Class matters in educational performance. Helen F. Ladd and Edward B. Fiske have recently persuasively argued this point in the New York Times and at a recent conference. One analysis Ladd conducted in the conference paper included academically high-performing countries like South Korea and Finland. As Ladd illustrates, in these two countries (as well as in lower-performing countries) the most privileged students do best academically and the least privileged do worst.

This gradient of academic achievement exists despite the fact that South Korean and Finnish students have among the highest median test scores in the world. The students cannot be accused of coming from cultures that do not value education. Both countries are also racially and ethnically homogenous. Thus, neither culture nor race can be used to explain why poorer Korean and Finnish children do worse in school than their richer peers. Class matters.

Class matters in the United States also. Ladd and Fiske report that “data from the National Assessment of Educational Progress [in the United States] show that more than 40 percent of the variation in average reading scores and 46 percent of the variation in average math scores across states is associated with variation in child poverty rates.”

This information helps us to understand the black-white achievement gap and its persistence. The child poverty rate for African Americans is regularly more than three times the rate for whites. Since class matters for educational achievement, it is not realistic to expect to close the black-white achievement gap while the economic gaps between blacks and whites are so large.

This is why I argue in A jobs-centered approach to African American community development that a jobs program for black communities is an important part of improving educational outcomes for black children. As the figure shows, there is a fairly strong relationship between the black child poverty rate and the black unemployment rate. In the early 1980s, the increase in black unemployment corresponds with an increase in black child poverty. In the late 1990s, the decrease in black unemployment matches a downward trend in black child poverty. The uptick in black unemployment in recent years is reflected in a recent rise in black child poverty.

If we reduce black unemployment, we reduce black child poverty. Fewer black children in poverty set the stage for higher black student achievement.

Some people believe that education is the key to lift blacks out of poverty, but it is important to realize the role that poverty and other forms of economic disadvantage play in black educational outcomes. Economic inequality plays an important role in unequal educational outcomes.

The incomes of the top 1 percent have fallen in the last two recessions because their incomes were disproportionately affected (through capital gains and stock options, among other things) by the steep decline in the stock market that occurred in the early 2000s and in the recent financial crisis. This decline in the stock market and incomes linked to it are disproportionately claimed by the rich, so this led to a temporary reduction in income inequality. After the early 2000s episode, high incomes and inequality rose quickly during the upturn as the stock market recovered. There is little reason to expect this not to be replicated in coming years after the sharp 2009 fall.

People would be well-advised to keep this in mind – too many observers, such as Megan McArdle, have highlighted this drop in top incomes by 2009 and suggested that maybe income inequality has stopped growing, saying “We don’t want to spend years focused on income inequality, only to learn that the financial crisis fixed it for us.” A New York Times article echoed this perspective. EPI countered in a post yesterday with new data showing that wages for top earners have restarted their upward march after hitting a post-recession low in 2009 – meaning that income inequality (or at least inequality of wages) is, not surprisingly, already rising again.

The fall in incomes at the top between 2007 and 2009 had much to do with the fall in realized capital gains and EPI pointed out that capital gains actually fell far more than the stock market decline. That makes sense since households would not want to sell off their stock when prices are low. The graph below plots average capital gains income for the top 1 percent of income earners along with the S&P 500 index (both indexed to 1989) and shows that this “overreaction” of realized capital gains relative to stock market movements is far from unusual.

This dynamic was very much at play in the 1990s and 2000s. Capital gains income for top earners skyrocketed faster in the 1990s than the growth of the stock market and then fell faster after the technology bubble crash. This was followed by capital gains growth faster than the stock market in the recovery period from 2003 to 2007. Unfortunately, the data from Emmanuel Saez and Thomas Piketty on incomes used in this graph only extend to 2008, but it isn’t difficult to see what is happening here. The behavior of the S&P 500 since 2008 is shown, with the recovery from the 2009 bottom clearly visible. As reported in our blog post yesterday, we know that capital gains fell further in 2009, which surely helps to explain the dip in the top 1 percent of incomes that McCardle highlights.

