Guest Post: Heather Boushey on Inequality and Growth

Nov 6, 2012Mike Konczal

Mike here: Special guest post by Heather Boushey of the Center for American Progress, responding to a recent citation of her work with Adam Hersh on inequality and growth (work we discussed here). The launch of this post was delayed on my end as a result of Sandy-induced work/email chaos.

Mike here: Special guest post by Heather Boushey of the Center for American Progress, responding to a recent citation of her work with Adam Hersh on inequality and growth (work we discussed here). The launch of this post was delayed on my end as a result of Sandy-induced work/email chaos. Hope you check it out, as well as their excellent report that is discussed within.

Inequality does appear to affect economic growth

by Heather Boushey

It is now a well-known fact that the United States has the highest levels of inequality among developed countries. Increasingly, the economics profession is questioning how this affects our economy, not only in terms of what it means for those at the bottom of the income distribution, but in terms of how high inequality affects economic growth and stability.

The New York Times recently published a thoughtful piece on the relationship of rising U.S. inequality to long-term economic growth. In the wake of that article, they published a Room for Debate online forum on this topic and Scott Winship, a scholar a the Brooking’s Institution was among those participating. Mr. Winship cites our report on the topic to discuss what he argues is inadequate evidence linking inequality and growth.

We are grateful that Mr. Winship acknowledges CAP's central role in this debate, but grossly mischaracterizes our conclusions. The quote he pulled from our report gives the false impression that our research supports the conclusionthat inequality is not a problem for economic growth.

Our argument is that we need to look specifically at the channels through which inequality affects economic growth, specifically in the U.S. context. For example, there is evidence that documents how the rich don’t spend as much of their income as the non-rich. If inequality keeps rising and the rich pull in a larger and larger share of national income, this stunts demand, the lifeblood of the economy.

Another mechanism is through entrepreneurship, which is often portrayed as the dynamic force in a capitalist economy. Yet, most entrepreneurs come from the middle class. The middle class provides both the economic security and access to education and credit that entrepreneursneed.

If inequality is due to the top pulling far away from the rest of the economy,which creates a very wealthy elite, this is often associated with a well-known economic phenomenon of “rent-seeking.” The wealthy will tend to use their outsized resources to garner a bigger piece of the pie, rather than on investments that will increase productivity and make the whole pie bigger. And, there is growing evidence that this is exactly what is happening to our economy, threatening long-term growth. For example, economists have been finding that as money has flowed into the financial sector, that industry has increasingly used its resources to promote policies that benefit itself only.

In opposition to Mr. Winship’s claim, the preponderance of evidence does supports the conclusion that inequality can hamper economic growth. We conducted a thorough review of the literature and in the quote he took, we were highlighting methodological limitations in a specific class of empirical studies. We also pointed out that cross-country panel data studies look at reduced form equations for growth and we argue that we should be thinking instead about a structural model.

Others have found our report to be data-driven. Jim Tankersley, journalist with the National Journal encouraged his readers to consume the report “in its entirety,” describing is as a “The bulk of Boushey and Hersh's sources aren't partisan in any way - just detailed, data-driven analysis from top economists.” This blog called it “the best up-to-date arguments that progressives discussing inequality should understand inside out.” And in a lengthy discussion on the subject last month by Jared Bernstein, former chief economist to the vice president, our work was used to frame a summary of the latest research on this topic. 

We are typically pleased to have our research cited in the paper of record, the New York Times. However, it is no fun to have our work grossly misrepresented.

 

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Transition Tasks: Commit to a New Model of Economic Growth

Oct 31, 2012Bo Cutter

The global economy is heading toward a huge transformation. Can America rise to the challenge?

Neither of our two major political parties have at their cores a commitment  to economic growth. In his second term, President Obama has an extraordinary opportunity to grab the golden ring, make a genuine commitment to sustainable, equitable growth, and follow that up with a credible, plausible entrepreneurial growth model.

The global economy is heading toward a huge transformation. Can America rise to the challenge?

Neither of our two major political parties have at their cores a commitment  to economic growth. In his second term, President Obama has an extraordinary opportunity to grab the golden ring, make a genuine commitment to sustainable, equitable growth, and follow that up with a credible, plausible entrepreneurial growth model.

But aren't both parties pro-growth in their platforms and their various position statements? Of course they are. It's a necessary ritual of political life. But for both the left and the right, growth is a residual - it's what you're for, after you get everything else you want. Moreover, both parties are wedded to whole sets of client groups whose agendas don't include economic growth at all.

The right wants austerity, low taxes, budget surpluses, preferably no government but at the most a small and passive government, no abortion, a Christian nation, and no immigrants - all before it wants growth. There will certainly be those who argue that some of these elements are essential aspects of an economic growth strategy, but I've yet to see a serious and specific growth model from the right and I've heard nothing about equitable and sustainable growth. In any case, the problem is that you can't just get elements of this list; holding today's right-wing coalition together requires that you get the whole package.

The left favors large active government almost as a principle, rather than a tool for something. By far it's highest priority is the current social safety net, unchanged forever. It does not regard debt or deficits as issues that matter. It is deeply contemptuous and dismissive of business, suspicious of markets, and is far more concerned about income distribution than about income expansion. It is very concerned - as it should be - about the short- and long-term effects of unemployment and it wants a sustainable and equitable world but sees no particular connection between these good things and economic growth. As with the right, one searches in vain for any useful theory or model of long run growth in the writings of the left.

The central attitude toward growth of both party philosophies is similar to the foreman on the loading dock who said, regarding his company's attitude toward quality, "It's in the slogan, and the vice president talks quality at least four times a year. But the assistant vice president talks shipping cases several times a day."

