How Obama Is Caught Between Economic Growth and Shrinking Incomes

 

In President Barack Obama‘s big speech on the economy Thursday, the president touted his party’s economic agenda and repeated a claim similar to one he’s made before: “It is indisputable that our economy is stronger today than it was when I took office.”

Then he added, “It is also indisputable that millions of Americans don’t yet feel enough of the benefits of a growing economy where it matters most — in their own lives.”

Behind Mr. Obama’s frustration: A striking divergence between the growing economy and the share of that growth going as income to the median American household.

In the economic expansions of the 1980s and 1990s, roughly coinciding with the presidencies of Ronald Reagan and Bill Clinton, the amount of gross domestic product for each person in the economy, or GDP per capita (red in all the charts), was growing. And the median household income — the earnings of the middle household (blue in all the charts) — was also growing.

Income inequality surely existed in the ’80s and ’90s, but the pie available was growing and Americans in the middle were getting a piece of it. Then incomes slid during the 2001 recession at the beginning of George W. Bush‘s presidency and never quite recovered, even as GDP per capita continued to grow. The recession that began in December 2007 sent both measures falling.

Since Mr. Obama took office, GDP per capita has reclaimed its lost ground. But these gains have not accrued to the median household.

A look at the year over year change shows the breakdown. In the 1980s and 1990s, median incomes and GDP per capita both rose. But beginning around the year 2000, per capita GDP has posted a number of solid years, while median household income has had few years of positive growth.

In 2013, median household income climbed for the first time since 2007, but by only a tiny bit — less than $200.

Since 1999, this has opened a widening gyre between the two measures. GDP per capita has risen, while median incomes have fallen. Mr. Obama would like credit for the recovery of the former. But it’s the stagnation of the latter that has left so many households dissatisfied.

How Obama Is Caught Between Economic Growth and Shrinking Incomes
Josh Zumbrun
Fri, 03 Oct 2014 12:00:08 GMT

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The repugnance of high salaries: Switzerland

 

Swiss Voters Reject High-Pay Initiative
Seems like there is something something to study about the repugnance of high pay,… Though in the end the swiss didn’t vote in favor of curtailing it…
“ZURICH—Swiss voters overwhelmingly rejected an initiative that would have restricted executive salaries to 12 times that of the lowest-paid employee.
Roughly 65% of Swiss voters Sunday opposed the 1:12 Initiative for Fair Pay, according to results from all of the country’s 26 cantons reported by Swiss television. Another 34% supported the proposal, which was named for the organizers’ belief that no one in a Swiss company should earn more in a month than someone else makes in a year.”
and this is disappointing
“The youth wing of the Social Democratic Party of Switzerland, which organized the initiative, said the country had missed an opportunity to curb executive pay that it sees as spiraling out of control.
“We’re obviously disappointed at the result, but we were faced by opponents who ran a high-profile fear campaign,” said David Roth, the president of the youth wing, which is known as Juso. “One positive from the campaign, however, is that the issue of fair pay and a fair economy has been placed in the public domain.”
HT: Sandro Ambuehl had told me about this referendum

The repugnance of high salaries: Switzerland
Muriel Niederle
Mon, 25 Nov 2013 18:59:00 GMT

Distribution of US Federal Taxes

 

For those who like some facts to go with their arguments over redistribution and tax policy, the Congressional Budget Office has just published “The Distribution of Household Income and
Federal Taxes, 2010.” Here is some of what caught my eye.
There are several main categories of federal taxes: individual income tax, the social insurance taxes that fund Social Security and Medicare, corporate income tax (which is ultimately paid by individuals), and excise taxes on gasoline, cigarettes and alcohol. This chart shows the average tax rates paid in each category, broken down by income group.

A few observations here:
1) It’s important to remember that this is the average rate of tax expressed as a share of income. For example, those in the top 1% are almost surely  paying the top marginal tax rate of about 40% on the top dollar earned. But when all the income taxed at a lower marginal rate is included, together with exemptions, deductions, and credits, this group pays an average of 20.1% of their income in individual income tax.
2) Average individual income taxes are negative for the bottom two quintiles. This arises because of “refundable” tax credits like the earned income tax credit and the child tax credit, which mean that many lower-income households not only owe zero in taxes, but receive an additional payment from the IRS.
3) In the calculations for effects of the corporation income tax, the underlying assumption is that high-income households end up paying much of the cost, because they are the ones who own most of the stock in these companies. In the calculations for excise taxes, the analysis is that low-income households pay a greater share of their income for these taxes, because they spend a greater share of their incomes on these products.
What if instead of looking at average tax rates, we look at the share of each of these taxes collected from the different groups? The table looks like this:

