The Federal Reserve Board's 8 Percent Hike in the Social Security Tax
Monday, 30 November 2015 00:00 By Dean Baker, Truthout | Op-Ed
(Photo: Federal Reserve Symbol via Shutterstock)
In the last couple of weeks the prospect of a 0.2 percentage point increase
in the payroll tax has become a major issue separating the two leading
contenders for the Democratic presidential nomination. Sen. Bernie Sanders
has proposed an increase of this size to pay for system of paid family leave
that is part of his platform. While former Secretary of State Hillary
Clinton also supports paid family leave, she opposes any tax increase on
middle-class workers, and insists she can get the money elsewhere.
The intensity of this debate over a tax increase of 0.2 percentage points
(at $70 a year for a typical worker), should have people wondering why the
candidates aren't talking about the prospect of a much larger tax increase
imposed by the Federal Reserve Board. The Fed's tax increase could easily
exceed 8 percent of the wages for ordinary workers, yet it is not drawing
any attention from the presidential candidates.
The idea of the Fed imposing a tax on workers may sound a bit strange. The
Fed doesn't literally make deductions from workers' paychecks, like Social
Security and Medicare. Rather, the Fed's actions affect what goes into
workers' paychecks. By making the labor market tighter or looser, the Fed
affects workers' ability to get wage gains or to even keep their pay rising
in step with prices.
On average, workers' pay had kept pace with productivity growth in the
economy until the recession in 2008. Not all workers saw these gains, since
the benefits of productivity were highly skewed towards those at the top,
like doctors, CEOs and Wall Street bankers. But the share of workers as a
whole changed little from the late 1970s to 2007.
When the collapse of the housing bubble sank the economy and sent the
unemployment rate soaring, workers' share of national income plummeted.
Prior to the collapse, workers' share of the income generated in the
corporate sector had averaged close to 82 percent. This fell as low as 73
percent in the downturn. It has since edged up slightly, but it is still be
below 75 percent.
This means that wages are more than 8.0 percent lower on average than would
be the case if the collapse of the housing bubble had not devastated the
labor market. From the standpoint of workers' ability to pay for their food,
rent and other bills it makes no difference whether the government taxes
away another 8 percent of their pay or whether the Fed's policies push down
their pay by 8 percent. Either way, they have 8 percent less money.
Of course the Fed did not deliberately bring on the collapse of the housing
bubble and the resulting recession. However, we faced this crisis because of
the Fed's failure to recognize the growth of the housing bubble and to take
steps to counter it. The Fed had substantial regulatory power which could
have been used to check the explosion of bad mortgages that fueled the
bubble. It also has an enormous platform which could have been used to warn
investors and homebuyers of the risks of the bubble.
The Fed's failure to recognize and take steps to contain the housing bubble
was one of the largest policy blunders of the last century, but the question
at the moment is its policy going forward. Here there is real ground for
concern that it seems intent on preventing workers from regaining the wages
they lost in the downturn.
The Fed has indicated its intention to raise interest rates in order to slow
the economy and reduce the rate at which the economy is generating jobs.
This will prevent the labor market from getting tighter.
There is no guarantee that the labor market would get tight enough to allow
workers to regain the ground they lost even if the Fed didn't act to slow
growth. The growth rate has been weak throughout the recovery. The US
economy currently faces drag from weak foreign economies and the downside
risk of collapsing bubbles in some commercial and residential real markets,
as well as some tech stocks. While these bubbles are not large enough that
their collapse will bring on a recession, it will slow growth further.
For these reasons, leaving rates low doesn't guarantee that workers regain
the ground they lost in the downturn, but if the Fed raises rates fast
enough, it will certainly guarantee that the wages do not return to their
pre-recession share of income. This policy is especially pernicious, since
it tends to be workers at the middle and bottom of the pay ladder who
benefit most from a tight labor market, which means that the workers most in
need of help will be penalized by the Fed' rate hikes.
In short, it's interesting to watch the presidential candidates fighting
over a 0.2 percentage point tax increase. It would be much more interesting
to see them debate a Federal Reserve Board policy that can have an impact on
after-tax pay that is 40 times larger.
Copyright, Truthout. May not be reprinted without permission.
DEAN BAKER
Dean Baker is a macroeconomist and co-director of the Center for Economic
and Policy Research in Washington, DC. He previously worked as a senior
economist at the Economic Policy Institute and an assistant professor at
Bucknell University. He is a regular Truthout columnist and a member of
Truthout's Board of Advisers.