Other than playing whack-a-mole with each other over the short-term growth rate right now, the view of both the left and right is that the economy is a perpetual motion machine that will just keep rumbling along. But it isn't. Not ever and particularly not now. 

Economies have rhythms. They don't just march along forever at some preordained rate of growth. Big economies respond over decades, generations, to big impulses: revolutions in the cost of power, or transportation, or information; revolutions in the applications of these big cost shifts. These impulses spread throughout an economy, driving higher rates of economic growth, and then, as they become pervasive, lose their force. America has experienced such impulses, or waves, at least five times in the last 200 years. We are in the end phase of one such impulse and the very early stages of the next.

The "golden era" of the 20th century between roughly in 1950, and 1980 represented the full flourishing, the height of one such era and growth impulse. In these 30 years, the economy was dominated by large companies, managerial capitalism, and a financial system that evolved to meet those particular needs. The success of this era importantly shaped our expectations, our sense of how the world works, our institutions, and our politics. But as successful as this era was, the most important thing to know about it now is that it is over. Both parties - and both America's left and right - believe or at least act as though it is returning again, it's just around the corner. And it's the other guy's fault that it hasn't rearrived yet.

But it's not coming back. One reason among others is that we will never again see a world in which our economy dominates the world's economy. Beginning in the 1970s, as colonial empires collapsed and economic philosophies were revolutionized, major new nation states entered the same world economy we were in along with billions of new workers and households. At first that represented a boost to us, but as the economic sophistication of these economies evolved this new world meant vast and hard structural shifts for us. As Michael Spence makes clear in his book "The Next Convergence," much of the structural change we see and don't like comes from this changing shape of the world. Falling manufacturing employment, the 20-year slowdown in income growth, a large piece of income inequality, and the polarization of our labor force are all due in part to the changing shape of the global economy. (Just to be clear, the other major factor in all of these structural shifts is technological change.) 

We can't do anything about the shape of the world, but we can figure out how to change and thrive in this new environment. Which means we have to have a new growth model.

Fortunately, another technological revolution is occurring now and all of the elements of a new growth model are coming together. The model plays to American strengths and is there for us develop - unless we choose to be stupid. The model will require entrepreneurial capitalism, independent capital, high levels of private sector investment, equally high levels of infrastructure investment, mayors who see their cities as platforms for growth, and an educational revolution. It requires us to see that technological change can, uniquely, work for us. I've called it an era of mass specialization; it can be much more equitable and environmentally sustainable than the golden era.

And here lies President Obama's second transition task and a huge opportunity. He has to start immediately making this new growth model clear and comprehensible to Americans. He has to offer the hope that there is more to the future than just a repeat of the trends of the past. And he has to begin to propose the public policies that will allow the next growth era to be born. But above all, this will require that President Obama sees equitable, sustainable growth as the core of his governing philosophy for the second term.  Two good places to start with would be to put his endorsement of Simson-Rivlin-Dominici-Bowles in the context of a focus on growth and to make this the theme of his January 2013 State of the Union.

President Obama told me once at a very small breakfast in New York - long before he was president - that he wanted to be a transformational president. I believe him, but I don't think he's achieved that yet. Here's the chance. What could be more transformational, and more truly progressive, than to change America's governing political philosophy, wrench our politics away from its infatuation with wedge issues and a return to the 1950s, and usher in a new era of growth? As I started by saying, the golden ring is out there and the merry-go-round is heading toward it. 

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic Presidents.

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What We’re Not Talking About When We Talk About Inequality

Oct 31, 2012Joelle Gamble

It's not enough to maintain a safety net that catches people when they fall. We have to keep them from falling in the first place.

It's not enough to maintain a safety net that catches people when they fall. We have to keep them from falling in the first place.

As a millennial, my generation has been told that if we simply work hard and go to college we will be able to achieve even greater economic gains than our parents. That promise now rings false. The gap between the economic have and have-nots is widening dramatically. Those of us who grow up in middle or low-income families may not have the opportunity to move up the socioeconomic ladder. With the widening gulf between rich and poor hampering economic opportunity so markedly that economist Alan Kreuger has named the phenomenon the Great Gatsby Curve, we need to ask ourselves if our political leadership is taking the right steps to address inequality in America.

The current election debate has focused on progressive tax policy and debt reduction as the central components of how government will both spur growth and reduce inequality in America. We only hear about how education, infrastructure, and health care play into the debate on specific occasions, such as when a question is directed toward one of those topics.

Meanwhile, the conversation around government priorities, outside of direct fiscal policy, has been limited to what programs people will lose if a particular candidate is elected. The two major presidential candidates, as well as many down ticket national candidates, regularly accuse each other of wanting to destroy social security “as it is” or restrict access to Medicare for seniors.

How we change tax rates on the middle class and how we continue to fund our social safety net are both important questions. Our government must ensure that the tax code is working fairly. It must make sure that social programs protect individuals when they fall. But the larger drivers of our economic growth and equality in the United States are being largely ignored in favor of these narrow topics. It is not enough to catch people when they fall. Government must, more importantly, ensure that its citizens have the equal access to resources that will make them less likely to fall in the first place. By providing equality and opportunity, we can spur long-term economic growth and prevent higher costs.

There are some investments that government can make that will do more for long-term economic growth and equality in America than others. Investing in education and job training, building a strong infrastructure of Internet access, and providing quality health care has been shown to not only reduce inequality but also promote economic growth.

