Unshared Sacrifice

David Frum asks:

Two questions for the Republican presidential candidates:

1) Is this a problem?

2) If yes, what can be done about it?

Of course Democrats should address it as well. I see two concurrent things happening here. One is the failure of policymakers to manage the business cycle adequately. The labor share of national income is a highly cyclical phenomenon. When a recovery from a recession begins, what happens is that firms have market opportunities and low labor costs. That leads to high profits, which lead to new investments, which reduces the unemployment rate. Then when the unemployment rate is low, the labor share of income grows. In the period before the 2001 recession when we had full employment, the labor share of income was healthy. Had the elites charged with management of macroeconomic policy succeeded in maintaining full employment, we wouldn’t have this problem.

The second thing has to be the entrance of hundreds and millions of poor people from the developed world into the global labor market, right? In the aggregate, this has produced large benefits. And the appropriate policy response would have been something like a big increase in the generosity of the Earned Income Tax Credit to ensure that everyone who works hard and plays by the rules shares in the gains. But instead we spent the 2000s enacting regressive tax cuts. And now that it’s time to pay the piper for that, the focus is all on cutting spending. It’s a hell of a raw deal.