  The steam engine was feared to destroy middle-class jobs.  (John Henry was a steel-drivin’ man – a good job at good wages, at least as he was reported to believe in some versions of the old folk song.  He hammered himself to death attempting to demonstrate that a steam engine could not replace a man – and apparently therefore proved the opposite.)  Not to date myself excessively, but when I was in school, “automation” was to many a frightening word.  A futurist named Robert Theobald argued that workers soon would become so productive that the few persons who earned the spectacular resulting incomes would not demand as much output as the entire workforce could produce.  Therefore, society would face a challenge of dividing the limited available work among the many potential workers so that all could earn an adequate living.  Today’s only revision to that horror story – repeated during every “jobless recovery” since – has been to add globalization to the vile technological brew.

Could this time be different?  Certainly.  No one can see the future.  And with every past burst of technological progress, some jobs and the values of their required skills have been destroyed, leaving some people worse off and unhappy.  But this economic cycle has been horrendous – surely the worst since the Great Depression – and the lethargy of its recovery has been the best-anticipated surprise in post-World War II economic history.  (The most important finding of economists Carmen Reinhart and Kenneth Rogoff was the extended duration of economic downturns resulting from financial crises – not the hair-trigger effect of debt in excess of 90 percent of GDP slowing growth, on which so much controversy has focused.)  And with true recovery from every past economic cycle, there has come a period of widely shared prosperity – of which the economy of the late 1990s is perhaps the best and most-recent, but not the only, example.

So the answer to the President’s inequality concerns probably lies primarily in his agenda for faster overall economic growth.  A more robust earned income tax credit (EITC), extended unemployment insurance benefits, and a higher minimum wage are intended to address the symptoms of inequality, but not the root cause of slow growth.  (This blog has discussed the issues underlying extended unemployment benefits and the minimum wage in past posts.)  But the President’s growth agenda was pretty much of a laundry list, which is worth considering briefly item-by-item.

Improving education is on everyone’s (including the President’s in the State of the Union) to-do list for growth.  But there is limited consensus on how.  Probably closest to operational agreement is expanding access to early childhood education, as the President proposes.  CED has made that case in numerous policy statements.  The primary counter-arguments hold that government is trying to step in between parents and their children, and to impose one-size-fits-all, cookie-cutter curriculum.  Quality preschool, when practiced, has a strong track record of achievement.  We need to reconcile best practice with our values of individualism and parental independence.

The President cited initiatives, including apprenticeships, at the secondary-school level to connect students with prospective employers and convey needed skills.  There is considerable support for this concept, though objection sometimes is heard that some students could prematurely be tracked into programs that preclude their progress into postsecondary education.  At the postsecondary level, the President advocated control of tuitions that are rising beyond the means of many prospective students.  The controversial question here is the means of doing so.  CED has issued a policy statement in which we advocate cooperation between business and wide-access educational institutions to innovate process improvement and hold costs down while maintaining or improving quality.

The President put Vice President Biden in charge of a program to improve and scale up the federal government’s programs for mid-career training of displaced workers.  This is a challenging, perhaps thankless, assignment.  Market signals of job opportunities (and therefore promising training fields) one or two years down the road can be hard to read.  Private training firms have proved themselves adept at skimming only the most-promising prospects from the top of the pool of applicants to maximize their reimbursements from the federal government.  Mid-career training is essential; let us hope that the Vice President can succeed where previous efforts have failed.

The President called for patent litigation reform, to prevent the practice of persons with no true investment in knowledge applying for very general patents for the sole purpose of litigating true innovators for alleged infringement.  He further called for increases in basic research funding.  These policy ideas are sound, though their payoff is uncertain and (especially in the case of basic research) likely years into the future.

The President touted his energy policy as a success, given the increase in domestic oil production to more than half of current consumption.  Together with that oil production, of course, has come much-increased production of natural gas.  The President cited natural gas as the bridge fuel to take our economy to a fully renewable future, and both advocated investment in new auto fueling infrastructure and pledged environmental protection along the way.  It is not yet certain – though it is hoped, and is possible or even likely – that continued high levels of natural gas production are consistent with protection of water resources and prevention of leakage of greenhouse gases at the wellhead.  Furthermore, the cost of investment in fueling infrastructure could be considerable, and the timing of such investment relative to the verification of the efficacy of environmental protection and efficient technology, and market acceptance of natural gas for fueling autos, will be critical.  Any go-no go decision on such fueling-infrastructure investment could be one of the biggest that our society will make for years to come.

Finally, the President advocated corporate tax reform.  Here, rhetoric may have soared above reality.  The President said that by repealing obsolete and inefficient tax subsidies and incentives, the Treasury could afford to reduce tax rates on corporations that create jobs at home.  The current federal statutory corporate tax rate is 35 percent.  The standard advertising line for proposals to reform the corporate tax is attainment of a tax rate no higher than 25 percent (though the President in the State of the Union did not specify a number).  However, experts have estimated that the elimination of anything that looks, feels, or smells like a preference in the current tax law – and it is far from clear that anyone with an election certificate would be willing to go that far in clearing the tax code – will finance a reduction of the corporate tax rate only to 27 percent.

So the President’s proposal to reform the corporate tax and reduce the tax rate is highly ambitious.  But the President immediately added that with the revenue raised by eliminating corporate tax preferences, the nation could embark on a major infrastructure investment program.  Many economists would in principle support the President’s separate call for increased funding for basic research, but even the most wondrous resulting knowledge breakthroughs most likely will not allow the President to spend the same dollars twice.

Advocates of one policy initiative or another routinely promise a payoff in increased economic growth.  But there is wisdom behind the old economist joke that if that $50 bill on the sidewalk were real, someone would have picked it up already.  None the less, we must keep trying – to reduce inequality and increase mobility, and for many other reasons – and so the nation should debate the President’s program as well as any other reasonable idea that we can find.

(My favorite personal State of the Union experience:  In one late Clinton Administration cycle, a draft of the address was sent around for comment and suggestion.  In a paragraph toward the end of the draft, I proposed a fairly inconspicuous-looking one-word edit.  The next draft came around; I noticed that my edit had not been taken, and I proposed it again.  Then came the final, speak-now-or-forever-hold-your-peace draft.  Again, I saw that my proposed edit was not taken.  This time, I pulled out my red pen, made the edit again, and drew an arrow to the following note which I wrote at the top of the page:

THIS IS IMPORTANT:  The sentence below contains a triple negative, and in its current form and if the proposed edit is not taken, will have the President of the United States tell the parents of America to tell their teenaged children to take drugs.

It turns out that this was one of the years in which President Clinton’s address ran so long that he omitted several paragraphs, including the paragraph in question here, from his actual presentation.  However, somewhere, there is an “as prepared for delivery” version that will keep the parents of America on the straight and narrow.

That is my reward.  That, plus being told that in the final editing session by the speechwriters, someone said, “Joe Minarik is the only person in the White House who would have caught that.”

Well, apparently so...)