Education and training are paramount in providing job opportunities. One of the largest factors affecting earnings inequality in the United States is technological change. Innovation has caused many modern companies and industries to become increasingly dependent on the availability of human capital found in the communities in which they are located. Areas with higher percentages of college-educated works are doing better at attracting and retaining business (and the jobs they bring) than areas with less educated populations. American workers need affordable access to education and skills training to be able to compete in the changing labor market.

Future worker competitiveness will also depend on building strong information infrastructure, especially increasing access to high-speed Internet, as Roosevelt Institute Fellow Susan Crawford rightly argues. Technology has created jobs that require workers to be able to work with large quantities of information and work collaboratively with partners who may not live in the same country, yet alone the same city. Even simple processes such as job applications or unemployment benefit applications now require access to a stable Internet connection. Currently, around one-third of Americans lack access to high-speed Internet.

As has been widely shown, access to quality, affordable health care reduces costs for individuals and their families, as well as American taxpayers as a whole. In the absence of access to affordable preventative care, only individuals with significant financial resources can pay for regular doctor visits, examinations and, potentially, long hospital stays. For those without large incomes, these basic health care needs can severely affect their ability to pay bills and sometimes send them into bankruptcy. Beyond basic care and insurance, affordable care for reproductive health services can serve as a step toward gender parity.

Not only do education, Internet access, and health care move us toward a more equal society, they also give taxpayers more for their tax-dollar. Individuals without access to quality schools and health care grow up to have fewer choices and opportunities to get high-skill, high-pay jobs that offer benefits. This makes them more likely to need social programs during the course of their lives. Making a stronger initial investment in programs such as education and heath care that give people opportunities is wiser than allowing the negative effects of failing to do so cripple the federal budget and the economy over the long run.

Making a stronger initial investment in opportunity via programs such as education and heath care is wiser than allowing the negative effects of not making those investments cripple the federal budget and the economy over the long run. None of this is to say that spending on defense, physical infrastructure, and our basic social safety net are not needed. But the United States needs to change its priorities and push for long-term planning with investments in long-term results. Education, information, and quality care are key to producing a more equitable society.

Joelle Gamble is Deputy Field Director of the Roosevelt Institute | Campus Network.

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FDR's Message to Obama and Romney: America's Strength Abroad Begins at Home

Oct 29, 2012David B. Woolner

FDR knew that America's willingness to fight inequality was more important than its ability to wage war.

Our strength is measured not only in terms of the might of our armaments. It is measured not only in terms of the horsepower of our machines.

The true measure of our strength lies deeply imbedded in the social and economic justice of the system in which we live.

FDR knew that America's willingness to fight inequality was more important than its ability to wage war.

Our strength is measured not only in terms of the might of our armaments. It is measured not only in terms of the horsepower of our machines.

The true measure of our strength lies deeply imbedded in the social and economic justice of the system in which we live.

For you can build ships and tanks and planes and guns galore; but they will not be enough. You must place behind them an invincible faith in the institutions which they have been built to defend. – Franklin D. Roosevelt, 1938

In their recent debate on foreign policy, both President Obama and Governor Romney made a point of linking America’s security with the health of the U.S. economy. Governor Romney, for example, argued that the ability of the United States to promote “the principles of peace” abroad “begins with a strong economy here at home,” while President Obama said that thanks to our experiments with nation-building in places like Iraq, “we've neglected…developing our own economy, our own energy sectors, our own education system. And it's very hard for us to project leadership around the world when we're not doing what we need to do here.”

Both candidates are correct, of course, in pointing out that a healthy economy—and in Mr. Obama’s case, a healthy education system and energy sector—are critical to the overall strength of the nation and hence our ability to project American influence overseas. But as has been the case with so much of this campaign, neither man had much to say about another critical element of national health that also plays an important part in our foreign policy: the social health of the nation.

Roughly 70 years ago, when the United States was living in a far more dangerous world than we are living in today, Franklin Roosevelt argued that America’s place in the world was not merely dependent on our military and economic power, but also dependent on our ability to create a society where social and economic justice were paramount. For Roosevelt, this meant building a nation which, in “arming itself for defense has also the intelligence to save its human resources by giving them that confidence which comes from useful work,” which in “creating a great navy has also found the strength to build houses and begin to clear the slums of its cities and its countryside,” and which as “the industrial leader of the world has the humanity to know that the people of a free land need not suffer the disease of poverty and the dread of not being wanted.”

Indeed, in gazing out over a world where anti-democratic forces were on the march, Roosevelt also insisted that “unhappy events abroad” had “re-taught us two simple truths about the liberty of a democratic people.” The first truth was that “the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself. That, in its essence, is Fascism—ownership of Government by an individual, by a group, or by any other controlling private power. The second truth is that the liberty of a democracy is not safe if its business system does not provide employment and produce and distribute goods in such a way as to sustain an acceptable standard of living.”

For Roosevelt and the generation that lived through the Depression and war, these truths were very real, and as such the conviction that the health and strength of the nation were linked directly to its ability to deliver social and economic justice for all its people was regarded, not as a luxury, but as a critical component of national security.

And yet on the campaign trail today we hear very little about the vital need to address the same disturbing trends that FDR warned us about all those decades ago: the vast and growing unequal distribution of wealth among the American people, the dangers of the rise of “private power” to the exercise of democracy, the fact that in America today roughly one-third of our citizens have rejoined the ranks of the poor or near poor.

No, instead what we hear is an endless stream of uninspiring messages about each candidate’s “plans” to create jobs, reduce the deficit, and “keep America strong.” But after living through four long years of the Great Recession and bearing witness to a society where 400 individuals now own more wealth that the bottom 150 million combined, the American people deserve more than mere platitudes. They want to hear their leaders articulate a vision for America that involves the creation of a better and more just society, a society that will inspire what Roosevelt called “the anguished common people of this earth.”

