The Pay's the Thing: How America's CEOs Are Getting Rich Off Taxpayers

Apr 16, 2014Susan Holmberg

Income inequality will continue to rise unless we close the performance pay loophole and curb the growth of executive compensation. For more, see "Fixing a Hole: How the Tax Code for Executive Pay Distorts Economic Incentives and Burdens Taxpayers," by Susan Holmberg and Lydia Austin.

Income inequality will continue to rise unless we close the performance pay loophole and curb the growth of executive compensation. For more, see "Fixing a Hole: How the Tax Code for Executive Pay Distorts Economic Incentives and Burdens Taxpayers," by Susan Holmberg and Lydia Austin.

It’s proxy season again, and we will soon be deluged with news profiles of CEOs living in high style as our ongoing debate on CEO pay ramps up. Last week, the floodgates opened when the New York Times released its annual survey of the 100 top-earning CEOs. Lawrence Ellison from Oracle Corporation led the list again with over $78 million in mostly stock options and valued perks, an 18 percent drop in pay from last year. Poor Larry.

Rising CEO pay has been a hugely contested issue in the U.S. since the early 20th century, particularly in the midst of economic downturns and rising inequality (these two often go together). Because the numbers are just so staggering, most of the current debate focuses on the rapid rise in CEO pay over the past four decades. While executive pay remained below $1 million (in 2000 dollars) between 1940 and 1970, since 1978 it has risen 725 percent, more than 127 times faster than worker compensation over the same period.

With any luck, ascendant French economist Thomas Piketty and the English-language release of his book Capital in the Twenty-First Century will build much-needed momentum in D.C. to institute reforms that address our CEO pay problem. This is a major driver of America’s rising income inequality, which is the central focus of Piketty’s magnum opus. One reform in particular that is critical to slowing down the growth of CEO pay and its costly impact on our economy is closing the performance pay tax loophole.

Inspired by compensation guru Graef Crystal’s bestseller on corporate excesses and skyrocketing executive pay, then-presidential candidate Bill Clinton elevated CEO pay as a core issue of his 1992 campaign with a pledge to eliminate corporate tax deductions for executive pay that topped $1 million. Clinton was successful only in part; his policy did become part of the U.S. tax code  as Section 162(m), but it came with a few unfortunate qualifiers, namely the exception for pay that rewarded targeted performance goals, or “performance pay.”

The logic of performance pay comes from Chicago-school economists Michael C. Jensen and Kevin J. Murphy, who published a hugely influential piece in the Harvard Business Review in the early 1990s that argued executive pay should align CEO interests with what shareholders care about, which is higher stock prices. Otherwise known as agency theory, this idea has profoundly shaped the executive pay debate and is arguably the primary reason the performance pay loophole made it into the tax code.

Once Section 162(m) became law, what do you suppose happened next? Predictably, companies started dispensing more compensation that qualified as performance pay, particularly stock options. Median executive compensation levels for S&P 500 Industrial companies almost tripled in the 1990s, mainly driven by a dramatic growth in stock options, which doubled in frequency.

Most of us think of skyrocketing CEO pay as simply a moral problem. However, economists like Piketty and my Roosevelt Institute colleague Joseph Stiglitz have been expounding about the havoc that rising income inequality wreaks on our economy (and democracy). When middle-class wages stagnate, consumer demand diminishes, which has tremendous spillover effects in terms of investment, job creation, tax revenue, and so forth. That particular set of problems relates to how much CEOs are paid. But there are also costly problems with the structure of CEO pay, i.e. what they’re paid with.

Performance pay can (and has) made executives very wealthy, very quickly, which creates incentives for shortsighted, excessively high-risk, and occasionally fraudulent decisions in order to boost stock prices. What kind of effect does this behavior have on the economy at large? Think mortgage crisis and subsequent global financial meltdown. Performance pay also diminishes long-term business investments. According to William Lazonick, in order to issue stock options to top executives while avoiding the dilution of their stock, corporations often use free cash flow for stock buybacks rather than spending on research and development, capital investment, and increased wages and new hiring. 

