You Decide!

By DR. MIKE WALDEN William Neal Reynolds Distinguished Professor Emeritus N.C. State University

You Decide: Has There Been Some Good News on Income Inequality? Decades from now, people who lived through the pandemic will remember it as a horrible period. Over a million people in our country died, with millions more sick but still surviving. Thousands of businesses closed forever, learning was lost in schools, and lives were disrupted in multiple ways.

But could there be some positive impacts of the pandemic? Some say the new technologies for remote interactions in business, medicine, and shopping have been a plus. The pandemic revealed dependencies we’ve developed on other countries for key products. This has sparked renewed interest in “reshoring” some of those products to our country, which would both increase our economic independence and create jobs.

One of the most significant economic issues of our time has been widening income inequality. This simply means the income gap between those with higher incomes and those with lower incomes has been growing.

A big reason for this trend is economic changes in the 21st century. Technology has been the driver of much of the recent economy. Firms in the tech sector need highly trained workers, often with four year college degrees or more. These trends have led to big pay increases for college degreed workers in technology and also in many other professional occupations. The pay raises for college trained workers have swamped those for other workers, thereby leading to larger gaps between high paid workers and low paid workers. However, some recent national statistics indicate this situation may have changed. In the last two years, national numbers show hourly earnings have risen fastest for occupations paying the least while at the same time increasing the slowest for occupations paying the most. This has resulted in income inequality decreasing during the last two years.

Don’t misinterpret this statement. Workers in high earning occupations still make more money than workers in low earning occupations. Yet, compared to two years ago, the gap in earnings is lower today.

What’s happened to cause this outcome? Has our economic world been turned upside down? No, it’s not been turned upside down, but it may have been twisted.

Two forces have collided to reduce income inequality. The first is the pandemic. The pandemic made many people cautious about taking jobs that often require personal contact, particularly if the job is low paying. Indeed, studies are now revealing a significant number of workers furloughed from their low paying jobs during the pandemic used their free time to upgrade their skills. Consequently, when the economy reopened, those individuals moved to higher paying occupations.

The second force is demographics. Many — but certainly not all — low paying jobs are taken by young workers. The jobs I had while in high school and college was certainly low paying. But due to a declining birth rate, the increase in younger workers has significantly slowed. This has limited the potential availability — in economics. We call it “supply” — of low wage workers.

Hence, with relatively fewer workers seeking their jobs, firms in low paying businesses have needed to increase hourly earnings to compete for employees.

The narrowing of income inequality has happened at the national level, but what about North Carolina? I have tracked trends in income inequality in North Carolina over several decades. I recently updated my measures to include data since the pandemic.

The answer to my question about whether income inequality has narrowed in our state is “yes” — indeed, a big “yes.” I divided North Carolina occupations into three categories: high paying, middle paying, and low paying. High paying occupations include jobs in sectors like finance, management, and the professions. Middle paying occupations are in manufacturing, construction, health care, education, and a few others. Low paying occupations include administrative support, personal services, and food service, plus a few more.

For most of the last two decades, income inequality in North Carolina has increased, just as in the nation. But since the pandemic, there’s been a dramatic change. From 2020 to mid-2022, average weekly earnings for high paying occupations rose 2.7 percent. For middle paying occupations, the jump was 7.2 percent. But for low paying occupations, the gain in average weekly earnings was 15.3 percent, twice the increase for middle paying occupations and more than 5½ times the increase for high paying occupations.

Combined with other measures I developed, income inequality in North Carolina in mid-2022 was at the lowest level in two decades.

Of course, low paying businesses that were induced to raise worker wages by over 15 percent in less than two years likely had to raise their prices significantly to customers. But this would also happen if the pay jump was for high paying or middle paying occupations.

One question is whether workers in low paying occupations will continue to see similar gains or even if they will keep their current gains. Much will depend on how businesses with low paying occupations adjust to these new circumstances in future years. Will they use more technology and consequently reduce the employment of people? Or could they reorganize tasks to use fewer workers but continue to pay them more?