President Obama has offered hints of this in his call to move the country forward, but in the dangerous world that our parents and grandparents inhabited, Franklin Roosevelt went much further. In the final and anxious days of the 1940 election, for example, he reminded his fellow citizens that they were a generation living in “a tremendous moment of history,” where the “surge of events abroad” had led some to ask whether “the book of democracy” might “now to be closed and placed away upon the dusty shelves of time.” For Roosevelt the answer was clear and unequivocal:

All we have known of the glories of democracy—its freedom, its efficiency as a mode of living, its ability to meet the aspirations of the common man— all these are merely an introduction to the greater story of a more glorious future.

We Americans of today—all of us—we are characters in this living book of democracy.

But we are also its author. It falls upon us now to say whether the chapters that are to come will tell a story of retreat or a story of continued advance.

I believe that the American people will say: "Forward!"

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute. He is currently writing a book entitled Cordell Hull, Anthony Eden and the Search for Anglo-American Cooperation, 1933-1938.

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“We’re All in This Together” vs. “You’re on Your Own” Government

Oct 15, 2012Elizabeth Stokes

As the Roosevelt Institute | Campus Network begins work on building a Government By and For Millennial America, Elizabeth Stokes defends the idea of government as a steward of the common good.

As the Roosevelt Institute | Campus Network begins work on building a Government By and For Millennial America, Elizabeth Stokes defends the idea of government as a steward of the common good.

Despite no specifics on how they will slash taxes and also balance budgets, it is clear that the Romney-Ryan budget plan follows an ideology we've seen before. Seeking to block grant Medicaid and voucherize Medicare, the Ryan budget, endorsed by Romney, fundamentally warps the meaning and purpose of the social safety net. This ideology views government as important not for guaranteeing the collective success of all, but for protecting the individual’s right to make his own success. It views government as important not for creating a framework that meets the needs of all citizens, but for supporting and responding to the needs of the market. And it sees government, if it must offer public provisions, as an entity that works best when its services are farmed out to the private sector.

But this view of government completely ignores its role as steward of the common good. To see why this role is so important, just take a look at the recent financial crisis. It has shown us that macroeconomics is more complex and more unpredictable than our economics textbooks would have us believe. Restricting government’s scope as the precondition of a “freely” functioning market is not enough to make the market provide effectively and justly for all. As the Census Bureau recently reported, even though GDP has grown, 2011 saw huge income gains for the top 5 percent of income distribution, declines for the middle, and stagnation at the bottom. Evidently, the market alone cannot allocate resources in a way that a just democracy demands, nor can it be relied upon to stably ensure the wellbeing of our most vulnerable.

But this is the problem with the Romney-Ryan ideology: it completely misunderstands what a just democracy demands. As Jeff Weintraub puts it, the democratic ideal requires active participation in collective decision-making, carried out within a framework of fundamental solidarity and equality. The Romney-Ryan ideology severely jeopardizes this ideal. How can democracy be fully realized if 47 percent of citizens are viewed exclusively as rapacious moochers and not as fundamental equals in a shared political community? How can self-governance be possible when we fail to guarantee a fundamental baseline for all and let market-generated inequalities distort political equality?

The fundamental equality democracy requires cannot be satisfied by a handful of political rights (not that these mean much anyway given voter suppression efforts). Rather, government must also guarantee what T.H. Marshall would refer to as the social elements of citizenship: equal access to basic essentials that relieve people from the constant struggle for survival and thus provide them with the time and energy to participate in political society as engaged citizens. These basic essentials are not simply an assortment of handouts for the destitute, but are universal and based on generally shared rights of citizenship (the 96 percent know what I’m talking about). Ensuring such a baseline enables us to do away with the artificial distinctions of makers or takers, and instead binds us in a community of mutual sacrifice and success. 

Guaranteeing these social elements of citizenship also entails containing the market and money’s influence so that a person’s life chances and engagement with democracy are not exclusively determined by market position. It is therefore important to have non-market institutions, such as government, direct the market in order to uphold the common good and redress market-generated inequalities. This does not simply mean redistribution policies that tax the rich and give to the poor – after the fact mop-ups via social spending are not enough to make up for the disempowering processes that lead to market-generated inequalities in the first place. Rather, we must also focus on predistribution, i.e. the way in which the market distributes its rewards to begin with (such as regulations that protect consumers and empower workers).

The concept of government as steward of the common good recasts its role in society, seeing it less as a third entity that runs alongside the market economy and the private household but more as a force in the service of the common good that is prior to both and directive of each. Government should act as the framework that both enables and is subject to democratic decision-making in society. It should ensure all people have the minimum they need to participate and engage as citizens and its fundamental direction should be shaped by public voice and societal goals that are collectively and consciously decided.  

Ryan lauds choice, competition, and self-sufficiency as the pillars of his social safety net, implying that marketization will enhance liberty as well as efficiency. However, these words are pure rhetoric and pretense. By putting the market in charge of the common good, he would fundamentally transform basic welfare goods, which are shared in common by all citizens, into commodities, which are bought by individual consumers in a volatile marketplace. While the ethos of social insurance is “we are all in this together, rain or shine,” marketization says to the citizen “here’s some money, you’re on your own.” The Romney-Ryan ideology not only severely undermines one of the most important pillars of government, but also bars those subsets of the population who are reliant on government benefits from the democratic community. 

Elizabeth Stokes is a Working Group Fellow for the Roosevelt Institute | Campus Network's national initiative, Government by and for Millennial America, and a senior at the University of Pennsylvania.

