Last week, Roosevelt Institute Senior Fellow Bo Cutter’s latest installment of the Next American Economy breakfast series featured Andrew McAfee, principal research scientist at MIT’s Center for Digital Business, discussing his book The Race Against the Machine. A self-proclaimed technology optimist, McAfee lays out in stark and sobering terms the workforce displacement that has already taken place and will continue as the speed of technological innovation only increases. Watch here as McAfee relates how chess, rice, and, an Indian emperor help explain why computers keep getting twice as fast every year:

While computers are able to take on increasingly complicated tasks (like becoming a Jeopardy champion), McAfee notes that there are still a few places where humans can hold their own against their soon-to-be cyber overlords, namely complex communication, advanced pattern recognition, and entrepreneurship. However, examples of “science fiction becoming reality,” like the Google Car and nearly pitch-perfect language translation software, make clear that computers “are eating away at those advantages very quickly.” Bottom line: As a result of this “unprecedented digital encroachment,” the bundle of skills that the typical American worker has to offer potential employers is dwindling.

On the upside, McAfee makes clear that technological progress will continue to make us a more productive and rich society. But with the way things are wired right now, not everyone will get to enjoy the party. McAfee points out that while GDP and even mean income is generally increasing, median income has actually declined.

So what can we do about all this? McAfee offers up three places to start. First, invest in America’s infrastructure. Second, use appropriate policy tools (read: taxes) to deal with what we know will be increasing distance between haves and have-nots. Finally, increase innovation in our education system at all levels. McAfee believes our fate is in our own hands and that “the choices that we make as a society and an economy over the next generation are really going to strongly determine whether it’s a utopian or dystopian future that we head into.” 

For more, watch the full roundtable discussion below:

Scott Keyes at Think Progress notes the following comment from Rep. Virginia Foxx (R-NC), who chairs the House subcommittee on higher education:

FOXX: I went through school, I worked my way through, it took me seven years, I never borrowed a dime of money. He borrowed a little bit because we both were totally on our own when we went to college, totally. [...] I have very little tolerance for people who tell me that they graduate with $200,000 of debt or even $80,000 of debt because there’s no reason for that. We live in an opportunity society and people are forgetting that. I remind folks all the time that the Declaration of Independence says “life, liberty, and the pursuit of happiness.” You don’t have it dumped in your lap.

A major problem with our leaders is that they are approaching what is happening in the public university through a mental model of a world that no longer exists.

EdwardMurray at DailyKos notes "Virginia Foxx went to the University of North Carolina-Chapel Hill in 1968. According to the National Center for Education Statistics, in 1968, the average yearly cost for tuition, room, and board for a public university was $1,245 which, in today’s words, is one thousand two hundred and forty-five dollars for a year’s worth of college. For today’s average college student, that dollar amount is roughly equivalent to the cost of a textbook and a garbage bag."  Quick and the Ed has notes "Representative Foxx would have paid $279 for the academic year—about $2,140 today. That’s about equivalent to what students pay right now at community colleges, not public four-year institutions—especially not public flagships."  Rebuild the Dream has a petition going on the matter.

Beyond the fact that it was much cheaper, how does University of North Carolina-Chapel Hill's tutition look on a chart?  Digging into UNC-Chapel Hill's Office of Institutional Research and Assessment website, which has online collections of several previously published yearly reports (data from here, here, here and here), we can construct the following graph.  Some years, especially earlier ones, are missing. Data is adjusted for inflation:

As you can see, tuition is roughly around $2,000 a year for most of the 20th century after the Great Depression.  Starting in the late 1990s and early 2000s it skyrockets.  It shows no sign of slowing down, either.  This is a political choice, based on what we want the university to do and how we want to provide it as a country.  There was a political consesus that made sure Virginia Foxx had college available as a publicly-provided good - her "opportunity society" is a world of high quality "public options" available to those who can use them - and now there is a new set of active choices to have students at UNC-Chapel Hill graduate with debt.  Foxx should know better than to ascribe it as a simple morality play.  If she doesn't know this, which is possible, that's a major problem.

