Greg Mankiw, in his defense of the top one percent (pdf), notes that “the key issue is the extent to which the high incomes of the top 1 percent reflect high productivity rather than some market imperfection,” and quickly turns to a discussion of CEO pay. Mankiw’s got a point—so let’s discuss whether or not CEO pay simply reflects compensation for ‘talent’ and productivity.
Mankiw does not present any evidence on whether CEO pay reflects high productivity: rather, he offers an argument that corporate governance is not problematic, using research by University of Chicago business school professor Steve Kaplan as his evidence. In fact, the chief claim that CEO pay tracks that of other talented workers also comes from Kaplan, who has a paper (not yet public) in the forthcoming Journal of Economic Perspectives issue along with Mankiw’s contribution and a paper from me and my colleague Josh Bivens. In this post, as promised in a prior one on Mankiw’s data claims, I draw on the evidence presented in our paper to show that CEO pay has grown far faster than that of other very high wage earners (the top 1/1000th) and that the CEO advantage relative to other very high wage earners has grown more than the college wage premium. We also demonstrate that Kaplan’s own data series shows the same pattern. A fair-minded review of these data, in our view, leads to the conclusion that the spectacular growth of CEO pay does not simply, or even primarily, reflect the market for talent, or some imagined increase in CEO productivity.
The Supreme Court yesterday did not, for the time being, prevent the University of Texas from continuing its affirmative action plan.
Nonetheless, like the voting rights decision issued today, the Fisher case decision was another setback for racial justice. For one thing, the Court invited another challenge after the case again goes through the lower courts. There, the University will have to prove that it could find no other way to get a diverse student body without explicitly considering race, and will have to prove that it used “good faith” in use of race to achieve diversity. If challengers can show that the University’s examination of applicants’ overall qualifications is really a cover for enrolling black and other minority students—for example, if it is more intent on having black students than violin players, or students from different parts of the state, or other “diverse” factors—affirmative action will be in trouble.
The University and its civil rights group allies have, from an understandable tactical need to defend affirmative action by whatever means are available, accepted a Supreme Court framework that undermines equal rights in the long run.
That framework is “diversity.” According to it, we pursue affirmative action not to remedy the legacy of slavery, Jim Crow, and continuing discrimination, not because equal opportunity for African Americans is an end in itself, but because
- having a diverse student body improves the educational experience for white students, and because
- it trains corporate and military leaders who will be more effective if they look like and have a better understanding of those they lead.
Forgotten has been the idea that African Americans are underrepresented at the University of Texas and at other elite institutions because, as Justice Ginsburg put it in her lonely dissent, they suffer from “the lingering effects of an overtly discriminatory past, the legacy of centuries of law-sanctioned inequality.” In reality, affirmative action is necessary not to make white students more comfortable in the presence of blacks, but to remedy those effects.
Seventy-five years ago today, President Roosevelt signed into law the historic Fair Labor Standards Act. The Fair Labor Standards Act established the minimum wage, legislated a standard workweek, and outlawed oppressive child labor. President Roosevelt called it, after the Social Security Act, “the most far-reaching, far-sighted program for the benefit of workers here or in any other country.”
Prior to the passage of the Fair Labor Standards Act, both adults and young children often worked brutally long hours only to earn starvation wages. This was especially true during the Great Depression. As the Depression endured, firms not only laid off hundreds of thousands of workers, but also implemented significant wage rate cuts. Despite low wages, or perhaps because of them, many workers (including children) continued to work long hours in unjust conditions. Workers often labored in what were essentially sweatshops, only to earn low wages. While campaigning for a second term, President Roosevelt received a note from a young girl that read: “I wish you could do something to help us girls….We have been working in a sewing factory,… and up to a few months ago we were getting our minimum pay of $11 a week… Today the 200 of us girls have been cut down to $4 and $5 and $6 a week.” Thousands of children, as young as seven years old, were denied a basic education and instead worked in mines, mills and factories for a pittance. During his first re-election campaign, President Roosevelt publically committed to eliminating child labor and improving labor standards for all working Americans.