 

Teamwork image via Shutterstock.com.

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Romney's Tax Plan is Another Shot Fired in the Generational War

Oct 3, 2012Mark Schmitt

Romney's new cap on tax deductions, like his other policies, would transfer wealth to the wealthy and hit the young while shielding the elderly.

Romney's new cap on tax deductions, like his other policies, would transfer wealth to the wealthy and hit the young while shielding the elderly.

On Tuesday, Mitt Romney hinted at a key detail about his mysterious tax reform proposal. While he had previously suggested that he might eliminate some tax deductions or credits to pay for his proposal to reduce rates by one-fifth, yesterday he suggested that he would instead cap each taxpayer's total deductions at $17,000. Some questions remain, such as whether he would include the exclusion for health insurance in the cap, whether it applies to single filers or married couples, or whether it would raise enough money to pay for his proposed cuts. (Probably not.) But assume that it's a cap on the value of the biggest deductions, such as the mortgage interest deduction and the deduction for state and local taxes.

Because Romney would keep the preference for capital gains and dividend income and lower the top rate, any proposal to eliminate major deductions would in effect be, exactly as the Obama campaign has argued, a tax increase for the middle class to pay for a tax cut for the rich. A cap would work differently. Since it would impact only those whose deductions total more than $17,000, it would affect only the fairly well-off – those whose mortgage interest, state and local taxes, out-of-pocket health expenses, and other deductions exceed $17,000. As Suzy Khimm points out at Wonkblog, that will mostly be wealthy people in high-tax jurisdictions – but even the purchaser of a $450,000 house in Washington, DC would pay $18,000 in mortgage interest at the beginning.

Yet the Romney proposal as a whole, with capital gains still protected, would nonetheless redistribute income from the merely well-off to the very, very rich. To see what I mean, let's look at Mitt Romney's own tax return for 2011: Romney's deductions total $4,519,140 – a lot of money. At his average tax rate of 14 percent, deductions saved him $632,679. A cap would take away all but about $2,000 of that $632,679.

But look at what the capital gains preference does for him: Romney took home $12,573,249 in capital gains in 2011. (I've left out dividends, just to keep it simple.) At 15 percent, that's about $1,885,950 of his taxes. But if he paid the same rate as on ordinary income, 35 percent, he would pay about $4.4 million. So the capital gains preference saved him $2.5 million, while deductions saved him only about $632,000.

I'm just using Romney as an example here, partly because he's a very rich person whose tax return I happen to have. But a well-off family, earning maybe $200,000 a year in ordinary income with a $600,000 house, is already paying a much higher rate than the Romneys of the world and would face a significant increase.

There's one more thing about this proposal that hasn't really been mentioned: It would be a giant intergenerational transfer from young to old. Just as Paul Ryan's Medicare proposal creates a generational divide between those currently under 55 (who have spent much of their working lives in a stagnant economy) and those who are older and whose benefits would be protected, capping deductions has a similar generational effect. Why? Because younger people benefit disproportionately from the mortgage interest tax deduction and older people benefit from preferential rates on capital gains and dividends.

The mortgage interest deduction is worth much more in the early life of a mortgage, when most of each monthly payment is interest, than later, when it becomes mostly principal. And the deduction has no value for people who have paid off their homes or paid mostly in cash from the sale of an old home. Finally, older homeowners are more likely to have purchased before the real estate bubble of the 2000s. In a 2008 paper, the economists James Poterba and Todd Sinai examined the distribution of tax deductions by age and other categories. They found that homeowners between the ages of 25 and 35 got an average value from the mortgage interest deduction of $1,155, and homeowners between 35 and 50 got $1,598. But homeowners over 65 got only $149 on average from the deduction.

Who benefits from the preference for capital gains and dividends? Here's a chart from Paul Caron's TaxProf Blog

As the chart indicates, taxpayers over 65 are twice as likely to have capital gains or dividend income than those 45-55, and those preferred sources of income make up much more of their income than for younger groups – six times as much in the case of dividends. The Romney tax plan would protect this advantage.

While many older Americans live under great economic stress and poverty, there is a significant portion of them who benefited greatly from the economic prosperity of the post-War era, who had significant economic gains from their early investments in housing and in the stock market in the 1970s and 1980s, and who also benefit from programs such as Medicare and Social Security that provide them significant economic security. The younger generation (by which I mean those under 55) has not had the same advantages, and both Ryan's budget and Romney's tax plan would make it worse for them while protecting the wealthiest of the older generation.

Mark Schmitt is a Senior Fellow at the Roosevelt Institute.

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The Recession Ends. Then What?

Sep 24, 2012

It may be hard to imagine, but (we all hope, anyway) some day the recession and meager recovery period will come to an end. At that point, will the debates we're having now about the economy become completely irrelevant? What will we have to fight about?

It may be hard to imagine, but (we all hope, anyway) some day the recession and meager recovery period will come to an end. At that point, will the debates we're having now about the economy become completely irrelevant? What will we have to fight about? Roosevelt Institute Fellow Mike Konczal and EPI's Josh Bivens took this question on in the latest Fireside Chats episode on Bloggingheads:

As Mike points out, "Right now the debates seem very focused on things very specific to this recession," such as what the Federal Reserve could do to make things better or whether we should reduce mortgage burdens to boost consumption. Those are "very technical and very important debates to be having," he points out, "but they’re very narrow to the moment we’re in right now." Once we one day leave these issues behind, what will liberals decide to promote? And will we all be able to get on board?

