Rosy jobs reports are misleading: Crisis is coming, and fixes are few

In the last two weeks Dow dropped over 1,700 points. The slide has been variously attributed to the federal debt, interest rate hikes, trade war with China, arresting Huawei’s CFO, Apple’s troubles, Brexit woes — take your pick. There’s no lack of reasons to worry.

Two things unlikely to make the list are the job market and federal tax reform. They’re supposed to be bright spots, yet they both point to deep, interconnected threats to the economy:  surprisingly widespread joblessness, untenable economic inequality, burgeoning debt, and failure of policymakers to deal with them.

Despite the 49-year low in unemployment, mass joblessness is hiding in plain sight in the latest rosy Bureau of Labor Statistics (BLS) jobs report. Of about 259 million non-institutionalized adults, over 100 million aren’t working (6 million officially unemployed plus 96 million “not in the workforce”). Job gains are concentrated in the 20 percent most prosperous zip codes. Across the rest of America, there are fewer jobs now than in 2007.

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The labor force participation rate, unchanged in November at 62.9 percent, has been orbiting a 40-year low for years. Falling official unemployment plus persistently low labor force participation indicates job market tightness is partly due to more Americans leaving the workforce.

Some retire or otherwise choose not to work, but most are sidelined by lack of opportunity. Seniors, women, people of color, people with disabilities and legal immigrants are disproportionately affected. Of 156 million Americans who do work, 34 million work part-time (5 million want more work and can’t find it). Of the prime age men 25 to 54, 19 percent don’t work full time — many more than during most recessions. Fewer than half of American adults have full-time jobs.

The other half are falling further and further behind as economic inequality continues to rise, and the divide deepens between those prospering in this job market and those on the outside looking in. Yet these outsiders are the economy’s greatest untapped resource, and losing their contributions is its greatest liability.

Mass joblessness drives up national debt because it entails massive social costs — everything from crime and drugs to healthcare — which government pays for one way or another. Despite that, our economic policies are often tone-deaf to the problem, and make joblessness worse.

For example, payroll taxes raise over a trillion dollars a year — about a third of federal revenue — by taxing employment. The employer portion of the tax artificially raises labor costs, a chronic drag on labor demand and job growth. The employee portion is the biggest tax most Americans pay, and the most regressive. It disproportionately affects middle- and low-income households (income beyond $132,900 is exempt), shrinking their paychecks and consumer spending, which undercuts economic growth.

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When the Senate debated tax reform a year ago, Senators Rubio and Lee tried hard to cut payroll taxes for low-income families through the Child Tax Credit. But that would have meant cutting corporate taxes to 20.9 percent instead of 20 percent, and Senate leaders balked. The $1.8 trillion tax cut package passed without payroll tax relief, or offsetting revenue.

This fall, Congress extended and expanded the cuts, spending another $657 billion, then agreed on a $1.3 trillion omnibus that increased spending $300 billion, all without offsetting revenue. In 2018, the federal deficit jumped 17 percent to $779 billion, and the national debt topped $21 trillion for the first time. CBO says the debt is growing “rapidly” and the deficit will top $1 trillion by 2020.

Confronted with these numbers recently, President TrumpDonald John TrumpO'Rourke: Trump driving global, U.S. economy into recession Manchin: Trump has 'golden opportunity' on gun reforms Objections to Trump's new immigration rule wildly exaggerated MORE shrugged, but markets tanked. Soaring deficits and debt drive up interest rates, slowing growth. Interest on the debt is projected to cost $7 trillion over the next decade.

It's a pocketbook as well as a macro issue, since high national debt forces households to pay more for credit cards and loans, and undercuts wage growth. In fact, over the next 30 years it will reduce an average family of four’s income by $16,000.

The Administration plans to cut Medicare and other entitlement spending and institute some form of privatization. Attacking the safety net would reduce debt, but at the price of directly hurting ordinary Americans. That’s no solution.

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Next year, House Democrats will try to expand Medicare and other entitlement spending. That could also hurt ordinary Americans by incurring more debt if it isn’t paid for. Often the first instinct for funding entitlements is to raise payroll taxes (Bernie SandersBernie SandersJoe Biden faces an uncertain path Bernie Sanders vows to go to 'war with white nationalism and racism' as president Biden: 'There's an awful lot of really good Republicans out there' MORE proposed to fund paid family leave this way in 2016). But that undermines job growth, and without much more robust job creation, tens of millions will languish on the sidelines instead of rejoining the workforce. That’s no solution, either.

It’s a dilemma, but a solution exists: enact pro-employment tax reform by cutting payroll taxes to stimulate job growth and raising other revenue to pay for it. Whether it’s a non-labor value-added tax, taxes on waste and pollution (e.g. a carbon tax offset with payroll tax cuts) or ending tax breaks for special interests, there are lots of options and more than enough potential revenues from non-labor sources to replace payroll taxation.

The strategy is called “payroll tax shifting.” It boosts labor demand by shifting the tax burden from employment to resource consumption, waste and pollution, setting up a large shift in the relative costs to business of hiring people vs. using things (materials, energy, technology, land).

The nonpartisan employment policy group Get America Working! (which I consult for) estimates this could generate some 40 million full-time equivalent jobs, without raising net taxes or deficits. Smart Republicans and Democrats alike point out that shifting Medicare and Social Security financing to non-labor revenue sources would be a more sustainable way to fund entitlement spending, rather than shackling it to payroll taxation and keeping it on a collision course with job growth.

It may be a heavy lift politically, but as our fiscal situation deteriorates and policy options narrow, all lifts gain weight.

Tax shifting should have broader political appeal than draconian Medicare cuts or running up yet more debt. If the new Congress wants to get something done to pay down debt, address mass joblessness and rising inequality, shore up entitlement funding, give working families meaningful relief, and calm jittery markets, it should raise revenue from non-labor sources, and use it to cut payroll taxes.

Stephen Kent is president of the public interest PR firm KentCom LLC, and a consultant to the employment policy group Get America Working!