Roosevelt and Frances Perkins, U.S. Secretary of Labor from 1933 to 1945 and the first woman appointed to the U.S. Cabinet, devised the Fair Labor Standards Act with two goals in mind. First, the administration aimed to improve job quality through the abolition of child labor, the establishment of a floor on wages, and a ceiling over hours worked. Second, the administration hoped the Fair Labor Standards Act would create new jobs for millions of the nation’s unemployed by reducing overtime and forcing employers to hire more employees to compensate. The ultimate version of the Fair Labor Standards Act, signed into law by President Roosevelt on June 25, 1938, established a 25-cent minimum wage (that would rise to 30 cents beginning in October 1939), introduced a 44-hour maximum work week (that would first fall to 42 hours in October 1939 and would then fall to 40 hours in October 1940), and set the general age of workforce entry at 16.
Greg Mankiw’s paper in the Journal of Economic Perspectives’ symposium on the top one percent is generating plenty of commentary. Josh Bivens and I have a contribution in that symposium and some new evidence that casts doubt on one of Mankiw’s key claims: that the doubling of the income share of the top one percent reflects the increased economic contributions, or productivity, of those in the top one percent. Specifically, Mankiw claims “that changes in technology have allowed a small number of highly educated and exceptionally talented individuals to command superstar incomes in ways that were not possible a generation ago.” Mankiw’s evidence for this is pretty thin, and we offer contrary evidence. This will take two blog posts, this one addressing the correspondence of growing educational wage disparities and the rise of the top one percent and the next one focused on executive pay.
Before getting down to business, let’s dispose of the distracting discussion by Mankiw and others (e.g. Chrystia Freeland) that we are discussing the incomes of superstar ‘innovators’ like Steve Jobs or J.K. Rowling. The majority of those in the top one percent are financial sector professionals and executives, not ‘innovators.’ Moreover, it is the growth of financial sector and executive incomes, as Jon Bakija and co-authors document, that explains roughly two-thirds of the income growth of the top 1.0 or top 0.1 percent (an analysis we argue understates the role of executives and finance). Besides, as Dean Baker points out, even superstar innovators benefit from a government set system that skews rewards upwards.
The public isn’t stupid. They realize that if hundreds of thousands of foreign guestworkers are brought in by businesses to take jobs in IT, engineering, and the sciences, there will be fewer opportunities for them and their children. A new poll published June 20 by the National Journal asks, “Should Congress allow for MORE guest workers or FEWER guest workers in this industry?” The three industries are agriculture, high-tech and construction. The respondents split with respect to agriculture, but by a big majority—55 to 34—they want fewer high-tech guestworkers, and by even bigger numbers—61 to 30—fewer guestworkers in construction.
Sadly, on this and almost any issue that corporate America lobbies intensely, members of Congress mostly fail to represent the views and interests of their constituents; they take the side of the corporations that make big donations to their campaigns, to independent expenditures on elections, and to the political parties. Only a principled few are willing to stand up to Microsoft, Facebook, Apple and Intel.
The result is that the new immigration bill will triple the flawed and misused H-1B guestworker program and shut off opportunities for hundreds of thousands of young people here who thought an engineering, math or computer science education would be the ticket to economic security and a rewarding career. It does less damage to U.S. construction workers, though it doubles the number of H-2B visas, which have been used to bring in construction guestworkers, and creates a new W-visa guestworker category, for which 15,000 visas a year are designated.
Rhode Island state treasurer Gina Raimondo is running for governor on the strength of the pension reform she spearheaded in in 2011. The hitch? The new plan—a hybrid between a traditional defined benefit (DB) pension and a 401(k)-style defined contribution (DC) plan—actually increases costs for taxpayers while leaving most state employees and teachers worse off, as Robert Hiltonsmith lays out in a new EPI briefing paper.
Raimondo managed to pull off this sleight of hand because she did save taxpayers money—not through the new hybrid plan, but by slashing pension benefits already earned by workers and retirees, a move that is being challenged in court. These cuts came on top of cuts made in earlier rounds, which in a companion brief I estimate amount to a 34 reduction in benefits for a prototypical career worker, with some workers experiencing cuts of 40 percent or more.
Why introduce a poorly-designed hybrid that costs more without benefiting workers? Good question. Hybrids are hot in policy circles, mostly for good reason. Many private-sector employers aren’t in a position to take on long-term pension obligations, yet 401(k)s have proven to be a disastrous substitute, raising costs and placing inordinate risk onto workers, even the few who manage to play their cards exactly right. EPI (pdf) and others have estimated that DC plans cost roughly twice as much as DB plans to provide a similar level of retirement security.
