To reduce poverty, create more jobs

By Donald Lambro
Monday, September 3, 2007

WASHINGTON -- Labor Day is a time to reflect on the economic well-being of the American worker, an issue on which our nation is deeply divided -- between those who say we've never had it so good and those who complain that things have never been worse.

As usual, the truth lies somewhere between these two poles of thought.

Financially, most Americans are doing well -- indeed, they say this about themselves in most surveys -- but there are a lot of economic problems in our economy that still need fixing.

Even in the midst of the housing market's downturn, most Americans own their own homes -- nearly 70 percent -- more than ever before in our history. Fifty percent own them outright. Moreover, despite the decline in housing values in some regions, most Americans have seen the value of their homes climb to record highs.

Owing to 401(k)s, IRAs and other tax-free savings plans, more than half of all Americans own stocks, a historic level of corporate ownership in equities that cuts across most income levels.

The U.S. Census Bureau came out with its annual figures last week that reported two other positive economic trends: The poverty rate fell last year for the first time in 10 years and median household income, when adjusted for inflation, increased for the second consecutive year.

While median income -- meaning, half make more and half make less -- rose to $48,201, it still has not climbed back to its pre-recession high of 1999 just before the tech market tanked.

Many tend to think of the poverty rate as a static pool of people, when in reality it is more fluid than that, with people rising out of poverty or falling into it due to family breakups, divorce, job losses or some other economic catastrophe.

In this case, the Census Bureau analysis said the rise in median income was largely due to the jump in the number of people who obtained full-time jobs. It further noted that the poorest households showed the largest gain in incomes.

The chief reason: job creation. Unemployment has fallen over the past seven years and is down to 4.6 percent of the eligible workforce. More Americans are working now than at any other time in our history. A majority of the states have jobless rates of less than 3 percent to 4 percent.

Note to policymakers: The best way to reduce poverty is to expand the economy and create more jobs.

Critics point to the wide disparity of incomes in our country -- or what they call "income inequality." The Washington Post, in a fit of class envy, reported, "The share of income going to the 5 percent of households with the highest incomes has never been greater."

But instead of concentrating on how much wealth, investments and savings people at the higher-income scale have accumulated, we should be focusing on how to open up opportunities for wealth creation among those at the median-income level or below. There are a number of ways to help workers save, invest and earn more income. Here are a few:

Stop taxing the interest on ordinary savings (outside of IRAs and other tax-free methods), and start offering paycheck mechanisms for workers to save more. One proposal sitting on the back burners in Congress would establish automatic savings accounts that small businesses would offer to any worker they hire. The money would be automatically withheld, as employers do now for payroll taxes, and deposited into a special tax-free account that each employee would own and take with them whenever they change jobs.

Notably, the idea of establishing universal IRA-style savings accounts for all workers cuts across ideological lines. Both the conservative Heritage Foundation and the liberal Brookings Institution are jointly promoting the idea. It is estimated that tens of millions of workers who now save nothing would see their automatic savings accounts grow substantially over their working lives, helping to narrow the wealth and income gap.

The reason wealthier people are wealthy is because they own stocks and bonds. More Americans below the median-income levels can own stocks and bonds, too, if we let them put a small portion of their Social Security withholding into personal-investment accounts, as President Bush has proposed.

Here's another idea being pushed by former Massachusetts Gov. Mitt Romney:

Abolish the capital-gains tax on stocks and dividends for people in the bottom tax brackets to encourage them to invest and keep more of their gains.

Actually, the capital-gains tax should be abolished for everyone because it has been achieved with money that was already taxed as income, but that faces huge political obstacles from the pro-tax, anti-growth Democrats in Congress. But I'll bet even Democratic Rep. Charlie Rangel, the chairman of the tax-writing Ways and Means Committee, would support Romney's plan for his Harlem, N.Y., constituents.

Many, if not most, American workers are doing well in this economy. But there are too many who aren't because of tax and regulatory obstacles to higher rates of economic expansion, job growth and savings needed to create wealth and boost incomes.

The next great worker-reform movement will demand that we tear down these obstacles to those on the lower rungs of the economic ladder.