In his Iowa caucus speech Tuesday evening, former senator Rick Santorum (R-Pa.) pushed for deep tax cuts for the wealthy, $5 trillion in budget cuts over five years, a cap on government expenditure at 18 percent of the economy, and a balanced budget amendment “as a guarantee of freedom for this country.”

This isn’t just radically conservative—it’s a farcical proposal bordering on Ron Paul-levels of delusion. (No, we’re not all Austrians now.) To reiterate: arbitrarily capping government expenditure at 18 percent of GDP isn’t just undesirable, it’s infeasible and absolutely crazy. Federal spending has exceeded 18 percent of GDP since 1966 (roughly the inception of Medicare and Medicaid). As the population ages and health care costs continue to spiral, federal spending will have to rise, not fall, if voters want government to continue providing health care to seniors, impoverished children, and the disabled (polling strongly suggests they do). The House Republican 2012 budget—which proposed ending Medicare and eviscerating Medicaid—wouldn’t even reduce federal spending below 18 percent of GDP by 2040. Under a current policy baseline, spending is projected to be about 22.5 percent of GDP over fiscal years 2012-21. Wrenching expenditure down to 18 percent of GDP would therefore slash nearly 5 percent of GDP, or $8.7 trillion, from the budget over the next decade (cutting $1 in $5 dollars of expenditure). But even deeper budget cuts would be needed to achieve $5 trillion in cuts over five years anytime soon (in the first five years, the cap would only cut $3.7 trillion, relative to current policy).

From Flickr Creative Commons by Gage Skidmore

But it gets worse! Santorum’s spending cap is also tied to a balanced budget amendment, and his tax plan wouldn’t raise anywhere close to 18 percent of GDP in revenue. An extension of current tax policies—the starting point for Santorum’s sweeping tax cuts—is projected to raise revenues of only 17.6 percent of GDP over the next decade. From there, the alternative minimum tax would be repealed; the top tax rate would be reduced to 28 percent (while retaining major tax preferences and expanding exemptions); capital gains and dividends taxes would be further reduced to 12 percent; the estate tax would be repealed; the corporate tax rate would be halved to 17.5 percent and fully eliminated for manufacturers; and businesses would get even bigger tax breaks on foreign profits, research, and investment. Not a cheap wish list. While we haven’t scored it yet, it wouldn’t be surprising if Santorum’s tax plan fails to raise even 16 percent of GDP, forcing much deeper budget cuts. (Kevin Hassett of the American Enterprise Institute ballparks the annual static revenue loss between $550 billion and $700 billion, or between 3.4 and 4.3 percent of GDP.)

This could easily sink the U.S. economy. As Europe is discovering, the notion that spending cuts increase growth (i.e., expansionary austerity) is totally bunk in today’s context of high unemployment, low interest rates, and large output gaps. Spending caps and balanced budget amendments are terrible fiscal policies because they obstruct counter-cyclical fiscal stabilization and instead force pro-cyclical spending cuts. According to the private forecasting firm Macroeconomic Advisers, “If actually enforced in fiscal year (FY) 2012, a [balanced budget amendment] would quickly destroy millions of jobs while creating enormous economic and social upheaval.”

Senator Santorum’s plan wouldn’t just exacerbate future recessions—it would preclude a return to full employment and likely trigger another deep recession. What part of prolonged mass underemployment, widespread economic insecurity, and trillions of dollars in forgone national income represent a guarantee of freedom?

It is shocking that in the wake of a deep economic crisis brought on by irresponsible financial practices, Congress would stymie the Consumer Financial Protection Bureau by not approving a director. President Obama was right to insist that the American public be protected by making a recess appointment of Richard Cordray. Cordray has excellent credentials.

An unchecked financial industry played a key role in bringing on the Great Recession—the worst economic downturn the country has seen since the depression of the 1930s. This American Life documented the anything-goes attitude in the financial industry prior to the recession. The show reported that “to make a mortgage-backed security, you needed mortgages. Lots of them.” People making securities “needed to buy up as many mortgages as possible.” They threw all standards and requirements out of the window. Mortgage loans were made to anyone, even 23 dead people in Ohio.

