The ongoing Occupy Wall Street movement launched on Sept. 17 and its “We are the 99 percent” campaign highlights that the top 1 percent has fared very well while the 99 percent have not fared so well over the last few decades. (The conservative rebuttal, “We are the 53 percent,” referring to households with positive federal income tax liability, is insultingly flawed and misleading.) OWS’ mantra is easily supported by data, as EPI President Lawrence Mishel highlighted in this week’s economic snapshot.

From 1979 to 2007, the inflation-adjusted pre-tax incomes of the highest-income 1 percent of families (in 2011, the 1 percent are those with incomes exceeding $441,000) increased 224 percent. Think that’s impressive? The incomes of the top 0.1 percent rose 390 percent. So where does that leave the rest of us?

For the bottom 90 percent of Americans, incomes grew just 5 percent over the same 28-year period. Whether it’s the bottom 90 percent or the OWS folks’ 99 percent, this much is clear: We have a winner-take-all economy and the substantial rise in economic inequality has prevented the vast majority from improving their living standards in line with what was possible. The nation’s not broke, even if the bottom 99 percent are.

It’s popular to criticize Keynesian economics by alleging that the Recovery Act was an experiment in fiscal expansion, and because two-and-a-half years later the economy still hasn’t roared back to life, it must have failed.

What this criticism forgets is that the federal government isn’t the only government setting fiscal policy. While the federal government did conduct Keynesian expansionary fiscal policy over the last few years, the states have been doing the reverse, acting, as Paul Krugman put it, like “50 Herbert Hoovers” as they cut budgets and raise taxes. They’re forced to do this because the cratering of private-sector spending which threw the economy into recession blew huge holes in their budgets (in particular with a huge fall in income, sales, and property taxes, and increases in demands on safety-net programs), and just about all of them are required to balance their budgets each year. Overall, states have had to close over $400 billion in shortfalls over the last few years – this is spending power siphoned off from the economy and acts as a significant “anti-stimulus.”

This means that just looking at the amount of federal stimulus that’s been enacted significantly overestimates how much fiscal support has actually been pumped into the economy. In fact, as the Goldman Sachs graph below shows, the net fiscal expansion across all levels of government only lasted through the third quarter of 2009. For the last two years, state and local cuts have been overwhelming the federal fiscal expansion, making overall fiscal policy across all levels of government actually contractionary and creating a net drag on economic growth.

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What’s needed to reverse this drag of public-sector austerity on growth? The $35 billion for state and local aid that’s part of the American Jobs Act is a good start, as it would help keep states and local governments from being forced to cut further. As the last two years of austerity have shown, this would only serve to further weaken the economy. And if we’re going to get out of this economic hole, we first need to stop digging down further.

Last week, Congress considered two important pieces of legislation that will affect imports and exports; one would provide a substantial boost to the U.S. economy in the near term while the other will be irrelevant at best. The first was S 1619, The Currency Exchange Rate Oversight and Reform Act of 2011. I have estimated that ending currency manipulation with China and other Asian countries could create up to 2.25 million jobs over the next 18 to 24 months, boosting GDP by up to $285.7 billion and reducing the federal budget deficit by up to $857 billion over the next 10 years.

This bill passed the Senate with a strong, bipartisan majority of 63 votes. A similar measure passed the House last year by an overwhelming, bipartisan majority of 349-79.  This year, the companion bill to the Senate measure, HR 639 has attracted 225 co-sponsors, also a bipartisan majority. However, the bill faces opposition in the House this year from Republican leadership, who may not allow it to come up for a vote, while the White House has also expressed concerns about the legislation.

Contrast the fate of currency legislation with the package of free trade agreements negotiated by the Bush administration with South Korea, Colombia and Panama. These deals were rushed through both chambers of Congress last week just in time for the visit of South Korea’s president Lee Myung-bak. The Korea and Colombia FTAs were opposed by more than two-thirds of House Democrats, and 64 percent opposed the Panama FTA. Yet, both were approved by the House and Senate and will be signed into law by President Obama later this week.

