Watch Me Discuss the Future of the Economy on The Sam Lesante Show!

Let’s start 2016 by getting up-to-speed on the American economy! Here’s an interview with me, just in time for the holidays, on The Sam Lesante Show, where we cover everything from the federal budget deal to the Federal Reserve rate hike to the lingering problem of inequality:

You haven’t heard from me for a few months because I’ve been busy doing research on these economic issues. In 2016, I’ll be writing about my findings. I hope you’re as excited as I am for the new year and all the debate it brings!

Our Kids Aren’t the Only Ones Suffering From Inequality. We’re Failing Our Parents Too!

You wouldn’t know it to read the news these days, but the Baby Boomers are in trouble.

Rarely does a day go by that the Baby Boomers aren’t blamed for something. They’re bankrupting Social Security. They caused the Great Recession. They’re hogging all the money.

Well, I’m here to tell you that you’ve got the wrong culprit. Most Baby Boomers don’t have nearly as much money as you think they do. You’re rounding up the many to prosecute the few. That’s just bad police work.

This is a plea for the parents out there. They raised us and fed us, they taught us and nursed us, they brought us into this world, and for the most part, they tried to make it better for us. And we are failing them.

We are failing our parents.

We have a strange sense of obligation in this country. We talk a lot about what we owe our children but very little about what we owe our parents. The future is sacrosanct; the past quickly forgotten.

And we should talk about our children. Because we’re failing them too.

Pick up a copy of Robert Putnam’s new book Our Kids, and you’ll see all the ways we’re failing them:

  • More and more kids are growing up with one parent instead of two. The single parent is less likely to find a job. They have less time to spend with their kids. As a result, their children perform worse in school, exhibit more behavioral problems, and experience more anxiety and depression.
  • More and more kids aren’t eating dinner with their family. They aren’t having conversations with their parents. They don’t know the alphabet when they start school. And they never catch up!
  • More and more kids are living below or near the poverty line, where they “experience severe or chronic stress,” making it harder to concentrate, “cope with adversity, and organize their lives.” They are more likely to be neglected, discouraged, abused, and traumatized. And they have permanent brain damage!
  • More and more families can’t keep up with the rising cost of childcare. They send their kids to low-quality daycare. They have less time available to spend with their kids. And when they do spend time with them, their financial worries make it harder for them to be patient, focus, and nurture.
  • More and more students are falling behind their peers in school. Their parents don’t have the time or knowledge to help them. Their schools don’t have the fundraising capability to make up the difference. Their teachers are demoralized. Their classmates are disruptive, discouraging, and even violent. Extracurricular activities are either unavailable or too expensive to participate in. College is even more expensive. And if they do make it to college, it’s one with lower graduation rates and a future of higher unemployment and lower earnings.
  • More and more kids don’t trust people. They don’t have mentors to teach them about life. They don’t have youth organizations to keep them safe and healthy. They don’t have programs to show them how to apply for college or budget their money. They don’t have contacts to help them find a job. And they think their vote doesn’t matter, so the problem just keeps getting worse!

For Putnam, this is where the story ends. And who can blame him? Kids are an easy sell. No one can blame them for their lot in life.

But what happens when they become adults? We don’t like to talk about that part. Affordable housing, food stamps, incarceration, labor unions, mandated health insurance, Medicaid, Medicare, the minimum wage, paid leave, progressive taxation, public jobs, Social Security, unemployment insurance, welfare — that’s the controversial stuff. Better not to touch those subjects. Kids deserve a helping hand, but adults? We’re not so sure.

The problem is, those adults were kids once upon a time too, and when they were, many of them had it just as bad. And now, after heaping disadvantage upon disadvantage on them for twenty years, they’re expected to compete on the same playing field as everyone else. It’s as if they were running a race, and their peers were given a twenty-year head start — and we criticize them for not catching up!

These adults deserve equalizing policies every bit as much as their kids.

Long-Term Unemployment by AgeThe young and the old aren’t so different after all. It’s the wrong contrast. Even if we wanted to take money from the old and give it to the young, it wouldn’t work because they don’t have it!

The Baby Boomers are trillions of dollars short of the wealth they need to retire without a “drastic lifestyle change.” Over half of them will get most of their income from Social Security, and one in four will have nothing but Social Security. For those who got laid off during the Great Recession, they’re having a much harder time getting rehired than younger generations. And because they were the ones who were holding mortgages when the bubble popped, their homeownership rate has nosedived so badly that Trulia’s chief economist Jed Kolko calls them “the lost generation of homeowners.”

Clearly, inequality affects Americans of every age — and that is why you cannot cure what ails the children without treating the parents, for the ailment is not generational. It is economic, and it perpetuates itself down through the generations.