But we also can see the stock market increase in 2010 and 2011, which is surely driving capital gains income for the top 1 percent higher. The important part of the inequality debate is not to cherry-pick individual years where the rich suffer, or do exceptionally well, but to show the unmistakable trend over time. Temporary reductions in the relative income of the very rich are a common feature during recessions – but so far, the long-run trend of growing income concentration has re-established itself quickly after these cyclical downturns. Given this, it is most unlikely that the financial crisis has fixed income inequality.

(Wonky note: The spike in capital gains income in 1986 was due to a change in tax law in 1986: The Tax Reform Act of 1986. The law raised the rate on capital gains income, effective January 1 1987, from 20 percent to 28 percent.  Long-term capital gains on corporate stock were seven times their December 1985 levels in December 1986. For more, see “The Labyrinth of Capital Gains Tax Policy: A guide for the perplexed” by Leonard Burman, Brookings Institution Press, 1999.)

Yesterday, the House of Representatives passed legislation authored by Rep. Dave Camp (R-Mich.) that would reduce the maximum number of weeks of unemployment insurance benefits that the federal government provides to jobless workers from 73 weeks to 33 weeks.

Claims that unemployment insurance benefits dissuade the jobless from looking for work are untrue, as the accompanying chart shows. Research by Carl Van Horn and the Heldrich Center at Rutgers University shows that unemployed workers who receive unemployment compensation do more to find a job than those who never receive benefits. They do more online job searching, are more likely to look at newspaper classified ads, and are more likely to send email inquiries and applications to prospective employers.

The reason unemployed Americans can’t find jobs isn’t a failure to look. As EPI economist Heidi Shierholz points out, they can’t find jobs because there are 10.6 million more unemployed workers than there are available jobs.

—with research assistance from Hilary Wething

Given presidential contender Newt Gingrich’s recent surge to frontrunner status in the polls, it was only a matter of time before the Tax Policy Center dug into Gingrich’s doozy of a tax plan. Howard Gleckman’s analysis on TaxVox notes that Gingrich’s plan represents such a gargantuan tax cut for upper-income households that it will blow a hole of nearly $1 trillion in the federal budget annually (more than doubling projected budget deficits). To date, Gingrich is winning the voodoo economics derby for peddling the steepest tax cuts for top earners and the biggest deterioration in the fiscal outlook.

According to TPC, the Gingrich plan would reduce revenue in 2015 by $850 billion relative to current policy and $1.28 trillion relative to current law; it’s important to remember that the difference in revenue levels projected under current policy and current law represents the difference between an unsustainable and sustainable budget outlook in the next decade.

Like Rick Perry’s tax plan, Gingrich has proposed an optional flat income tax but at a lower rate of 15 percent (to Perry’s 20 percent) beyond personal deductions of $12,000 for filers and dependents. Optional tax schemes are always a recipe for revenue loss, and this is especially true when they offer a 20 percentage point reduction in the top marginal tax rate. Again like the Perry plan, Gingrich’s alternative income tax would preserve deductions for charitable giving and home mortgage interest (though, unlike the Perry plan, maintain the earned income tax credit and child tax credit). Like almost every one of the GOP candidates’ tax plans, Gingrich would eliminate all taxes on capital gains, dividends, and large estates and gifts. (See this TPC summary table of the GOP presidential candidates’ tax plans.)

But the real coup de grâce lies on the corporate side, where Gingrich would drop the corporate income tax rate from 35 percent to 12.5 percent, allow immediate expensing of capital investments, and eliminate all taxes on corporations’ foreign income (i.e., moving to a territorial tax system). There is much talk of reducing the top corporate income rate in exchange for eliminating business tax loopholes and broadening the tax base, but there is no base-broadening in the Gingrich plan—only base-narrowing coupled with rate reductions. Economists Thomas Piketty and Emmanuel Saez found that the decline in corporate income taxation has been a prime driver of declining progressivity in the U.S. federal tax code since the 1960s, a trend that would be greatly exacerbated by Gingrich’s tax plan.