At best, the administration claims that these deals will support a few tens or hundreds of thousands of jobs that could be created over the next decade (I have estimated that when the effects of growing imports are included, we are likely to lose over 200,000 jobs over the next seven years due to the Korea and Colombia FTAs alone). But the United States has a jobs crisis now. A decade from now, if employment finally recovers, these deals could simply end up moving jobs from one industry to another. FTAs are no answer to the jobs crisis, even in the best case.

Given the jobs crisis, why can’t we pass currency legislation that enjoys broad, bipartisan support? Why are controversial trade deals that will have, at best, a minimal impact on unemployment being rushed through Congress with a full-court press from the White House? The answer is simple. Big business opposes restrictions on China trade because they earn enormous profits on cheap and subsidized imports from China, and because low real wages in China keep a lid on wages of their U.S. workers. And big business favors FTAs, because they make outsourcing easier. So it turns out that the Occupy Wall Street group has it right. When it comes to trade, it’s not about ideology, or politics, it’s about the money.

The Tax Policy Center’s verdict on Herman Cain’s ‘999’ plan is in, and it’s not pretty for the vast majority. Last Sunday, Cain claimed on Meet the Press that his plan would lower taxes on most Americans. Analysis of the plan proves otherwise. The average household would see an $836 tax increase, with 84 percent of households paying more, relative to current tax policies. In this case, that’s what ‘broadening the base’ entails: more households paying much more in taxes.

Mr. Cain said the elderly wouldn’t be made worse off, because the elimination of capital gains taxes would offset the new taxes levied on their consumption, again a wildly unfounded claim. It turns out that 86 percent of elderly households would see a tax hike, which is unsurprising because fewer than 10 percent of households will even pay capital gains taxes this year, again according to TPC. If the vast majority is getting hosed, who’s reaping the benefit?

I recently characterized the ‘999’ plan as the inverse of the so-called ‘Buffett Rule’ that millionaires and billionaires shouldn’t be paying a lower effective tax rate than middle-class households. TPC’s distributional analysis demonstrates just this. The chart below depicts effective tax rates under current policy (blue) and the ‘999’ plan (red) across various cash income ranges.

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Under a progressive tax code, effective tax rates should rise with income. TPC treats the ‘999’ plan effectively as a 23.6 percent flat sales tax, which is in fact the final phase of Mr. Cain’s tax plan (TPC’s wonky explanation here and Howard Gleckman offers a more accessible explanation here). Upper-income households consume less of their income than middle-class families, hence lower effective tax rates and a regressive tax code. (Note: the tax code is less progressive than the blue bars suggest because the federal tax code is layered on top of regressive state and local taxes, as Citizens for Tax Justice notes in this report.)

Under ‘999,’ average tax rates would begin to fall for households with income exceeding $200,000. Households with income exceeding $1 million would see their effective tax rate roughly halved from 32.9 percent to 17.9 percent, for an average tax break of $455,000, relative to current tax policies. The top 0.1 percent of filers—those with incomes of roughly $2.7 million and above—would get an average tax cut of $1.4 million, as Jared Bernstein depicts nicely. This is where the benefit of eliminating wealth taxes (i.e., capital gains, dividends, and estate taxes) really kicks in; the highest-income 0.1 percent will pay 49 percent of all capital gains taxes this year.

The American consumer is in no position to lead the economy to recovery. Lower-income and middle-class Americans are burdened by mortgage debt and lost housing equity, underemployment, and a decade of falling real median income. In this context, I fail to see how jacking up taxes and slashing disposable income for 84 percent of the population constitutes responsible tax reform, much less a jobs plan. It’s more along the lines of kick ‘em when they’re down.

Mr. Cain’s ‘999’ plan amounts to highway robbery, not a jobs plan. It’s simple, all right, simply a massive redistribution of after-tax income up the earnings distribution.