So, yes, by all means, let’s talk about inequality of opportunity for our kids because that’s where it all starts. But let’s also remember that those kids grow up, and when they do, it doesn’t get easier. The scars of childhood last a lifetime.

We tend to overlook those scars and place blame on those who have fallen behind in the race. But for those of us who have been given a head start and don’t reach back to offer them a hand, the real failure rests with us.

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This op-ed was originally published on the Huffington Post.

The Grand Republican Strategy: We Win, You Pay!

On a recent trip to London, I got into a conversation with a wealthy oil and gas investor about climate change. He didn’t disagree we need to shift from fossil fuels to renewable energy, he said. His job is to make sure the lights in our homes still turn on while we make the transition.

Fair enough, I said. Would you support a carbon tax or a cap-and-trade program to speed up the transition?

“Sure,” he said, to my surprise, without hesitation. “As long as the revenue is spent on new technologies, and not given away to poor people.”

Ah. There’s always a catch.

At first, I thought it was a strange caveat, especially since we’d just got done talking about income inequality, an issue that he seemed quite concerned about. It wasn’t until I saw the Republican presidential hopefuls unveil their new economic plans that it all made sense:

I really want to do the right thing, he’s saying, as long as I don’t have to pay for it.

Carbon Tax BurdenThe reason for his concern, by the way, is that poor people have to spend a higher percentage of their income on oil and gas than rich people, so the burden of a carbon tax or a cap-and-trade program would fall the hardest on them. Many people think that’s unfair since (a) they’re already strapped for cash and (b) they’re not the ones profiting from all the carbon emissions. So progressive proposals usually include a rebate of some sort to ease their cost.

Our friend the oil-and-gas investor would rather give that money to — surprise, surprise — corporate America.

This, I realized, is the grand strategy of the new “reformocon” movement in the Republican party. No longer can a Republican run for president without admitting that the government must do something about our nation’s most pressing problems — but neither can he ask his friends in the One Percent to pay for it. Thus is born a new slogan: We win, you pay!

Mike Lee and Marco Rubio, two of the leading reformocons in the Senate, put this strategy to the test earlier this month when they released an ambitious tax plan centered around an expansion of the Child Tax Credit for middle-income households. Sounds great, right? Rather than cutting government spending for the middle class, these Republicans want to spend more. Heaven knows they could use it, after decades of dismal income growth. But who will pay for it?

Certainly not the rich. The Lee-Rubio plan eliminates taxes on investments, where they get most of their income, and it lowers the corporate tax rate and the income tax rate for the top bracket. Add it all up, and it turns out to be an enormous tax cut for the wealthiest Americans and barely any relief for everyone else.

Republican Budget CutsAnd what happens when all these tax cuts increase the budget deficit by $400 billion a year? Well, if recent history is any indicator, these same Republicans will scream “Crisis!” and demand spending cuts. If you’re wondering where those cuts will come from, look no further than the latest Republican budget, which gets two-thirds of its cuts from programs that help low- and moderate-income households. It scorches their budgets by 40 percent!

So, who will pay for the reformocons’ new plans? You know who.

No sooner had the ink dried on Marco Rubio’s deceptive debut than his presidential competitor Jeb Bush announced, in a speech about income inequality, that he would abolish the federal minimum wage.

Among the reformocon movement, Jeb Bush is not alone in this desire. You may wonder how they can expand the Child Tax Credit in one breath and abolish the minimum wage in the next, since the two policies are basically intended to help the same people?

It’s very simple really, once you understand the “we win, you pay” principle. Wages are paid by corporations. Tax credits are paid by…well, you just saw who, and it ain’t the corporations.

So, for the reformocons: Tax credits, good. Wages, bad.

The most egregious example of this strategy is our first official presidential candidate, Ted Cruz, who’s advocating a “flat tax,” charging the same rate to everyone, regardless of their income. For that to work, he’d have to raise taxes significantly on most Americans in order to cut them significantly for the richest Americans because the only way to raise the same amount of revenue is to find a rate somewhere in the middle of what the two groups pay now. It’s basic arithmetic.

But you never hear the reformocons talk about arithmetic in their speeches. They talk about inequality and upward mobility and the American middle class. They talk about all sorts of expensive new plans, and they never mention that there’s a catch.

They can’t mention the catch because it undermines the entire point of their reforms. If they win, you pay. And if you pay, they’re not helping you after all.

So, who are they helping? You know who.

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This op-ed was originally published in the Huffington Post.

Saving Capitalism From a Painful Demise

Below is my new article in the Winter 2015 issue of the Wharton Magazine. Thanks to editor Matt Brodsky for allowing me to reprint it here!

