16

Extend the payroll tax cut

Creative Commons

Kai Ryssdal:  It looks like the payroll tax cut is maybe, probably, possibly going to be extended past the end of the year. Assuming Democrats and Republicans can find a way to pay for it.

And we all know what happens when you assume, though. So get ready the umpteenth round of the budget fight.

Commentator Robert Reich has a suggestion.


Robert Reich: The basic bargain at the heart of the American economy used to be that employers paid their workers enough to buy what employers were selling. That bargain created a virtuous cycle of higher living standards, more jobs, and better wages.

Back in 1914 Henry Ford decided to pay his workers three times the average factory wage because they'd use the money to buy Model-Ts. His profits doubled in two years.

But now that bargain has come apart. New data from the Commerce Department shows employee pay down to the smallest share of the economy since the government began collecting the data in 1929. And corporate profits, the largest share of the economy since then.

Yet incredibly, some politicians think the best way to restart the nation's job engine is to make corporations even more profitable. That means reducing corporate taxes and cutting back on regulations.

These same politicians want average workers to have even less money. They're against extending the payroll tax cut or unemployment benefits. And they want to make it harder for workers to form unions.

These politicians have it upside down.

The reason companies aren't creating more jobs is because consumers don't have money. And their spending accounts for 70 percent of the economy.

You see, without the basic bargain we're in a vicious cycle. The only way out is to put more money into the pockets of average Americans. At the very least, extend the payroll tax cut and unemployment benefits.

Beyond this, we need a new WPA to get the long-term unemployed back to work. And a Civilian Conservation Corp to create jobs for young people. More teachers for overcrowded classrooms. More construction workers rebuilding highways and bridges.

Pay for all this by hiking taxes on millionaires. Get it? There's really only way to revive the American economy. That's by restoring the basic bargain.


Ryssdal: Robert Reich teaches public policy at the University of California, Berkeley. His most recent book is called "Aftershock: The Next Economy and America's Future." We hope your comments are in our future. Send us your thoughts.

About the author

Robert Reich is chancellor's professor of public policy at the University of California, Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton.
Log in to post16 Comments

Pages

Professor Reich, I am a chemist, not an economist. I have no idea what you will find if you follow this suggestion, but I think it is perhaps relevant to your thesis. Once the Henry Ford model of paying enough so that workers could afford to buy a Model T was more widely adopted, what percentage of GDP (GNP?) was paid to ordinary working mortals (how much was available to be spent?)

Perhaps a simple graph of ordinary wages as a percentage of GDP vs overall economic prosperity over time is worth constructing? This seems to be what you are talking about; if ordinary mortals have a smaller and smaller portion of the economy to spend, if more and more of it is tied up in mega-yachts designed to promote envy on the part of other who own such stuff, the overall economy suffers because not enough is made, bought, sold because the wherewithal to purchase it is all tied up in a few hands. Do I understand correctly?

If so, what is the best way to address the problem? The goal seems clear enough.

Thanks,

baumgrenze

This essay should be turned into a stump speech and repeated every day by every politician, put in television and radio ads, and sent as a letter to the editor to every newspaper, until the clear and obvious points become accepted wisdom.
The people who have made negative comments seem to be willfully missing the point and quibbling over details. The point is that the economy will NOT be rescued by new products or inventions, and no matter how many tax breaks you give them, corporations will NOT hire more workers UNLESS AND UNTIL people have money to spend. LOANING them more money will not help. We have to put people back to work. The only entity able to do that is the government. The way to pay for it is to take the money that is sitting idle, or being used in the great Wall Street Casino and pay people to rebuild our country. If the money is sitting idle (which it is, because there is nowhere profitable to invest it) then it doesn't hurt the rich to tax it and put it to use. The rich will benefit in the long run by having healthy, educated workers and a safe, reliable infrastructure upon which to build new businesses.

Agreed, but infrastructure is just large scale invention which takes a lot of big, muiltidisciplinary, multi-community thinking to make successful. So again, we need the Henry Fords first to conceive the ideas and implementation plans that create the jobs for average Americans. Infrastructure is the most difficult kind of invention, however, because it often has the most stakeholders and therefore, becomes more expensive to design as more and more cooks demand access to the kitchen. The kitchen, however, has been taken over-mostly by monetary and economic interest groups. As long as economic interests are allowed to dominate and control the problem solving process we will continue to be served the same meal of undercooked meat which has made us sick. Time to put the real, multi-talented cooks in charge of the kitchen again, tip them well for their efforts, but also hold them accountable for food poisoning.

Justicesr - What you are describing is Socialism. Do you recommend that this fact be included in the stump speeches, letters, etc that you advocate?

Dr. Reich, I think, knows that a payroll tax cut is like putting a band aid on a gushing jugular. Worse yet, it takes away from Social Security and Medicare in the process, and essentially gives Congress another thing to put off on future generations. But, he is probably strongly advocating this because the fantasy that has been created that cutting spending and tax cuts will solve our economic problems clogs the airwaves and congressional minds. This is the only thing on the table.