As The Huffington Post has reported, Senator Bernie Sanders (I-Vt.) is introducing three amendments to the Senate’s comprehensive immigration bill (S.744). Two are intended to create and open up jobs for young people, and the third would prohibit large companies that have announced mass layoffs from hiring temporary foreign workers. Sanders is rightly concerned about youth unemployment (which averaged 16.2 percent nationwide last year, and 13.1 percent in Vermont) and the massive expansion of current temporary foreign worker programs and the creation of new ones in the Senate bill. He’s also correct to see the connection between these two phenomena.
On the Senate floor Tuesday, Sanders discussed the inconsistency between the country’s persistently high youth unemployment and the Summer Work Travel (SWT) program. The SWT program was created to facilitate cultural exchanges, by allowing foreign college students to work and travel in the United States. But over time it has become a large guestworker program run by the State Department without the necessary basic rules to protect workers. Unlike other programs that allow foreign residents to work here temporarily, the SWT program does not require that guestworkers be paid a prevailing wage, or require employers to first recruit, or even advertise, jobs to U.S. workers before they can hire guestworkers on J-1 nonimmigrant visas.
Rigorous Research is Needed to Eventually Inform Better Economic Policy, Regardless of Political Realities
In his latest Bloomberg column, Ezra Klein has a nice feature of my recent paper on income inequality growth in the United States and the role of tax policy. Klein’s dichotomy of the income inequality debate splits the “fatalists” from the “redistributions,” with differing views on government’s role in widening income inequality. Downplaying government’s complicity and scope for policy, Klein’s fatalists chalk up income inequality growth to market forces and factors like globalization, technological change, and job polarization. (See Larry Mishel, John Schmitt, and Heidi Shierholz refute this latter argument.) The redistributionists, on the other hand, believe that government policy has contributed to income inequality and policy should be reoriented to instead push back against post-tax, post-transfer income inequality growth.
With regard to the fatalists, one cannot dispute on objective grounds that changes in federal tax and transfer policies between 1979 and 2007 have exacerbated post-tax, post-transfer income inequality growth, up 33 percent over this period, versus market-based income inequality growth of 23 percent (both measured by the Gini index). Moreover, the role of tax policy changes in exacerbating post-tax and post-transfer inequality is understated in these measures because of the phenomenon of “bracket creep”—top incomes rise faster than the inflation adjustment for tax brackets, subjecting more income to taxation at top rates—which innately increases the redistributive nature of the tax and transfer system over time. But while tax and transfer policy should have been pushing harder against inequality growth instead of exacerbating it, there are practical limits to how much increased redistribution can mitigate strong market trends.
So some papers that will make up a symposium in the summer issue of the Journal of Economic Perspectives about the rise of the top 1 percent of incomes are hitting the airwaves. Larry Mishel and I are contributing one as well, The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1 Percent Incomes. Greg Mankiw mounts a self-described “defense” of the top 1 percent here (PDF), Miles Corak writes about the implications of inequality for mobility here (PDF), and Alvaredo, Atkinson, Piketty and Saez examine the top 1 percent in historical and international perspectives here (PDF).1
Our argument (shocker) is that the rise of the top 1 percent of incomes is not simply the result of a competitive, well-functioning market rewarding skills and capital to the precise degree necessary to elicit their supply. Instead, lots of the rise in top 1 percent of incomes is about the creation and/or redistribution of economic rents.
We highlight the two occupations that dominate the top 1 percent—corporate executives and finance professionals—and review the voluminous data and research literature that strongly suggests that these occupations exercise substantial market power over their own pay, and that their pay exceeds the contribution they make to economic output. We also provide new evidence that CEO compensation has grown far more than that of other top wage earners, those in the top 0.1 percent of the wage structure. The current pay gap between CEOs and other top earners is much greater than during the 1947-79 period and has grown far faster than the college-high school wage premium since 1979. This is evidence that directly contradicts the claim that CEO pay has been largely set by the market for talent.
Who in America is willing to work 100 hours a week without getting paid for those brutally long hours (not to mention without the time-and-a-half pay required for overtime)? The answer should be, “no one.” But for undocumented immigrants, who don’t have the right to take above-board, normal jobs, almost any job, no matter how abusive or how low the pay, is better than nothing—especially if they owe debts to criminal smugglers who know where their families live.