The first issue Josh sees rearing its head is what we consider the "natural" rate of unemployment to be. Right now it's pretty obvious that unemployment is too high. At what point does it fall so much that some people, including the Fed, start to say it shouldn't go any lower? This question will have larger implications as well. As Mike says, "You see policy experts running around trying to figure out how to boost the wages of the lower quintile, but we know what has done it in the past 30 years, and it’s when unemployment is below 5 percent for a sustainable period of time." In fact, he says, a low unemployment rate "is the ultimate jobs program, it is the ultimate policy solution," and boosts wages for everyone -- not just those at the bottom.

What else will we squabble over when the economy once again booms? Bivens predicts social insurance programs -- Social Security, Medicaid, and Medicare -- will have to be on the agenda. And related to that will be just how high we can go with tax rates on the rich. "Obviously you can have a fairness argument and a just deserts argument, but the economic case is pretty clear that [tax] rates [on the wealthier] could go much higher," Mike says. "But we’re seeing resistence to just getting to near 40 percent at this point." Brace yourself, political battles are coming.

Watch the full episode below, in which Mike and Josh discuss how little we all take home and whether inequality and the social safety net have anything to do with it:

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The Recession Ends. Then What?

Sep 24, 2012

It may be hard to imagine, but (we all hope, anyway) some day the recession and meager recovery period will come to an end. At that point, will the debates we're having now about the economy become completely irrelevant? What will we have to fight about? Roosevelt Institute Fellow Mike Konczal and EPI's Josh Bivens took this question on in the latest Fireside Chats episode on Bloggingheads:

It may be hard to imagine, but (we all hope, anyway) some day the recession and meager recovery period will come to an end. At that point, will the debates we're having now about the economy become completely irrelevant? What will we have to fight about? Roosevelt Institute Fellow Mike Konczal and EPI's Josh Bivens took this question on in the latest Fireside Chats episode on Bloggingheads:

As Mike points out, "Right now the debates seem very focused on things very specific to this recession," such as what the Federal Reserve could do to make things better or whether we should reduce mortgage burdens to boost consumption. Those are "very technical and very important debates to be having," he points out, "but they’re very narrow to the moment we’re in right now." Once we one day leave these issues behind, what will liberals decide to promote? And will we all be able to get on board?

The first issue Josh sees rearing its head is what we consider the "natural" rate of unemployment to be. Right now it's pretty obvious that unemployment is too high. At what point does it fall so much that some people, including the Fed, start to say it shouldn't go any lower? This question will have larger implications as well. As Mike says, "You see policy experts running around trying to figure out how to boost the wages of the lower quintile, but we know what has done it in the past 30 years, and it’s when unemployment is below 5 percent for a sustainable period of time." In fact, he says, a low unemployment rate "is the ultimate jobs program, it is the ultimate policy solution," and boosts wages for everyone -- not just those at the bottom.

What else will we squabble over when the economy once again booms? Bivens predicts social insurance programs -- Social Security, Medicaid, and Medicare -- will have to be on the agenda. And related to that will be just how high we can go with tax rates on the rich. "Obviously you can have a fairness argument and a just deserts argument, but the economic case is pretty clear that [tax] rates [on the wealthier] could go much higher," Mike says. "But we’re seeing resistence to just getting to near 40 percent at this point." Brace yourself, political battles are coming.

Watch the full episode below, in which Mike and Josh discuss how little we all take home and whether inequality and the social safety net have anything to do with it:

 

Crossroads image via Shutterstock.com.

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Romney's 47 Percent Remarks Reflect the Mentality FDR Fought Against

Sep 20, 2012David B. Woolner

Romney's comments may spark a widespread backlash against the kind of contempt for the poor that FDR once overcame.

But here is the challenge to our democracy: In this nation I see tens of millions of its citizens—a substantial part of its whole population—who at this very moment are denied the greater part of what the very lowest standards of today call the necessities of life…

I see one-third of a nation ill-housed, ill-clad, ill-nourished.

Romney's comments may spark a widespread backlash against the kind of contempt for the poor that FDR once overcame.

But here is the challenge to our democracy: In this nation I see tens of millions of its citizens—a substantial part of its whole population—who at this very moment are denied the greater part of what the very lowest standards of today call the necessities of life…

I see one-third of a nation ill-housed, ill-clad, ill-nourished.

But it is not in despair that I paint you that picture. I paint it for you in hope—because the nation, seeing and understanding the injustice in it, proposes to paint it out. We are determined to make every American citizen the subject of his country’s interest and concern; and we will never regard any faithful law-abiding group within our borders as superfluous. The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little. - Franklin D. Roosevelt, 1937

Mitt Romney’s callous remarks about the 47 percent of Americans who “pay no income tax,” are “dependent on government,” see themselves as “victims,” and will never “take personal responsibility… for their lives,” have been seized upon by both conservative and liberal commentators as the strongest indication yet that Romney is out of touch with the American people. They have also proved to be something of an embarrassment for fellow members of his party who are running for office. In Massachusetts, for example, U.S. Senator Scott Brown told the Boston Globe that Romney’s remarks did not represent the way Brown viewed the world. “As someone who grew up in tough circumstances, I know that being on public assistance is not a spot that anyone wants to be in.” Similar sentiments were echoed by a number of other Republican candidates, like Senator Dean Heller of Nevada, who told Politico that as the son of an auto mechanic and a school cook—with five brothers and sisters—he did not "view the world the same way” Romney does. In New Mexico, meanwhile, Republican Governor Susana Martinez responded by noting that her state had “a lot of people that are at the poverty level…but they count as much as anybody else.”