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Charles Lane had an editorial at the Washington Post while I was out about fair value accounting:

There is general agreement that federal budgets should include a dollar figure for the estimated lifetime cost of each year’s new lending. Congress adds up all the expected cash flow associated with a particular credit program — interest and principal payments, fees, expected defaults — and calculates its “present value,” based on a notional interest rate known as the discount rate.

Under current law, however, Congress bases these estimates on the government’s ultra-cheap cost of borrowing. That means the calculations are done as though everyone were as default-proof as Uncle Sam, which understates the costs and risks to taxpayers.

The Congressional Budget Office believes “fair value” accounting, which adjusts the discount rate to reflect the risk of widespread defaults during downswings in the business cycle, would be more accurate.

Yglesias responded here.  This is entirely a fight over the discount rate to use for estimating government loans and whether we should be "measur[ing] the costs of federal loans and loan guarantees at [private] market prices."  As those of you who follow the global warming economics debates closely know, slight changes in discount rates can have huge policy implications.

Jason Delisie of New America and Economics21 also argued for fair value accounting at The Agenda Blog in light of a post I wrote; he was also kind enough to invite me to a big Economics21 panel he organized on fair value accounting which is online here.

A few points.

1.  I tried to make an example using swaps but it didn't convey the point well, so let's try it a different way.  Imagine two identical firms A and B, who are making identical loans.  They should use the same discount rate, correct?

Now imagine that A has a lower borrowing cost of capital than B for whatever exogenous reasons - ratings, savings, size, etc. It must be the case, provided that cost of capital is a monotonically increasing input into the discount rate (and I know of no model in which that isn't the case), that A has a lower discount rate.  A is the government here under these circumstances.  That doesn't mean that the discount rate should be the cost of borrowing per se, but financial logic dictates we don't take the same market discount rate as B for A.  I haven't seen a sufficient answer to this argument.

2.  It's ironic that Lane pushes the idea of "downswings" so aggressively, because the whole reason the government now stands behind the mortgage market is because the entire private market collapsed during the downswing.  Student loans weren't going to go out and the securitization channel is a swamp of fraud, missing or forged documents and bad incentives on the servicing end.  Meanwhile the government churns along without a crisis.

I'm not sure what to make of the argument that private lending channels couldn't survive the downturn without their costs exploding and therefore the government, which is surviving fine, should use the discount rates of the private market - more prone to collapse! - because of a risk of a downturn.

3.  Most of these arguments, especially in response to #1 above, are predicated that "shareholders" of the government, i.e. citizens, need to be compensated some amount X - equivalent to private market returns.  It's not clear to me why this is the case or how to determine it other than a normative argument about what government is. I brought up that this implies a normative argument as to what the government is supposed to do in the panel and got some really bad looks from the wonks in the audience; Yglesias also came to the same conclusion in his response to Lane.  But fair value accounting assumes that the government is just like any other firm, when in fact it has unique abilities (compulsion, scale, longevity, lack of a profit-motive, currency, etc.) that distinguish it from any private firm.

4.  The two CBPP wonks at the panel, Richard Kogan and Paul N. Van de Water, went medieval on everyone else; it was like watching a kung-fu fight.  That whole crew is awesome.  Read their entire report, but note their points about "phantom costs" and that if we need a higher discount for risk-bearing is it weird that we don't need a lower discount for risk-mitigating programs like Social Security and unemployment insurance.

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The progressive argument on taxes shouldn't focus exclusively on marginal rates. We need to rethink all the harmful incentives in our tax code to fight inequality.

