Behind the Data: Continuing Trend Towards Income Inequality Calls for Action

The NYT headline read in part “…Incomes Remain Stagnant..” and that, in fact, is true: Median household income barely budged between 2013 and 2014, according to survey data released Wednesday by the U.S. Census Bureau.

As shown in the graph below (red line) this reflects a broader trend in which median incomes have been flat to declining for more than a decade.

fredgraph

Source: Federal Reserve Bank of St. Louis, FRED economic data

How is that possible, TDV asked itself, if the overall economy, which is broadly reflective of total income, has been growing, albeit at an anemic rate averaging just over 2% since 2010?

The answer: a continuing trend towards income inequality

The graph above illustrates the point. Average per capita GDP is growing (top line), while median household incomes are flat to declining.  In other words, the incomes of the wealthy are increasing, while those in the middle to the bottom of the income distribution curve – the middle class and the poor – have seen their incomes stagnate.

So what do you do about it?

In addition to a long overdue increase in the minimum wage, this country needs to fix it regressive tax policies which is a major factor contributing to income inequality in the U.S. 

For additional discussion on regressive tax policies in the U.S., see the TDV blog Democrats Need to Stand Up to Special Interests and Reform Regressive Tax Policies.

Wall Street Journal Vastly Distorts Cost of Sanders’ Health Care Plan

A WSJ article yesterday by Laura Meckler, a Washington-based political reporter, claimed that over the next ten years, Bernie Sanders’s proposals would cost $18 trillion – $15 trillion of that cost would purportedly be from Sanders’ plan to provide healthcare coverage for all Americans.

That’s an average of $1.5 trillion a year – an approximate one-third increase in a $3.9 trillion Federal budget.

Really?

Well, as it turns out … No.

The $15 trillion figure is based on a study by Gerald Friedman of the University of Massachusetts—Amherst. However, the Executive Summary of that report states a single-payer healthcare system actually results in a net savings to the economy:

“[a single-payer system] could save an estimated $592 billion annually by slashing the administrative waste associated with the private insurance industry ($476 billion) and reducing pharmaceutical prices to European levels ($116 billion). In 2014, the savings would be enough to cover all 44 million uninsured and upgrade benefits for everyone else. No other plan can achieve this magnitude of savings on health care.”

Where did the author come up with the $15 trillion estimate? According to the Meckler:

WSJ_LauraMeckler

Wow, a $15 trillion verbal estimate? One that appears to contradict the main report the article is relying on? At best, Meckler is guilty of oversimplifying a complex issue. At worst …. well, let’s not go there.

If only the WSJ had similarly fact-checked how much the wars in Afghanistan and Iraq would cost when George W. Bush ran for President in 2000.

Hillary on Campaign Finance Reform: A Step in the Right Direction

Excerpted  from the New York Times, Sept. 8, Hillary Clinton Announces Campaign Finance Overhaul Plan:

“Mrs. Clinton’s embrace of campaign finance reform might not only help her shore up support among liberals who are increasingly captivated by Mr. Sanders, but also help her and her husband, former President Bill Clinton, shed their image as overly cozy with the donor class. In recent years, the Clintons have come under criticism for their paid speeches to Wall Street banks and foreign donations to the Clinton Foundation. Under Mr. Clinton’s administration, donors were wooed with rounds of golf and nights in the Lincoln Bedroom.”

Democrats Need to Stand-Up to Special Interests and Reform Regressive Tax Policies

The top Federal personal income tax rate (see graph below) has plummeted since the 1950’s when the highest rate paid by the wealthiest Americans stood at 91%. Today, the top rate is just 39.6%, a 56% decline over 34 years.

xxxBudgetAndEconomics.xls

Source: Tax Policy Center

The biggest reductions came during the Reagan Administration, from 1981 to 1989, under the theory that reducing tax rates would spur “supply side” economic growth. Well, that hasn’t worked. Today, as TDV noted in a recent blog, Economic Growth is Anemic.

But personal income tax rates alone don’t tell the whole story.  Even though personal income rates are low by historical standards, they are still nominally progressive.

What makes the overall tax system regressive is comparatively low rates – 15% to 20% – for non-wage or “unearned” income – capital gains, interest and dividends.  And since non-wage income is a higher proportion of income for wealthy Americans, many wind up paying a smaller percentage in taxes than many low and moderate income Americans.

