Bankruptcy Judge Should Respect Michigan’s Constitution Even If Michigan Governor Rick Snyder Doesn’t

Gov. Rick Snyder is corrupting Detroit’s recovery even before it begins. By ignoring the state’s constitution and its protection for accrued public employee pensions, Snyder is undermining the rule of law and adopting the kind of “ends justify the means” reasoning that usually precedes violations of public trust. Snyder has violated his oath to uphold and defend the state’s constitution by asking a federal court to reduce the pensions of Detroit’s public employees, including many who risked their lives for years in service of the city.

The Michigan constitution is unambiguous. Section 24 states:

“The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.”

Yet, Gov. Snyder has set in motion a bankruptcy process whose aim is to do exactly what the constitution forbids – to diminish that contractual obligation and pay Detroit’s pensioners and retirees less than the full financial benefits they earned.

One can only hope that U.S. Bankruptcy Court Judge Steven Rhodes will rule, instead, that Emergency Manager Kevyn Orr and Gov. Snyder did not have the authority to file a bankruptcy petition that would unconstitutionally impair the city’s pension obligations.


New York Times Op-ed Blames the Victims of Detroit’s Decline

So much is wrong in Stephen Richter’s NYT op-ed today, called “What Really Ails Detroit,” starting with his grossly inaccurate timeline. Richter says Detroit’s (and the United States’) “day of reckoning” came in the 1970s when American car manufacturers began facing competition on their home soil for the first time. That’s 20 years after the Big 3 started to abandon Detroit for the suburbs and Detroit began to hemorrhage its white population. As I said in an earlier blog post, “Between 1947 and 1958, the Big Three built twenty-five new plants in the Detroit metropolitan area, all of them in suburban communities, most more than fifteen miles from the center city. As the jobs moved away, so did the city’s residents. From 1.85 million in 1950, the city’s population declined to 1.62 million in 1960 and 1.51 million in 1970.” That’s a loss of more than 300,000 residents in two decades. The exodus of white residents (the entire decline was accounted for by whites, since the number of black residents increased), of jobs, and of wealth has never stopped. Detroit now has a population under 700,000, but the white population has declined by more than 1.4 million since 1950.

What ails Detroit is not the skills gap that Richter posits, but abandonment by its white population and by the owners of capital, starting with the auto industry, but including retail corporations, insurance companies and almost everyone else who had previously invested in the city. Detroit’s unemployment rate is the highest of any of the 50 largest cities because almost no one is investing there. When corporations do invest, as Chrysler did with its new Jefferson North assembly plant, they will find plenty of employees with the skills to make manufacturing a success again.

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Once Again, American Manufacturing Suffers from Lots of Things, but Excess Blue-Collar Pay Isn’t One of Them

In a NYT column today titled “What Really Ails Detroit,” Stephen Richter repeats a common story much beloved by serious-sounding pundits who don’t know much economics: that the thirty year run of broadly-shared growth after World War II was only possible because of “the absence…of any real competition from other nations,” and that American workers’ troubles since then are their own fault for not getting smart enough to compete on the global stage. He asserts that even as this international competition increased, “companies like General Motors continued to shower blue-collar workers with handsome pay and benefits,” hobbling their ability to compete, even as they refused to upskill sufficiently to compete in the global economy.

This narrative is really common—common enough to see if it holds up to any serious data scrutiny.

Start with claims that excessive blue-collar pay destroyed manufacturing.  For a paper examining those claims, check this out (pdf). Spoiler alert: it’s not. Inflation-adjusted hourly wages for production workers in U.S. manufacturing peaked in 1978 and were about 8 percent lower in 2007, while manufacturing productivity rose by well over 100 percent in that period.

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What We Read Today

Complacent Consensus on China

This piece originally ran in the Huffington Post.

Within the next few years, China will surpass the United States as the world’s largest economy.

Anticipating the impact of this milestone on our national psyche, the US policy class has been assuring Americans that there is nothing to worry about. Hardly a week goes by without a major media story suggesting China is an economic paper tiger: its economy is imbalanced, its leaders are corrupt, its banks are over extended, etc. Anyway, the stories routinely note, it will be decades before China catches up to us in per capita income.

Yet in the balance of global power, size matters. Many countries have higher per capita incomes than the United States (e.g., Norway, Qatar, Singapore). It is the large scale of the American economy that has made us the dominant political power in the world. Our big economy supports a big military, foreign aid, and allows policymakers to use access to our huge consumer and financial markets to buy allies and votes in the UN.