This American Life cited the experience of Mike Garner, a bartender who was made into a banker overnight to feed mortgages to Wall Street:

Mike Garner’s bank did not care all that much how risky these mortgages were. This was a new era. Banks did not have to hold on to these mortgages for 30 years like they used to. They didn’t have to wait and see if they’d be paid back. Banks like Garner’s would just own the mortgages for a month or two. And then they sold them on to Wall Street. And then Wall Street would sell them on to the global pool of money.

“The actual guys cruising strip malls all across Nevada buying mortgages from brokers– their commission depended on selling more loans,” so they too encouraged the recklessness. At every step in the process of producing mortgage-backed securities people were making a lot of money . . . until the bubble burst.

And then, millions of homeowners were stuck with loans they could not afford, loans that would lead them to foreclosure.

Although it has been going on for years, the foreclosure crisis is probably less than half over according to a recent analysis by the Center for Responsible Lending. CRL finds that of mortgage loans made from 2004 to 2008, 2.7 million have ended in foreclosure. But another 3.6 million homes remain at risk of foreclosure. These foreclosures hurt not only the person owning the loan but the entire community. The neighboring homeowners experience declining property values. The cities obtain less in tax revenue to provide city services.

Most foreclosed homes were owned by whites—1.5 million in CRL’s analysis—but the research also suggests that Latinos and African Americans were targeted when brokers and banks began their desperate search for more and more mortgages. Latinos and African Americans were more likely to end up with mortgage loans that were very profitable to the financial services industry but more expensive and risky for the consumer.

Among borrowers with good credit scores (FICO scores of 660 or higher), Latinos and blacks were more than three times as likely as whites to be given a higher-rate subprime loan. They were two to three times as likely as whites to be saddled with a prepayment penalty. Latinos were nearly twice as likely as whites to be given an adjustable rate mortgage. Thus, even Latinos and blacks with good credit ratings found themselves in bad loans.

These bad loans that were disproportionately sold to Latinos and blacks may help explain why we have seen such a dramatic loss of wealth among these groups since the start of the recession. For most Americans, their home is their main source of wealth. Latinos and blacks were more likely to be given loans that would end in foreclosures, loans that would dramatically reduce their level of wealth.

The figure shows that 5.1 percent of loans made to whites from 2004 to 2008 ended in foreclosure. For African Americans, the rate of foreclosure is 9.8 percent. For Latinos, it is 11.9 percent, more than double the white rate. Further, an additional 13.7 percent of loans to Latinos are seriously delinquent—delinquent for more than 60 days or in the foreclosure process. Among African Americans, 14.2 percent of loans are in this situation, as opposed to 6.8 percent of loans to whites.

Mortgages are only one type of financial product. There are many other products and services where there have been reports of abuses. The Consumer Financial Protection Bureau was created to protect consumers from these dangers. We are currently struggling to recover from the ravages of a financial meltdown fueled by abusive lending.  In appointing Cordray, the president did the right thing.

On the heels of Mitt Romney’s narrow eight-vote victory in the Iowa caucuses Tuesday, the Tax Policy Center has put out a timely distributional analysis of the tax components of his economic plan. Over the course of his campaign, TPC notes, Romney has proposed “permanently extending the 2001-03 tax cuts, eliminating taxation of investment income of most individual taxpayers, reducing the corporate income tax, eliminating the estate tax, and repealing the taxes enacted in 2010’s health reform legislation.”

According to TPC, Romney’s tax plan would result in a significant increase in the deficit. Against a scenario in which the Bush tax cuts (and other provisions) are allowed to expire, the Romney plan would lower revenue by $600 billion in calendar year 2015, about a 16 percent cut. Assuming all expiring tax provisions are extended, his plan would reduce revenues by $180 billion in the same year.

