Friday, December 20, 2013

the purported past and future of america's social contract...,


theatlantic | The low-wage social contract seeks to balance poor private sector pay with cheap consumer goods, low taxes, and government subsidies that boost after-tax incomes. What does this mean in practice? Cheap imports from countries like China are one big part of it, as are policies like the Earned Income Tax Credit and Child Tax Credit that allow Washington to supplement low-income workers’ pay through the tax code.

Proponents of the low-wage social contract on both the left and the right have argued that the combination of inexpensive goods and low taxes should give consumers more spending power than they would have in a high-wage, high-price economy. In a famous paper entitled “Wal-Mart: A Progressive Success Story,” Jason Furman, now Chairman of the President’s Council of Economic Advisors, argued that the low-wage model actually made low-income consumers better off overall.
For many, though, the bargain has clearly failed. It is true that tax credits and cheap goods have boosted the standard of living for otherwise impoverished workers. Yet, according to the Census Bureau’s Supplemental Poverty Measure, which takes into account wage subsidies and additional costs like taxes and medical costs, almost 10 percent of the total working population still lives in poverty. This includes roughly 5 million Americans who work full-time, year-round. 

A key reason for this is that the low-wage social contract does not do much to help families in the areas they need most. Clothing, food, and other items found at Wal-Mart might be cheap for low-wage workers. But other necessary services—health care, daycare, eldercare, and college—have simultaneously become less affordable and more important as most mothers work outside of the home and the wage premium for college remains high. In 1960, the average family spent about $12,000 in inflation-adjusted dollars on childcare, education, and healthcare over the course of 17 years raising a child. Four decades later, the average family spends almost $63,000 per child. Medical out-of-pocket expenses now push more people below the poverty line than tax credits can lift above it.

The low-wage social contract has also contributed to a lack of aggregate demand.  Because workers are also consumers, and because low-income households spend more of their money than do wealthier households, the low wage system limits the power of workers to help the economy grow by purchasing goods and services.

The Next Social Contract
That’s how we got here—but what might lie ahead?

While the “low wage” social contract may not be much of a bargain for many workers, there’s no pretending we can go back to the New Deal-era system of old. The combination of conditions that allowed for high wages, high profits, and low prices no longer exists in a service-based economy with more unstable employment and in which the declining number of manufacturing jobs are more subject to global competition. And while the welfare capitalist model did benefit many in the middle class, it often excluded African-American workers and was reliant on a family model based on a sole male breadwinner. The next social contract needs to adapt to these new economic conditions and further the huge strides we have made toward equality for women and minorities in the workforce.
What, then, would a better social contract look like?