RedState.org blogger Erik Erickson has launched a counterattack to the Occupy Wall Street’s “we are the 99 percent” campaign. Erickson’s retort: “Suck it up you whiners. I am the 53 percent subsidizing you so you can hang out on Wall Street and complain.”

What’s he talking about? This 53 percent figure refers to the share of all households who pay federal income taxes. Far too many people, hearing this statistic, miss the crucially important adjectives “federal” and “income” and take it to mean that nearly half of American households pay no taxes at all. This is clearly wrong. Essentially every adult in the country pays taxes. They pay federal excise taxes when they buy gasoline, they pay state sales taxes when they buy clothes and electronics, they pay local property taxes if they own a house, and they pay federal payroll taxes on every dollar of income they earn – unless they’re lucky enough to earn over $107,000, when Social Security taxes revert to zero.

Federal income taxes, in fact, accounted for only 37 percent of federal taxes and just 20 percent of total federal, state, and local taxes paid in 2010. So why have conservative activists like Erickson tried to privilege the income tax over others? Well, mostly because they’re hoping people think this refers to all taxes. But conservatives particularly dislike the federal income tax because it’s pretty much the only significant part of our tax code that remains progressive – though less so after a decade of Republican-backed tax cuts. (The most progressive federal tax, the tax on large estates and gifts, has been eviscerated over the last decade.)

Most taxes besides federal income taxes are flat or regressive, meaning that lower-income households pay a higher share of their income in these taxes than the rich. Citizens for Tax Justice has a great report that points out that the tax system as a whole is nearly flat – meaning that households across the income distribution are paying about an equal share of their income in taxes.

The 47 percent that pay no federal income tax that Erickson thinks he’s subsidizing are a mix of current taxpayers that just happen to have not made enough income in the current year to have income tax liability, and former income taxpayers (retired households), as explained in this post. Unlike other taxes, the federal income tax intentionally exempts subsistence levels of income from taxation, largely through the standard deduction and personal exemption. The tax code also provides an extra standard deduction for retirees, who face high costs of living, and exempts some Social Security income from taxation. Because of this, and because the effect of the earned income tax credit (EITC – first introduced in the Nixon administration and expanded under both the Clinton and George W. Bush administrations) is to offset payroll tax liability for low-earners, it is true that 18 percent of households (mostly retirees and very low-earning families with children) will face no net federal taxes on income this year. Is it really so offensive that retirees and families with very low incomes are not paying this particular tax?

One wonders where this hilarious attempt to cherry-pick tax stats to divide the world into the virtuous and undeserving will end. According the Tax Policy Center, 90 percent of tax units will pay no capital gains or dividends taxes this year – does this make the rest of us freeloaders? But wait, eliminating all taxes on capital gains and dividends is a prime goal of conservative policymakers – are they trying to replace the undeserving freeloaders with virtuous freeloaders?

Or, are they just trying to mislead people who are angry (with good reason) about the outcomes the economy is producing and threatening to pin some outrage where it actually belongs?

Eons ago, in blogtime, Ezra Klein wrote an excellent piece on policymaking in the face of the Great Recession and its aftermath. It’s a long piece with plenty to recommend, but I’ll just spend some time lingering over his reliance on the now-famous finding of Carmen Reinhart and Ken Rogoff (and the IMF) that recessions accompanied by financial crises tend to be followed by much slower and less robust recoveries.

This finding is true and useful but far too often misinterpreted. There is nothing inherent in the economics of financial crises that makes slow recovery inevitable – they just require that policymakers figure out how to engineer more spending in their wake, same as in response to all other recessions.

Rather, the real problem they pose to policymakers is that engineering such spending increases in the wake of financial crises often requires policy responses that seem unorthodox or radical relative to the very narrow range of macroeconomic stabilization tools that enjoy support across the ideological spectrum. To put this more simply – they require policymakers do more than watch the Federal Reserve pull down short-term interest rates. For decades, all recession-fighting was outsourced to the Fed’s control of short-term “policy” interest rates – this despite the fact that in the U.S. this recession-fighting tool hasn’t actually been all that successful since the 1980s (see Table 2 in this paper).