According to the New York Times, fourteen 7-Eleven franchises have been charged with raking in $180 million since 2000 in illegal profits from underpaying employees, and another 40 franchises are under investigation. Employees who should have been paid as much as $1000 a week were paid only $300-$500 while being forced to live in unregulated, substandard boardinghouses operated by the stores’ owners.
It took 13 years for an employee to finally complain about wage theft and call in the authorities to break up the illegal operation. That’s a good measure of the fear and intimidation that keeps the undocumented in the shadows and lets greedy employers get away with paying sweatshop wages.
Clearly, legalization of the undocumented will improve the labor market in the United States by bringing abused workers out of the shadows and starting the process of lifting wages. However, this will work better and faster if Congress also provides the right enforcement resources, including the Labor Department wage and hour inspectors and attorneys needed to investigate and prosecute cheating businesses and the criminals who run them. The U.S. spends $18 billion a year on border security and immigration enforcement, and will spend even more if the Senate’s proposed comprehensive immigration law, S.744, is enacted. It seems clear to me that some of those funds should be redirected to the Labor Department and its never-ending battle against wage theft and exploitation.
The abuse of temporary foreign workers in the United States has been well documented, from the Bracero program of the 1960s to the recent cases of seafood workers in Maryland (PDF) and Louisiana, fast-food workers in Pennsylvania, and forestry workers in Georgia. The wrongs to workers are sometimes nothing short of criminal: wage theft, violence and threats of violence, even peonage.
But harm is done to U.S. workers, too, before temporary “guest” workers are ever brought to the U.S. The businesses that could and should be recruiting and hiring workers here in the U.S. at decent wages are shunning them to hire more exploitable, more desperate foreigners. The law and regulations that govern guestworker programs, most notably the H-2B non-immigrant visa program, are ignored or circumvented, leaving U.S. workers jobless while people from thousands of miles away do jobs the local workers are able and willing to do.
The law and regulations forbid the admission of any H-2B guestworker to the U.S. unless the employer attests that U.S workers capable of performing the job are not available and that the employment of foreign workers will not adversely affect the wages and working conditions of similarly employed U.S. workers. The Department of Labor and the various State Workforce Agencies are charged with verifying that the jobs of U.S. workers are protected, but they have failed to do so.
A few articles that our experts found interesting recently:
- A New Guide for Understanding Our Inequality (Inequality.org)
- Fight the Future (New York Times)
- Housing discrimination persists in U.S. in more subtle ways, HUD report says (Washington Post)
- It’s Not a Housing Boom. It’s a Land Grab (Color Lines)
- No More Captive Workers (Roll Call)
- Young, black and buried in debt: How for-profit colleges prey on African-American ambition (Salon)
Fred Hiatt trots out the standard centrist argument for cutting the already-stingy system of American social insurance (Social Security, Medicare, Medicaid): we need to cut this spending to preserve the “good” spending that he likes—non-defense discretionary (NDD in budget jargon) spending.
I agree with him that lots of NDD spending is good—it includes the general business of running the non-defense portions of the government as well as programs like Head Start, and it also includes a substantial chunk of public investment financed by the federal government. So yes, let’s preserve this.
But this claimed tension between spending on Social Security and Medicare versus NDD spending is plain false. We recently looked at various competing budget proposals to see what their implications were for NDD spending and public investment at the end of the budget window. Paul Ryan’s budget, which takes a chainsaw to the social insurance programs also saw the biggest squeeze on NDD spending and public investment. President Obama’s budget, which included damaging cuts to Social Security and was couched in the language of protecting public investment, still saw NDD and public investment spending reach historic lows by the end of the budget window. The Congressional Progressive Caucus Back to Work budget had no cuts to social insurance and yet had substantially higher NDD spending and public investment than all other plans. (more…)
Friday’s infographic from Stateline at the Pew Charitable Trusts shows year-over-year job creation at the state level. We track state-level job trends at the Economic Policy Institute also, paying particular attention to trends in job creation and state unemployment rates.
These trends are important—they provide point-in-time information and benchmark states’ progress getting back on track since the start of the Great Recession in 2007. Our monthly analyses track trends over the previous three months, six months and year. Many of our EARN state partners produce reports that drill down deeper in their respective state labor markets.
It’s important, though, to step back and look at these recent trends in the context of job loss during the Great Recession and population growth since the beginning of the recession.
