Can Higher Education Solve America’s Economic Crisis?

Part 2: Massive Tax Cuts or More Educated Workers? Which Is the Better Choice for a Broken Economy?

In late December 2017, the House of Representatives and the Senate, urged on by President Trump, approved a dramatic restructuring of the tax code. The primary goal of this restructuring was to reduce the tax burden on corporations to allow them to retain more of their earnings in the expectation (or, more correctly, the hope) that with more dollars in corporate pockets, some of those dollars would be spent creating new jobs for additional workers and/or augmenting the wages of current workers.

Grover Norquist, the founder and president of Americans for Tax Reform, claims that the proposed tax reform is in reality a jobs bill [1] — and since everyone favors adding jobs, everyone should support the bill. (Ironically, the six largest U.S. banks collectively eliminated 8,000 jobs just before the tax bill passed, despite the fact that banks were among the industries most favored by the tax cuts.) [2]

Even though the tax bill will result in a $1.4 trillion loss in tax revenue over the coming decade, the gamble is that the growth in the number of jobs and job-related income (annual increases in GDP of 4 percent or more each year) will provide such a boost to the economy that the growth in overall tax revenue will make up for the lost $1.4 trillion. (Not factored into the expectation of large GDP increases, however, are the plans of the Federal Reserve Bank to continue to raise interest rates to prevent inflation and an overheated economy. The Fed and Congress are effectively pulling on the same economic rope — but in opposite directions.) [3]

We can analyze whether a tax cut was the best possible economic stimulus that Washington had available to it by looking at the assumptions that form the basis of the tax reform legislation:

  1. Corporations today lack the financial ability to add jobs or to pay their workers higher wages. The primary reason for the “bull” stock market of the last eight years is that corporate America has been doing very well, on the whole, and earnings have typically met or exceeded analysts’ projections — and when that happens, the price of a share of stock rises, making investors very happy, further driving up share price. The Dow Jones Industrial Average has increased from about 6,500 in March 2009 to over 26,000 today — quadrupling in just over eight years. Corporate America is strong, and the companies that survived the Great Recession are generally far more robust today than they were in 2008. Corporations already have all the money they need to hire more workers.

 

  1. But it’s still the case that, at 35 percent, corporate tax rates are too high, much higher than in most of the nations with which we compete, and a lower rate (21 percent) would make corporate America more competitive. While it is true that our posted corporate tax rate is high, what the corporations actually pay averages just under 19 percent. [4] Stories abound of how major corporations, especially those doing business internationally, establish headquarters in offshore tax havens where earnings can be retained without being subject to the U.S. tax code. Other strategies that push against the boundaries of the law have the cumulative effect of dramatically reducing the actual tax bill for these corporations. The point is: Using the posted tax rate as the argument, rather than the rate of tax actually paid, gives a misleading impression of the tax burden American corporations really face. A reduction in the posted rate should have been accompanied by a comprehensive reform of the various techniques and loopholes now used by corporations to avoid paying anything close to the posted tax rate.

 

  1. But what about all those new jobs that will be created? The underlying assumption of the tax bill is that a dramatic reduction in taxes will allow corporate America to hire many more employees and pay them well, but as I noted earlier this outcome is more correctly characterized as a hope than an expectation. We have been hearing for some time that corporate America cannot find skilled and experienced workers. The demand for workers exists now, but the supply of those workers is insufficient to meet that demand [5]. Giving corporations more money to hire more employees won’t work if the prospective employees don’t exist. Moreover, for corporations, their workforce represents an expense — and corporations are very cost-conscious. Every dollar not spent on salaries is a dollar that can be put into stock dividends, or used for corporate stock buybacks, a strategy that increases the price per share — both outcomes that are much appreciated by shareholders. (Increases in share price also help corporate leaders meet the provisions of their employment contracts, resulting in their being granted bigger bonuses.) Of course, in theory they could just give their workers that money, as a sign of corporate benevolence. Unfortunately, when the interests of the workers are pitted against the interests of the owners, the owners almost always win — and the migration of money from labor to capital over the past three decades has been a primary contributor to the growth America has seen in income inequality. In short, the idea that corporate tax reduction will result in higher wages or more jobs is fanciful, and not supported by any evidence.

