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January 24, 2014

Mercatus Scholars on the 2014 State of the Union

Below, scholars with the Mercatus Center at George Mason University look ahead to policy areas the president will likely raise in his State of the Union speech on Tuesday.

Income Inequality

Donald Boudreaux, Professor of Economics and Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center at George Mason University

"The president has called income inequality a ‘defining challenge of our time,’ but there is no economic theory that suggests income inequality is evidence of an economic failure. Simply put, more wealth for rich people does not mean less wealth for everyone else. Unlike in centrally planned economies, in the US rich people can create more wealth rather than resorting to seizing it from others.

"Giving the government the power to take wealth from one citizen and give it to another also opens up the potential for abuse, where redistribution favors those with greater political influence. If we are worried that the concentration of income can lead to abuse of the economy, we should also be worried about the concentration of power among politicians and giving a select few even greater control of the free market."

See also: No Time Like the Present – Barron's

Minimum Wage

Keith Hall, senior research fellow and former Bureau of Labor Statistics commissioner

"Everybody wants to see sustained wage and salary growth, but raising the minimum wage will not achieve this goal. It could prompt businesses to hire fewer workers or cut employee hours. Low-skilled workers are more easily replaced either with technology or fewer—but more productive—higher-skilled workers. “While a proposed increase has been touted as a way to assist millions of working families, most of the people making at or near the minimum wage are under the age of 25 and nearly a third are teenagers. This age group is already struggling during this historically slow economic recovery, with only 46 percent of the population under 25 years old currently employed. Furthermore, since 2007 the number of hourly workers making $8.25 an hour or less has fallen by nearly 6 million.

"Some argue that more public sector intervention is necessary to reduce poverty and boost wages. But history has shown that only job gains from a stronger economy can solve the problem. If we want to improve worker pay and the labor market as a whole, we need to focus on policies that encourage private sector growth."

See also:
More Government Spending Won’t Reduce Poverty – US News & World Report
The Employment Costs of Regulation

Entitlements and Discretionary Spending

Veronique de Rugy, senior research fellow

"There's little the president could say to convince the American people of his intention to deal with the nation’s long-term spending and debt crisis. And I am confident he won’t even try. In the latest budget deal, the president and legislators on both sides of the aisle sent a clear message they can’t be trusted to follow through on promised spending cuts—even tiny spending cuts—so how can they be trusted to tackle entitlement spending reform?

"Regrettably, what Americans will believe is the president’s calls for even more spending and higher taxes, as that’s all we've seen accomplished to this point. But we know where this will take us. Academic research overwhelmingly finds that governments that fail to control spending, and instead raise taxes, struggle economically. The most successful way to deal with our huge amount of debt without damaging the economy is to cut spending, not to raise taxes. More important, we need to reform the drivers of our future debt: Social Security, Medicare, Medicaid and Obamacare."

Charles Blahous, senior research fellow and public trustee for Social Security and Medicare

"A prerequisite for leadership is confronting the serious challenges of our time and rallying Americans to address them. One of the greatest challenges facing this nation is the unsustainable fiscal trajectory of the federal government, which threatens our children’s prosperity and even their ability to control their economic future. We should hope that the State of the Union Address frankly recognizes this challenge, and expresses a willingness to incorporate the good ideas of people across the political spectrum in overcoming it.

"Too often in recent months, we have heard fiscal realities wished away with the mantra that the ‘deficit is in decline,’ a phenomenon that has occurred solely because recent deficits were at record highs. During the president’s first term the fiscal outlook grew far worse, not better, and we are running out of time to deal with it without severe consequences. Too often as well we have heard superficial talk about income inequality without appropriate recognition that the poorest among us will suffer the most as worsening federal finances constrain economic growth and hamstring the government’s ability to provide assistance to those in need.

"Every non-partisan analysis of the budget, including that of the Congressional Budget Office, attributes the unsustainable fiscal situation to continuing growth in the costs of Medicare, Medicaid, Social Security, and the Affordable Care Act. Anything that helps us rein in the costs of those programs will help us address the fiscal problem. Focusing on other parts of the budget equation – including the tax side and discretionary appropriations – is essentially a distraction, because that is not where the causes lie.

"Above all else, we should hope that we do not hear in the address that the deficit is coming under control, or that slower health care inflation is magically fixing the fiscal problem. Neither is true, and such remarks would deliver a concerning signal that for the time being the fiscal challenge will be allowed to grow worse."

Affordable Care Act

Robert Graboyes, senior research fellow

"The ACA is failing in so many ways, and its failures threaten Americans’ health and wealth. The still-broken website is just one problem. A more serious concern is the tens of millions who will likely lose their health insurance coverage this year—just as millions did last year. Some may ‘just’ lose their doctors—but for those with serious illnesses, that alone could be catastrophic.

"At this point, we really don’t know whether the law has had any significant effect on the total number of insured. All of the delays and alterations by executive order are just band-aids. And lurking out there is the potential for devastating security breaches involving Americans’ intimate financial and medical data.

"As difficult as it may be, the president will at some point have to confront Americans’ fear—and in some cases anger—about the Affordable Care Act. And as painful as it may be, both the president and Congress are soon going to have to revisit health care reform."

Tax Reform

Jason Fichtner, senior research fellow

"Simply calling to wring more revenues out of the current tax code is not real tax reform. The US tax code is a muddled mess, riddled with loopholes and exemptions benefiting special interests at the expense of a more level playing field. This hurts competition, distorts market decisions and impedes economic growth.

"The excessive complexity of tax code not only reduces the amount of revenue government collects, it also costs Americans nearly $1 trillion in compliance costs every year.

"Tinkering around the edges, as lawmakers did with the fiscal cliff deal, will only exacerbate the problem. Successful reform requires broadening the tax base, lowering rates, and eliminating loopholes to create a more stable, equitable system and provide more long-term predictability."

Regulations

Jerry Ellig, senior research fellow

"It seems logical that a president would make greater use of regulation, executive orders, and other unilateral actions if he cannot get legislation through Congress. But some research in political science finds that divided government is associated with less new regulation. This occurs because when government is divided, Congress may pass fewer laws giving discretion to regulatory agencies, may reduce funding for regulatory agencies, and may scrutinize regulation more carefully through oversight hearings. So whether we get more or less regulation in the next couple years depends on what Congress does, not just what the president wants.

"Furthermore, federal agencies often adopt new rules without an adequate analysis of what problem they are trying to solve or the potential economic impact of the new rules. Without meaningful regulatory reform, agencies will continue to produce rules with little accountability for real results. Can our economy afford that type of unnecessary risk?"