This lens on state economies tells a very different, though equally important, story about what is happening in the labor market at the state level. We see, for instance, that despite the fact that Texas has led job creation, with 326,000 jobs gained between April 2012 and April 2013, it continues to have a jobs deficit of nearly 600,000 jobs. In other words, in order for Texas to return to pre-recession employment rates, the state would need to create another 594,100 jobs.
Catherine Rampell had a good piece in the Times yesterday on the rise in college completion among 25-29 year olds. She surveys lots of interesting data and comes away with the generally encouraging conclusion that college completion is on the rise.
But two influences she identifies as probable suspects in driving this increase don’t really fit the data: a rising college wage premium and the decision of young people to “shelter” in college while the recession-damaged labor market remains weak. We’ve examined both of these in the past, and, the college wage premium has actually been flat for over a decade and there didn’t really seem to be much sheltering during or after the Great Recession.
Given this, the real reasons for increased college completion seem like open, and important, questions.
Since the late 1970s, the United States has experienced a sharp divergence in the distribution and growth of market-based income, with gains overwhelmingly skewed toward the very top of the income distribution and away from the bottom. This era of widening income inequality represents a sharp break from the first three decades following World War II, when the gains from growth were shared fairly equally across the income distribution, even tilted somewhat favorably towards lower-income over upper-income workers. The increasingly lopsided concentration of income growth at the top of the distribution comes at the expense of stagnant or falling living standards for working families.
Policymakers have lately taken more of an interest in curbing income inequality growth, and to that end, it is critical to understand the impact and scope of tax policy. Changes in tax and transfer policies are one of the more easily quantifiable contributors to income inequality, say compared with policies (or lack thereof) related to labor protections, collective bargaining, minimum wage erosion and trade.
While both tax and transfer policies can influence inequality growth, tax policy is particularly policy relevant. Tax policy can more easily be fitted to the upwardly skewed income distribution than transfer policy, and there is vastly more market-based income than transfer income at the top of the scale, so doing so would further advance Congress’s prioritization of deficit reduction. Additionally, changes in tax policy can be implemented faster than changes in many transfer benefits, as politicians are reluctant to change retirement benefits for those approaching retirement.
The Senate’s proposed comprehensive immigration reform legislation could bring 11 million unauthorized migrants out of the shadows and grant them equal protection under the law. That in turn would even the playing field in the labor market, improving not just the wages and working conditions of exploitable unauthorized workers, but also those of less-educated U.S. workers employed in similar occupations. Employers engaged in a race to the bottom to find the most vulnerable and exploitable workforce will find it much more difficult to get away with violations of immigration and labor laws. However, the Senate bill fails to grant adequate employment and labor law protections to the hundreds of thousands of temporary foreign workers—also known as guestworkers—who enter the U.S. workforce every year.
Jennifer Rosenbaum of the National Guestworker Alliance in New Orleans has a great op-ed in Roll Call that explains:
“The current Senate bill would provide one small category of guestworkers — those on the proposed W visa — whistle-blower protections and the ability to change employers without losing legal status. But the bill risks leaving hundreds of thousands of guestworkers subject to captive labor. And lobbyists are pushing to make sure that there are as many of those guestworkers as possible.”
A federal district court judge ruled yesterday that Fox Searchlight violated the minimum wage law when it failed to pay its interns for their work on the movie Black Swan. This is excellent news—unpaid internships hurt mobility, exploit young workers, and are frequently illegal.
The judge, following a ruling made 15 years ago by then district court judge Sonia Sotomayor1, upheld and applied the Department of Labor’s six-part test for determining whether an internship is employment covered by the Fair Labor Standards Act or is, instead, training or education that can illegally go unpaid.
Congratulations are due to Eric Glatt, the lead plaintiff, who has become a leading activist in the fight against the deregulation of wages and the spread of unpaid labor. And congratulations, too, to the law firm of Outten and Golden, which represents Eric Glatt and plaintiffs in several cases that challenge the new sense of entitlement employers have to ignore the law and treat employees like serfs. Increasingly, trial lawyers are on the front lines of the fight to protect the dignity of work and the rights of labor. As state and federal agency budgets are cut the role of trial lawyers is growing in importance.