The top quintile pays 92.9% of all income taxes and 68.8% of all federal taxes. The top 1% pays 39% of all income taxes and 24.2% of all federal taxes.
How have federal tax rates changed over time for various income groups? It’s true that average tax rates for the top 1% are down from the mid to late 1990s. It’s also true that tax rates for the rest of the income distribution are lower in 2010 than back in the 1990s. From 2008 through 2010, the federal tax rate as a share of income was at its lowest level during this time period. Of course, this is due in part to people having less income and finding themselves in lower tax brackets, and in part to various tax cuts aimed at stimulating the economy.

Finally, how does the federal tax system alter the distribution of income in the United States? Here’s a table from the report that I edited to focus on the 2010 data. You can see that in terms of before tax income, the lowest quintile had 5.1% of income before taxes, and 6.2% of income after taxes; the highest quintile had 51.9% of income before taxes, and 48.1% of income after taxes; and the top 1% had 14.9% of income before taxes, and 12.8% of all income after taxes. Because these figures are based on income, they don’t take into account how spending programs that don’t provide income directly to people like Medicare, Medicaid, or food stamps affect consumption levels.

I’ll close by saying that in my experience, presenting these kinds of statistics doesn’t really change anyone’s mind about whether the tax system is fair or unfair, or how the tax system should be altered.  Back in 1938, Henry Simons of the University of Chicago wrote a book called Personal Income Taxation, in which he commented: “The case for drastic progression in taxation must be rested on the case against inequality — on the ethical or aesthetic judgement that the prevailing distribution of wealth and income reveals a degree (and/or kind) of inequality which is distinctly evil or unlovely.” Most people don’t alter their “ethical or aesthetic judgement” about what is “evil or unlovely” based on statistical charts. But I live in hope that the presentation of facts, like water against stone, can at least erode the sharper edges of some of our political disputes.

Distribution of US Federal Taxes
Timothy Taylor
Thu, 05 Dec 2013 12:00:00 GMT

Straw man

But the question (for those of us who support capitalism but decry income inequality) is not whether there should be any inequality, but rather how much inequality we need to tolerate, and most especially whether a long-term trend toward growing inequality is good for the economy or the health of society. We can argue about how much inequality is necessary, but almost no one thinks that ever-growing income inequality is a social or economic good.

From the New Republic

So often now I hear discussion that assumes we can only choose on income equality to have zero inequality (as the old Soviet state aspired to) or basically ignore distributional issues.  That is a false choice.

Problem Productivity | Still Skeptical After All These Years

Problem Productivity | Still Skeptical After All These Years.

More on Hollowing Out of the Middle

This is from the link in the previous post.  You’ll note the hallowing out of the middle, even before the effects of taxes.

It seems we need a way to increase opportunities in the middle and prepare more people for high skill jobs at the top.  More relevant education is the most obvious thing.

Turning the Dialogue From Wealth to Values – NYTimes.com

Turning the Dialogue From Wealth to Values – NYTimes.com.

A Report on Mankiw on Income Inequality on PBS…

Grasping Reality with Both Hands

via A Report on Mankiw on Income Inequality on PBS….

I get some of his points here, but I don’t think lower taxes per se imply greater inequality.  I think Mankiw is right to direct the debate away from taxes as a source of inequality, though that doesn’t say they’re irrelevant.

Inequality: Maybe a Worse Problem than Liberals think, because Conservatives are Right about its Cause

For at least the last quarter of century the sense among most folks is that inequality in wealth in the US is growing.  I see a couple of conclusions being drawn about this fact.  One is attributing this inequality to unwinding of New Deal policies:  allowing unions to be weakened; and reducing the progressiveness of income taxes (reducing income taxes on high income individuals, while raising the regressive payroll tax). Liberals who buy this explanation, tend to be the very concerned about the impact of the growing rift and its impact on society and our democracy.   The alternative is that the return to superior ability and special skills are growing relative the simple willingness (and need as well) to work at routine jobs.  Those who subscribe to this point of view (usually conservatives) seem much more sanguine about the resulting inequality.

The disturbing thing to me, is that I think both sides are aligning themselves based on ideology not examination of the facts and thinking.   In the end they may both be understating how serious a problem this is.