Just out in the Boston Review this month is a forum on inequality -- not just the problem, but what to do about it, featuring Roosevelt Institute Fellow Mike Konczal among the participants. The lead essay by David Grusky argues that progressives have rushed to assume that redistributive tax policy (that is, tax rate increases on the very rich) are the obvious remedy for inequality, neglecting the structural distortions -- what he calls, confusingly, "rents" or "market failures" -- that allow the very rich to build up an even greater share of wealth before taxes than after. Grusky argues that rather than hoping for redistributive taxes to ameliorate pre-tax inequality, we should address the structural forces. He mentions two: high CEO pay and profound inequalities in educational opportunity.

Grusky is right that there is a limit to what modest changes to the progressivity of tax rates at the high end can do. Even assuming that economists Thomas Piketty, Emanuel Saez, and Stefanie Stancheva are correct in their contribution to the forum that the top individual income tax rate could go as high as 83 percent without adverse economic impact, there is a political limit which is no less real than an economic limit. Even progressives are reluctant to talk about raising marginal rates higher than 39.6 percent (the pre-Bush top rate) or the low 40s, and then only on those with incomes more than five times the median. Tax rate increases, absent a radical political transformation, will adjust for inequality only at the edges.

Other than Piketty et al, the respondents don't disagree with that point, but doubt Grusky's basic assumptions about inequality from a variety of angles. Konczal, for example, points out that it's not just inequality of pure income we should be concerned about, but radical inequalities of voice and political power.

But there's an important point that none of the respondents make, which is that there's more to taxes than marginal rates. The structure of taxation itself affects the "rents" or distortions that benefit the very wealthy and burden the working poor. Both of Grusky's alternatives show this. Take, for example, high CEO pay. Grusky argues that a higher tax rate would do little to change the structural incentives (captive boards, for example) that have driven up CEO pay. That may be right. But the tax code has created its own incentives for companies to overpay CEOs. For example, the limit of $1 million on the amount of executive pay that can be deducted as a business expense can be avoided if the pay is linked to performance. This not only permits high pay packages, it encourages CEOs to focus on short-term performance, which is often not in the long-term interest of the company or its employees.

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Favorable tax treatment of stock options also encourages high CEO pay. And many economists believe that the 1986 Tax Reform Act, which brought the top individual income tax rate lower than the corporate tax rate, encouraged corporate executives to take profits as pay rather than let it stay in the corporation where it would be taxed at a higher rate. There is certainly a strong correlation, as the sharp climb in CEO pay begins at exactly that point.

Which is to say, we can do more with the tax code than just fiddle with rates. We can change incentives in the corporate tax or the individual income tax to change the incentives on executive pay. We could even vary the corporate tax rate based on CEO or top executive pay, or the ratio of the CEO pay to average-worker pay, benefitting corporations like Whole Foods that both pay their CEOs less and average workers more.

Grusky's other proposal is to radically broaden access to higher education, by "increasing the number of slots in higher education and committing to fair and open competition for them." He's not very specific about how to do that. But, again, the tax code provides some examples of how we already structure access to higher education in ways that benefit the better-off. Tax benefits -- deductions and credits -- form an ever-larger share of how we pay for higher education, totaling $14.7 billion in 2012. While one program, the (temporary) American Opportunity Tax Credit, is refundable, so that even families that pay no income tax can benefit, the majority are not, and programs such as 529 accounts for college savings benefit almost exclusively the well-off. A study by the College Board showed that households with incomes over $100,000 receive 26 percent of the benefits of higher education tax expenditures. Pell Grants, on the other hand, overwhelmingly benefit students from families with incomes below $50,000. Pell Grants are scheduled to be cut under last summer's budget deal. A shift from some of the tax expenditure programs to Pell Grants would preserve college opportunity for millions of low- and moderate-income students.

There's more to the tax code than marginal rates. In many ways, the code's complex web of incentives and preferences represents the deep structure of our national priorities, one that often seems to benefit the middle class while largely benefiting the wealthy. Tax reform that looks at much more than the top rate can address economic inequality in exactly the way Grusky proposes.

Mark Schmitt is a Senior Fellow and Director of the Fellows Program at the Roosevelt Institute.