How would people fare under the Romney plan? Distributional tables show the majority of the benefits from the proposed tax changes would go to those at the top of the income scale. Using a current policy baseline scenario, almost 60 percent of the share of total federal tax changes would go to those in the top 1 percent, and one-third of changes would go to those in the top 0.1 percent. (The figure below shows distributional effects under both a current law and current policy scenario.) Tax units making over $200,000 would see over 80 percent of the benefits. It is important to bear in mind that the top 1 percent of households received 65 percent of all income gains over 2002-07; these are generally not households struggling to make ends meet.

In contrast, many lower-income taxpayers would actually see their taxes increase because the Romney plan would allow the American Opportunity tax credit and portions of the earned income tax credit and the child tax credit to expire. In fact, according to the TPC analysis, over half of the taxpayers facing a tax increase under Romney’s plan actually make less than $30,000 a year.

It’s not like we haven’t trod this path before. The Bush-era tax cuts blew a hole in the budget and failed to generate even mediocre economic results for middle-class households. Yet Romney’s tax plan, like many others being put forth in this election, doubles down on dangerous tax cuts, while heavily weighting the benefits toward the wealthy.

Inequality means that some income earners claim a larger slice of the pie than others. Some people might argue that this is not such a big problem if everyone has an equal shot at winding up at the top. Some even claim that this is the essence of the American Dream; that regardless of where you begin, if you work hard, you can have all the opportunities to succeed.

Unfortunately, income mobility—movement between income classes—is less common than purveyors of the American Dream would have you believe. An article by Jason DeParle in today’s New York Times discusses important findings from five large studies, including research by Markus Jantti and coauthors and Miles Corak, which both show mobility in the U.S. lags behind its peers. Significant other research has demonstrated a similar lack of mobility in the U.S.

In a world of perfect mobility, people will be able to move up in the income distribution with hard work and dedication, regardless of where in the distribution they started out. One way of thinking about this is by looking at college completion rates by income status and eighth grade test scores. If all it took were high test scores to get ahead, no matter what your income, you would have an equal opportunity to graduate from college. These data tell another story: High-income students who have low test scores are more likely to graduate from college than low-income students with high test scores.

Other research demonstrates that mobility is more restricted for some groups than others. African Americans who start out in the bottom 25 percent of the income distribution are nearly twice as likely to remain there than whites.  In addition, white Americans who start out in the bottom 25 percent are about four times more likely to make it to the top 25 percent of the income distribution than blacks.

As DeParle notes in his article, the notion of the American Dream is actually less common in the U.S. than in many peer nations. Look at the relationship between a son’s earnings and his father’s earnings. The likelihood of a son staying in the bottom 40 percent of the wage distribution if his father was in the bottom 20 percent is higher for those in the U.S. than in peer countries (Denmark, Finland, Norway, Sweden and the United Kingdom). The U.S. also boasts lower rates of upward mobility because a lower share of sons with low-income fathers end up in the top 40 percent of the wage distribution than in similar countries.

A new paper by Katharine Bradbury released last fall looks at changes in mobility across time. The figure below shows the percent of those in the poorest and richest quintiles that move up or down and those that move far over the subsequent 10 years.

While it is not clear that mobility has fallen, it is evident that mobility has not increased. Although many argue that income inequality is acceptable in the U.S. if mobility is also greater, this clearly shows that mobility has not increased enough to offset the drastic rise in inequality over the last 30 years.

In his excellent piece in today’s New York Times on the declining economic mobility of Americans, Jason DeParle mentions a commentary by Reihan Salam for the National Review Online, “Should we care about relative mobility?”

Salam disputes that there’s anything wrong in the natural tendency of economically successful families to give their children special advantages in the competition for jobs, education and other resources. He admits, however, that affluent white families may have social networks that blacks cannot access and that protect whites, but not blacks, from downward mobility. Salam writes:

“To be sure, there might be an incumbent-protection story here, as Scott [Winship] has suggested. That is, it is possible that non-black families in the top three-[fifths] of the income distribution are giving their children advantages that protect them from scrappy upstarts in ways that might damage our growth prospects. That really is a legitimate concern.”