Unfortunately, it has also allowed us to borrow from the rest of the world to finance a chronic trade deficit. China, with whom we have the largest deficit, is as a consequence our largest creditor, holding over $1.2 trillion in US IOUs.

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Inflating Detroit’s Pension Liabilities, Part 2

In a recent blog on the Detroit bankruptcy, I noted that Detroit’s Emergency Manager, Kevyn Orr, may have inflated pension liabilities by lowering the assumed return on pension fund assets. Because most of the cost of pension benefits comes from investment earnings, this can double or even triple the cost of these benefits (Orr quintupled the cost, which suggests other factors are involved).

Public pension fund actuaries use an expected rate of return rooted in historical experience—in practice, usually slightly lower than realized returns over the long run. Some financial economists are critical of this practice, and argue that, although expected returns on risky assets take into account the possibility of losses due to default risk and the like, they don’t factor in risk aversion—the fact that most investors prefer guaranteed returns over volatile ones even if the average expected return is the same in both cases. In the critics’ view, this means contributions to fund future pension benefits should be based on yields on “risk-free” government bonds in order to avoid shifting risk from current to future generations of taxpayers. (A variation of this argument, which seems contradicted by present circumstances, is that pension benefits are guaranteed and should therefore be discounted using a guaranteed rate of return.)

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What is Smart about Budget Cuts that Push More People into Poverty?

Last week, House Speaker John Boehner said, “sequestration is going to remain in effect until the president agrees to cuts and reforms that will allow us to remove it. The president insisted on the sequester none of us wanted, none of us like it, there are smarter ways to cut spending.” It’s true that sequestration takes a meat ax to discretionary spending in the federal budget, indiscriminately cutting spending across-the-board and slowing the economic recovery. Of course, there are smarter ways to alleviate longer-term budget problems, most of which would not kick-in until after the economy recovers from the Great Recession. But what are the “smarter” ways House Republicans have offered?

One proposal, championed by House Majority Leader Eric Cantor and Chairman of the Committee on Agriculture Frank Lucas, is to cut the Supplemental Nutrition Assistance Program (SNAP) by $40 billion over 10 years. Some in the conservative Republican Study Committee would go even further and reduce SNAP by that amount per year—a reduction of over 50 percent. Using the Census Bureau’s Supplemental Poverty Measure (SPM), which allows for the inclusion of both in-kind government benefits and taxes in poverty analysis, I estimate that this latter policy could increase the number of people in poverty by 2.2 million. Almost one million of these people would be children.

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Detroit: Pensions, Racism and Bankruptcy

Detroit’s current citizens and the public employees who serve them are not the cause of Detroit’s fiscal problems. They are the victims of forces beyond their control, including globalization, capital flight and racism. No one can, with any seriousness, blame Detroit’s librarians, social workers, garbage collection workers or street cleaners for the city’s catastrophic loss of population and tax base, the long decline and near-collapse of the Big 3 auto companies, or the 1967 riots, which launched a frantic exodus of businesses, white residents, and money from the City of Detroit to the suburbs.

As the suburbs grew and new highways encouraged sprawl in the 1950s and 1960s, Detroit’s manufacturing employment base and population—and especially its white population—began to decline. As Thomas Sugrue has pointed out, between 1947 and 1958, the Big Three built twenty-five new plants in the Detroit metropolitan area, all of them in suburban communities, most more than fifteen miles from the center city. As the jobs moved away, so did the city’s residents.

From 1.85 million in 1950, the city’s population declined to 1.62 million in 1960 and 1.51 million in 1970. By 1980, white flight was nearly complete: whites, who made up 83% of the population in 1950, were only 34% of the population, one million fewer than in 1950. The terrible riots in 1967 accelerated the movement of white families to the suburbs, but a combination of opportunity and racism had spurred hundreds of thousands to leave Detroit well before the U.S. Army occupied it. The hostility of whites toward blacks, their fear, and economic self-interest as they understood it led them to refuse to live in integrated neighborhoods, spurring them to sell their homes and abandon the city.

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What We Read Today

Walmart Fight is About the Degradation of Work in America

Originally published in the Current Newspapers, July 31, 2013.

The ongoing battle between Walmart and workers is about the role that workers play in our city and our nation. We need to ensure that workers also benefit when economic growth continues and corporations produce more profit, higher stock prices and ever-escalated CEO compensation. The fight over Walmart is not about a better minimum wage. It’s about livable wages, and the role of Walmart in the economy. We need profitable, efficient companies like Walmart to pay decent wages, and taxpayers shouldn’t be subsidizing them when their CEOs and other top executives are making hundreds of millions of dollars a year.