The best response to a recession that is either so deep or so infected by debt-overhangs that conventional monetary policy is not sufficient, is simply to engage in lots of fiscal support – think the American Recovery and Reinvestment Act (ARRA) – but (as Ezra notes) much, much bigger in the case of the Great Recession.

But, this kind of discretionary fiscal policy response to recession-fighting (and jobless-recovery fighting) had fallen deeply out of favor in the same decades that saw increasing reliance on conventional monetary policy[1]. In fact, advocating fiscal policy that was up to the task of providing a full recovery in the wake of crises that defanged conventional monetary policy somewhere along the way got labeled radical, rather than simply nuts-and-bolts economics.

Further, this rejection of discretionary fiscal policy was done on very thin analytical reeds – essentially the fear was that it took too long to debate, pass, and see an effect from fiscal policy – and that if the recession was “missed” in real-time by policymakers, we would end up providing lots of fiscal support to an already-recovered economy – and might even cause economic overheating that would lead to runaway inflation and interest rate spikes.

This fear led to the strange mantra in the debate over fiscal stimulus in 2008 that policy had to be targeted, temporary and timely – which basically ruled out most things but tax cuts. But, given that the last three recessions have seen extraordinarily sluggish return to job-creation in their wake, this timely obsession was clearly misplaced (and, plenty argued so in real-time).

So we’ve come to what is, I think, a big gap in Ezra’s piece – the repeated (and correct) insistence that the political system just couldn’t accommodate what nuts-and-bolts economics indicated was needed (i.e., large-scale fiscal support) for a full recovery without examining just how we found ourselves with a political system that has become deeply stupid about fighting recessions and jobless recoveries. Read more

There are now two competing proposals to fix America’s aging public school buildings and, coincidentally, give jobs to thousands of construction and maintenance workers. One will work; the other won’t.

The first, the one that would be effective, was proposed by President Obama and introduced by Connecticut Rep. Rosa DeLauro (H.B. 2948) and Ohio Sen. Sherrod Brown (S. 1597). Fix America’s Schools Today! (FAST) is a straightforward federal grant program that would send $25 billion directly to state education agencies and local school districts by formula, accounting for need, and permitting them to hire contractors to make repairs, do deferred maintenance, and make improvements in public K-12 school buildings and facilities. We estimate it could put 250,000 people back to work.

On Oct. 12, Virginia Senators Jim Webb and Mark Warner introduced the second, more complicated yet very limited bill to rehabilitate only the nation’s ‘historic’ schools, The Rehabilitation of Historic Schools Act of 2011. According to their press release, Virginia Gov. Bob McDonnell and U.S. House Majority Leader Eric Cantor also support their proposal.

As my colleague, Jared Bernstein, wrote in his blog last week, it’s good to see bipartisan support for fixing up our public school buildings. And it’s true that, as Jared pointed out, “the first step towards fixing a problem is recognizing the problem and taking responsibility for it.”

Unfortunately, the Webb-Warner Historic Schools Rehabilitation Tax Credit plan is so limited in scope that it would accomplish little in terms of either job creation or school modernization.

Their plan offers developers a federal tax credit to enter into public/private partnerships with states and school districts to help pay for modernization of schools that are on the National Register of Historic Places.

Private partners would have to purchase the historic public school building and then lease it back to the school district. As part of the sale-lease-back agreement they would modernize the historic schools using the incentive of the federal tax credit to reduce the overall cost.

However, unlike FAST, the tax credit program is small, convoluted, and slow. The President proposed rehabbing 35,000 school buildings, but there are fewer than 1,000 public schools on the National Register of Historic places. The policies, approvals, and agreements needed for school districts to enter into developer partnerships (the kind of bureaucratic and legal red tape politicians normally deplore) add a level of complexity that will take time and limit the impact on both school repairs and jobs. And poorer school districts – the ones that need help the most — just won’t be able to make use of a tax credit—they need a grant to make these repairs.