Rather than shifting the burden of taxation from upper-income households to the middle class, the Gingrich plan would lower average tax rates across every income level. Effective tax rates would peak for households earning between $100,000 and $200,000 and then fall precipitously (see chart below). Households earning over $1 million annually would see the effective tax rate plunge to 11.9 percent—below that levied on families earning $40,000 to $50,000 a year, according to TPC. Gingrich would go all in on the failed supply-side experiment by more than quadrupling millionaires’ tax cuts from $141,000 under the Bush-era tax cuts to $748,000 (relative to current law). Relative to current tax policies, millionaires would see a tax cut of $607,000 in 2015, further reducing their tax bill by 62 percent.

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Of course, pushing massive tax cuts for the highest-income households is par for the course among this year’s GOP presidential field. Ezra Klein compares the impact on average taxes under the tax plans of Gingrich, Perry, and Herman Cain, nicely depicting the unambiguous theme of massive tax cuts at the upper-end of the earnings distribution. Yet, as President Obama noted in his speech in Osawatomie, Kan., we’ve tested the trickledown theory before and it didn’t work; the Bush-era tax cuts were an ineffective, unfair, and expensive failure that presided over the weakest economic expansion since World War II. (This economic legacy hasn’t dissuaded Gingrich from crediting himself with helping “Ronald Reagan and Jack Kemp develop supply-side economics.”)

But Gingrich’s tax plan surpasses the supply side experiments of the past and those proposed by his rivals in terms of defunding government. I somehow doubt that Gingrich’s proposed lunar mineral mining colony would pay for a fraction of these highly regressive and dear tax cuts. Not even eliminating Medicare (and its projected $688 billion expenditure for 2015) would pay for this tax proposal.

In his recent speech in Osawatomie, Kan., President Obama spoke to the challenges of rebuilding the middle class, drawing a clear distinction between policies that foster shared prosperity and those that stack the deck against middle-class Americans. In a sharp rebuke of supply-side economic policies, the president stressed that the costly Bush-era tax cuts produced the “slowest job growth in half a century” while making it harder to pay for public investments as well as the economic security programs forming the backbone of the middle class. As our colleague Ross Eisenbrey wrote last week, the president flatly rejected the “failed ‘you’re on your own’ economic policies that got us into the worst recession in 75 years.” The deterioration of the middle class necessitates that economic policy focus on promoting economic opportunity and mobility rather than prioritizing those already at the top of the earnings distribution.

The first step to rebuilding the middle class is restoring full employment. Beyond the scarring effects wrought on the families of 24 million un- and underemployed workers, massive and persistent slack in the labor market will preclude employed workers from negotiating real wage increases (needed to reverse the decade-long trend of falling real median household income). Yet fiscal policy is poised to drag heavily on economic growth and employment entering 2012; Congress should be expanding efforts to accelerate growth and hiring, but a litany of meaningful job creation measures have instead been filibustered in the Senate. As Congress bickers over continuing the payroll tax holiday and Emergency Unemployment Compensation (EUC) program (set to expire at the end of the month),  a new bill has been put forth that would meaningfully address the jobs crisis and begin restoring economic security for the middle class.

The bill that does this, the Restore the American Dream for the 99% Act (H.R. 3638), was rolled out by Congressional Progressive Caucus co-chairs Keith Ellison (D-Minn.) and Raul Grijalva (D-Ariz.) earlier today. Our analysis of the bill’s job creation measures shows that it would meaningfully boost near-term employment – to the tune of almost 2.3 million jobs in fiscal 2012 and 3.1 million jobs in fiscal 2013 – all while improving the long-term fiscal outlook.

The Act for the 99% would continue the EUC program and replace the payroll tax holiday with the more targeted Making Work Pay tax credit. But the act spans far beyond the scope of job creation measure currently being considered. The bill would also fund direct job creation programs, increase federal surface transportation investments, reinstate higher federal matching rates for Medicaid, and defuse the automatic spending cuts scheduled under the Budget Control Act (which, if triggered, will greatly amplify the fiscal headwinds impeding recovery).

