Believe it or not, this sort of dovetails with my previous post. Here's Robert Reich in the NY Times:
We're sliding into recession, or worse, and Washington is turning to the normal remedies for economic downturns. But the normal remedies are not likely to work this time, because this isn’t a normal downturn.
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The only lasting remedy, other than for Americans to accept a lower standard of living and for businesses to adjust to a smaller economy, is to give middle- and lower-income Americans more buying power — and not just temporarily.
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The only way to keep the economy going over the long run is to increase the wages of the bottom two-thirds of Americans. The answer is not to protect jobs through trade protection. That would only drive up the prices of everything purchased from abroad. Most routine jobs are being automated anyway.
A larger earned-income tax credit, financed by a higher marginal income tax on top earners, is required. The tax credit functions like a reverse income tax. Enlarging it would mean giving workers at the bottom a bigger wage supplement, as well as phasing it out at a higher wage. The current supplement for a worker with two children who earns up to $16,000 a year is about $5,000. That amount declines as earnings increase and is eliminated at about $38,000. It should be increased to, say, $8,000 at the low end and phased out at an income of $46,000.
Median household income is about $48,000. What would be the ramifications of making almost half of all households receive the earned income tax credit? The EITC is a great program, and probably could be expanded in the sense of giving a larger amount to the lower income earners. It's the closest thing we have to Milton Friedman's negative income tax. It is a potentially powerful anti-poverty program.
But I'm less sanguine about making the EITC a middle class entitlement, which is exactly what would happen if we were to follow Reich's advice. I'm not sure a middle class entitlement is what Friedman had in mind.
Reich is right about one thing though.
Over the longer term, inequality can be reversed only through better schools for children in lower- and moderate-income communities. This will require, at the least, good preschools, fewer students per classroom and better pay for teachers in such schools, in order to attract the teaching talent these students need.
Except that he forgets to mention that it also requires a change in the way we fund schools at the state and local level. The federal government is impotent to do anything about that, and that's probably a good thing. Though it is tempting to think that the federal government could swoop in with a grand fix, I fear that they would make things worse. Our recent record on federal government intervention in K-12 education is not exactly stellar.
one thing that can be said for EITC as a mass entitlement is that it would short-circuit the social engineering features in tax policy, just as the AMT was beginning to do. Everyman would scream at losing the distortive tax exemptions that lead to secular overinvestment in housing, but we get to follow the OECD's sound advice another way, with a different structure that creeps toward a simpler tax.