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Analysis
Wage stagnation overshadows US poll

Wage stagnation overshadows US poll

Wanted: dialogue on the American dream

by Marsha Vande Berg in San Francisco

Wed 27 Apr 2016

America’s economic worries hover like dark clouds over the presidential candidates’ campaign trail. Following the latest batch of primaries, notably New York last week and Pennsylvania this week, Hillary Clinton is close to edging out Vermont Senator Bernie Sanders to become the Democrat standard-bearer. The Republican contest is closer, but Donald Trump, the real estate mogul, appears to be strengthening his position as frontrunner ahead of Ted Cruz, making less likely a contested selection at the July GOP convention.

In past campaigns, candidates could focus on shiny promises of education, a good wage, home ownership and future prosperity for voters’ children. This time, wage stagnation is the central issue – reflecting the electorate’s fears of losing both income and hopes for the future.

In 2014, a typical American family earned $53,657, barely $200 over their income a year earlier. Adjusted for inflation, the federal minimum wage peaked in 1968 at $8.54 (in 2014 dollars). Congress last raised the minimum wage in 2009 to the current $7.25, although several states have raised their statewide minimums.

Translated into the political arena, these facts electrify Trump supporters and amplify the cri de coeur of Sanders’ backers.

Whoever takes office in January will have to move away from campaign politics and find sound policies that can move America and Americans forward.

The new leader must promote and listen to a national dialogue about how Americans themselves can renew the American dream – and then act on what is said. Special interests in Washington speak with money. Yet, this campaign season, individual interests within the electorate are demanding a change from business as usual. Politicians who ignore this dynamic will earn the scorn and cynicism of the American public.

On the tricky question of how to respond, one answer comes from soundings taken by Edward Lazear, a labour market economist, professor at Stanford university’s Graduate School of Business, and former chairman of President George W. Bush’s council of economic advisers.

Inviting his students to think unconventionally about tax policy and the presidential campaign, Lazear made the simplistic point that the primary reason for taxes is to raise revenue – and revenue in turn funds key components of the American dream.

However the fundamental purpose of taxes becomes distorted when the tax code – which hasn’t been reformed significantly since 1986 – becomes used in a progressively complicated fashion to influence incentives. Fairness in the tax system is desirable yet difficult to define.

Lazear asked his graduate school students which of the candidates they believed stood for a winning tax and revenue solution. He described Trump as lowering income tax in general with a top rate of 25%, bringing down capital gains tax for all but the rich, and reducing the corporate tax rate to 15% from 35%. The result would be 12% growth in GDP and a loss in tax revenues over 10 years. Clinton was seen as making relatively minor changes, supporting a 4% surcharge on the rich as well as higher capital gains tax and limiting deductions. These policies were regarded as producing minimal negative growth – less than 1% over 10 years and roughly revenue neutral.

None of the leading candidates appears to have come up with solutions for slowing worryingly high rises in entitlement growth, notably for Medicare and Medicaid. So which candidates did the Stanford students favour? Uncharacteristically for many on campuses today, 28 favoured Clinton’s plan; 21, Trump’s; 13 voted for Cruz; and surprisingly only three for Sanders. This inconclusive outcome produces one clear pointer: on the difficulties the next US president faces in finding consensus on restoring the American dream.

Marsha Vande Berg is Distinguished Career Fellow at Stanford University this year. This forms part of OMFIF's series of commentaries on the US presidential election on 8 November.

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