Is a “Blank-slate” Approach the Right Way to Reform our Tax Code?

Two weeks ago, Senators Baucus and Hatch, respectively the chairman and ranking minority member of the Senate Finance Committee, sent a “Dear Colleague” letter to solicit input on which tax expenditures to keep in the tax code. They are proposing a “blank-slate” approach for tax reform—eliminate all tax expenditures from the tax code and then add in the ones that can be justified. It’s a positive development that the senators aren’t constraining the initiative to be revenue neutral, but what sounds like a novel and fresh approach to tax reform that broadens the tax base and simplifies the tax code, both laudable goals, will likely obtain neither.

My guess is the “blank-slate” approach to tax reform is doomed to failure. 100 senators, backed by thousands of lobbyists, are all but guaranteed to come up with a plan as complicated as the current tax code. Perhaps serious tax reform is not in the cards for the 113th Congress.

Tax expenditures are tax credits, tax deductions, and exclusions embedded in the tax code, which reduce a taxpayer’s tax liability; they are often referred to as loopholes. According to the Joint Committee on Taxation, there are over 200 tax expenditures affecting individuals, and they are estimated to reduce Fiscal Year 2014 tax revenues by $1.1 trillion. “Broadening the base” refers to the elimination or reduction of these expenditures, and is held up as the gold standard for tax reform. Depending on who you ask, increased revenue from broadening the base should be used to reduce tax rates, reduce deficits, or increase expenditures on education, infrastructure and the social safety net.

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Government–Not Business–Has Been the Source of Breakthrough Innovation

The New York Times obituary for Douglas C. Englebart, identified as the “Computer Visionary Who Invented the Mouse,” is fascinating reading, in part because Englebart, an Oregon farm boy, was in many ways the father of modern networked computing. Beginning in the early 1960s, he put together a team of engineers and computer scientists, funded by the federal government, that developed a prototype for most of the computer tools we all take for granted today. He unveiled them at a conference in San Francisco in December 1968, which “set the computing world on fire.” In the words of the Times obituary:

“Dr. Engelbart was developing a raft of revolutionary interactive computer technologies and chose the conference as the proper moment to unveil them.

For the event, he sat on stage in front of a mouse, a keyboard and other controls and projected the computer display onto a 22-foot-high video screen behind him. In little more than an hour, he showed how a networked, interactive computing system would allow information to be shared rapidly among collaborating scientists. He demonstrated how a mouse, which he invented just four years earlier, could be used to control a computer. He demonstrated text editing, video conferencing, hypertext and windowing.”

Englebart was a visionary, but his ground-breaking work was not supported by venture capital and his innovations were not the result of the private market or corporate enterprise. His innovations were not spurred by the prospects of incredible income and wealth, all lightly taxed. Rather, the work was funded and organized by a visionary bureaucracy in the U.S. government. As the Times describes it, “during the Vietnam War, he established an experimental research group at Stanford Research Institute (later renamed SRI and then SRI International). The unit, the Augmentation Research Center, known as ARC, had the financial backing of the Air Force, NASA and the Advanced Research Projects Agency, an arm of the Defense Department.”

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Council on Foreign Relations Wades into Education Debates, but Misses the Big Picture

The drumbeat of doom-and-gloom about American education continues. The latest entry is a June report by the Council on Foreign Relations, warning that the “real scourge of the U.S. education system–and its greatest competitive weakness–is the deep and growing achievement gap between socioeconomic groups that begins early and lasts through a student’s academic career.”

Every industrialized country has an achievement gap between higher and lower-class children. In the United States, we have a similar and overlapping gap between whites and blacks. These gaps have narrowed, but not much, because both races have posted remarkable gains in recent generations.

Consider this: black achievement has improved so much that in elementary school mathematics, blacks now perform better than whites did only a generation ago. Improvements have been less great but still substantial for black elementary and middle schoolers in reading and for black 12th graders in both math and reading. White students have also improved in this time, however, so the gap remains.