All this and Americans get the bill. Beyond the innumerable costs we’ve borne from the recent economic crisis, the Economic Policy Institute calculated that taxpayers have subsidized $30 billion to corporations for the performance pay loophole between 2007 and 2010. According to a recent Public Citizen report, the top 20 highest-paid CEOs received salaries totaling $28 million, but had deductible performance-based compensation totaling over $738 million. Assuming a 35 percent tax rate, that’s a $235 million unpaid tax bill. The Institute for Policy Studies calculated that during the past two years, the CEOs of the top six publicly held fast food chains “pocketed more than $183 million in performance pay, lowering their companies’ IRS bills by an estimated $64 million.”

Congress is long overdue to close the performance pay loophole. The Supreme Court just made that harder. Thanks to Citizens United and now the McCutcheon decision, the same CEOs who are benefitting from the loophole are much freer to draw upon the corporate coffers to donate big money to politicians to maintain these loopholes.

Nevertheless, there is potential for getting it done. Senators Blumenthal (CT) and Reed (RI) have introduced the Stop Subsidizing Multi-Million Dollar Corporate Bonuses Act (S. 1476), which would finally end taxpayers’ subsidies to CEOs by closing the performance pay loophole and capping the tax deductibility of executive pay at $1 million. In the House, Rep. Lloyd Doggett (D-Texas) has introduced a companion bill, HR 3970.

There are many policy ideas for how to curb skyrocketing CEO pay. Piketty and his colleague Emmanuel Saez argue for a much higher income tax rate for top incomes. (The growth rate of CEO pay was at its lowest when the U.S. had confiscatory tax rates for the very rich.) In the current political climate, a more viable step toward slowing the growth of CEO pay and the damage it does to our economy is to, at long last, close the performance pay loophole. It should never have been there in the first place.

Susan Holmberg is a Fellow and Director of Research at the Roosevelt Institute.

Image via Thinkstock

Share This

Daily Digest - April 15: What Makes Taxes Worth It?

Apr 15, 2014Tim Price

Click here to receive the Daily Digest via email.

Read My Lips: More New Taxes! (New Republic)

Tax Day would be a time for celebration if there were a clearer connection between paying taxes and receiving the many valuable public services and benefits they fund, writes Jonathan Cohn.

Click here to receive the Daily Digest via email.

Read My Lips: More New Taxes! (New Republic)

Tax Day would be a time for celebration if there were a clearer connection between paying taxes and receiving the many valuable public services and benefits they fund, writes Jonathan Cohn.

TurboTax Maker Linked to 'Grassroots' Campaign Against Free, Simple Tax Filing (ProPublica)

Giving taxpayers the option to use pre-filled tax returns could save them money and time, but tax software developer Intuit is lobbying hard against the proposal, reports Liz Day. 

Chances of Getting Audited by IRS Lowest in Years (AP)

Deep budget cuts have put such a strain on IRS resources that the agency audited only 1 percent of individual returns last year, writes Stephen Ohlemacher, and that number will drop in 2014. 

C.E.O. Pay Goes Up, Up and Away! (NYT)

Despite efforts to restrain the growth of executive pay through increased transparency and regulation, median CEO compensation grew 9 percent in 2013, hitting $13.9 million, writes Joe Nocera.

The Single Mother, Child Poverty Myth (Demos)

Family composition in the U.S. is not much different from that of Northern Europe, writes Matt Bruenig, but the European countries have much more generous welfare systems to keep children out of poverty.

What the French E-mail Meme Reveals About America's Runaway Culture of Work (The Nation)

French workers are often mocked because they continue to fight for work-life balance, writes Michelle Chen, but American work culture's disregard for those boundaries is the real historical outlier.

How 250 UPS Workers Fired for a Wildcat Strike Won Back Their Jobs (In These Times)

An outcry from union members, activists, elected officials, and customers forced UPS to reverse its decision to fire hundreds of drivers at a Queens facility for protesting a co-worker's dismissal, reports Sarah Jaffe.

New on Next New Deal

What is Economic Growth Without Shared Prosperity? 

Roosevelt Institute | Campus Network National Field Strategist Joelle Gamble argues that economic policy should focus on improving life for all Americans, not just those at the very top.

Share This

A Millennial’s Case for Fixing Social Security

Apr 11, 2014Brian Lamberta

Instead of giving up of Social Security, Millennials should push an easy fix for the so-called funding crisis: lifting the earnings cap.