The summer has begun and greedy employers across the country are searching for people who will work for them for free. Meanwhile, in a few weeks the nation will celebrate the 75th anniversary of the Fair Labor Standards Act, which makes it illegal for most employers to take advantage of their fellow Americans’ work without paying at least the minimum wage for it.
At a time when the real value of the minimum wage is well below the levels of the 1960’s (making entry-level workers quite affordable), when the weak labor market is forcing college graduates in record numbers to take jobs that don’t require a college degree and entry level wages for college grads are already substantially below the levels of 10 years ago, the exploitation involved in not paying employees anything at all is shameful and economically dangerous.
It’s dangerous because the main obstacle to a healthy recovery from the Great Recession is weak consumer demand, and unpaid internships hurt consumer demand in two ways. First, they leave interns without any wage income, reducing their ability to purchase the products and services supplied by businesses. Second, they lower expectations and reduce wage demands by employees who do have paying jobs.
Nevertheless, employers from coast to coast think that simply by calling a job an internship, they can take advantage of young people desperate to start their careers and get the benefit of their talents and work, but not pay them even a measly $7.25 an hour.
Yesterday was the 50th anniversary of the Equal Pay Act, which President John F. Kennedy signed into law in 1963 to help combat wage discrimination based on gender. Since that time, the gender gap in wages has indeed improved significantly, particularly since the late 1970s. In 1979, the median hourly wage for women was 62.7 percent of the median hourly wage for men; by 2012, it was 82.8 percent.
One thing to note is that a big chunk of the improvement in the gender wage gap since the 1970s—more than a quarter of it—was happening because of men’s wage losses, rather than women’s wage gains. With the exception of a period of labor market strength in the late 1990s, the median male wage has decreased over essentially the entire period since the late 1970s. That has made the gender wage gap smaller, but it certainly isn’t the kind of improvement anyone wants to see.
It is important to note that the forces that were holding back male wage growth over this period were also acting on women’s wages, but the gains made by women over this period in educational attainment, labor force attachment, and occupational upgrading more than overcame these adverse forces (at least until the last decade, when women’s wages have also dropped).
What are the forces holding back the wages of both women and men? Essentially, economic policy has not supported good jobs over the last 35 years. Rather, the focus has been on policies that were advertised as making everyone better off as consumers: deregulation of industries, the Federal Reserve Board prioritizing low inflation over full employment, the weakening of labor standards including the minimum wage, a “stronger” dollar, and the move toward fewer and weaker unions. In fact, these policies have served only to make the already-affluent better off. They have eroded the individual and/or collective bargaining power of most workers, widened wage inequality among both women and men, and depleted access to good jobs.
There have been a lot of great articles recently (for example, here) about the large remaining gender gap in wages, and the work that needs to be done to get more women access to good jobs.
Here are some of the articles our experts found interesting today:
- What’s Next for Social Security? (New York Times)
- Why a Romney economic adviser wants the government to just hire people (Washington Post)
- Now is the time to be an infrastructure hawk, not a deficit hawk (Washington Post)
- An obscure new rule on microwaves can tell us a lot about Obama’s climate policies (Washington Post)
CAP’s rethinking of the grand bargain path is good. Now CAP should rethink their role in putting us on that path.
The Center for American Progress (CAP) has issued an important new report saying that “new realities” dictate that we “reset button on the entire fiscal debate,” end the pursuit of a fiscal “grand bargain” with Republicans in Congress on deficit reduction, and replace the sequester (through 2016). One can only hope this signals a change in direction for the administration and others on the center-left who embarked on the grand bargain deficit reduction journey in late 2009 and early 2010 when their focus should have remained on job creation. That turn of events was one of the most consequential economic policymaking decisions in decades, because it derailed job creation (i.e., further stimulus) efforts thus ensuring that recovery from the Great Recession would be agonizingly slow. That, of course, has had a hugely adverse impact on the wages, benefits and employment of the vast majority of Americans, but has also had tremendous political fallout (i.e. 2010) and weakened the public’s faith in government’s ability to spur job growth. It was a clear unforced error by CAP and the administration to suggest the need for a grand bargain on deficit reduction, embodied in the appointment of the Simpson-Bowles commission. For these reasons it’s worth examining the argument CAP has made and compare it to the situation in late 2009 and early 2010 when CAP pushed for a grand bargain, praised the Simpson-Bowles effort and recommended a deficit plan that, if adopted, would have started to cut spending in October 2010 (when, it turns out, unemployment was still 9.5 percent). This is not an across-the-board indictment of CAP—they do lots of excellent work, including Michael Linden’s budget analyses. But it is important to highlight that there were two paths available to liberal and center-left policymakers over the course of this crisis, and many of today’s difficulties are with us because the wrong path was chosen. EPI, I am proud to say, was and remains resolutely focused on the ongoing jobs crisis.
