America Needs a New Social Contract
Following a weak “recovery” from the 2008 recession, everyone would prefer a return to the levels of economic growth seen during the post-World War II era. Much political airtime is spent debating ways to make that happen. But many economists think that increased growth is unlikely to occur anytime soon. They believe that basic social changes such as aging populations and slowing gains from technological progress have made it more likely that low growth or “secular stagnation” will be the “new normal.” Secular stagnation is not just an American problem, it is a worldwide phenomenon.[1] This essay suggests that a new social contract is needed as a result. A social contract establishes the basic expectations that a society and its members have for each other; an example is the New Deal’s policy changes that guaranteed citizens minimum levels of social security and financial stability.
Secular stagnation raises fundamental social issues, especially in a global digital economy. Recently The Economist magazine ran an excellent special report on the impact of the digital revolution on society and the economy.[2] One of its conclusions–which seems well-borne out by the experience of the past two decades–is that the rapidly expanding digital economy is likely to eliminate enormous numbers of traditional lower and middle-class jobs. At the same time it seems very likely that long-term secular stagnation will lead to significant decreases in social mobility.
As a result of these changes, it will be increasingly difficult to maintain large, long-term concentrations of wealth and income in the face of growing poverty without risking serious social disorder.[3] The Left’s preferred solution to this problem is wealth redistribution through taxation or indirectly through regulation such as price or rent controls. Over the past several decades, conservatives have opposed increased taxation and regulation, or have proposed tax cuts and regulatory relaxation. Neither side in this ongoing redistribution debate is proposing a viable political approach. The reason is that political resistance to changes adverse to either side’s “redistribution coalition” constituencies will be at its highest in an era of secular stagnation. Chronic gridlock has been and will be the inevitable result. Nor is either side in this debate accurately or fully accounting for the effects of its preferred proposals on society (through external costs, for example) or on the growing national debt.
There is, however, a far preferable course of action that can meet the political goals of both progressives and conservatives. We can create a new social contract adapted to our current economic conditions. The policies needed to put in place this new social contract would include: progressive inheritance taxation; a consumption tax that protects the poor; and a guaranteed level of social welfare. These tax and income security changes would make it possible to minimize government control of the non-defense economy except to protect important social values such as health, safety and the environment.
Inheritance taxation laws should be revised to disperse wealth fully within one generation (about twenty-five years). The economic and political dominance of inherited wealth was a central flaw of European society. Inherited wealth puts social power in the hands of people who did nothing whatsoever to earn it, and have only their bloodlines to justify their authority. The predictable result in Europe was generations of incompetent government punctuated by massive social upheavals such as the French Revolution. It is not unreasonable to expect the same result here if wealth concentration is permitted to continue.
Income taxation, however, should be approached differently. Income taxation raises two distinct policy problems: should the United States continue to use income taxation as a major means of generating government revenue? And if so, should income taxation be made more progressive? Job losses in the digital economy will inevitably require increased social income subsidies. The authors of The Economist report suggested that in view of the political and technical difficulty of shifting this increased social burden to high-income taxpayers, who already pay a very large share of all taxes and have mobile capital, America should consider adopting a consumption tax in lieu of its income tax.[4] They wrote: “Shifting the brunt of taxation from income to consumption in America could help the country resolve its fiscal and inequality problems at the same time….”[5]
Long a political third rail in America, the consumption tax is an idea whose time has come. A consumption tax could provide not only the revenues needed to fund existing government programs, but those needed to provide minimum social welfare in food and housing security. It could easily be structured to protect the poor. It would reshape the economy in desirable ways. America is far too dependent on consumer spending to drive its economy, and decreasing such spending would allow badly needed investments in infrastructure and manufacturing. Moving to a consumption tax and a new social contract would mean that income disparities would no longer be a significant focus of political debate. There would no longer be large political incentives for efforts to restrict economic decisions in the name of equalizing incomes, whether through taxation or indirectly through regulation. Thus regulation could focus on protecting health, safety and the environment, and preventing anti-competitive conduct. The result would be that citizens could make economic decisions with a maximum amount of freedom, increasing efficiency and productivity.
In summary, both progressives and conservatives need to rethink their views on the best way to confront secular stagnation in order to avoid predictable future social unrest. Maintaining current rigid ideological stances will simply result in continued political gridlock, and in the face of secular stagnation and the digital revolution, gridlock is increasingly dangerous. Instead, America needs a new social contract to strengthen its social bonds in a global world.
Notes
[1] For an excellent survey of the secular stagnation debate, see Coen Tulings and Richard Baldwin,eds., Secular Stagnation: Facts, Causes, and Cures, available free online at http://www.voxeu.org/sites/default/files/Vox_secular_stagnation.pdf. Economist Robert Gordon, for example, points to a series of obstacles to growth, which are summarized by Tulings and Baldwin as follows: “Beyond technology, he focuses on four structural ‘headwinds’.
- Demography: The population is stagnant, life expectancy is increasing rapidly.
- Education: The mass education revolution is complete, no further increase in the average US education level is to be expected.
- Inequality: The raising share of the top 10% of the income distribution has deprived the middle class of income growth since 1980.
- Public debt: The gloomy outlook for public debt makes current public services unsustainable.” (Ibid., p. 4.)
[2] The Economist, October 4, 2014, Special Report on the World Economy, “The third great wave.”
[3] Roughly fifteen percent of American households live below the poverty level, and it appears that even households above that level are experiencing increased employment and food insecurity. In a global digital economy, levels of insecurity and impoverishment are likely to increase absent government action.
[4] According to Congressional Budget Office data, in 2010 the top 20 percent of taxpayers by market income paid 69.3 percent of all federal taxes. After accounting for government transfers, these taxpayers received 47.2 percent of total after-tax income. By comparison, the bottom sixty percent of taxpayers by market income received 35 percent of total after-tax income (including transfers) and paid 12 percent of federal taxes. See http://www.cbo.gov/sites/default/files/44604-AverageTaxRates.pdf. (accessed 11/02/2014), Box 1, p. 7.
The Economist concludes that “a higher tax burden will encourage tax avoidance…and distort economic decisions….” Governments “cannot expand much more without running into seirous fiscal constraints.” Tax competition may become an increasingly divisive international issue.” The Economist, Special Report (note 2 above), 18.
[5] The Economist, Special Report (note 2 above), 18.
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