The job creation elements of the bill would be more than financed by accompanying deficit-reduction proposals, which include enacting a millionaire surcharge, reducing spending by the Department of Defense, closing oil and gas loopholes, and taxing financial speculation. As President Obama said in his recent speech, “This isn’t about class warfare. This is about the nation’s welfare. It’s about making the choices that benefit not just the people who’ve done fantastically well over the last few decades, but that benefits the middle class, and those fighting to get into the middle class, and the economy as a whole.”

By focusing on boosting employment and economic growth—and by financing these measures with offsets that will have relatively little adverse impact on either the economic recovery or the economic security of the middle class—the Congressional Progressive Caucus has offered a legislative blueprint to meet President Obama’s vision for rebuilding the middle class.

In Jason DeParle’s New York Times article today, it appears that some folks are claiming that the inequality that Occupy Wall Street has called attention to is a thing of the past and of no concern, all because income inequality declined during the recession between 2007 and 2009. Bunk! That decline is the result of the stock market decline and the very same trend occurred in the early 2000s recession only to end with inequality reestablishing and exceeding its previous heights by 2007 (as DeParle quoted Jared Bernstein saying in the article. Go Jared!).

Wage and salary data show wage inequality rising from 2009 to 2010 (recovering more than a third of lost ground), suggesting that it is too early to shed crocodile tears for the top 1 percent. Regardless of last year’s trend, it remains the case that income inequality in 2009 was still substantially greater than it was in the late 1970s. Moreover, the conclusion that a lion’s share of income gains accrued to the top 1 percent or even the top 0.1 percent, while income growth was modest for the bottom 90 percent (as Josh Bivens and I recently wrote) remains absolutely true.

As Josh and I explained, there are three dynamics at play in the shift of income up to the top 1 percent and the top 0.1 percent. First, there’s the shift upwards in the distribution of wage and salaries, which also reflects the “realized option income” provided to CEOs that are counted as wage income. Second, there’s the shift upwards in the distribution of capital income (capital gains, interest, dividends): According to the Congressional Budget Office, the top 1 percent reaped 57 percent of capital income in 2007, up from 38 percent in 1979. Last, there is a shift toward greater capital income and proportionately less labor compensation since 1979.

What’s happened to these dynamics in the recession? We know the stock market declined more than a third from 2007 to 2009 (judged by the NYSE and the S&P indices) and the realized capital gains at the top fell over 70 percent (according to the IRS data for those  with incomes $500,000 or more, which I will refer to as those with top incomes). Though capital gains comprised 36 percent of top incomes in 2007, the stock market decline and an even far greater drop in capital gains meant that capital gains contributed only 16 percent of their income in 2009. That explains a lot of the fall in inequality between 2007 and 2009. However, the 20 percent gain in the stock market in 2010 should have helped top incomes recover a bunch of lost ground, don’t you think? I would expect gains in the stock market and realized capital gains to fare better than real wages over the next few years, fueling greater inequality.

We also know that corporate profits are now substantially greater than they were before the recession. In fact, as Heidi Shierholz and I wrote in August, “In 2010 the share of corporate income going to profits was 26.2%, the highest share since the years during World War II, when national policy used wage and price controls to consciously suppress wage growth.” So, it seems that one of the dynamics causing greater inequality is certainly going strong.

I (along with research assistant Nicholas Finio) have been tracking the trends in top wages using the historical data produced by Wojciech Kopczuk, Emmanuel Saez, and Jae Song for 1979 through 2004 (developed with access to Social Security earnings microdata) and updating their analysis using wage data published by the Social Security Administration. These wage data are available for 2010 so we can get a look at part of the overall income picture to see how quickly, if at all, income inequality is recovering lost ground. As the graph shows, the share of wages earned by the top 1 percent fell from its historic high in 2007 of 14.1 percent to 12.2 percent in 2009. That is what the top 1 percent’s share of wages was back in 2003 in the last recession and what it was in 1996, seemingly reversing more than a decade of wage inequality. However, the top 1 percent’s share of wages was just 7.3 percent in 1979 so the drop by 2009 was nowhere close to reversing the three-decades growth of wage inequality.