So, if you can't have steak, I guess go for the peanuts.

I think Mr. Reich is correct that more money needs to get into the hands of working people, but, like many of the other commenters here, he has missed an important step in the process of getting money into the hands of working Americans. He cites Henry Ford as a great businessman who was able to get money into the hands of working people. While it is true that Mr. Ford was a great businessman, his even greater gift was probably his ability to problem solve large scale issues through scientific invention. All of the business skill in the world would not have helped Mr. Ford if his cars, factories, and assembly lines were not top notch scientific and engineering breakthroughs. With his broad range of skill, Mr. Ford was not a businessman but rather an engineer. And this fact is what is lost in the current debate. This is not about socialism or capitalism. The debate about socialism versus capitalism is over and we all know which side won that battle. So going forward, what needs to be reconized before America can recover is that business and capitalism are only tools for solving problems, they are not the solutions. Solving big problems takes a broad range of skills from science, to economics, to philosophy, education and art (A broad range of skills is the basis for mastering the practice of engineering). Therefore, all of this talk about taxes, who pays what, and who works what hours doing which tasks learned out of a text book is irrelevant. It gets us lost in the weeds - inventing things and writing textbooks about them is the work that matters when you want to get money in people's pockets other than your own. The first step towards getting more money in the hands of average Americans should be a debate about how we get economic and business centric thinkers (i.e. corporations with large cash reserves) to collaborate more productively with their problem solving counterparts in other fields. Few businessman today have the technical knowhow of a Henry Ford. They are too focused on the business and economic side of things. Get more money to the Henry Fords (or groups of people that are equivalent to a Henry Ford) and all kinds of new, innovative, and PROFITABLE products will be produced. Oh, and who will make those products? The average American. This is how engineering and product innovation works. Cut engineering and product innovation out of the loop and you get China (or Texas) .

-A non-socialist but anti-"business and economic theory" can unilaterally save the world Berkeley grad

I heartily agree with almost everything you wrote, EXCEPT: "This is not about socialism or capitalism. The debate about socialism versus capitalism is over and we all know which side won that battle." (later text shows you believe capitalism "won") This "battle" is far from over, as evidenced by Dr. Reich's carefully chosen (and deceptive) words.

Dr. Reich knows economics, so the misleading statements and factual errors in this story are apparently purposeful. A few corrections for the "good Doctor".

Ford increased workers "potential" wages by a little more than twice in 1914 (not three times). The extra money was paid out at the end of the year as a bonus, but was conditioned upon good behavior. Ford had dozens of investigators monitoring the lives of his workers to make sure that they were "deserving" of the bonus. His primary motivation was to avoid the disastrous levels of turnover and absenteeism that were then current. Dr. Reich's "story" sounds better, but some of us are still partial to facts. You will note that he stated that Ford profits doubled in the next 2 years. He didn't state that worker pay was the key contributor, but he certainly let us think that.

Next he provided more misleading, statements based on the "argument from authority", followed by his "solutions". A new WPA and CCC? With today's regulatory environment, and the certain demand for top-to-bottom unionization? That idea is absolutely ludicrous. It would be 10 years before the first dirt could be moved. And to top it off, he says, "Pay for all this by hiking taxes on millionaires." He is smart enough to know that confiscating all the income of the wealthy wouldn't be sufficient to accomplish what he recommends.

Shameful. Just shameful.

Will Reich never learn? I begin to believe he actually knows better but in the name of social justice he blissfully ignores the basics of economics. There is a simple basis to the US fiscal crisis and that is entitlement spending. Even if taxes were to increase beyond their historical average of 18% of GDP they are still not enough to cover the coming explosion of entitlement spending. Reducing the payroll tax which is actually intended to fund one of those massive entitlements, Social Security, is simply nonsensical. Of course, Reich simply substitutes a surtax on the "wealthy" (repeat after me income is not wealth) to make up for the lost revenue. This is nothing more than a redistribution of wealth irrespective of how deserved that redistribution is. And that is the real goal of Reich. By definition someone earning $1MM is inherently undeserving while someone earning $50k is. There is no explanation of why. That million dollar earner may spend 12 hours a day in surgery after $300k in school loans and over 25 years of education and training or oversee an international workforce that requires her to spend 75% of her time away from her home. Meanwhile that $50k earner could be a high school graduate working 40 hours/wk in an auto factory with no tangible skills. It does not matter to Reich. That $50k earner is inherently good and deserving of a retirement paid for by others, particularly those earning much more. That $50k earner needs the extra free money to spend on imported Chinese goods at Walmart that does little to "stimulate" the economy.

I know Robert can't help himself. He does not believe that individuals should generally be responsible for themselves: their skills, their savings, and their financial obligations. They must be cared for. From each according to his ability, to each according to his needs. It has never worked, but that won't stop Reich from trying.

I am sorry but Robert Reisch is a socialist, who belongs in Berkeley, CA. He thinks that we can go back to the days of the New Deal. I don't want to come off as negative but please ...

Pages

With Generous Support From...