In the May issue of Educational Leadership, I attempt to show how our misunderstanding of the origins of racial segregation stands in the way of efforts to narrow the black-white academic achievement gap.
Socially and economically disadvantaged children perform, on average, at lower levels of achievement than advantaged children. The achievement gap primarily results from disadvantaged children coming to school unprepared to take advantage of what schools have to offer, not primarily from inadequate teachers or schools. Children who come to school from households with poor literacy levels, who are in poor health, whose housing is unstable, whose parents are suffering the stress of unemployment, and who are themselves stressed as well in neighborhoods with high levels of crime and violence, cannot be expected to achieve, on average, as well as middle class children, even if all have high quality instruction.
Disadvantaged children’s obstacles to achievement are exacerbated when these children are concentrated in racially and economically homogeneous and isolated schools. Meaningful narrowing of the achievement gap will not be possible without breaking down these barriers and integrating black children into middle-class schools.
On May 1st, I wrote a blog post pointing out that at a rate of 175,000 jobs per month we won’t get back to the December 2007 unemployment rate until 2020. Apparently, I was looking into a depressing but very accurate crystal ball, since 175,000 jobs is exactly how many jobs we ended up getting in May.
It’s still true that at 175,000 jobs per month, we won’t close the jobs gap before the end of this decade. To close the jobs gap by 2016, the year of the next presidential election, we have to add more than 300,000 jobs every month.
As we’ve discussed, the sequestration enacted March 1 cut federal spending by $85.3 billion for fiscal year 2013. The sequester not only cut money allocated to federal programs, but also meant reductions for federal spending at the state and local level. States and local governments depend on federal grants and loans to fund essential services and programs, helping them maintain infrastructure, provide education, administer health and social services and ensure public safety. In 2011, federal grants to states and localities totaled $607 billion and accounted for approximately 25 percent of state and local government spending.
A report released by EPI last week finds that the sequestration decreased federal funding for state grants by $5.1 billion in the 2013 fiscal year. Although the March 1 sequester reduced federal grant spending to all states (relative to the continuing resolution federal grant spending already in place), some states were impacted more than others, ranging from a 0.68 percent cut in Tennessee, to a 3.36 percent cut in Wyoming (see Table 1 in the paper).
Following sequestration, the current continuing resolution was signed into law on March 26—less than a month after the budget sequestration began—setting funding levels for the remainder of the fiscal year, and thus impacting grant funding to programs at the state level. The map below illustrates the changes in each state’s fiscal 2013 federal grant funding, compared to fiscal 2012 federal grant spending, as a result of sequestration and funding levels in the current continuing resolution. Differences in how grant funding is distributed are dependent both on how programs function as well as which states participate in programs funded by federal grant money. After accounting for both sequestration and the current continuing resolution, grant funding for 26 states is estimated to increase, while grant funding for the remaining 25 states (including the District of Columbia) is estimated to decrease.
My colleague Tom Hungerford has laid out why he’s not part of the alleged consensus cited by Dylan Matthews that cutting corporate tax rates would boost GDP growth, based on a skeptical look at the research and data. I’d just add a couple of extra points:
First, this is all kind of tangential to the live debate currently going on about corporate tax reform. This debate is sadly all about revenue-neutral reform. So, all research that has used effective average corporate tax rates as explanatory variables in growth regressions is irrelevant to this kind of debate. And the upshot of such reform is even unclear as to what it will do to effective marginal rates—some firms will see their taxes go down, while others will see them go up. So, even if one believed in a huge growth bonanza from significantly cutting corporate taxes—that’s not what the debate in DC is about.
Second, even if one believed the modest growth-spurring impacts of cutting corporate tax rates cited in much of the research that Dylan and Tom discuss, I still don’t think that I’d fall all over myself trying to accomplish this as a high-priority policy goal.
