The purpose of this book is to explain how government policies should be changed to both encourage greater work effort and reduce economic inequality. In a complex society such as ours, the economic rewards from work are determined by a combination of market forces and government policies. Labor markets tend to distribute economic rewards in proportion to productivity. That can be efficient, but it also generates significant inequality. When the market distribution of economic rewards is unfair, it falls to the government to adopt policies that promote greater economic justice. Governments influence market outcomes through a combination of regulation, spending, and taxation. In a free-market economy, government intervention can and necessarily must be limited. As this book shows, however, government can and should intervene, both to make work more attractive and to promote greater economic justice.
The goal here is not to turn us into a nation of workaholics. On average, Americans probably work hard enough. But we should increase the rewards from work for low-skilled Americans, and we should reduce the work disincentives that so many other workers face.
Chapter 1, Developing a National Strategy for Work, explains the centrality of work in American society and shows how market forces and government policies combine to determine the current rewards from work. The chapter also discusses economic inequality in the United States, with particular emphasis on the relatively high level of inequality in the distribution of earnings. Next, the chapter explains how antidiscrimination laws and recent changes in tax, welfare, and elder policy have encouraged greater work and work effort. Finally, this chapter suggests how further improvements in government tax, transfer, and regulatory policies could both encourage work and promote greater economic justice.
Chapter 2, Working in the U.S.A., discusses who is working and who is not. Pay, work patterns, and demographic trends are highlighted. In particular, chapter 2 discusses the relationship of earnings to education, age, gender, race, and other important demographic factors. It also discusses the recent trend of rising earnings inequality.
Chapter 3, How Labor Markets Reward Work, uses some of the basic principles of labor economics to explain how labor markets distribute earnings and earning opportunities. In particular, the chapter explains the standard economic model of labor supply and shows why labor markets inevitably lead to significant inequality in the distribution of earnings and earning opportunities.
Chapter 4, How Government Affects the Distribution of Earnings and Income, explains how government policies can, and should, influence the distribution of earnings and other economic resources. It considers how taxes, transfers, and regulations affect the labor market's initial distribution of earnings and earnings opportunities.
Chapter 5, Making Government Work, focuses on the question of just how far the government should go to "correct" the market's unequal distribution of earnings and other economic resources. It also considers how government policies can both promote greater economic justice and encourage greater work effort.
Chapter 6, Making Taxes Work, recommends various ways to reform the tax system to minimize work disincentives and promote greater economic justice. The chapter starts by discussing some major problems with the current tax system. Then, the chapter suggests six relatively modest changes that could improve the current system. For example, the chapter recommends that we broaden the tax base and reduce tax rates on earned income, stop taxing low-income workers, restructure the earned income tax credit, replace personal exemptions and standard deductions with refundable personal tax credits, reduce marriage penalties, and simplify the tax system and reduce compliance costs. Beyond such incremental changes to the tax code, chapter 6 also considers more fundamental changes to the current system. For example, the government could integrate the income and Social Security taxes into a single, comprehensive tax system. That system could be based on earnings, income, consumption, wealth, or some combination of these tax bases. Most important, however, that comprehensive tax system should be designed to both promote greater economic justice and encourage greater work effort.
Chapter 7, Making Welfare Work, recommends various ways to make work more rewarding for low-skilled Americans and make the distribution of economic resources fairer for all low-income Americans. The chapter starts by putting the welfare system in its historical context. Next, the chapter identifies some of the major problems with the current welfare system. The chapter then suggests seven relatively modest changes that could improve the current system. The government should increase earnings subsidies for low-income workers, provide more money to help support the children of low-income parents, provide more child care assistance for low-income parents, and make disability programs work friendly. In connection with those reforms, the government should reduce or eliminate the marriage penalties faced by low-income workers, better coordinate the many overlapping welfare programs, and update the federal measure of poverty.
Beyond such incremental changes, chapter 7 also considers more fundamental restructuring. Ultimately, it would make sense to integrate the tax and transfer systems into a single comprehensive system.
Chapter 8, Making Social Security Work, discusses how Social Security influences individual decisions about work and retirement and offers recommendations for improvement. After a brief overview of the current system, the chapter explains the need for reform. The chapter then suggests seven reforms that could increase work incentives and reduce work disincentives. The chapter suggests that we move away from payroll financing, reduce the progressivity of the Social Security benefit formula while concomitantly expanding Supplemental Security Income, increase the Social Security benefit-computation period beyond 35 years, raise the early and full retirement ages, tax Social Security benefits like pensions, replace spousal benefits with earnings sharing, and change the way that benefits accrue and are paid out.
Beyond such modest reforms, chapter 8 also considers replacing the current Social Security system with a two-tiered system. The first tier would provide a basic Social Security benefit to every older American, and these benefits would be financed out of general revenues. The second tier would provide an additional earnings-related benefit based on payroll tax contributions made to individual accounts.
Chapter 9, Making Pensions Work, discusses how pensions influence individual decisions about work and retirement and offers recommendations for improvement. At the outset, the chapter provides an overview of the current pension system, discusses some recent trends and problems, and explains the work incentives and disincentives created by pension plans. The remainder of the chapter suggests how to make the pension system work. The basic approach is to expand coverage and pay workers in proportion to their productivity. Ultimately, however, we might need to replace the current voluntary system with a mandatory universal pension system.
Chapter 10, Making Health Care Work, explains how the American health care system works and suggests a number of improvements. In particular, that chapter recommends ways to expand health care coverage, strengthen the connection between health care and work effort, and restructure health care markets. Ultimately, the goal should be a health care system that provides nearly universal coverage at a reasonable cost and does so with a minimum of work disincentives.
Chapter 11, Making Labor Markets Work, discusses how government regulation influences labor markets and offers recommendations for improvement. In particular, the chapter recommends that the government vigorously enforce the laws against employment discrimination, reduce incarceration levels, make education and training work, modestly raise the minimum wage and index it for inflation, expand the unemployment insurance program, promote unionization, and make full employment a reality.
Finally, chapter 12, Working Together, pulls together the book's principal recommendations about how to reform the government's tax, transfer, and regulatory policies. The result is a comprehensive system that would generally increase the economic rewards for work and promote greater economic justice. That system would have earnings subsidies and low effective tax rates on earned income. In addition, that system would ensure that workers would not lose their health coverage as a result of changing jobs or as a result of entering or leaving the workforce. That system would also provide government assistance for education, training, child care, and many other social welfare services.
In short, this is a book about how America works and about how to continue making America work in this new millennium.