In addition, the payroll tax that finances Social Security is capped on incomes above $118,500 — this amounts to a further tax break for the wealthy.

One of the most extreme examples of unfair, regressive Federal tax policy is the treatment of management fees paid to hedge fund and other portfolio managers. It is called “carried interest” and taxed at a top rate of 23.8%, under the assumption that it is really long-term capital gains. This interpretation stretches the bounds of credibility.  As a recent Slate blog pointed out, even Donald Trump has taken issue with that.

The low rate on hedge fund management fees points to a closely related problem: Wall Street and big business generally appear to be writing the rules. Not only are we not sufficiently regulating Wall Street, we are giving them huge tax breaks. When the financial crisis hit in 2008, middle income taxpayers footed most of the bill. Then, the Federal Reserve stepped in further inflated asset values by holding interest rates artificially low, so we have actually rewarded Wall Street for its reckless behavior.

It is not just about Wall Street, however.  It’s a long-standing principle of Democratic politics (even if it seems to have been largely forgotten in recent years) that fairness and equity dictate that he people who benefit the most from civil society should pay a higher proportion of their income in taxes. In addition, the country badly needs the additional revenue from a more progressive tax system to invest in America, its infrastructure and its people, and grow the economy.  A look back over modern history suggests that  high marginal tax rates not only do not harm the economy – they are closely correlated to periods of strong economic growth (see analysis at politicsthatwork.com).

Of the Democratic candidates for President, only Bernie Sanders appears to support a fundamental shift to a fairer and more progressive tax system, as discussed in a recent Daily Kos blog.  Unfortunately, other leading Democrats just seem to want to nibble at the edges of the tax reform, tweaking the tax code without really addressing the underlying issue that the tax code as a whole has become highly regressive and needs a complete overhaul.  SeeTDV blog, Progressive Taxation: Not on Hillary’s Agenda.

Part of the reason many Democrats seem hesitant to tackle our regressive tax system head-on is because Wall Street is an equal opportunity contributor to Democrats and Republicans alike. Or, perhaps, Democrats are intimidated by the Republican / supply side propaganda machine, led by organizations such as the “Club for Growth” – organizations that have pumped millions over decades into aggressive campaigns against higher taxes.

Whatever the reason, it is time for Democrats to stand up to the special interests, do the right thing, and reform our regressive tax system.

Debt is Debt. Investment for Growth is “Good”

In Paul Krugman’s column in the New York Times yesterday, the headline asserted “Debt is Good.”

At the risk of nitpicking over an otherwise excellent article, is debt really “good”? Debt can be used to finance all kinds of things – such as routine government expenditures or unnecessary foreign wars.

As most economics majors will tell you, debt that yields a positive future return is good – debt that doesn’t yield a positive return – well, not so much.

Of course, a big question becomes – how do you measure future returns?

Well, as one measure, how about the impact on economic growth?

Public investment in infrastructure typically has a positive impact on economic growth. It creates jobs, improves mobility and stimulates future economic activity. That’s good.

Debt – well that is just a means to an end – and some debt is better than others – in other words, some debt yields high returns; some debt yields marginal or negative returns.

So how about we focus the discussion on the need for high-return investment in public infrastructure to stimulate jobs creation and economic growth?

A big mistake this country is making, in the opinion of TDV,  is to conflate debt and investment.  Let’s invest for growth – and if we need debt to make that happen, so be it.

To Help Address Inequality, Invest for Growth

Democrats in particular often have a tendency to lose sight of the big picture. Hillary Clinton’s economic proposals are a case in point: a whole laundry list of initiatives, many of them important and worthy, but nonereally getting to the heart of the core issue facing America – which is stagnating economic growth.

BLS_GovtInv_NatlDef_Stats.xlsx

The Federal Reserve Bank has done its bit by buying bonds and holding down interest rates. But the net effect of Fed actions has been to inflate asset values, which is turn has contributed to the inequality of wealth and income in the U.S.

Congress, on the other hand, has completely failed to do it job. Even though we have inflated asset values and increased asset-related income from dividends and stock appreciation, taxes on wealth and asset income are at historic lows, further exacerbating inequality.

Meanwhile, government investment in infrastructure and other fixed assets has declined significantly since the great recession of 2008, with all levels of government failing to step up to the challenge.