When I was a child, there were times when I wanted to go someplace with a group of friends and my mother would say no. I would then argue that I should be allowed to go “because all my friends are going.” As would be expected, my mother would respond with “suppose all your friends jumped off a cliff, would you?” I would always answer no, of course, but I gather that a number of people would answer “I’d be a damned fool not to.” In his Wonkblog post, Washington Post’s Dylan Matthews appears to be the latest to respond this way when he joins the “consensus around the idea that increases in the corporate tax rate hurt growth.” Before getting into why I am not part of the so-called consensus, I need to first correct a glaring error in Matthews’s blog.
He cites a Tax Notes article (and CRS report) I wrote with Jane Gravelle in 2008. He notes that we concluded: “The traditional concerns about the corporate tax appear valid. While many economists believe that the tax is still needed as a backstop to individual tax collections, it does result in economic distortions.” This conclusion, he claims, contradicts my new analysis of the corporate tax rate. There are two problems with his claim. First, he omitted the next sentence: “These economic distortions, however, have declined substantially over time as corporate rates and shares of output have fallen.”
Read in isolation, the second verification assessment by the Fair Labor Association (FLA) of remediation steps at three Foxconn factories making Apple products might lead one to think that essentially all labor rights violations have been addressed. The FLA’s report, for instance, features the claim that Foxconn has already completed “98.3 percent” of the necessary steps to correct the problems at its factories. But while some of the steps taken – such as reducing work weeks to below 60 hours and certain safety and health improvements – do represent progress, the overall score given by the FLA as well as the accompanying rosy language about reforms are fundamentally deceptive. Consider:
The FLA ignores crucial reforms promised by Apple and Foxconn, including increasing wages enough to offset reductions in work hours and providing back pay for uncompensated work time. On March 29, 2012, the FLA described the basic remedial actions to be undertaken by Foxconn and Apple by July 2013. Paragraph five of this announcement contained the promise that Foxconn would increase compensation enough to offset any reduction in overtime hours. Paragraph six contained the promise that Foxconn and Apple would provide retroactive pay for the many circumstances in which workers had not been compensated for all their overtime hours. Paragraph seven of the March 2012 announcement said a study would be undertaken to determine the amount of compensation necessary to provide for basic needs; according to the FLA’s own survey, 64 percent of workers said their compensation did not provide them enough to meet their basic needs.
Matt Yglesias doesn’t think that Figure B in Tom Hungerford’s new paper on corporate tax rates and economic growth “proves” a non-relationship between the two. He’s right, of course, but then goes on to argue that including this chart specifically, and including charts in blogs generally, is a borderline shady practice. This I don’t really get.
So, I shall make the case for the use of charts with a chart, below.
But, first, a quick thought on another point in Matt’s post. He notes that we at EPI aren’t keen on seeing corporate tax rates cut reformed anytime soon because we like revenue and we “feel that the corporate income tax raises it in a distributionally progressive way.” We do like revenue, but our thoughts on the incidence of corporate tax rates are not “feelings”—they’re pretty evidence-based. The CBO, for example, used to assume that 100% of the corporate income tax fell on owners of capital (a very well-off bunch relative to the rest of the population). Now they assume that 3/4ths does. So our view that most of the incidence of the corporate income tax falls on capital is not some wild-eyed heterodox view.
We’d probably quibble even with the change to put some of the incidence on wages (though I’m not a huge expert in this one), and we know of the growing effort by some economists to claim that the incidence of the corporate income tax is actually borne by workers, but we’re convinced by the counter-evidence (see here (PDF) and here (PDF) for some of this evidence). A side-note—it’s always fun to see people who claim in one venue that corporate tax rates should be cut reformed because the incidence is actually borne by workers claim in another that the corporate income tax is bad because it “double-taxes” capital income. Really, you can’t have both claims.
What we read today (and the rest of this week):
- From the Mouths of Babes (New York Times)
- Study: Tax Cuts Might Drive Income Inequality After All (The Atlantic)
- Disability, Social Security, and the missing context (Columbia Journalism Review)
- Joblessness Shortens Lifespan of Least Educated White Women, Research Says (New York Times)
- Discipline and Punish: The New Unemployment ‘Reform’ (Labor Notes)
- Low interest rates are the final straw for many company pensions (Washington Post)
- The Unemployed Need Bold, Creative Moves from the Fed (Fiscal Times)
- Report: More seniors are living in poverty (Politico)