As America’s largest company, Walmart has a huge impact. Not just in Washington, D.C., but in every community with a Walmart. Walmart brings down wages everywhere. Its low wages require public subsidy of its workers, since Walmart workers make so little that they must rely on Medicaid and other public assistance programs to make up the difference between their insufficient salaries and what it really costs to make ends meet.

Walmart can afford to pay workers more. The Walton family has a combined wealth greater than the bottom 48.8 million American families combined — 41.5 percent of all U.S. families. One of Walmart’s closest competitors, Costco, pays an average wage of about $20 per hour. Walmart could pay its top executives less and pay workers more, or it could raise workers’ wages and still make plenty of money for the Walton heirs by passing costs on to consumers. Researchers at the University of California at Berkeley figured out that if every Walmart in the U.S. had a minimum wage of $12 per hour and passed the entire additional cost on to consumers without taking anything out of Walmart’s profit margins, it would increase prices by a mere 1.1 percent, or $0.46 per shopping trip for the average Walmart shopper.

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Why Citizenship Matters: Getting to the Bottom Line

This past Tuesday, I had the opportunity to participate in a half-day workshop on immigration reform sponsored by the AFL-CIO and the Economic Policy Institute in Washington, DC. The focus of the session was on why a roadmap to citizenship for America’s undocumented residents was an essential component of reform, a topic that is increasingly relevant as certain House Republicans argue for creating a legalization process that would exclude citizenship as the ultimate endpoint.

Speaking at the event were Senator John McCain and Congressman Xavier Becerra (they were clearly the main draws!), as well as a selection of economists, activists, and business leaders. I was expecting a wonkish discussion about policy—and, as one of the two economists sharing our views, that was certainly my anticipated contribution.

Instead, it was an extremely moving event, particularly when Senator McCain’s eyes teared as he recounted a reenlistment ceremony for U.S. soldiers he attended in Iraq, one where some immigrant soldiers who were slated to receive citizenship that day were represented only by their empty boots, having just lost their lives defending a country they were still hoping to fully join.

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The National Labor Relations Board Now Has All Five Members

Now that the Senate has confirmed the appointments of a full slate of members of the National Labor Relations Board (the quasi-judicial body that decides labor relations cases and protects the right of workers to organize unions), the 18-month long fight over the president’s nominations looks ridiculous. Despite precipitating a mini constitutional crisis over the president’s right to make recess appointments, and coming close to the parliamentary equivalent of nuclear war in the Senate, the end result is little different than if the Senate had simply confirmed President Obama’s original nominees. On the other hand, a lot of damage has been done along the way.

For those who haven’t followed closely, Senate Republicans filibustered the nominations of two Democrats, Sharon Block and Richard Griffin, who strongly support the National Labor Relations Act’s mission of encouraging collective bargaining. They were targeted because Republicans sought to demonize the Board and President Obama over a case involving Boeing’s decision to open new facilities in South Carolina. In that case, the NLRB filed a complaint against Boeing because company officials had described the decision to locate the plant in South Carolina as punishment for the Machinists union’s exercise of its legally protected right to strike. Even though no Board member ever ruled on the case, which Boeing and its union eventually settled, Sen. Lindsay Graham and others made it a cause celebre and fabricated an election campaign story that President Obama was trying to prevent investment in right-to-work states like South Carolina. Sen. Graham even suggested that the NLRB should be put out of business.

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Deficit Reduction: It’s Not the Economy, Stupid

For the past three years, Washington policymakers have been fixated on reducing budget deficits. And currently, short- and medium-term deficit projections have plummeted, due both to changes in legislation as well as revisions due to technical factors. In May, for example, the Congressional Budget Office revised the deficit projections that it had released in February, reducing its fiscal year 2013 deficit projection by 24 percent, or $200 billion. Similarly large reductions apply in each subsequent year, reducing the ten-year cumulative deficit estimate by $618 billion. As a consequence of smaller deficit projections, the CBO anticipates that the federal debt held by the public will be 73.6 percent of GDP by 2023—1.5 percentage points less than it is this year, and more than four percentage points less than CBO’s previous forecast for 2023.

Both the revised longer-term outlook and the unexpectedly rapid reduction in the near-term deficit have prompted some to change their tone on the urgency of further deficit reduction. Earlier this week, the Center for American Progress brought together a panel of experts to discuss the shifted outlook and what it means for debt-reduction policies in the current climate.