The Council on Foreign Relations acknowledges that American student achievement is “higher than ever,” but says gains have been small. In fact, gains have been quite large, and for disadvantaged students, have outpaced gains in comparable industrial countries. One country with which we are typically and unfavorably compared is Finland. Yet although Finland’s scores remain high, achievement of its disadvantaged students has plummeted in the last decade, while that of comparable U.S. students has surged.

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Does Value-Added Trade Have Any Implications for Trade Policy?

The Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) have reported that significant portions of China’s exports to the United States contain non-Chinese value added, including some small fraction of parts and materials originating in the United States. The OECD and WTO have proposed new estimates of trade in value-added (VA), a measure of trade that is net of foreign value-added. They claim that “China’s bilateral trade surplus with the United States shrinks by 25% on a value-added basis, reflecting the high level of foreign-sourced content in Chinese exports.” But, my new EPI report shows that the OECD-WTO analysis is “fundamentally flawed and should not be used in anti-dumping or other types of fair trade cases.”

The OECD-WTO analysis suffers from at least three critical flaws:

  • The OECD-WTO analysis fails to account for rapid technological change and the fact that China is rapidly moving up the value chain and increasing the domestic content of its exports.
  • The OECD relies, in part, on flawed Chinese data on its own trade flows. Estimates developed in the EPI report show that China’s global trade surplus was 117 percent to 250 percent (i.e., 2 to 3.5 times) larger than reported by China in the 2005-2009 period.
  • The OECD-WTO estimates do not accurately reflect the flow of Chinese exports coming into the United States through third countries. China became the world’s largest exporter in 2006, and roughly half of its exports are intermediate products and transshipped goods. As a result, the United States absorbed $54.2 billion to $77.9 billion per year in additional, indirect imports originating in China and imported from the rest of the world between 2005 and 2009 that were not reflected in the OECD estimates. When indirect imports are included, U.S. VA trade with China exceeds conventional measures of the gross bilateral trade deficit in this period.

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What We Read Today

Happy Fifth of July. Here’s what we read this week:

If Today’s Jobs Report is Taken as Yet Another Excuse for Inaction, It Will Be Truly Bad News

There are not enough thumbs-up graphics on the internet to show how much I agree with and how important I think this Paul Krugman blog post is. He goes through all of the obvious indicators signaling that the economy is far from healed from the Great Recession, as well as all of the puzzling ways policymakers seem determined to ignore this, and ends with:

I guess what I’m saying is that I worry that a more or less permanent depression could end up simply becoming accepted as the way things are, that we could suffer endless, gratuitous suffering, yet the political and policy elite would feel no need to change its ways.”

We said much the same thing in the introductory chapter to State of Working America, 12th Edition published last Labor Day:

We should be very clear about the danger of this complacency in the face of elevated unemployment. It’s not simply that full recovery to pre-recession health will come too slowly—though this delay alone does indeed inflict a considerable cost. Instead, the danger is that full recovery does not come at all. Nations have thrown away decades of growth because policymakers failed to ensure complete recovery. Japan has been forfeiting potential output—trillions of dollars’ worth, cumulatively—for most of the past 20 years. Recent research (Schettkat and Sun 2008) has suggested that the German economy operated below potential in 23 of 30 years between 1973 and 2002 because monetary policymakers were excessively inflation-averse. Lastly, U.S. economic history provides the exemplar of what can happen to a depressed economy when policymakers fail to respond correctly: The level of industrial production in the United States was the same in 1940 as it was 11 years before.”

And today’s jobs-numbers, while a nice mild boost above recent trends, really don’t change this assessment at all.


Four Years Into Recovery, Austerity’s Toll is At Least 3 Million Jobs

The official start of the recovery from the Great Recession began in June 2009. This coming Friday will mark the release of employment data for June 2013, allowing us to assess how this recovery stacks up against earlier recoveries 4 years in, as well as letting us diagnose obvious areas of economic weakness in the current recovery.