The particular mechanism Salam identifies – internships — is one that EPI has identified as a serious problem for the economic mobility of minorities and for the labor market in general.  Salam recognizes that internships are sometimes reserved for the affluent: “Moreover, parents who have achieved some success tend to be part of social networks that can give their children access to valuable economic opportunities. Even the most committed egalitarian won’t deny her daughter the opportunity to take an internship with a beloved friend and colleague just because other children won’t get the same leg up.”

Unpaid internships, in particular, exclude students from poorer families who can’t afford to work for nothing for a summer or a semester, especially after they graduate from college with tens of thousands of dollars of student loan debt. The children of affluent families, on the other hand, can afford to live in the most expensive cities in the U.S., such as New York and Washington, making contacts, building their resumes, and sometimes even learning skills, while their parents pay for their room and board, travel and entertainment. Before even taking into account the family connections that reserve some of the best opportunities for the sons and daughters of the affluent, the $4,000-$5,000 cost of, for example, moving to Washington and living for 10 weeks prevents almost any working class kid from taking an unpaid internship.

As Ross Perlin points out in his meticulously researched book, Intern Nation, the number of unpaid internships is growing exponentially, fueled by the failure of the U.S. Department of Labor to enforce the minimum wage, a new industry of internship coordinators and consultants, and the recession. It’s hard to quantify the impact of this phenomenon on the decline in economic mobility, but I suspect it has been substantial and will continue to grow until the  Department of Labor cracks down on what is, in many cases, illegal exploitation.

A couple of commentators have put forward reasons why 2012 might be a better-than-expected year for the economy. Matt Yglesias’ entry into the “happy days are here again” sweepstakes is a bit older, but it’s smarter than most and invokes an obscure, but important, economist of olde to make the point. Thus, it’s a good peg to use to remind people about the case for pessimism.

Yglesias’ post basically sums up multiplier-accelerator models of recovery – the idea that when recoveries begin, they will be self-sustaining and initial improvements in one sector of the economy will generate further increases in activity in other sectors (this reasoning also explains the dynamic of contractions, not just recoveries).

As Yglesias puts it:

“But every downward tick in the unemployment rate is another twentysomething moving out of his parents’ basement, stimulating a return to a more normal level of construction. Multifamily housing starts are already up 80 percent over the past year to accommodate the likely coming flood of renters, and there’ll be more to come once people have more cash in their pockets.

This increase in economic activity will boost state and local tax revenue and end the already slowing cycle of public sector layoffs. Re-employment in the construction, durable goods, and related transportation and warehousing functions will bolster income and push up spending on nondurables, restaurants, leisure and hospitality, and all the rest. Happy days, in other words, will be here again.”

This is indeed what recovery will look like when it comes. But there’s very little evidence that the process has started.

For one, “every downward tick in the unemployment rate” that we’ve seen over the past two years (i.e., since the unemployment rate peaked at 10.1 percent in Oct. 2009) has not represented somebody getting a job (and hence able to move towards independence and spending). Rather, it’s represented somebody dropping out (or choosing not to enter) the labor force. And even over the past year (since Nov. 2010), fully two-thirds of the decline in the unemployment rate was driven by a shrinking labor force and not by employment growth.

The best chart to show that a robust multiplier-accelerator process has yet to begin remains the difference between actual and potential GDP. The size of this gap is the progress that is being made (or not) towards recovery. The free-fall of this ratio that was the Great Recession has stopped, but so has the upward progress of the early part of the recovery (when, by the way, there was an actual boost to the recovery being provided by fiscal support, instead of the drag that will constitute the next year). Until one sees a rapid upward movement in the gap between actual and potential GDP (and, actually, until one sees this movement driven by improvements in actual rather than a deterioration in potential GDP), it seems awfully premature to think that a positive, self-reinforcing cumulative causation has set in or can be banked on for the coming year.

As you’ve probably noticed, Working Economics is on vacation. Unless there’s some breaking news or other pressing circumstances, we’ll resume blogging on Tuesday, Jan. 3. Until then, please take time to enjoy your families and the holiday season!