Instead of giving up of Social Security, Millennials should push an easy fix for the so-called funding crisis: lifting the earnings cap.

As a public policy student, I’m used to hearing lively debates and diverse perspectives from my professors, fellows students, and course materials. There is one issue on which they consistently agree: apparently, Social Security cannot work for my generation. Polling data confirms this sentiment. Between half and three-quarters of Millennials do not expect Social Security to exist when we retire. Despite all of the rhetoric and doubts, I know that Social Security can work for Millennials – but it’s crucial that we fix the program.

I learned the importance of Social Security during my summer internship at The Alliance for Retired Americans, which was part of the Roosevelt Institute | Campus Network’s Summer Academy program. I learned that Social Security is the primary source of income for most seniors. The internship also taught me all about the program and its current issues, inside and out.

To give some background, Social Security is the widest reaching public benefit program in the United States. Starting at age 62, almost all Americans are eligible to receive monthly checks based on the amount they or their spouse paid into the program during their working years, with the benefit amount increasing for those who delay taking payments. The benefits of Social Security for retirement must be earned – 12.4% of nearly everyone’s yearly income below an annually adjusted cap is taxed to fund the program. For 2014, the cap is set at $117,000. Any income above $117,000 is completely ignored, so a person earning $1,000,000 will pay a 2.2% tax rate in 2014 and person earning five-figures will pay a 12.4% rate. To put it another way, a millionaire finishes paying her Social Security taxes by mid-February (at the latest) while the average American pays those taxes all year long.

Currently, there is a funding gap, which is often overstated as a “crisis.” Based on the Social Security Administration’s own predictions, only about three-quarters of benefits can be paid after 2033. Poor planning regarding the retirement of the Baby Boomers did not cause this gap. In preparation for the retirement of the Baby Boomers, we amended Social Security during the 1970s and 1980s; their retirement is almost entirely funded. This lapse (“the crisis”) is directly linked to the unintended consequences of reforming the taxable earnings cap in the 1970s.

Since 1975, Congress has linked annual cap increases to the average growth in wages. Post-World War II wage growth has consistently favored higher earners, who already had total incomes above the cap. This led to two disturbing trends, the first of which is shown in this chart, taken directly from the Social Security Administration’s website:

 

 

As seen here, the cap used to reduce taxes for many more Americans, but since the 1970s it's leveled out from reducing taxes for the top 15% to helping just the top 6%, establishing its status as a tool for the mega-rich to avoid paying taxes. Since the wealthiest Americans have benefitted most from wage growth in recent years, the amount of income that is untaxable for Social Security purposes has increased from 10% to 17% since 1975. In essence, the funding gap is a result of an antiquated and poorly calculated tax break that allows the wealthiest Americans to avoid paying their fair share.  

Social Security can remain in perpetuity if we scrap the cap. Historically, regular adjustments have been applied to program to ensure its continued solvency, and this obvious change should be no different.

Millennials: I urge you look more deeply into this issue and better understand the facts as the debate continues. Most of the money that our grandparents use to pay their bills comes from Social Security, so simply letting the program crumble would have disastrous effects. As a generation, we are far less likely to have union-backed pensions and extra money for savings. Fixing Social Security could be more necessary for our generation’s retirement stability than any before us.

Brian Lamberta is an urban studies and public policy student at the CUNY Macaulay Honors College at Hunter College and currently serves as the Northeast Regional Communications Coordinator for the Roosevelt Institute | Campus Network.

Share This

America Can Attain Full Employment with a Bold Approach to the Jobs Emergency

Apr 9, 2014Jeff Madrick

A new report from the Rediscovering Government Initiative lays out 15 ways the government can create more and better jobs starting right now.

A new report from the Rediscovering Government Initiative lays out 15 ways the government can create more and better jobs starting right now.

After five long years, the economy has at last produced enough new jobs to compensate for the 8 million lost in the Great Recession of 2009. But in that same period some 7 million more Americans reached employment age, and we have only produced about half the jobs we need to keep up with population growth. To make matters worse, the jobs created during the recovery pay on average much less than those lost. Yet rather than pulling out all the stops to create more and better jobs, too many politicians and economists tell us we can’t move too quickly. They cite limitation after limitation: inflation fears, budget deficits, skills mismatches, and so on. Americans deserve better than this defeatism. We deserve bold action.

