If you’re writing about the ‘fiscal cliff,’ you need to read The State of Working America
Earlier this week, we released the old-school version (i.e., printed book instead of website) of The State of Working America, 12th Edition. All things economic that are not “fiscal cliff” related are having a hard time getting a public hearing these days, which is understandable. But we think that The State of Working America really should be a required reference for anybody writing about fiscal policy debates.
A key point we at EPI have tried to make over and over again in fiscal discussions is that approaching these issues only within the framework of “spending” and “revenues”—with no sense of the broader economic context— will lead to all the wrong questions being asked and solutions being offered. And The State of Working America provides this crucial broader context.
Take the debate over taxes, particularly tax rates on the highest-income households. The first thing the data in SWA help illuminate is just how modest the changes currently under discussion are, and how low taxes paid by the highest-income households are in historical perspective. For the top 0.1 percent, for example, the average effective federal tax rate in 2011 is only about half as high as it was in 1970, and the changes under discussion would only give these rates the gentlest nudge (see the effect of these cuts starting in 2000) back towards these 1970 rates.
Or, take the debate over the key social insurance programs: Social Security, Medicare, and Medicaid. These programs actually contributed more than half of all income growth for the middle-fifth of households between 1979 and 2007. And they contributed almost 10 times as much as did growth in wage and salary incomes. They were, in short, one of the only things going well for moderate-income households for most of the years in this nearly three-decade period; cutting them would hamstring the one reliable source of income strength for these Americans.
Or take key safety net programs meant to provide help to the most vulnerable—like unemployment insurance and Supplemental Security Income (SSI). As a share of the average income of the bottom quintile, such cash transfers actually shrank dramatically over the same 28-year period preceding the Great Recession.
Lastly, current debates over fiscal policy are explicitly balancing the imperative of the richest households locking in some of the lowest tax rates in post-World War II history against the continued protections offered by Social Security, Medicare, and Medicaid. Does the evidence suggest that this group at the top of the income ladder really needs some extra help given economic trends in recent decades? As we document in The State of Working America, it’s awfully hard to make the case for that: The top 1 percent of households claimed more of the total rise in average income growth between 1979 and 2007 (the last year before the Great Recession) than the entire bottom 90 percent combined.
And did lowering tax rates on the very rich spur a bonanza of growth that more-than-compensated low– and moderate-income households for the rise in inequality over this time? Not really.
In short, The State of Working America, provides the crucial economic context that should help move fiscal policy debates away from simply bending revenues towards spending. Instead, it can help make sure that these debates focus on the kind of economy and society we want.
Further, this book should remind us that there is a lot more to economic policymaking than fighting over the budget and taxes (as important as these may be). The vast majority of the rise in inequality in recent decades has occurred at the pre-tax and pre-transfer level, and this has in turn been driven by a whole portfolio of economic policy choices—not just fiscal—which have predictably shifted bargaining power from low– and moderate-income workers and their families to those better positioned. The minimum wage has been allowed to get battered by inflation for decades at a time; the right of willing workers to form unions has not been safeguarded against growing corporate hostility; macroeconomic policy has privileged low inflation over the low unemployment rates that most workers need to see decent raises; the rules governing globalization have protected corporate interests while thrusting rank-and-file American workers into direct competition with a much poorer global labor pool; and our system of corporate governance has allowed rule-rigging by executives and the financial sector to channel ever-higher incomes their way.
All of this might make for less-spectacular daily headlines than fears of a “fiscal cliff,” but the accumulated weight of these decisions on living standards growth at the low– and middle-end of the American income distribution has been suffocating. One can only hope that debates over how to reverse these policy choices generate 1 percent of the attention as mostly-misguided debates over the “fiscal cliff.”