The recent news on income inequality in the country and North Carolina is good. Will the trends continue, or will they be temporary? You decide.

You Decide: How Worrisome is the National Debt? When I speak to a variety of groups around the state, I know at least one of the questions likely to be asked: What are we going to do about the national debt? The national debt certainly does appear to be scary. It now stands at over $31 trillion. This is more than the annual income of all businesses and workers in the country. Divided by the population, the national debt is more than $9,000 per person, including both adults and children.

At the same time, we’re worried about the size of the national debt. Our national politicians are debating increasing the allowable size of the debt. Congress periodically sets a limit for the national debt, so when that limit is reached, Congress has to raise the limit to continue borrowing. This always creates intense debate over debt, spending, and taxes.

One worry is that if the debt limit isn’t increased, there won’t be enough money to fund all government programs. In particular, if interest payments on the national debt couldn’t be paid, there could be a default on federal debt securities. If a default occurred, the stellar financial reputation of the United States government would be severely tarnished, and interest rates would rise.

With the national debt in the news, this is a good time to address key questions about it, thereby giving you information and perspective to decide how big of a debt problem we have.

Is the national debt the same as individual debt? The short answer is “no.”

If I borrow money, I have limited time to repay the loan. One reason is that I have a limited time to live. This is not the case with our federal government. As long as our country continues, so does the federal government. The federal government can continually borrow new money to pay off old debt that has come due.

Isn’t much of the national debt owed to foreign countries? Can’t they demand their money back at any time? Foreign investors currently own ⅓ of the national debt. Japan and China are the biggest foreign holders of U.S. debt, each owning around $1 trillion of U.S. government debt. The investments – called Treasury securities – issued to fund the national debt have a designated time period at which they must be repaid. This is typical for any debt, such as mortgages or vehicle loans. Holders of U.S. Treasury securities can’t demand their money back anytime they wish. They can, however, sell their Treasury securities to other investors. economy, won’t the debt eventually cause our economy to collapse, therefore making interest payments on the national debt impossible for the federal government?

At some point, won’t the federal government require citizens to pay their share of the national debt? This is highly unlikely. As indicated earlier, the federal government can always borrow more to pay off debt that has come due.

But isn’t this what’s called a “Ponzi scheme,” where new borrowing is continually used to pay existing investors? Aren’t Ponzi schemes destined to eventually collapse? Ponzi schemes do collapse when existing investors want their money back, and the inflows of new money are insufficient to pay them. For the national debt, financial support to make interest payments is ultimately determined by the size and growth of the national economy.

Still, with the national debt now larger than the annual value of the U.S.

What matters is not the size of the debt relative to the size of the economy. Instead, it is the size of annual interest payments on the debt relative to the size of the economy that is key. The same is true of private debt. For example, a lender looks at monthly interest payments on a home mortgage relative to the borrower’s monthly income when evaluating the loan.

When interest payments on the national debt are compared to aggregate annual national income, the good news is the ratio is not at a record high. In fact, today’s ratio stands at 2 percent, significantly under the recent peak of 3 percent in 1991. However, the nonpartisan Congressional Budget Office predicts the interest payment/national income ratio will jump to over 7 percent by 2052.

What can be done about the national debt? At its core, the national debt is a political issue based on collective decisions about spending and taxing. If spending and tax revenues don’t match, borrowing fills the gap.

However, for a long time, many economists have made a simple recommendation to make federal borrowing more logical. In the private economy, including both households and businesses, borrowing makes the most sense when it is done for long lasting investments. Any financial expert will tell households not to borrow to pay for dayto-day expenses but to use it only for long lasting purchases, like a home, vehicle, or college education. These expenditures often provide a big payback and, therefore, can be considered investments.

The idea is, therefore, to limit federal government borrowing to large investments, such as for physical infrastructure (transportation is a good example) and even human infrastructure (education, medical research, and medical emergencies like COVID-19). Indeed, most states already follow this idea.

The national debt will continue to be challenging and may even become a larger challenge. Do we need to panic or calmly make some logical changes? You decide.