And if you find the wait for our return too unbearable, you can revisit some of our most popular posts since our launch last fall:

• By the numbers: 2010 income, poverty, and health insurance coverage
• Regulatory uncertainty not to blame for our jobs problem
• Clive, don’t change the subject
• What should have been different this time? The policy response
• It’s [not] the economy [that I recognize]
• Garbage in, garbage out at Heritage and AEI?
• Why falling unemployment may not be making voters happy
• Supply-side’s abject failure
• On fairy tales about inequality
• Top 10 lies about Social Security (from those who just want to dismantle government)

As my colleague Monique Morrissey highlights, Jeff Madrick has a terrific (albeit somewhat depressing) list of the 10 worst economic ideas of 2011. Doubling down on the failed supply-side experiment and making taxes more regressive is honored as the fallacious economic policy coup de grâce of the year:

“At the top of the list for sheer scandalous insensitivity are Herman Cain’s and Newt Gingrich’s tax plans for America… Gingrich’s plan wins the gold medal: his plan is both regressive and a gigantic revenue loser.”

Spot on. Cain’s plan is wildly regressive. Gingrich’s plan is grossly unaffordable and irresponsible. Cain’s “9-9-9” plan would swing the average tax rate for households in the lowest income quintile (those earning under $18,000 annually) by 18.3 percentage points, from 1.8 percent to 20.2 percent. The swing at the top end of the earnings distribution is almost as wild, with rates plunging 17.2 percentage points to 17.9 percent for the top 0.1 percent of earners (those making roughly $2.7 million or more), an average tax cut valued above $1.3 million. (See this Tax Policy Center current policy baseline table.)

As for Gingrich, Madrick notes his optional flat tax would blow a gaping hole in the federal budget: $850 billion relative to current policy and $1.28 trillion relative to current policy in 2015 alone. The price tag has (extremely misguided) purpose: The highest income 0.1 percent would see their average tax rate cut by two-thirds and fall to only 10.8 percent, a giveaway averaging $1.9 million per household.

But this is more than a two-pronged onslaught of voodoo economic practitioners. Remember Rick Perry’s tax plan? Eerily similar nostrum: Gut the central tenant of a progressive tax code that effective tax rates are supposed to rise with income, give the highest income 0.1 percent a tax cut of $1.5 million, and drain the Treasury of $995 billion relative to current law ($570 billion relative to current policy) in 2015 alone. The presidential campaign trail has been inundated with plans to slash corporate tax rates, cut capital gains and dividends taxes, and eliminate the estate tax. (See this great comparison table detailing and contrasting all the GOP presidential candidates’ tax plans, produced by the good folks at TPC.)

It’s also worth noting that House Budget Committee Chairman Paul Ryan was paving this path in 2010 when he released his Roadmap for America’s Future, which proposed shifting the distribution of taxes from upper-income households to the middle class by replacing the corporate income tax with a regressive subtraction-method value added tax that forces up middle-class tax rates. (Ryan would end all taxation of corporate profits by also eliminating taxes on capital gains and dividends.)

This is the bedrock of conservative economic policy. It’s even politically enshrined in Grover Norquist’s Taxpayer Protection Pledge. Never mind that it hasn’t improved economic performance, it has and continues to defund government, and it would continue to exacerbate income inequality. Unfortunately, with the election looming, it’s a safe bet that sweeping regressive tax cuts will be a top contender for 2012’s worst economic policy ideas.

The whole list is worth a read. Other highlights include the fallacy of expansionary austerity and arbitrarily capping federal expenditures as a share of the economy (somewhere between 16.6 percent to 21 percent, none of which would be tenable levels).

Jeff Madrick rightly dubbed cutting Social Security and raising the Medicare eligibility age two of the 10 worst economic ideas of 2011. Nevertheless, the idea that we need to work into our late 60s or even 70s has become an obsession of many inside the Beltway, who prefer to close Social Security’s modest projected shortfall on the cost side rather than the revenue side. Likewise, self-styled budget hawks are more concerned with reducing government spending on health care than addressing inefficiencies in the overall system, which are worse in the private sector.

