Monday, April 10, 2006

Monday with McKenna: Bend Over, Joe Schmoe

Monday with McKenna today features a hotly topical discussion that I sort of started last Thursday with my "Waterfall Economics" post. While putting that post together, it occurred to me that the comments of Mr. Entin of IRET deserved further attention. I knew I was out of my depth in these waters. Fortunately, however, my partner Terry McKenna is not.

Brian asked me to look at the website for the Institute for Research on the Economics of Taxation (IRET). I am not an economist, but have some training in economics and am familiar enough with the profession to be able to separate technical analysis from political argument. So here goes.

The IRET is a supply side think tank. They deliver genuine economic analysis, not spin. But the value of their analysis is diminished by their belief that economics is divorced from value assessments. Their focus is exclusively on taxation - they favor a “Flat” tax on personal income and believe that taxes on savings and capital create inefficiencies that impede economic growth. You get a sense of where the institute stands from the following sentence: “In a free society, public policy cannot and must not seek to define and pursue the common good.” This sentence came near the beginning of a lecture given in 1995 by the Institute’s founder, the late Dr. Norman B. Ture. Asked to speak upon the common good, Mr. Ture dismissed the topic out of hand, hectoring the audience in favor of flat taxation and in support of the sort of limited government that made the Great Depression possible.

So what do supply-siders like IRET make of the current trend towards greater income disparity or about the frightening trend toward the impoverishment of the American middle class? By the way, if you believe that supply-side economics is dead, you’re wrong. All of the right-wing websites preach what amounts to trickle down economics - they just avoid the phrase.

But first, what do I mean by "frightening trends"?

1. Employers are cutting back on the private safety net – this is the combination of generous health care plans combined with defined benefit pensions. Even profitable employers like Citibank and IBM have opted out of their pensions;
2. For smaller employers, if they offer health insurance at all, the deductibles have risen to as much as $5000 – all in the name of affordability;
3. The public safety net has also been slashed. Welfare is limited to a few years, and states are reforming Medicaid both by paying less to doctors, and by cutting eligibility;
4. We have created a lot of new jobs, but many are in the low paid service sector. Overall, wages are at best stagnant;
5. Middle-aged workers should expect an extended layoff at some point before they reach retirement. After a long wait, their next job will likely be poorly paid and with minimum benefits.

Are there right-wing ideas about how to stop the downward slide?

As far as IRET is concerned, they say nothing about social policy. For the rest of the conservative movement, in general, they play down the issue of income disparity. If admitted to at all, the disparity is seen as a mark of the success of those who have made it—that is, as something to be celebrated. And to be frank, conservatives are not interested in genuine social policy; they mostly just want to cut taxes.

But the Bush Administration has bravely cobbled right-wing ideas about how to repair the failing private safety net. And the answer is SAVINGS. That’s right, tax privileged savings. But I looked at the numbers and they just don’t work out.

Being Joe Schmoe

I simulated the earnings of one imaginary worker for his entire work career. Let's call him Joe Schmoe. Starting at age 22 with a salary of $30K, I gave Joe 3% annual wage growth (thus a salary of $95K at age 65). I also placed him in the sort of “low cost” high deductible health plan that Bush desires. I started Joe off with a modest premium of $3500 ( which I increased then by 2.5% each year). I also had him deposit 5% each year toward a health savings account. I gave him a few years with a brief period of unemployment, but made him healthy – so he did not need to spend much of his savings account. By age 65, Joe's account would have a little less than $60K: that would be pretty much his retirement health care fund. Again, that’s assuming only occasional expenses that exceed the deductible. (Just to show you where relatively common health care costs have gone, I just had an MRI – approved by my HMO. It costs approximately $2500).

But Joe Schmoe also needed to save for retirement. To generate an annual retirement income of roughly $30,000 and to have enough to last till age 90 he would need approximately $375,000. So Joe would need to save another 15% of salary each year.

Let’s look at Joe at age 44 – by then he would be earning $51,000 – net $35,000 after health care and pension deductions, and before taxes, house and car payments etc. By retirement age, Joe Schmoe the pensioner's retiree health care premium could be as high as $10,000 per year. If so, he would net just $20,000. If he didn’t own his home by retirement, he’d certainly not be able to afford to rent. In fact, he'd be more likely to be your proverbial Alpo retiree.

This simple illustration explains how the savings idea falls apart. Conservatives imagine a world of thrifty workers, working hard, living right, and SAVING. But for the average person, his or her dollars are spread pretty thin. And yes, I know I omitted spousal earnings, but I also did not allow for any major problems. Suppose our family had a diabetic child. Or maybe one or both adult wage earners became disabled long term.

There is simply not enough money to pay for it all.

Of course employers could raise wages, but there is little impetus to do that. At the bottom end of employment, the availability of illegal aliens keeps wages down. And even at the high end, businesses would rather share their wealth with the stockholders.

What’s my point? The private safety net always depended upon large non-cash income in the form of benefits. For the typical employee – especially at the lower end, the cost of benefits may be as much as 1/3 of salary.

What we need now is not another impetus toward savings. Instead we need a recognition that the free market has not done well here - thus we need a return to genuine wage and benefits policy. My suggestion (and by the way, look at Massachusetts re health care – they are doing something similar): mandate both retirement coverage (401k’s) for all employees – include a mandated employer contribution of 3 – 6%; add to that mandated health insurance – for all employees, full time, part time, even “consultants.”

Yes, the free marketers would scream, but it would start the turn of the tide.

—T. McKenna

For more on how the right-wing think tanks have managed to turn the debate in their favor, read here.

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