In a new report, A Bold Approach to the Jobs Emergency, the Bernard L. Schwartz Rediscovering Government Initiative offers fifteen ideas that could get us back to true full employment and at the same time build a foundation for rapid economic growth in the future. We are demanding a full-court press to recreate the economic opportunity that America once offered. We emphasize some ideas that have been heard before, but many that are forced to the back seat or are hardly talked about at all.

There are taboos among policymakers that are holding us back. Above all, we must take fiscal stimulus seriously again. Today’s economy operates far below its growth potential. The fiscal stimulus we need should not only make the social safety net whole but also be tied to aggressive investment in transportation, communications, and clean technologies that have been badly neglected.

The federal government can itself create useful, good-paying jobs in transportation, teaching, and health care. A carefully crafted federal job creation program, as was successfully enacted under FDR, can work today. Fifty billion dollars worth of new jobs could go a long way toward helping Americans.

The repressive effect on jobs and wages that results from aggressive Wall Street practices is all but invisible in Washington. Academic economists are almost as bad as the Washington think tanks in paying too little attention to how big finance can undermine both jobs and wages. Our report highlights the findings of researchers such as Eileen Appelbaum, formerly of Rutgers, and Rosemary Batt of Cornell, who show that the leveraged buyout and privatization crazes have on average led to many lost jobs and significantly less spending on R&D. It also showcases the work of William Lazonick of the University of Massachusetts, Lowell, who has long called attention to how massive corporate stock buybacks may help shareholders in the short run but hurt the American economy by diverting investment.

Poor wages are also part and parcel of America’s economic failure. Today’s typical household earns no more after inflation than it did almost 20 years ago. Only 44 percent of Americans think they are middle class, the lowest level recorded. However, until fairly recently, raising the minimum wage has also been taboo. The bill before Congress to raise the federal minimum wage from $7.25 to $10.10 may still not pass, but intelligently designed studies suggest such a hike could lift not just 1 million, as the Congressional Budget Office has too conservatively estimated, but 6 million people out of poverty and provide raises for about 25 million people. Similarly, we need an expansion of the Earned Income Tax Credit to childless adults, which the president supports.

Most tragically, we neglect our young. Six million or so Americans ages 16 to 24 are neither in school nor have a job. Dozens of local agencies have been created to place these “opportunity youth” on a middle-class track. But they badly need to be scaled up, and federal support is the only way to do so.

The new interest in funding pre-kindergarten in New York City and elsewhere is welcome. But help has to come much earlier in the lives of children in poverty. One in every five America children under the age of six live in poverty, the second-highest rate in the rich world. A growing body of research shows unambiguously how poor children are cognitively and emotional deprived—and how bleak their futures inevitably are. In America more than in any other rich country, inequality begins at birth. We need to address this crisis to begin building the economy of the future.

If America wants a strong future, it had also better invest more in technological research. Government research has been the heart of the innovation economy, as economists have increasingly shown. But Congress mindlessly cut such research last year. It must be revived and expanded. Other recommendations in our report include investments in energy, national paid family leave policies, and re-vamped workforce training.

The decline of work is not inevitable, and there are more ideas than the 15 we present in our report. We calculate that we can get the unemployment rate below 5 percent and raise wages with a combination of such programs, without incurring a dangerously growing budget deficit.

But bankrupt ideology, narrow politics, and bad economics are robbing the nation of its confidence and hope for the future. A comprehensive jobs plan is not even being attempted in America. Failure becomes contagious. Let’s end the fatalism about employment in America now and win back the nation’s hard-won optimism. 

Jeff Madrick is the Director of the Bernard L. Schwartz Rediscovering Government Initiative.

Share This

Daily Digest - April 2: Winning the Fight Against Inequality

Apr 2, 2014Rachel Goldfarb

Click here to receive the Daily Digest via email.

5 Facts About Women’s History That Will Keep You Fighting (MTV Act)

Danica Davidson talks to Roosevelt Institute Senior Fellow Ellen Chesler about some of the most incredible accomplishments in women's history and the still-unfinished work of the feminist movement.