The figure below (also here) compares the current recovery to the three prior recoveries. Recessions are marked by the lines to the left of the zero point on the x-axis, while recoveries are to the right. The figure shows that job growth in the current recovery is slightly stronger than the job growth following the recession of 2001. However, it is slower than in the prior two recoveries and is in fact slower than in any other previous recovery dating back to World War II. Furthermore, jobs fell much further and faster during the Great Recession than in any other recession over that period, meaning that we are stuck in a much larger jobs-hole four years into recovery than in any previous business cycle. The fact that four years into the recovery we still have not yet come close to making up the jobs lost in the downturn, (much less the jobs needed to keep up with growth in the potential workforce over that time), is a grimmer situation than anything our labor market has seen in seven decades.

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Congress Should Act Today to Keep Student Loan Interest Rates Low

The interest rates on government-backed student loans are set to double if Congress does not act today. Currently, low- and middle-income students can take out federal loans—called Stafford Loans—at a rate of 3.4 percent. Today, under current law, this rate will increase to 6.8 percent—a rate that will make repayment on student debt much more difficult than it is already. PLUS loans, which are issued to parents and graduate students at a rate of 7.9 percent, will become more costly, as well. If Congress continues to stall, millions of college students will see their future loan obligations increase substantially, putting further strain on upcoming graduates who already face a bleak job market.

If this crisis sounds familiar, that’s because it is. Congress made the same deliberations last summer, and eventually extended the low interest rates for an additional year. This year, there is bipartisan agreement that a long-term solution—rather than yet another year-long extension—is needed. The question what long-term rate is appropriate for student debt is a complicated one—but allowing rates to double today would hurt both current and future students in an already ailing economy.  Unemployment for young college graduates is close to 9 percent and underemployment is near 18 percent. What’s more, for recent graduates, wages increased 1.5 percent cumulatively between 1989 and 2012. For men, the increase was 4.8 percent, but women actually saw their real earnings decrease by 1.6 percent in this time period.

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CEOs Recovering Well, Workers Not So Much

Escalating CEO compensation is a major contributor to income inequality. Along with financial sector pay, growing CEO compensation has helped more than double the income share of the top 1 percent over the past three decades. Moreover, the fact that CEO pay has risen so quickly since the end of the Great Recession is an indicator that the top 1 percent is doing far better than ordinary Americans in the recovery.

One way to illustrate the increased divergence between CEO pay and an average worker’s pay over time is to examine the ratio of CEO compensation to that of a typical worker, the CEO-to-worker compensation ratio. Our new EPI paper, CEO Pay in 2012 Was Extraordinarily High Relative to Typical Workers and Other High Earners, presents this analysis of CEO compensation based on our tabulations of Compustat’s ExecuComp data. The ratio measures the distance between the compensation of CEOs in the 350 largest firms and the workers in the key industry of the firms of the particular CEOs.

The CEO-to-worker compensation ratio1 in 2012 of 272.9 is far above the ratio in 1995 (122.6), 1989 (58.5), 1978 (29.0), and 1965 (20.1), as shown in the figure below. This illustrates that CEOs have fared far better than the average worker over the last several decades. It is also true that CEO compensation has grown far faster than the stock market or the productivity of the economy.

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What We Read Today

Inequality Is Real. Shows You How to Fix It.

We just launched a new website, I want to take an opportunity to tell you a little about it. What this website does is help everyday people see themselves in the economy.

My team here at EPI and at Periscopic worked hard to make  fun, accessible and informative. Generally, people get that inequality exists, what we are trying to do is explain why it matters.

The website takes people through a series of pages where they can see themselves in the story of inequality. There’s a great video, narrated by Robert Reich, which tells the story of how inequality was and is being created.

The site begins with a look at the income distribution and users can visualize how much money the top 10% takes home in income versus the bottom 90%. That’s lets users see themselves through the eyes of their particular demographic characteristics—age, gender, race/ethnicity, and education—and sees how average wages differ depending on your personal characteristics. Users can play with this interactive feature, putting in different comparisons and seeing how things are different.