How “stupid” is it really that at the very time when the real cost of borrowing is near or below zero, Congress (and state and local governments) ratchet back on investment? Especially when the overall condition of our infrastructure – roads, bridges, transit and airports – is so awful.

No wonder we have an inequality problem in this country. We have inflated asset values; kept asset related taxes low; reduced investment in infrastructure and failed to maintain reasonable levels of growth in the economy that Americans depend on for jobs.

David Brooks: Mangling Economic Theory to Justify Poverty-Level Wages

July 25, 2015 – There are two contradictory justifications corporations, and their mouthpieces, use to argue against the minimum wage.

The first is Inflation Theory, which says that any increase in the wages paid to the lowest-income workers is immediately counter-acted by a society-wide increase in prices.  New York Times columnist David Brooks, in The Minimum Wage Muddle, explains Inflation Theory this way:

“The costs of raising the wage are passed onto consumers in the form of higher prices. Minimum-wage workers often work at places that disproportionately serve people down the income scale. So raising the minimum wage is like a regressive consumption tax paid for by the poor to subsidize the wages of workers who are often middle class.”

If that sounds somewhat nonsensical, it is. Inflation Theory is flawed because inflation is relative—it does not matter if the price of an apple goes from 50 cents to a dollar so long as everything else doubles in price, including wages. And it is blatantly misleading to characterize minimum wage workers as “middle class”; if they are a head of household or supporting a family, they are living in poverty.

But while inflation is neither inherently good nor bad, inflation benefits debtors and hurts creditors.

Inflation has a two-fold benefit to the working poor who carry significant debt (mortgage, student loans, credit cards).  First, workers earn more money. The lowest income earners (minimum wage), receive the biggest benefit, but those making just-above minimum wage will also see a rise in wages.  Second, they can more easily pay back outstanding debts. This is the principle reason right-wing economists use Inflation Theory less is that there are clear winners (low-income workers, especially those with debt) and clear losers (the wealthy).

Which brings us to the Job Loss Theory. Job Loss Theory, unlike Inflation Theory, has the advantage of at least purporting to be supportive of low-income workers. Job Loss Theory holds that if the price of hiring workers goes up, firms will hire less workers.

As David Brooks explains Job Loss Theory:

“You can’t intervene in the market without unintended consequences. And here’s a haunting fact that seems to make sense: Raising the minimum wage will produce winners among job holders from all backgrounds, but it will disproportionately punish those with the lowest skills, who are least likely to be able to justify higher employment costs.”

Although Job Loss Theory is superficially supportive of low-income workers, the breakdown in the logic results from treating human beings as commodities. If Job Loss Theory were true, then the minimum wage would result in a sustained high unemployment. But no one—no economist, dare I say not even David Brooks—has the audacity to try to link, over time, the real minimum wage to unemployment.

We’ve highlighted David Brooks’ column for two reasons:  1) the shocking arrogance of a political commenter writing things like “here’s a haunting fact that seems to make sense” and 2) the use of both Inflation Theory and Job Theory to justify keeping low income workers in poverty.

Of course, David Brooks mangled economic theory left out the fact that any full-time minimum wage employee working full-time in any State in the U.S. feeding a family of four is living in poverty. And that’s under the ridiculous Department of Health and Human Services Guidelines that say that a family of four can live on less than $25,000.

What Recovery? Economic Growth is Anemic

In our previous article – Progressive Taxation: Not on Hillary’s Agenda – we touched on the laundry list of proposals the Democratic front-runner was offering to help fix the economy. Many were good ideas – others like implying it is OK to tax millionaires and secretaries at the same effective rate – not so much.  We don’t need a laundry list of great ideas – we need a basic acknowledgment that something is fundamentally wrong – and that it needs to be fixed.

EconGrowthByDecadeVer1What’s wrong is that the rate of economic growth is this country has been slowing over time to the point where it is barely keeping up with population growth. As shown in the above graph, from an average growth rate of more than 4% in the 1950’s and 1960’s, the rate of growth slowed in the decades from 1970 until 2000 to just over 3%, then slowed again to an average of under 2% since 2000.

The big issues of our day – lack of good jobs, stagnating wages and income inequity all stem in part from the fact that our economy is not keeping pace. How does the U.S. compare to other countries? What are some of reasons behind stagnating growth? And how do we fix our broken economy? These are some of the issues we will be discussing in upcoming editions of The Democratic View.