The easy and simple answer is, “politics.” Both sides are playing it. President Obama backed away from any meaningful entitlement reform, sending up instead what the White House called a “more traditional budget.” Not only did his proposal not include any proposals to trim the rate of growth of mandatory spending — interest on the federal debt, entitlement programs like Social Security, Medicare and Medicaid or public sector retiree benefits; it also included new tax proposals that were certain to be unpopular with Republicans.
The Democrats running in 2014 seemed to like the proposal, positioning them to campaign against Republicans’ indifference to rising inequality in American society, especially at the high end of the income scale. They also liked not having to deal with entitlement reforms in an election year, even though such programs now constitute nearly 70% of the budget, with their share rising.
Republicans probably were happy that the budget was “more traditional,” as it allowed them to brand it fiscally irresponsible. It also reduced the pressure on them — led by Paul Ryan — to come up with meaningful reforms to programs like Social Security and Medicare, each of which now has more than 50 million beneficiaries, many of whom vote regularly and could be expected to vote their pocketbooks. Instead, the Republicans seem happy to take their chances with the 2014 elections, where they entertain some hope of capturing the Senate and forcing compromises from a position of greater strength.
Another factor probably plays into this calculation by both sides. After the debt-ceiling showdown last year, the House and Senate Budget committee chairs agreed to two years of restraint on discretionary spending, that is on domestic and military spending programs requiring annual authorizations. Both sides may be prepared to live under that agreement rather than go through the pain of drafting and defending an alternative. This kicks the can of entitlement reform into next year, when the political dynamic will have been more clearly defined by the election.
Behind all of this maneuvering may be some signs of potential reforms down the road. The Republicans share with the Democrats a desire to simplify what has become a complex and exceptions-riddled tax code. The two parties clearly have different ideas about what constitutes a “loophole,” which ones should be closed and what should be done with the additional revenue. There also are many differences about how far to shift the burdens of the tax code from income and investment to spending (the United States relies much more on direct taxation of individuals and much less on taxing the value-added in economic activities than virtually all other developed countries). But the need to spur greater economic growth and higher employment could prompt change in a non-election year.
Second, both sides are troubled by the implications of widening income inequality for social stability. President Obama proposed extending the “earned-income tax credit” (E.I.T.C.) to childless workers. Several leaders on the Republican side, while being critical of many traditional anti-poverty programs, have expressed interest — even support — for the E.I.T.C. They like its tie to work and see it as more effective in helping people lift themselves out of poverty. There also is broadening support for greater investments in modernizing public infrastructure, even though the two sides disagree on whether to fund it through budget savings or new revenues.
One interesting point of contention surrounds President Obama’s pledge in his State of the Union message to raise the minimum wage, where he can do so with his discretionary authority, to $10.10 per hour. There has quickly grown up a debate about whether a higher minimum wage reduces employment, with both sides lining up their economic studies and authorities.
The experience in agricultural commodity markets — though different from factor markets like labor — may be instructive. We learned, from the 1930s through the 1980s, that artificially high commodity prices stimulated production and curbed demand. The resulting increased agricultural surpluses drew the government more deeply into supply management: paying farmers not to produce or to store the unwanted commodities and eventually paying to dispose of them through domestic and foreign feeding programs.
Does an artificially high floor under the wage rate risk a similar expansion of government’s role in the economy? Does it attract more workers than there is demand (i.e., by adding to unemployment)? Does it lead to more payments to prevent these “surpluses” (e.g., tax breaks to hire the unemployed), to store them (e.g., more and longer unemployment compensation) and to dispose of them (e.g., more public works and worker training programs)?
While labor markets may be “stickier” (i.e., do not respond as quickly) as commodity markets, it seems likely that they head to the same kinds of intrusive governmental programs in the end. Hopefully, better ways can be found to both soften the effects of poverty and to empower people to rise from it.