Too many liberals seem unwilling to look at the number of things other than the rise of the Reagan Republican revolution as the cause of pressure on the middle class and a tendency to push a few people to very high incomes and the rest to much, much lower incomes.  This week a mass walkout from Greg Mankiw’s introductory course in economic at Harvard took place.  Mankiw was coincidentally discussing inequality in the class.  You can here what he has to say on the subject here.  I think it’s notable that he doesn’t deny the shift toward a less flat distribution of incomes at all.  He says:

Oh, there’s no question that the gap between rich and poor has risen substantially. It’s been a long term trend since the 1970s, with pretty steady increases. And I lecture about this every year. It was a pure coincidence that I was lecturing on this topic the very day they decided to walk out….if you look at the data, one thing is very clear is that the changes in the tax code – even between, say, the Clinton era and the Bush era – are very, very small compared to the huge changes in inequality we’ve seen. So very little of the changes we’ve seen are due to taxes. It’s almost in data quality, almost all in before-tax incomes. So, you know, we can debate as to whether we want an extra few percent at the top or not, but that’s not really going to do much to change the long-term trend.

The point I take away is that the reason for growing inequality mostly isn’t reduced taxes on the high income individuals.  The protestors understand what’s the problem but have actively chosen to walk away from a chance to understand the cause.   There are more fundamental changes that won’t be undone with changes in the tax code.

A similar view to Mankiw’s is put forth in piece from Arnold Kling.  He writes:

I wish to suggest that structural change is an important factor in the current rate of high unemployment. The economy is in a state of transition, in which the middle-class jobs that emerged after World War II have begun to decline….

He notes the Greate Depression and the Post War period was one of similar transition, but of a happier sort:

The structural-transition interpretation of the unemployment problem of the 1930s would be that the demand for uneducated workers in the United States had fallen, but the supply remained high. The high school graduation rate was only 8.8 percent in 1912 and still just 29 percent in 1931. By 1950, it had reached 59 percent.³ With a new generation of workers who had completed high school, the mismatch between skills and jobs had been greatly reduced.

What took place after the Second World War was not the revival of a 1920s economy, with its small farming units, urban manufacturing, and plurality of laborers. Instead, the 1950s saw the creation of a new suburban economy, with a plurality of white-collar workers. With an expanded transportation and communications infrastructure, businesses needed telephone operators, shipping clerks, and similar occupations. If you could read, follow simple instructions, and settle into a routine, you could find a job in the post-war economy.

The trend away from manual labor has continued. Even within the manufacturing sector, the share of production and non-supervisory workers in manufacturing employment went from over 85 percent just after the Second World War to less than 70 percent in more recent years. To put this another way, the proportion of white-collar work in manufacturing has doubled over the past 50 years. On the factory floor itself, work has become less physically demanding. Instead, it requires more cognitive skills and the ability to understand and carry out well-defined procedures.

Now Kling suggests that

The economy today differs from that of a generation ago. Mortgage and consumer loan underwriters have been replaced by credit scoring. Record stores have been replaced by music downloads. Book stores are closing, while sales of books on electronic readers have increased. Data entry has been moved off shore. Routine customer support also has been outsourced overseas.

These trends serve to limit the availability of well-defined jobs. If a job can be characterized by a precise set of instructions, then that job is a candidate to be automated or outsourced to modestly educated workers in developing countries.

The result is what David Autor calls the polarization of the American job market.  Autor and various research collaborators have documented a number of findings that reflect this polarization:⁴

•    In recent decades, wage and employment growth have both been lowest at the middle segment of the skill distribution. Wage improvements have tended to be concentrated at the high end, and employment gains have tended to be largest at the low end of the skill distribution.

•    This particular symptom of polarization is also prevalent in OECD countries other than the United States.

•    In the United States, this polarization was exacerbated by the economic downturn. While both high- and low-skill jobs have held steady, the brunt of the recession has been borne by mid-skill workers. For example, growth in employment in sales was 54 percent from 1979 to 1989, 14 percent from 1989 to 1999, 4 percent from 1999 to 2007, and -7 percent from 2007 to 2009. Employment in sales was a key component of upward economic mobility after World War II, but technological change and globalization appear to have stalled or perhaps reversed this engine of middle-class affluence.

•    From 1980 to 2007, real wages for male workers with only a high school degree fell by 12 percent, real wages of male workers with only a college degree rose by 10 percent, and real wages of males with post-graduate degrees increased by 26 percent. Female workers show a similar pattern, although wage gains were generally higher for females over this period.