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In 2010, the wages of those in the top 1 percent grew 6.8 percent in inflation-adjusted terms while those in the bottom 90 percent saw their real annual earnings fall 0.7 percent. Consequently, the top 1 percent’s share of wages grew to 12.9 percent, the same as in 2004, and recovered more than a third of the loss from 2007 to 2009. The shift in wage distribution has mostly occurred among the top 5 percent and hasn’t really trickled down to the bottom 90 percent, whose wage share in 2010 was 61.5 percent. That puts the bottom 90 percent’s wage share back to where it was in 2006 when it was the lowest in any year (dating back to 1937). Note, that the bottom 90 percent had 69.8 percent of all wages in 1979; so there certainly has been a tremendous growth of wage inequality since 1979 despite whatever drop there’s been in the recession. Clearly, this much ballyhooed reversal of wage inequality hasn’t meant much to the vast majority.Read more

Ezra Klein made an excellent point this morning – one that we’ve been making virtually every month since early 2009 – that the “official” unemployment rate is currently understating weakness in the labor market because job prospects are so bad that literally millions of would-be workers have given up looking for work or simply never began looking.  (Interestingly, the shrinkage in the labor force over the last two years has been occurring among the more-educated groups in the labor market but not amongst those with the least education.)

For the record, I don’t blame the Bureau of Labor Statistics for the shortcomings of the unemployment rate – they do a fine job of measuring the unemployment rate as it is defined (namely, as the number of people available to work who are not working but are actively looking for work out of the total number of people who are either working or actively looking for work in a given month). The problem is that the information provided by the unemployment rate is difficult to interpret anytime the labor force is not growing normally, like right now. However, BLS produces a number of other measures that can help round out the picture of the labor market at a time like this, including measures of underemployment,  duration of unemployment, the employment-to-population ratio, and the number of people who experience unemployment at some point during a year.  All of these measures paint a much bleaker picture right now than the unemployment rate.

If I had to pick one, I think the best measure for assessing recent labor market trends is the employment-to-population ratio of 25-54-year-olds, which is simply the share of the age 25-54 population that has a job.  (I like using the 25-54-year-old population, because then we are certain that any trends we see are not being driven by retiring baby-boomers or increased college enrollment of young people, but the basic picture using the entire working-age population is the same.)

As the figure shows, the labor market plunged dramatically through the fourth quarter of 2009, and then, for the last two years, has basically bumped around at the bottom of that extremely deep hole. In other words, the improvement in the unemployment rate over the last two years, from 10 percent in the fourth quarter of 2009 to 8.6 percent today, is due virtually entirely to people dropping out of, or not entering, the labor force – not to a larger share of potential workers finding work. It goes without saying that that kind of improvement in the unemployment rate is not what we’re looking for.

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Jeff Madrick has a good review of Bill Clinton’s new book in the New York Times. The punchline of the review is that Clinton doesn’t offer much except for very cautious (Clintonesque?) proposals to combat the current jobs crisis and instead mostly highlights his own own efforts at bringing the federal budget deficit into balance in the 1990s while calling for this to again become a focus of economic policy.

This desire to return to the 1990s when the economy was generating much better (though bubble-fueled) outcomes is understandable, if misguided. But this desire helps illustrate a quick and dirty test that should be used to grade anybody’s policy prescriptions for combating the current jobs crisis: Are they just re-packaging policy ideas that they think would be a good idea anytime, or do they recognize that the economy’s exceptional troubles today require exceptional measures?

If it’s just re-packaging, you can generally discard them as serious solutions to the jobs crisis. So, when GOP members of Congress put out a “jobs plan” that relies on tax cuts and blocking regulation – it’s fair to ask when are they not in favor of tax cuts and deregulation? After all, if the exact same policies that they think are good ideas when the unemployment rate is 4 percent are also the only ones offered up to spur job creation when the unemployment rate is closer to 9 percent, doesn’t this imply that nothing special needs done about job creation today?

Take EPI, on the other hand. We don’t urge Congress every single year to pass hundreds of billions of dollars of debt-financed fiscal support. We do urge Congress to do this when the unemployment rate is historically high – because utterly boring textbook macroeconomics says that this is the proper medicine to treat an economy with very large amounts of productive slack, even after the Federal Reserve has exhausted traditional recession-fighting tools.