Romney’s remarks have also sparked a good deal of interest in just who the 47 percent are and what this figure means. Ironically, the net result this furor may be to inject a more elevated discussion into the nation’s political discourse about one of the most important issues facing the country: the alarming rise in the number of Americans who have joined the ranks of the poor.

According to official statistics just released by the Census Bureau, the number of Americans living in poverty reached 48.5 million people in 2011, the highest number in 53 years. And while the percentage of Americans living in poverty finally appears to be falling from its high last year of 15.9 percent, it is important to remember that the number of “near poor”—those individuals and families who struggle with incomes just above the poverty line—has topped 51 million. That means the total number of Americans living below or just above the poverty line now stands at just under 100 million—roughly one-third of the population.

Given these statistics, and the growing number of Americans who have retired and are living off of Social Security (which the retirees have paid for through payroll taxes), is it any wonder that approximately 47 percent of the American populace pays no federal income tax? Of course we should not forget that most of these individuals do pay payroll taxes as well as state and local taxes, not to mention sales taxes, which are in place in 45 states.

A far more important question is how it is that the richest country in the world now finds itself with roughly one-third of its population living in such dire economic circumstances. According to Mr. Romney, these 100 million Americans are stuck in or near poverty because they have refused to take “personal responsibility and care for their own lives.” As such, they are quite happy to live on government handouts, firm in their belief that they are “entitled to health care, to food, to housing, to you-name-it.”

Quite apart from the debate over health care, one would have thought that access to food and shelter is not something that a civilized society in the 21st century would deny its most vulnerable citizens—and when pressed Mr. Romney has backed away a bit from such an extreme stance. But the undeniable disdain in his comments for “those people” whom he has characterized as freeloaders who regard themselves as “victims” has sparked a strong negative reaction, even, as noted, from many members of his own party.

This is welcome news, for it may portend the first glimmer of hope that the winner-take-all, you’re on your-own philosophy of the extreme right is being undermined by a far more compassionate and realistic view of how a modern society is supposed to function; a society where we can all agree that government has a responsibility to provide the average citizen with a basic level of economic security and equal access to economic opportunity. This would include policies that ensure that all Americans have equal access to education and affordable health care and where the focus of the debate about the size and role of government would center how best to use government—not eliminate it—in our fight to eradicate poverty.

Seventy years ago, in the midst of an even worse economic crisis, Franklin Roosevelt faced a number of critics who characterized the world in a manner that was quite similar to Governor Romney’s. “You know their reasoning,” FDR said. “They say that in the competition of life for the good things of life; ‘Some are successful because they have better brains or are more efficient; the wise, the swift and' the strong are able to outstrip their fellowmen. That is nature itself, and it is just too bad if some get left behind.’” But, he went on:

It is that attitude which leads such people to give little thought to the one-third of our population which I have described as being ill-fed, ill-clad and ill-housed. They say, "I am not my brother's keeper"—and they "pass by on the other side." Most of them are honest people. Most of them consider themselves excellent citizens.

But this nation will never permanently get on the road to recovery if we leave the methods and the processes of recovery to those who owned the Government of the United States from 1921 to 1933.

In Roosevelt’s day, those who “owned the Government” from 1921 to 1933 promoted the same type of laissez-faire policies that Governor Romney and Congressman Ryan embrace and which contributed to the economic collapse President Obama inherited in 2009. By the mid-1930s, however, most Americans found themselves in agreement with FDR’s comment that “we have always known that heedless self-interest was bad morals; we know now that it is bad economics.” They also concurred with his view that “out of the collapse of a prosperity whose builders boasted their practicality has come the conviction that in the long run economic morality pays.”

Perhaps Mr. Romney has done us all a favor, for his apparent indifference to the plight of “those people” who make up the 47 percent of the American population has forced a good many of his fellow Republicans to admit that government does have a role to play in ensuring we live in a decent society. They may not agree with the Democrats on how just how large a role government should play, but their tacit acknowledgement that government can and must be part of the solution to the nation’s problems is a welcome change from the ceaseless and vacuous claim of the far right that government stands at the root of all our problems.

Who knows; in the long run, it may even lead to the moderation of the Republican Party, something which all Americans, even the 47 percent, would welcome with open arms. 

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute. He is currently writing a book entitled Cordell Hull, Anthony Eden and the Search for Anglo-American Cooperation, 1933-1938.

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The Theory of the Moocher Class

Sep 18, 2012Mark Schmitt

The conservative narrative of the "entitlement society" ignores the fact that most Americans are both givers and takers.

The conservative narrative of the "entitlement society" ignores the fact that most Americans are both givers and takers.

As David Brooks points out, Mitt Romney's remarks describing 47 percent of the population as, in effect, moochers who would vote for Obama because they got government benefits were not “off the cuff,” as he described them today. There is a carefully developed theory behind his words, which has seen expression in previous Romney speeches, such as one last December in which he described Obama's vision as an “entitlement society” in which “everyone receives the same rewards,” but in which “we'll all be poor.”

The lab where this theory that we're headed toward a radical egalitarian state is being developed is the American Enterprise Institute, the oldest of the conservative think tanks and one that, much like Romney, has forsaken the traditional business-minded conservatism of, say, the first President Bush, for hard conservatism in which everything is a grand showdown of incompatible worldviews. The two recent books by the current AEI president, Arthur Brooks (The Battle and The Road to Freedom) embody this apocalyptic approach, as does a recent essay-with-graphs by longtime AEI scholar and accomplished demographer Nicholas Eberstadt, called “A Nation of Takers.”

AEI invited me to participate on a panel with Eberstadt a few months ago, when the essay was just a series of unpublished PowerPoint slides. I welcomed the invitation, but had to cancel due to a conflict. However, I wrote up notes at the time, and what follows is adapted from those notes.