Among other problems, an obsession with working longer ignores the fact that women, at least, are working more at younger ages. Not only does this help Social Security’s finances, but it turns out that forcing seniors to keep working into old age might actually reduce the number of younger women who are able to work (this assumes there are jobs for everyone). A new working paper by economists Janice Compton and Robert A. Pollak finds that proximity to grandmothers increases mothers’ employment, presumably because grandparents are able to help with childcare. (Though the study only directly measures the impact on women who live near their mothers and mothers-in-law, it also indirectly captures some of the effect of doting grandfathers and other relatives.) Though the study doesn’t take into account whether the grandmothers are working or retired, retirees have more time to spend on care-giving, which can oftentimes allow their children the flexibility to return to, or remain in, the workplace.

This study resonated with me because, like a lot of new parents, my ability to return to work this year depended not only on a paid caregiver, but also on grandparents. My husband and I were lucky to have both a friend looking for a flexible job and parents living nearby who offered to pitch in one day a week and as needed. Not only is my daughter blossoming under her grandparents’ and my friend’s care, but my parents’ help indirectly boosted the economy by allowing both my friend and me to return to work. (Admittedly, in some cases grandparent care may reduce the paid workforce, and GDP, to the extent that it simply replaces paid care-giving with unpaid care-giving, but as feminist economists like to point out, GDP is not a good measure of social welfare.)

On Jan. 1, 2012, Washington will become the first state in the nation to have a minimum wage above $9 per hour ($9.04/hour to be precise). Washington is one of 10 states with some form of minimum wage indexing, requiring that the state minimum wage grow at the same rate as inflation, thereby ensuring that the real value of the lowest-paid workers’ wages does not shrink as normal costs of living go up. Eight of these states will have automatic increases take effect on New Year’s Day: Arizona, Colorado, Florida, Montana, Ohio, Oregon, Vermont, and Washington.

You may be thinking that $9 per hour seems like a lot, especially for the neighbor’s teenage son who works part-time down at the local fast food chain, right? Well this may be the perception that some have of minimum-wage workers, but it is wrong on a number of levels. First, the typical minimum-wage worker is not a teenager, nor is she a man. According to data from the Current Population Survey, 80 percent of minimum-wage workers are over the age of 20. This is true not just in the eight states seeing an increase on Jan. 1, but nationwide as well. At the same time, roughly 60 percent of minimum-wage workers are female, despite the fact that women make up only 48 percent of the national workforce. See the table below for more details.

Second, over three-quarters of minimum-wage workers work more than 20 hours per week, and just over half are full-time employees. In fact, my colleague Heidi Shierholz has calculated that families with a minimum-wage worker rely on those minimum-wage earnings for nearly half (45.9 percent) of their income.

Third, make no mistake, $9 per hour is not a lot of money. Assuming they work 40 hours per week, 52 weeks a year, a minimum wage worker earns $18,720 a year. For comparison, the 2011 federal poverty line for a family of three—such as a single mother with two children—is $18,530 a year. (Note: If you were only making the federal minimum wage of $7.25 per hour, your annual income would be $15,080 – not enough to be above the poverty line for a family of three, and just barely over  the poverty line for a family of two.)

Finally, in a historical context, the minimum wage has been considerably higher. In inflation-adjusted terms, the federal minimum wage was highest in 1968, at a value of roughly $9.85 per hour in 2011 dollars. So even at $9 per hour, the Washington minimum is well below historical highs, not to say anything of the federal minimum wage, which at $7.25 has declined in value by more than 26 percent since 1968. With inequality at record levels, and still on the rise, indexing the federal minimum wage would be one very basic protection of workers at the very bottom of the income distribution. The question we should be asking then is not whether Washington’s minimum wage is too high, but why isn’t the federal minimum wage just as high or even higher?

At least for the approximately 194,000 workers in Washington state, and the 1 million across all eight states, who will be directly affected by these increases, the value of their paychecks will hold steady for one more year. Roughly another 400,000 workers across the eight states, whose wages are just above the minimum, will also see a small pay increase as employers adjust their overall pay scales to reflect the new minimum. (These are the “indirectly affected” workers in the table below.) It’s a shame that low-wage workers nationwide will not see this same minimal protection of their wages, but at least for this New Year, we can toast the Evergreen State.

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