So is there an alternative approach to enhancing the economy?

As we noted in Part 1 of this series of essays, there is a huge imbalance in the job market — and it is expected to continue and possibly worsen — between the collective skills and abilities actually possessed today by American workers, and the skills and abilities employers say they need for the jobs they currently have available. A recent report from Georgetown University’s Center on Education and the Workforce [6] showed that, of all the jobs created since the beginning of the Great Recession, fully 73 percent required at least a bachelor’s degree — twice the actual percentage of college graduates now in the workforce. Consequently, huge numbers of people are eligible only for the small number of jobs that require limited skills, and since those jobs are not abundant, employers see no need to pay generously — and that’s why the inflation-adjusted income of people in the bottom quintile of family income has actually declined in recent years.

Conversely, there is abundant demand — and often a shortage in supply — for many jobs requiring specialized skills, which is why the inflation-adjusted income of people in the top quintile of family income has increased significantly as the Great Recession has faded into memory.

The solution seems obvious: More people need more education to rebalance supply and demand between workers and employers.

A greater supply of skilled workers — workers prepared for the jobs of today and tomorrow, not the jobs of yesterday — will allow corporate America to grow their businesses, and that, in turn, will enhance the American economy even as it improves median income. Similarly, fewer people seeking low-skill jobs will put pressure on employers to increase salary levels for those positions, in order to attract and keep these workers. That outcome will also improve median income and possibly bring some of the workers who have sidelined themselves, convinced they could never find a decent job, back into the job market, an outcome that would benefit everyone.

How might that outcome be achieved?

A report from the American Academy of Arts and Sciences [7] offers an intriguing possibility. The report provides two models stemming from a proposed federal investment designed to improve college graduation rates. The optimistic model assumes that an increase in higher education spending to 125 percent of current levels would raise current graduation rates by about 50 percent. The pessimistic model assumes that spending might have to be at 150 percent of current levels to achieve that outcome.

The models are complex, and the report runs for 35 pages. But in sum, an investment that is less than the $1.4 trillion cost of the tax cut, spread over the next 20 years, would begin to show net positive revenues around 2042, and these numbers would become increasingly positive thereafter. By 2046, the share of the adult population with at least a bachelor’s degree would rise from 32 percent to 46 percent; unemployment rates would fall by another half percent; earnings would increase by more than 3 percent; and the gross domestic product would be 2.5 percent higher than if we did nothing at all.

Sadly, this alternative economic stimulus was never considered in Washington. The tax cut would happen immediately, while the higher education investment would require a much longer time horizon — well outside the election-cycle thinking that seems to determine almost all of Washington’s actions.

But if the American people had been given a choice for improving the American economy between a gamble that reducing the corporate tax burden might, through corporate largesse, find its way into the pockets of workers and indirectly create more jobs — or directly investing in higher education institutions to increase their capacity and create more of the workers corporate America says it needs, thereby empowering the workers themselves — I would have supported choice No. 2.

Corporations or people? A gamble or an investment? Why can’t we do a better job as a nation of making the right choice? Why won’t our political leaders even give us a choice?

Next time: The role of higher education in preparing America’s workforce.

[1] “Anti-tax advocate defends GOP cuts,” Providence Journal, November 11, 2017

[2] “Big U.S. banks slashed 8,000 more jobs before tax-cut windfall,” Providence Business News, January 18, 2018

[3] “Fed Expects Tax Cut to Give Economy ‘a Modest Lift,’” The New York Times, December 14, 2017

[4] “The Right Way to Cut Corporate Taxes,” The New York Times, November 13, 2017

[5] “In Trump Country, College Is a Leaky Lifeboat,” The Chronicle of Higher Education, March 3, 2017

[6] “America’s Divided Recovery: College Haves and Have-Nots” 2016

[7] “The Economic Impact of Increasing College Completion” 2017

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