Click here to receive the Daily Digest via email.

5 Facts About Women’s History That Will Keep You Fighting (MTV Act)

Danica Davidson talks to Roosevelt Institute Senior Fellow Ellen Chesler about some of the most incredible accomplishments in women's history and the still-unfinished work of the feminist movement.

Paul Ryan’s Budget: Even More Austerity (MSNBC)

Cuts to Medicare and Medicaid will get more attention, but Suzy Khimm points out that Paul Ryan has proposed dramatic cuts to discretionary spending, including Pell grants and other programs targeted at low-income communities.

The Myth of Working Your Way Through College (The Atlantic)

A graduate student at Michigan State University has examined the data, reports Svati Kirsten Narula, and the costs of a year's tuition alone now exceed what a student could make working full-time at minimum wage.

Good News! Janet Yellen Speaks English, Not Fedspeak (The Nation)

William Greider praises the new Federal Reserve chair for her clarity when speaking to the public about the economy. He says she didn't dumb anything down while asserting the Fed's plans to support job creation.

New on Next New Deal

Why Inequality Matters and What Can Be Done About It

In his remarks to the Senate Budget Committee yesterday, Roosevelt Institute Chief Economist Joseph Stiglitz discussed the relationship between policy and inequality, calling on the senators to take action.

The Challenges to Organizing Workers in Today's Economy

In the fourth post in his series on his new report on labor reform, Roosevelt Institute Senior Fellow Richard Kirsch lays out the difficulties facing labor organizing today.

Reducing Flood Risks is Worth the Effort – and the Savings

Melia Ungson, Roosevelt Institute | Campus Network's Senior Fellow for Energy and Environment, writes about the Community Rating System, a program that encourages communities to reduce flood risks in exchange for lower insurance premiums.

Share This

The Progressive Budget Reminds Us That Government Can Create Jobs

Mar 17, 2014Nell Abernathy

Unemployment is still a major problem in the U.S., and the best solutions involve a more aggressive government response.

Unemployment is still a major problem in the U.S., and the best solutions involve a more aggressive government response.

The Congressional Progressive Caucus budget, released last Wednesday, is forecast to create more than 8 million jobs by 2017 – a claim that is bound to stir up an argument about the government’s role in job creation. It’s not a new argument – progressives and conservatives have been having it explicitly since 2008 and more implicitly for years before that – but it is worth revisiting, because progressives are losing, and it’s a battle we cannot afford to surrender.

First, some might wonder if we even need to worry about jobs anymore. Unemployment is falling, GDP has expanded, and the stock market has rallied. The political debate has shifted away from a focus on growth and toward the consequences of our failure to stimulate growth: rising inequality and poverty. But in the face of federal paralysis, the labor participation rate remains down, wages remain stagnant, and productivity continues to decline. Now more than ever, the government must restore the dream of dignified work to all Americans.

Even if we agree that there is a problem, the skeptics will argue that the government is too inefficient and bureaucratic to effectively create middle class jobs and support economic growth. But the 2009 stimulus package provides a prime example of effective government intervention. Economists of all stripes, including Alan Blinder, former vice chair of the Federal Reserve, and Mark Zandi, Chief Economist at Moody’s and former Economic Advisor to John McCain, agree that the ARRA succeeded in creating the 2-3 million jobs it was designed to create. In their analysis, Zandi and Blinder found that without the stimulus, the economy would have contracted 6 percent and unemployment would have hit 11.6 percent. Instead, at its worst, GDP declined 2 percent and unemployment hit 10 percent.

The problem was that the ARRA could not protect the U.S. from a shock that cost the economy 12 million jobs, because the $825 billion package was too small and tapered too soon to plug the $1.2 trillion drop in private demand.

Acknowledging the success of the stimulus, some conservative analysts argue the challenges we now must tackle are not remnants of the recession, which would be amenable to government intervention, but rather are the product of insurmountable structural trends – automation, globalization, financialization. But even if that is true, it’s not an excuse for the U.S. government to abdicate its role as a driver of economic growth. Indeed, a changing economic landscape requires an adaptive government to ease the transition. Increased automation requires reformed and renewed investment in human capital to allow American workers to dominate the information age. Globalized supply chains demand new labor laws to recognize the rise of sub-contracted work. A growing financial sector requires an enhanced regulatory regime to ensure capital is allocated toward productive uses.