“A Nation of Takers” shows in some detail the expansion of government benefits since the 1960s and the share of the population they reach. The data is not wrong, but it's selective, and the story that Eberstadt has wrapped around them – that receipt of benefits makes people “dependents,” that people are becoming “chiselers,” choosing to maximize benefits, that the expansion of entitlements was a political effort by the left that slowly overcame “resistance” from real Americans -- is highly tendentious. The reality is that people who receive benefits are no more or less “dependent” than corporations that get tax breaks or legal protections, that the expanding costs of major entitlements are about rising health care costs and, to a lesser extent, the demographics of an aging nation rather than more people becoming “takers,” and that the expansion of some benefits to the lower rungs of the middle class was a bipartisan project in which conservatives should take pride.

There is a story implied in the very word, “takers,” which is reminiscent of former Senator Phil Gramm's oft-repeated metaphor of a wagon: there are “people riding in the wagon,” he would say, and “people pulling the wagon,” and the people riding need to get out and pull. But while you can't pull a wagon and ride in it at the same time, you can certainly be a taker and a giver at the same time, or at different times in life. For example, Eberstadt's charts show that the government benefit that grew fastest in recent years, not surprisingly in a recession, is Unemployment Insurance. Everyone who receives benefits from Unemployment Insurance, without exception, has worked – usually full-time and steadily for at least a year – and paid into the system through their employers. And they will (they desperately hope) work again and pay even more. Some people might end up receiving more, over their long working lives, while others might pay in while having the good fortune never to be unemployed. But that's the nature of insurance. Most of us, other than the permanently disabled, are givers and takers to government, because that's what it is to be part of a community or a nation.

A look at the individual programs behind all of these charts indicates that the big story is the extension of the social safety net from the very, very poor to the lower rungs of the working poor, particularly through expansion of Medicaid and tax credits for working families. With bipartisan support, these innovations have fundamentally changed the social safety net that both conservatives like Charles Murray and Lawrence Mead and liberals like David Ellwood described in different ways two decades ago: a system in which it really did make more sense for poor parents not to work than to give up the linked package of benefits that went with non-work, including welfare, Medicaid, and food stamps. Meager as those benefits were, they were often economically preferable to a minimum-wage job without health care or other assistance, and with the added costs of child care.

Changing that system was not just a matter of imposing work requirements, but of smoothing the path into the workforce and toward self-sufficiency. Medicaid eligibility was delinked from welfare and linked instead to income, starting at 100 percent of the poverty level and reaching 185 percent in the Affordable Care Act. Together with the State Childrens' Health Insurance Program, expansions of the Earned Income Tax Credit, the Child Tax Credit, the Refundable Additional Child Tax Credit, the Child and Dependent Care Credit, the Make Work Pay Credit, expansion of child care, the after-school and summer food programs, and others, we have created a safety net that extends well into the low-income working population. These individuals, too, are both takers and givers – they are working hard, contributing to the economy, and while some of them may not pay federal income taxes at the moment, they will as they move up.

This dramatic reorientation of the safety net didn't just happen; most of these initiatives had significant bipartisan and cross-ideological support. Not only do they provide a ladder out of poverty and reward work, they also make possible the relatively low-wage, low-security labor market that gives employers enormous flexibility. Conservatives used to argue, for example, that raising the EITC was a better alternative to raising the minimum wage, and they mostly won that fight. The result is that low-wage employment is essentially subsidized, and businesses are able to hire at very low cost and low commitment, with none of the barriers to either hiring or firing that are common in Europe. Paul Ryan, Mitt Romney and others in the current wave of conservatism seem to have entirely forgotten the merits of these innovations, and in their promise to protect programs only for the very, very poor, they threaten to restore the hopeless poverty traps of the 1970s and 1980s.

It's also worth noting that most members of the “Nation of Takers” probably don't think of ourselves as “takers.” In her important recent book, The Submerged State, Suzanne Mettler of Cornell looked at data asking people whether they had ever benefited from a government social program. While most participants in the classic, older transfer programs were aware that they had benefited from programs, most of the newer programs, especially those delivered through the tax code, were invisible to a majority of their beneficiaries. (Even 45 percent of Social Security recipients said they had never used a government program, which may reflect the belief that they are receiving benefits they've paid for.)

While many on the left latched onto this data as evidence that Americans, especially conservatives, are hypocrites who revel in public benefits while maintaining an anti-government stance, there's really much more to it than that. Delivering benefits through “submerged state” programs has broken any kind of connection between citizens and the benefits we receive. We can't have a clear debate about whether we're a “Nation of Takers” or whether these benefits are essential to maintaining the promise of a middle class country if most of us don't even know the role that government plays in our lives.

Conservatives and liberals built the submerged state together, often sharing a preference for delivering benefits through the tax code. But a concerted effort to reduce the long-term budget deficit, with tax reform at the center of it, creates an opportunity to surface submerged programs and replace them with far more efficient, visible, direct programs. When the public is fully aware of the benefits it's receiving, it's possible that voters will recoil in shock at the degree of their dependency, or perhaps they will regain a healthy respect for the role of government in providing some of the security that helps them take full advantage of their capacities and opportunities.

It's disappointing that Romney shows no interest in either drawing out the submerged state or in the bipartisan project (of which his health reform in Massachusetts was a part) of smoothing the path to economic success for families. Instead, he just sees half the country as people who can't be convinced “that they should take personal responsibility and care for their lives.” That's a very strange view of this country and a tragic development in modern conservatism.

Mark Schmitt is a Senior Fellow at the Roosevelt Institute.

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