Retailers Need Consumers

American business leaders rallied around Franklin Delano Roosevelt in 1932 during his candidacy for the presidency, after which he immediately embarked on the most progressive legislative agenda in U.S. history to tackle the Great Depression. From today’s vantage point, it may seem surprising that titans of industry, executives from General Electric to Standard Oil to IBM, not only contributed to Roosevelt’s campaign but helped author many of his famous New Deal reforms. To the men who ran these companies, it was a simple matter of fiduciary responsibility — to current shareholders and to future ones — that they should ensure a more equitable distribution of prosperity, lest their own wealth be dashed to bits on the jagged rocks of a shrinking economy.

Today, we face a similar predicament. The great challenge of business in our time is reversing the destabilizing threat of inequality. While at first this may seem anathema to our profit-maximizing mission, distribution of income lies at the very heart of sustainable capitalism.

For this reason, today’s titans of industry have stepped forward to protest the growing distance between them and the rest of the country. Warren Buffett, Lloyd Blankfein, Stanley Druckenmiller, Bill Gross — legends whose lives and words are studied and idolized at the Wharton School — have all gone public with the wise advice that we steer away from those jagged rocks.

They are not alone in their concern. According to a recent analysis by the Center for American Progress, 68 of the top 100 retailers cite the flat or falling wages of the average American household as a risk to their business — a number that has doubled in the past eight years. A recent poll of small businesses similarly found a strong majority of them in favor of raising the minimum wage.

These business leaders sense an essential truth about our capitalism: Workers are consumers. They spend what they earn — or what they borrow. While the latter may work for awhile, it has limits — and calamitous risks. The only sure way to grow the economy in the long run is to grow consumer spending — and that means growing worker incomes.

In recent decades, workers’ incomes have not grown much, on average. Since the beginning of the Great Recession, the average household has lost 8 percent of its income, after adjusting for inflation. All the growth — and then some — has gone to the richest 10 percent of Americans. And most of that growth — 95 percent of total growth, to be precise — has gone to the richest 1 percent. And most of that growth has gone to the richest 0.1 percent. And so on.

Unsurprisingly, economic growth has been slower since the advent of this new trend. From 1950 to 1980, real GDP grew 3.8 percent per year, versus only 2.7 percent from 1980 to 2010. On the rare occasions when it has approached its previous faster rate, it was fueled by unsustainable borrowing. This is no coincidence. Recent work by economists Özlem Onaran and Giorgos Galanis has shown that most developed countries experience lower growth when the share of their income going to wages (as opposed to profits) declines. In the United States, for example, every 10 percent decline in the wage share causes the economy to shrink by 9.2 percent. In fact, that has been the experience of the global economy as well.

High wages are what economists refer to as a “positive externality.” They generate “spillover effects” that benefit the people who don’t pay for them. When workers receive high wages, they invest more in health and education, increasing their productivity and reducing the costs we all pay for a sicker, less-informed population. They motivate firms to invest in advanced technologies to reduce labor costs, making them more innovative and globally competitive. Workers who receive high wages are less likely to go out on strike, vote against free trade and immigration, protest in the streets, shirk on the job and commit crimes. That’s why, in an analysis of 19 developed nations from 1960 to 2004, economists Robert Vergeer and Alfred Kleinknect found that higher wage growth consistently led to higher productivity growth.

In other words, low wages may be good for one firm, but high wages are better for all firms. Yet many businesses would like to raise wages, but they fear losing ground to their competitors.

The only solution is collective action.

Economists have a collective action for precisely this sort of “coordination failure”: taxing the negative externality and subsidizing the positive. It is time that we recognize inequality for the negative externality that it is, slowing our productivity growth, roiling our markets with volatility, gridlocking our political system, and starving our economy of willing and able consumers. Inequality is a risk to our businesses, and it ought to be treated as such.

We should therefore see taxes not as penalties but as investments in a better, more equitable, more sustainable system. We should strive to prevent a “race to the bottom” in workers’ incomes; if we don’t, the day will come when no one will be left to pay the profits our shareholders demand. Business schools should teach courses about this issue, and business leaders should address it in their boardrooms. It is not merely a political issue. It is very clearly the business of Business.

Joseph Kennedy thought so when he went to work for President Roosevelt. As one of the nation’s most notorious stock manipulators, Kennedy might have been the last person we’d expect to join Roosevelt’s crew, but when Roosevelt named Kennedy as the first chairman of the Securities and Exchange Commission, he saw it as an opportunity to save the market from itself.

“We of the SEC do not regard ourselves as coroners sitting on the corpse of financial enterprise,” said Kennedy in a radio address to the nation. “On the contrary, we think of ourselves as the means of bringing new life into the body of the security business.”

As Wharton graduates, let us think of ourselves in the same manner, and act accordingly.