Then we have the deficit scolds, who are likely to claim that the CPC’s proposals are fiscally unfeasible. While hysteria about the government debt has prevented lawmakers from passing an additional large-scale stimulus package, new U.S. debt projections, and the clear failure of Europe’s austerity measures, prove these threats to be overblown. The danger associated with deficits, rising interest rates, and run-away inflation are far from a reality in the current climate of below-target inflation and non-existent interest rates.

In fact, the U.S. budget deficit fell to 4 percent of GDP in 2013, according to the CBI, and was projected to decline to 3 percent, the average for the last 40 years, in 2014. At about 73 percent of GDP, the federal debt remains high; however, the most effective way to reduce the debt to GDP ratio is to grow GDP, not shrink debt. National debt topped 118 percent of GDP immediately following World War II, and then the debt doubled over the next 30 years. But because the economy grew rapidly, debt fell to a healthy 30 percent of GDP by 1981. Europe’s experience with austerity reveals the danger of valuing debt-reduction above growth. As spending reductions slowed rising debt, they also cut GDP and increased the relative cost of debt payments.

The CPC’s budget will create new jobs, improve job quality, and invest in future job growth. The ideas are not new; many, like investment in infrastructure and workforce training, have been proposed in bills currently sitting in Congress. Nor are they necessarily bold; for example, funding R&D and using fiscal stimulus were considered common-sense government policies in previous generations. The problem up to this point has not been a lack of good ideas. It’s lack of political will. Let’s reopen this debate and use the vast number of policy tools we know to be effective.

Nell Abernathy is the Program Manager for the Roosevelt Institute's Bernard L. Schwartz Rediscovering Government Initiative.

Image via Thinkstock

Share This

The Progressive Caucus Budget Makes the Right Decisions

Mar 12, 2014Jeff Madrick

The "Better Off Budget" is the only budget proposal in Congress that really places people's needs ahead of political compromise.

The "Better Off Budget" is the only budget proposal in Congress that really places people's needs ahead of political compromise.

The Congressional Progressive Caucus has issued its annual budget and it is in different ways the antithesis of what both the Republicans and Democrats are offering. The Caucus calls it the “Better Off Budget," and it puts its money where its mouth is. Thank goodness they’ve issued it, because it puts in perspective how much is actually within our nation’s reach. It is aimed right where it should be: at creating jobs. The budget acknowledges that our jobs crisis is far from over (I’d call it the jobs emergency budget, of course). And it rightly says we can solve our problems.

The proposals errs slightly on the side of economic optimism, but that is as it should be. It stands in contrast to the modest improvements in social policy proposed by the Democrats, which won’t get unemployment down to 5 percent in the foreseeable future, and to the insensitive regression proposed by Paul Ryan and the Republicans. Those proposals are all politics, with little caring about the people’s thirst for jobs and opportunity. The progressives toss political compromise aside to do the right thing.

Their proposed budget does a lot of good in a lot of areas. It refuses to reduce entitlements; it provides a middle class tax break; it raises income tax rates on the wealthy; it provides a lot of money for infrastructure investment. I could go on.

But in this brief analysis I want to focus on the question of how much stimulus the economy can stand, which is really a question about how much slack there is in the economy. Conventional analyses say that slack—the potential to grow—has fallen. It’s mostly not because the economy is growing and catching up with its potential. The reason is that people are dropping out of the work force, maybe for good. They are losing skills. Some are retiring or getting close to retirement. Capital investment has been okay, but it has been far from stellar and therefore not likely to create exciting new products and industries that also increase productivity.

If the potential is not as high as typical economists, including the Congressional Budget Office, thought just a couple of years ago, we can’t push the economy up as fast as we might like, they argue.

The irony is that potential is down, as conventional economists measure it, because of the Great Recession and historically slow recovery, not because of a structural change in the economy. In particular, labor productivity growth is not very good. Total factor productivity, which (allegedly) measures the productivity of capital and labor combined, is somewhat stronger by historical comparison. I say allegedly because total factor productivity is a pretty flaky number.