School repair and modernization shouldn’t depend on the desire of developers to secure tax credits. We ought to be simplifying the tax code, not adding to its loopholes. Having recognized both the need to improve our educational infrastructure and a federal role, Webb, Warner and Cantor should join with the president in supporting FAST.

At the very least, even if they’re wedded to using the tax code to fund school modernization, they should expand their vision beyond a few hundred historic buildings.  The problems of unemployment and substandard school infrastructure are far too big for such a narrow solution.

All politicians say they want to protect the middle class, but who belongs to the middle class? The Census Bureau puts the median household income at a shade under $50,000, and a broad definition (leaving out the bottom and top twenty percent) gets you a range of about $20,000 to $100,000, ignoring differences in household size and regional cost of living.

But the definition of “middle class” seems to expand or contract depending on the context. When it comes to shielding taxpayers from tax increases, the “middle class” tends to extend well above the $100,000 threshold. For example, the Alternative Minimum Tax is “patched” by Congress each year in the name of protecting the middle class, even though roughly three-fourths of the forgone revenue comes from households making more than $100,000. Similarly, while campaigning for president, Barack Obama famously pledged not to raise taxes on married couples with incomes under $250,000 or single taxpayers with incomes under $200,000.

But when it comes to Social Security cuts, the middle class seems to shrink. The co-chairs of the president’s Fiscal Commission, for example, proposed cuts for the “most fortunate” that reduced benefits for Social Security’s prototypical medium earner (a worker earning around $43,000 in 2010) by 19 percent. Though some of this would come from across-the-board cuts like a lower cost-of-living adjustment, even targeted (“progressive”) cuts would fall on those earning as little as $38,000.

Why go after middle class retirees? One reason is that there are few wealthy retirees and they don’t receive much in Social Security benefits. Only 7 percent of Social Security beneficiary “units” 62 and older had incomes above $100,000 in 2008 (this includes single retirees and married couples). Even if these upper-income retirees all received close to the maximum benefit of around $35,000, it’s hard to achieve substantial savings without going lower down the income scale or eviscerating benefits for higher-income retirees, who earned them through years of contributions and already rebate some through the income tax system.

While trimming benefits for high-income retirees doesn’t get you very far, a modest payroll tax increase on high-income workers does. Currently, earnings above $106,800 are exempt from Social Security taxes. Taxing all earnings equally would all but eliminate Social Security’s long-run shortfall. Alternatively, removing the cap on the employer side and indexing it to cover 90 percent of earnings on the employee side (as it did in the early 1980s when Social Security was in long-term balance) would close around 70 percent of the shortfall if benefits are based on the employee contribution. This has the advantage of neither raising employee taxes nor creating outsize benefits.

Despite strong public support for lifting or eliminating the payroll tax cap, politicians like Texas Governor Rick Perry insist on keeping alive the idea that the projected Social Security shortfall can and should be closed by “means testing” benefits for high-income retirees. Going after AARP-card-carrying Lexus drivers living in gated communities (as Fiscal Commission co-chair Alan Simpson characterized opponents of benefit cuts) may sound like a good idea until you realize how elastic class categories are. In fact, even those of us who drive old Chevy Prizms and live in rental apartments had better watch out.

In an eloquent veto message of a school accountability reform bill last weekend, California Governor Jerry Brown articulated an alternative to the narrow standardization of schooling and the promotion of misleading quantitative test score measures that have characterized American education in the last generation.

Most observers recognize that as government increasingly held schools and teachers accountable primarily for the math and reading test scores of their students, schools inevitably narrowed their curricula to minimize attention to other important educational outcomes, substituted test preparation and test taking skills for real learning, and even engaged in cheating to meet politically determined targets.

Some policymakers have recently attempted to address these problems by advocating accountability for “multiple measures.” Their reasoning has been that the corruption of education that results from a near-exclusive focus on basic skills in math and reading can be ameliorated if other indices can be added to accountability systems to supplement the math and reading test scores. This was the goal of the California bill, sponsored by liberal Democrats, and sent to Brown for signature.

