The State of the Union: What the President Should Say

The President will have to devote a big part of
his speech to the economy, but which economy? Corporate profits are up
but jobs and wages remain in the doldrums. People with lots of financial
assets, or who are deemed "talent" by large corporations, are enjoying a
solid recovery. But most Americans continue to struggle.

In order for the public to understand what must
be done, the President has to be clear about what has happened and why.
Corporations are profiting from sales of their foreign operations,
especially in China and India. Here at home, they're catering to rich
Americans. But an important key to their profits is their reduced costs,
especially payrolls. The result has been fewer jobs and lower pay.

The Great Recession accelerated trends starting
three decades ago -- outsourcing abroad, automating work, converting
full-time jobs to temps and contracts, undermining unions, and getting
wage and benefit concessions from remaining workers. The Internet and
software have made all this easier.

He should point out that the U.S. economy is now
twice as large as it was in 1980 but the real median wage has barely
budged. Most of the benefits of economic growth have gone to the top. In
the late 1970s, the richest 1 percent of Americans got about 9 percent
of total income. By the start of the Great Recession they received more
than 23 percent. Wealth is even more concentrated.

This is the heart of our problem. Most Americans
no longer have the purchasing power to get the economy moving again.
Once the debt bubble burst, they were stranded.

The President should make it clear corporations
aren't to blame. After all, they're designed to make profits. Nor is it
the fault of the rich who have played by the rules. The problem is the
rules need fixing. He should stress that a future with no jobs or lousy
jobs for most Americans is not sustainable - not even for American
corporations, whose long-term profitability depends on the revival of
broad-based domestic demand. (Watch out for the upcoming "correction.")

The solution is to give average Americans a better economic deal.

For starters, he should propose to expand the
Earned Income Tax Credit (essentially, a wage subsidy) all the way up
through the middle class. And he should make the tax system more
progressive: The rate on the first $50,000 to $90,000 of income should
be cut to 10 percent; the next $90,000 to $150,000, 20 percent; and the
next $150,000 to $250,000, 30 percent. Make up the revenue by increasing
taxes on the next $250,000 to $500,000, to 40 percent; from $500,000 to
$5 million, to 50 percent; and anything over $5 million, 60 percent.
Tax capital gains the same as ordinary income.

In addition, he should call for strengthening unions by increasing penalties on employers who illegally deter them.

He will have to call for reducing the long-term
budget deficit, but must make sure to distinguish between public
investments that build future productivity (education, infrastructure,
and basic R&D) and expenditures that improve our lives or keep us
safe today. The former -- essentially the nation's "capital expenditures"
-- shouldn't be cut at all. Indeed, they should be substantially
increased. A "capital budget" separate from the regular federal budget
would help draw this fundamental distinction.

Finally, he should recommend that Congress make
college affordable by allowing federal loans to be repaid as 10 percent
of earnings for the first 10 years of full-time employment.

Importantly, he should make it clear this isn't
redistribution. These measures would be good for everyone. Rich
Americans will do better with smaller share of a rapidly-growing economy
than a large share of one that remains in a deep hole.