Now, there is a pretty good relationship between how fast demand is growing and productivity growth, both labor and total factor productivity. In any case, if the potential of the economy is reduced because growth is slower, people can’t get jobs, and investment in research is far from hot—well, then potential would likely rise if we got the economy growing rapidly again. There is good theory, partly Keynesian but also something called Verdoorn’s Law, to suggest this could well be the case. 

So, in sum, that’s what this debate turns on. Will stimulus bump up against a genuine GDP ceiling and cause inflation, or is that ceiling only an artificial one based on recent data generated in a very slow economic recovery? I’d argue the CBO analysis and that of others is proposing an artificial ceiling. We can growth much faster, and we can get unemployment down to 5 percent. More demand can and often has led to faster productivity growth and more aggressive capital investment.

That’s what the Progressive Caucus Budget is all about. The nation can afford a decent social safety net and adequate investment in its future, and can get five to 10 million more people working again. If the progressives’ budget overstates the possibilities, it is not by much. 

Jeff Madrick is a Senior Fellow at the Roosevelt Institute and Director of the Bernard L. Schwartz Rediscovering Government Initiative.

 

Image via Thinkstock

Share This

Daily Digest - March 5: Are the GOP's Plans Anti-Poverty or Anti-Poor?

Mar 5, 2014Rachel Goldfarb

Click here to receive the Daily Digest via email.

The New GOP Poverty Efforts Are Impractical, Incoherent, and Inhumane (TNR)

Click here to receive the Daily Digest via email.

The New GOP Poverty Efforts Are Impractical, Incoherent, and Inhumane (TNR)

Roosevelt Institute Fellow Mike Konczal explains the problems with the Republican focus on cutting costs and eliminating government programs. The president’s anti-poverty plan, while flawed, makes more sense.

The Partisan Divide Over the Earned Income Tax Credit (MSNBC)

Timothy Noah writes that the GOP now classifies any kind of government aid as “dependence,” even the EITC. That means the working poor can no longer count on any bipartisan support.

Obama's Budget: Help for Workers, Taxes for the Rich (CNNMoney)

Jeanne Sahadi says the president's budget proposal centers on tax reforms that help low- and middle-income workers. She lays out the minor changes this would mean for the wealthiest Americans.

Budget Day and Why That Matters–A Lot! (On The Economy)

It's true that many of the top-line budget numbers were set by the Murray/Ryan plan that ended the shutdown, but Jared Bernstein says the president's budget is about political aspirations.

The Real Poverty Trap (NYT)

Paul Krugman counters an assumption from Paul Ryan's poverty report, explaining that work effort doesn't guarantee social mobility. But reducing inequality increases mobility, so social safety net programs remain key.

Exclusive: Report Finds Taking A Paid Day Off When Sick Is A Privilege Of The Wealthy (ThinkProgress)

Bryce Covert looks at a new report from the Institute for Women's Policy Research, which shows the vast gap in access to paid sick leave between low-income workers and wealthier workers.

New on Next New Deal

Prevention Over Punishment: The Push to Reduce Gun Violence in Chicago

Focusing on strengthening neighborhoods and healing communities is a far more effective solution than sentencing minimums, write Roosevelt Institute | Pipeline Chicago City Network members Janaè Bonsu and Johnaè Strong

Share This

The Congressional Budget Office Should Serve the People, Not Politics

Mar 3, 2014Jeff Madrick

The CBO's projections often miss the mark, but its mandate is to produce a politically useful number.

The CBO's projections often miss the mark, but its mandate is to produce a politically useful number.

The admirable Jared Bernstein entirely misses the point in his post about recent critiques of the Congressional Budget Office. Floyd Norris, Zachary Karabell, and Dean Baker have noted how often the CBO gets it wrong, and how it influences policy in damaging ways. I wrote last March in Harper’s Magazine that there should be a shadow CBO to correct and decipher CBO pronouncements.

Jared counters that CBO economists are simply following ”state of the art” economics most of the time. What state of the art? Hasn’t confidence in “economic science” been sorely tested by the 2008 crash? It should have been tested long before that tragic event. In 2003, Robert Lucas said that we had solved the problems of depression. In 2005, Milton Friedman said that he wondered why so many people were worried about the economy because to him it appeared so stable—this at the height of the subprime mortgage boom. In 2008, Olivier Blanchard said macro was in good shape.

