What Getting Serious About Wages Doesn’t Look Like: Bipartisan “Tax Reform” and Trade Deals

Congress is back in session this week, following an election that saw the Democrats lose control of the Senate and fall further into the minority in the House. A number of postmortems about the election have focused on the issue of wage stagnation—the fact that wages for the bottom 70 percent of the American workforce have essentially seen no increase at all since 1979. Worse, without the full-employment period of the late 1990s that pushed up wages across the board, wages for this group of workers would have outright fallen over the past three decades.

One of the better insights in these postmortems on wages and politics came from Gene Sperling, former economic advisor to both the Clinton and Obama administrations, who told the New York Times that jump-starting wage growth “is not a silver-bullet issue.” Now, part of why I think this is such a good insight is that I’ve said it many times in the past—arguing for a wages policy agenda a long time ago—and reiterated it recently with some colleagues, arguing again for a wage policy agenda with the launch of our Raising America’s Pay project.

But I also like this insight because it’s just obviously true. Unlike, say, health reform or climate change abatement, this is not an issue that lends itself to a single omnibus piece of legislation that will pass and make the  problem go away (or even ameliorate it a lot).

Instead of one big fix, boosting wages for the vast majority of American workers will require changes along nearly every dimension of economic policymaking. Macroeconomic stabilization (which is mostly driven by the Fed) will have to reorient more to boosting wages broadly and less to keeping inflationary expectations very low. Regulatory policy will have to rebuild labor standards that once boosted wages but have eroded over time (minimum wages, guarantees to overtime pay and  the right to collective bargaining) and adopt modern labor standards that the country desperately needs (paid sick leave). It will also have to change to bring some actual discipline into the absurdly failed markets for corporate managers that have allowed their pay to skyrocket in recent decades and to crack down on financial practices that inflate that sector’s incomes without adding much in the way of economic value.

In short, a serious policy effort to boost American wages would involve bringing a wage focus to every aspect of economic policy.

So what are the prospects of policymakers getting serious about wages in the next two years? Not great.

On the plus side, there are a range of executive actions being proposed by the Obama administration that could help. They’ve already boosted the minimum wage for federal contractors and cracked down on contractors with histories of labor violations. They are expected to change overtime regulations to make more workers eligible for overtime pay. And they are (famously) considering executive orders to provide work authorization for many foreign-born workers residing in the United States who currently lack it. These executive actions (combined with an increase in the federal minimum wage) constitute a genuine wage agenda from the Obama administration.

So why my pessimism? Because the most cited issues on which the new Republican-led Congress and the Obama administration might strike a deal are tax reform and trade agreements.

Tax reform can, of course, be good or bad. But the bipartisan tax reforms currently floating around the Beltway almost always involve cuts in tax rates. And cuts to top tax rates are actually a prime contributor to the rise in inequality and the shift of income away from the low and middle portions of the income distribution in recent decades.

And expanded trade, facilitated by agreements that provide all sorts of protections to corporate investors but many fewer to workers in either country, has been a prime driver of wage stagnation in recent decades as well.

The DC pundit class loves bipartisan compromise, and this provides a powerful temptation for the Obama administration to push forward on these issues. But pushing some actions that help wages (the executive orders) while at the same time working with the other party on actions that will hurt wages (efforts to cut tax rates and expand trade largely under status quo trade rules) is the definition of how not to put the wage issue front-and-center.