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The Federal Reserve Board's 8 Percent Hike in the Social Security Tax
Monday, 30 November 2015 00:00 By Dean Baker, Truthout | Op-Ed
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reference not valid.
. (Photo: Federal Reserve Symbol via Shutterstock)
. In the last couple of weeks the prospect of a 0.2 percentage point
increase in the payroll tax has become a major issue separating the two
leading contenders for the Democratic presidential nomination. Sen. Bernie
Sanders has proposed an increase of this size to pay for system of paid
family leave that is part of his platform. While former Secretary of State
Hillary Clinton also supports paid family leave, she opposes any tax
increase on middle-class workers, and insists she can get the money
elsewhere.
The intensity of this debate over a tax increase of 0.2 percentage points
(at $70 a year for a typical worker), should have people wondering why the
candidates aren't talking about the prospect of a much larger tax increase
imposed by the Federal Reserve Board. The Fed's tax increase could easily
exceed 8 percent of the wages for ordinary workers, yet it is not drawing
any attention from the presidential candidates.
The idea of the Fed imposing a tax on workers may sound a bit strange. The
Fed doesn't literally make deductions from workers' paychecks, like Social
Security and Medicare. Rather, the Fed's actions affect what goes into
workers' paychecks. By making the labor market tighter or looser, the Fed
affects workers' ability to get wage gains or to even keep their pay rising
in step with prices.
On average, workers' pay had kept pace with productivity growth in the
economy until the recession in 2008. Not all workers saw these gains, since
the benefits of productivity were highly skewed towards those at the top,
like doctors, CEOs and Wall Street bankers. But the share of workers as a
whole changed little from the late 1970s to 2007.
When the collapse of the housing bubble sank the economy and sent the
unemployment rate soaring, workers' share of national income plummeted.
Prior to the collapse, workers' share of the income generated in the
corporate sector had averaged close to 82 percent. This fell as low as 73
percent in the downturn. It has since edged up slightly, but it is still be
below 75 percent.
This means that wages are more than 8.0 percent lower on average than would
be the case if the collapse of the housing bubble had not devastated the
labor market. From the standpoint of workers' ability to pay for their food,
rent and other bills it makes no difference whether the government taxes
away another 8 percent of their pay or whether the Fed's policies push down
their pay by 8 percent. Either way, they have 8 percent less money.
Of course the Fed did not deliberately bring on the collapse of the housing
bubble and the resulting recession. However, we faced this crisis because of
the Fed's failure to recognize the growth of the housing bubble and to take
steps to counter it. The Fed had substantial regulatory power which could
have been used to check the explosion of bad mortgages that fueled the
bubble. It also has an enormous platform which could have been used to warn
investors and homebuyers of the risks of the bubble.
The Fed's failure to recognize and take steps to contain the housing bubble
was one of the largest policy blunders of the last century, but the question
at the moment is its policy going forward. Here there is real ground for
concern that it seems intent on preventing workers from regaining the wages
they lost in the downturn.
The Fed has indicated its intention to raise interest rates in order to slow
the economy and reduce the rate at which the economy is generating jobs.
This will prevent the labor market from getting tighter.
There is no guarantee that the labor market would get tight enough to allow
workers to regain the ground they lost even if the Fed didn't act to slow
growth. The growth rate has been weak throughout the recovery. The US
economy currently faces drag from weak foreign economies and the downside
risk of collapsing bubbles in some commercial and residential real markets,
as well as some tech stocks. While these bubbles are not large enough that
their collapse will bring on a recession, it will slow growth further.
For these reasons, leaving rates low doesn't guarantee that workers regain
the ground they lost in the downturn, but if the Fed raises rates fast
enough, it will certainly guarantee that the wages do not return to their
pre-recession share of income. This policy is especially pernicious, since
it tends to be workers at the middle and bottom of the pay ladder who
benefit most from a tight labor market, which means that the workers most in
need of help will be penalized by the Fed' rate hikes.
In short, it's interesting to watch the presidential candidates fighting
over a 0.2 percentage point tax increase. It would be much more interesting
to see them debate a Federal Reserve Board policy that can have an impact on
after-tax pay that is 40 times larger.
Copyright, Truthout. May not be reprinted without permission.
Dean Baker
Dean Baker is a macroeconomist and co-director of the Center for Economic
and Policy Research in Washington, DC. He previously worked as a senior
economist at the Economic Policy Institute and an assistant professor at
Bucknell University. He is a regular Truthout columnist and a member of
Truthout's Board of Advisers.
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