Jared notes that the CBO assumes public spending will crowd out private spending as an example of how it follows textbook economics. That’s right, it does, and often entirely incorrectly. Textbook economics is getting a grilling by many macroeconomists these days.

The point is that the CBO’s mission is all wrong. Jared kind of acknowledges this; he adds in parentheses they should give ranges, not single-point forecasts. But that is not a parenthetical point. It is the heart of the matter. 

CBO economists can’t make single-point projections with any confidence, so why do they? These forecasts are often terribly misleading. The recent minimum wage report, as I noted on Next New Deal, is a perfect example. Everyone took the CBO's midpoint number as an actual projection. Why? Because the CBO said it was in just those words. That is its mandate. In addition, the CBO's “non-partisan” label is taken to mean "objective," and to non-practitioners, its projections simply reflect some hard, politically unbiased analysis.

Just like Wall Street bankers, politicians want a forecast that is a single number they can use. A range of projections does not have as much political force as a single number with the authority of the “non-partisan” CBO. In other words, the CBO is meeting the needs of its clients, not the needs of the nation.

It’s time to change the CBO's mandate fundamentally. These economists should produce ranges, they should explain as much as the project, and they should get over their habit of hiding the most important qualifications of their analysis in footnotes and appendices, thereby covering themselves (and perhaps relieving their guilt).

The state of economics simply doesn’t warrant the certitude that the CBO almost always implies—and then qualifies, as I say, in the footnotes. It would be very useful if Jared himself led a charge in reforming the CBO's mission. That doesn’t mean firing the economists there. It means having them do what economists can do, and not do what they can’t.

Jeff Madrick is a Senior Fellow at the Roosevelt Institute and Director of the Bernard L. Schwartz Rediscovering Government Initiative.

 

Image via Thinkstock

Share This

Daily Digest - February 28: The Deficit's Going Down. Will the Economy Go With It?

Feb 28, 2014Rachel Goldfarb

Click here to receive the Daily Digest via email.

Federal Budget Deficit Falls to Smallest Level Since 2008 (NYT)

Annie Lowrey reports on the sharp decrease of the deficit, which she ties to growth in tax revenue thanks to the improving economy as well as the surprising slowdown in health care costs.

Click here to receive the Daily Digest via email.

Federal Budget Deficit Falls to Smallest Level Since 2008 (NYT)

Annie Lowrey reports on the sharp decrease of the deficit, which she ties to growth in tax revenue thanks to the improving economy as well as the surprising slowdown in health care costs.

Budget Deficits Shrinking at the Expense of Economic Recovery (Blog of the Century)

Andrew Fieldhouse writes that policies focused on growth could have achieved the same reduction of the deficit with a far healthier economy, but instead, we have austerity policies.

The Mobility Myth (New Yorker)

American economic mobility has never been particularly high, says James Surowiecki, so public policy should focus on raising the standard of living of ordinary workers instead.

Governors Move to Block Farm Bill’s Food Stamp Cuts (MSNBC)

By raising heat subsidies linked to food stamp eligibility, the governors of Connecticut and New York have ensured hundreds of thousands of households will get a reprieve from cuts, writes Ned Resnikoff.

Not a Single Home Is for Sale in San Francisco That an Average Teacher Can Afford (Bloomberg Businessweek)

Karen Weise reports that a tight real estate market and dwindling pay for teachers are causing the problem, and it isn't good for the school system when teachers can't afford a place to live.

Why Ivy League Schools Are So Bad at Economic Diversity (The Atlantic)

Robin J. Hayes says that elite universities have a singular view of what a high-achieving applicant looks like on paper – and that view overvalues the opportunities provided by wealth.

Are Unions Necessary? (LA Times)

It's unions, writes Michael Hiltzik, that have secured most of the major workplace protections that help all workers, unionized or not. Who else will push for new improvements to labor law?

New on Next New Deal

Beyond Black History Month: A Roosevelt Institute Reading and Viewing Guide

As Black History Month comes to a close, the Roosevelt Institute suggests books, films, and more to continue the discussion and reflection on race in the U.S.

Share This

Pages