There are, obviously, more long-running policy debates that we have strong opinions on – we think the minimum wage should be raised and indexed to keep its value from eroding over time, and we think labor law should be reformed to allow willing workers to form unions. We don’t, however, claim that enacting these “perpetuals” are things that will yank down the overall unemployment rate in the next two to three years. They’re good policies for boosting the long-run economic performance of low- and moderate-income households, but they’re not serious job creators, per se. So, when simple job creation becomes a top priority, we put other things on top of that particular to-do list.

Also, we’re generally in favor of more public investment, in good times or bad. There’s a good reason for this – public investment has been lagging in recent decades and aids long-run economic performance. But even here we recognize different economic environments – when the unemployment rate is historically high and the economy needs spending power, we argue that public investments should be debt-financed. If the unemployment rate fell to very low levels even while the public capital stock needed upgrading, we’d argue that the case for financing these investments with taxes makes more sense (actually, for very high-return investments, one can imagine a case for debt-finance either way, but we wouldn’t argue for debt-finance on job creation grounds if the economy was performing well).

The figure below will help us recap: a good quick-and-dirty test for how sensible somebody’s top policy prescriptions for job creation are is  simply asking if they were arguing for the exact same policies at point A (i.e., before the Great Recession) and point B (i.e., at very high rates of unemployment). If so, these policies probably are not going to do much for jobs.

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The monthly unemployment rate published by the Bureau of Labor Statistics measures the number of workers who are not working and looking for work – that is, the unemployed – out of the total number of people who are either working or looking for work in a given month. But this understates the number of people who experience unemployment during any longer period, since someone who is employed in one month may become unemployed the next, and vice versa.

Yesterday, BLS released its report on “over-the-year” employment and unemployment in 2010, which measures (among other things) the share of the workforce who experienced unemployment at some point during 2010. The report finds that 15.9 percent of the workforce was unemployed at some point last year, much higher than the average monthly unemployment rate in 2010, which was 9.6 percent.

The figure shows the average monthly unemployment rate and the over-the-year unemployment rate. Using the ratio of the over-the-year unemployment rate to the average monthly unemployment rate in 2010 (the latest data available), the over-the-year unemployment rate for 2011 and 2012 are projected. According to the data, we can expect that 14.9 percent of the workforce – more than one in seven workers – will be unemployed at some point next year.

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It doesn’t have to be this way.  The number of people experiencing unemployment – and the scars this unemployment causes to careers, families, and communities – could be considerably reduced with substantial additional stimulus spending to generate jobs.

After adjusting  for household size, the income of households headed by adults 65 and older was 13 percent lower than that of households 35 and under, according to a new Pew report. (The gap is much larger when seniors are compared to households headed by adults in their peak earning years, which begs the question of why the authors chose to compare seniors with a group that includes not just young people starting their careers but also many students.)

What’s the title of this report? “The Old Prosper Relative to the Young: The Rising Age Gap in Economic Well-being.” That’s right, those oldsters are raking it in, once again.

How do the authors come up with a title like that, given the facts? In what’s become a familiar refrain, they focus on the fact that seniors, while they still have lower incomes, are not as far behind as they used to be, especially since the economic downturn walloped young people. O-kay! They also cite a lower official poverty rate for seniors, completely ignoring the fact that a new poverty measure that takes into account  higher out-of-pocket medical costs for seniors shows they have a poverty rate slightly higher than that of working-age adults, even with the help of Social Security and Medicare.

They also cite seniors’ higher net worth, implying that seniors who’ve paid off their homes and socked away some money in a 401(k) are better off than younger people, though the real story is that these savings aren’t nearly enough, even if they sucked every last penny out of their homes to pay for retirement. (In 2009, the median net worth of households aged 57-66 was roughly four times this group’s median annual income, according to the Federal Reserve’s Survey of Consumer Finances. Even with Social Security, pensions, and other income, that’s not enough to maintain the same standard of living through retirement.)

This is a familiar story, but in a new twist to the old ageist refrain, the Pew report also bops seniors for working longer. Well, that’s refreshing. We usually hear that older workers are lazy and retire too soon.