But because other important outcomes of education – like character, inquisitiveness, citizenship, civic awareness, historical reasoning, scientific curiosity, good health habits – cannot be standardized like math and reading scores, proponents of “multiple measures,” like the California senators who crafted the bill, are left with adding indices like attendance rates, parent satisfaction, graduation rates, the number of students taking advanced placement courses, and the like. But this does little to divert schools’ obsession with math and reading test scores, since they remain the only academic outcomes that count.

As Brown observed, “adding more speedometers to a broken car won’t turn it into a high-performance machine.”

In his veto message, Brown recalled an aphorism of Albert Einstein: “Not everything that counts can be counted, and not everything that can be counted, counts.” The bill, Brown said, “nowhere mentions good character or love of learning. It does allude to student excitement and creativity, but does not take these qualities seriously because they can’t be placed in a data stream.”

Brown invited the legislature to work with him to devise a truly workable accountability system for education, one that relies on qualitative evaluations by “panels [that] visit schools, observe teachers, interview students, and examine student work.”

The Broader, Bolder Approach to Education campaign has advocated such a system, and described it in more detail in a statement issued by nationally prominent educators and policy experts. The system is also described in Grading Education: Getting Accountability Right. If the panels that Brown advocates are constituted with appropriate experts in curriculum and instruction, and include members of the public as observers, they have the potential to finally provide citizens with the ability to distinguish effective from ineffective schools in their state and communities.

It is encouraging that California State Senator Darrell Steinberg responded to Brown’s veto message with a willingness to work with him to design such an accountability system. Should they succeed, it could signal that some in the nation may finally be ready to turn away from a well-intentioned but destructive reduction of schooling to the standardized tests that can, at best, measure only a small aspect of education.

High-profile education “reformers” in Washington, D.C., New York, and Chicago have asserted over the past decade that test-based accountability, whether for teachers (D.C. and N.Y.) or schools (Chicago) is key to student improvement. They have accused those who note the well-documented impact of poverty on academic achievement of “making excuses.”

Ten years in, what do they have to show for these resource-consuming “no excuses” initiatives? The answer seems to be very little, and maybe less than that. Recent reports on Chicago and Washington schools find little improvement in student achievement overall, with the white-black and rich-poor achievement gaps reformers promised to close actually widening in some cases. In New York, rewards for high-performing teachers proved so ineffective in raising test scores that the city abandoned them.

Michelle Rhee’s tenure as D.C. Public Schools Chancellor provides a stark example. Rhee invested $4 million in her new teacher evaluation system in 2009 and fired 1,000 educators in her 3 ½ years based heavily on test scores biased in favor of wealthier students. Current status? A stubborn achievement gap and apparently rampant cheating. In schools serving lower-income students especially, high stakes have also likely led to the substitution of real learning for test prep, to those students’ detriment. 

Two D.C. schools illustrate the strong correlation between test score disparities and the concentration of low-income students. In a January Washington Post article, Bill Turque notes that at Horace Mann Elementary School, with a 73 percent white student body and only 4 percent of students qualifying for free or reduced-price lunch, around 90 percent of students meet or exceed district achievement standards. Across town at Stanton Elementary School, where 85 percent of students qualify for free or reduced priced lunch, only 9 percent of students met or exceeded 2011 math and reading standards.

Rhee’s regime of test prep for students and tough accountability for teachers did little to narrow these gaps because it ignored the more complex and challenging issue of poverty. Ineffective teachers and principals clearly impede learning. But the variation in teacher quality is overwhelmed by the variation in social and economic conditions that promote (or limit) children’s readiness to learn. The failure of a small-carrot large-stick approach to attaining teacher “excellence” should give serious pause to the certainty of “reformers” like Michelle Rhee. It also challenges their assertions that acknowledging the effects of lack of early childhood education, excess mobility, family stress, and poor health on student outcomes amounts to “excusing” teachers. Rather, the “no excuses” crowd must stop excusing itself.