Any differences found in the section are dwarfed by the differences between the vast majority of Americans and what’s happened with wages and incomes in the top 1%

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Tipped Workers Deserve a Raise As Well

The word “minimum” is not difficult to define. Several synonyms immediately come to mind: lowest, least, smallest, littlest…

So you might reasonably assume that the “minimum wage” is the lowest wage employers can legally pay their workers, right?

Wrong. Some 3.3 million workers are paid the sub-minimum wage—often called the “tipped minimum wage”—of only $2.13 per hour. For these workers, employers may claim a “tip credit,” by converting tips received by the worker into income. So long as this tip credit, when combined with the tipped minimum wage, adds up to the minimum wage, the employer need not pay more than $2.13 per hour. If tips fall short of this amount, the employer is supposed to make up the difference. The federal minimum wage is currently $7.25 per hour, so the maximum tip credit that an employer can claim is $5.12 per hour at the federal level. The law effectively transforms tips earned by the worker into a subsidy for the employer.

The tipped minimum wage hasn’t been raised in 22 years.

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Coming Soon to the Big Apple – Paid Sick Days, as New York City Council Overrides Bloomberg Veto

Early Thursday, the New York City council successfully overrode Mayor Bloomberg’s veto of a bill giving New York workers access to paid sick leave, at long last. The bill phases in over two years, beginning in April 2014 for businesses with 20 workers or more.

The bill’s passage after a three year battle comes after supporters were able to broker a deal with City Council Speaker Christine Quinn in March. New York will now be the fifth city in the United States to require private sector employers to provide a minimum amount of earned paid sick time to their employers, joining Portland, San Francisco, Seattle and Washington, DC (the  Philadelphia City Council has twice passed paid sick leave legislation. Philadelphia Mayor Michael Nutter has vetoed the bill both times). Connecticut remains the only state with this distinction. This is a big win for the people of New York City. Overall, it’s a wise investment for employers, workers and the general public.

Nearly 40% of the private sector workforce in the United States has no ability to earn paid sick time. Furthermore, access to paid sick days has historically been far more common among high-income workers, leaving low-income families with little protection when they get sick or need to visit the doctor. This important legislation not only protects workers from lost pay or potential job loss when they or their family members get sick, it also protects the public by keeping sick workers, who feel economically compelled to work, from spreading illness to co-workers and customers.

Furthermore, the great benefits of earned sick days far outweigh the costs. The costs to business are often overstated, when the reality is that earned paid sick days cost very little when compared to business sales, as we showed in the case of Connecticut (and as we testified before the New York City Committee on Civil Service and Labor in March of this year).

While the lack of a national paid sick days policy has continued to erode family economic security, the efforts of jurisdictions around the country that have stepped up for workers and their families serve as models for cities and states throughout the nation.

Mankiw, Kaplan, CEO Pay and the Defense of the 1 Percent

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.

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What the Fisher Decision Ignores: “Diversity” Should Not Replace Integration as Our Goal

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.

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Celebrating 75 Years of the Fair Labor Standards Act

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.

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Greg Mankiw Forgets to Offer Data for his Biggest Claim

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.

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Americans want fewer high-tech guestworkers, not more

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.


Hybrid or Frankenpension?

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.

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Tackling Youth Unemployment With Amendments to the Senate Immigration Bill

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.

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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.

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Debating the Rise of the Top 1 Percent

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.

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7-Eleven‘s Modern Day Plantation System

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.

Senator Merkley Takes on H-2B Guestworker Abuses

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.

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What We Read Today

More Empty Rhetoric on Public Investment and Discretionary Spending: Fred Hiatt Edition

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. Read more

Ongoing State Jobs Deficits—Keeping State Employment Gains in Perspective

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.

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Rise in college completion welcome – but not driven by rising college wage premium or ‘sheltering’

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.


How much can tax policy curb income inequality growth? Maybe a lot

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.

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J-1 exchange visitors deserve labor rights and human trafficking protections

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.”

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