Using the latest Census Bureau data, Matthew Slaughter found that from 2000 to 2010 the real earnings of college graduates (with no advanced degree) fell by more in percentage terms than the earnings of high school graduates. In fact, over this period the only education category to show an increase in earnings was those with advanced degrees.⁵

The Great Depression of the 1930s can also be interpreted in part as an economic transition.

The outlook for mid-skill jobs would not appear to be bright.

So what do I conclude from all this?  That the sources of inequality are much deeper than the Bush tax cuts and the slow death of unions (thought I think they might be contributors).  This makes the whole issue more worrisome I think.  I suggest you read the whole Kling article.

I think he does a good job of outlining the things that are making it basically much harder for someone with a willingness to work, but not otherwise extraordinary skills to live a middle class life.   It’s also been noted that we see more sorting of high income earners marrying other high income earners.  This makes the gap between those well adapted to the job market of the future, and Joe Six pack who just wants a factory job even larger.

So do liberals react to this wisdom with a better understanding of the sources of inequality and start thinking about how to address them…

Judging from the comments on Kling’s article:  no.  The reaction seems like that of Mankiw’s student protestors.  Here’s one:

Kling thinks that he and his fellow propagandists can prevent it by deceiving the rubes. Their strategy is to relate a steady stream of tales of strapping young bucks buying t-bone steaks with their food stamps, and stress the importance of attacking some country that looks ripe for the invading.

If you read the Kling article, I think it is fair to say he really doesn’t offer a public policy solution, or even exhibit a lot of concern about trends that he acknowledges are taking us to a have and have not world.

That said though, I think liberals or moderates who acknowledge that inequality eventually undermines the basis for support of a social system should try to learn from the Kling article and the research it is based on.  Doing so leaves you see the problem as more intractable and perhaps even more serious than you might otherwise think.

Conservatives seem to draw the lessen that growing inequality is just a reflection of return to greater ability.  There evidence to support that.  However, the problem is that distribution of ability is itself somewhat random is it not?  Does that justify being sanguine about growing inequality in incomes.  I don’t think it does.  David Frum for one thinks the ability to sustain democracy may be in question.

To wrap all this up, inequality may be a more intractable issue than liberals realize, but more serious than conservative do.  I think less realiance on ideology might make that clearer to all involved.

What If Middle-Class Jobs Disappear? — The American Magazine

The economy today differs from that of a generation ago. Mortgage and consumer loan underwriters have been replaced by credit scoring. Record stores have been replaced by music downloads. Book stores are closing, while sales of books on electronic readers have increased. Data entry has been moved off shore. Routine customer support also has been outsourced overseas.

These trends serve to limit the availability of well-defined jobs. If a job can be characterized by a precise set of instructions, then that job is a candidate to be automated or outsourced to modestly educated workers in developing countries.

The result is what David Autor calls the polarization of the American job market. Autor and various research collaborators have documented a number of findings that reflect this polarization:4

• In recent decades, wage and employment growth have both been lowest at the middle segment of the skill distribution. Wage improvements have tended to be concentrated at the high end, and employment gains have tended to be largest at the low end of the skill distribution.

• This particular symptom of polarization is also prevalent in OECD countries other than the United States.

• In the United States, this polarization was exacerbated by the economic downturn. While both high- and low-skill jobs have held steady, the brunt of the recession has been borne by mid-skill workers. For example, growth in employment in sales was 54 percent from 1979 to 1989, 14 percent from 1989 to 1999, 4 percent from 1999 to 2007, and -7 percent from 2007 to 2009. Employment in sales was a key component of upward economic mobility after World War II, but technological change and globalization appear to have stalled or perhaps reversed this engine of middle-class affluence.

• From 1980 to 2007, real wages for male workers with only a high school degree fell by 12 percent, real wages of male workers with only a college degree rose by 10 percent, and real wages of males with post-graduate degrees increased by 26 percent. Female workers show a similar pattern, although wage gains were generally higher for females over this period.

Using the latest Census Bureau data, Matthew Slaughter found that from 2000 to 2010 the real earnings of college graduates (with no advanced degree) fell by more in percentage terms than the earnings of high school graduates. In fact, over this period the only education category to show an increase in earnings was those with advanced degrees.5

The Great Depression of the 1930s can also be interpreted in part as an economic transition.

The outlook for mid-skill jobs would not appear to be bright.

via What If Middle-Class Jobs Disappear? — The American Magazine.