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Detroit’s Pension Problems: Not as Bad as They’re Portrayed

Detroit’s emergency manager, Kevyn Orr, claims Detroit owes $3.5 billion (pdf) to its public pension funds. This is more than five times the $640 million the funds’ actuaries estimated in 2011,1 (pdf) vaulting pensioners into the ranks of the city’s major creditors, which isn’t a good place to be. It also contributes to Orr’s claim that Detroit owes a total of $18 billion—half to retirees and workers—and that bankruptcy is the city’s only recourse.

Despite obvious socioeconomic explanations for Detroit’s woes—the Great Recession walloped a city already suffering from deindustrialization and a flight to the suburbs—it sounds plausible that Detroit’s wounds are partly self-inflicted. After all, this is a city whose former mayor can’t seem to stay out of jail. And there’s certainly a history of elected officials around the country neglecting pension contributions to avoid raising taxes to pay for public services. So the idea that Detroit lowballed its obligations to workers and retirees has the ring of “truthiness,” to borrow Stephen Colbert’s phrase.

But pension obligations don’t blow up in your face like airbags, and politicians can’t make reputable actuaries like Gabriel Roeder Smith cook the books. When politicians want to save money by shortchanging pensions, they just don’t contribute what the actuaries tell them to contribute. This may be irresponsible, but it’s fairly transparent.

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The Next Federal Reserve Chairperson

Some months ago it became known that Federal Reserve Chairman Ben Bernanke was likely to step down as the end of his second term of appointment drew near. Initially, Federal Reserve Vice-Chair Janet Yellen appeared the favorite to succeed Bernanke, but now it seems as though Larry Summers has become the Obama administration’s preferred candidate. Summers’ candidacy raises grave political and policy concerns.

The case for Larry Summers rests on claims that he is a seasoned, crisis-tested, and known policy maker. His experience includes a stint as treasury secretary in the late 1990s and a stint as director of the National Economic Council from 2009-2011, where he oversaw the stimulus and recovery program. He is also a known quantity on Wall Street, where he has earned millions in speaking and consulting fees. Add in his academic credentials as an economics professor at Harvard, and Summers appears to be a model candidate – experienced in government and trusted by financial markets.

But digging deeper, the flaws begin to show. Many critics have pointed out that Summers led the charge for financial deregulation in the 1990s. Worse yet, he opposed updating regulation to deal with financial innovation, as exemplified by his opposition to derivatives regulation in 1998.

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What to Watch on Jobs Day

Expectations for July’s employment report, which will be announced on Friday, are for yet another month of tepid growth. In fact, it is likely that job growth in July was even slower than it has been in recent months. This is bad news for the economy, considering that even if the 196,000 average job growth of the last three months kept up, it would still take more than five years to close the 8.3 million jobs gap in the labor market.

Meanwhile, the employment report contains a whole host of indicators above and beyond the job creation and unemployment numbers, which can give clues about where the economy is headed. For instance, in June average hourly wages increased by 10 cents, the largest monthly increase in over 4.5 years. That sizeable increase, however, was likely an anomaly and is unlikely to be repeated. The high unemployment of the last five plus years continues to exert strong downward pressure on wage growth. 

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New Study Documents Serious Labor Rights Violations at Apple’s Second Largest Supplier

Over the past year, discussion of the conditions faced by workers in Apple’s supply chain has focused almost exclusively on what changes have, or have not, occurred at certain factories of its largest supplier, Foxconn. In light of the deplorable working and living conditions faced by Foxconn employees, many of which persist despite some reports to the contrary, that discussion is warranted. But it only covers part of the story: less than one-fifth of the workers in Apple’s supply chain are employed at the three Foxconn factories receiving the most public scrutiny. An illuminating new report and a video by China Labor Watch (CLW) underscore that labor rights violations would likely be found to be even worse if one were able to get an in-depth view of Apple’s entire supply chain.

The CLW study examined three Pegatron factories with more than 70,000 workers combined. Pegatron is Apple’s second largest supplier, and CLW gathered information by placing undercover investigators at the factories. The study describes 86 labor rights violations, including relying on scurrilous dispatch labor companies that exploit placed workers, widespread hiring discrimination, the significant misuse of underage workers and pregnant women, low wages, forced and uncompensated overtime, and harsh working and living conditions. It discusses 17 specific commitments in Apple’s supplier code of conduct that Pegatron violates.

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Does a Grand Bargain Have to Include a Bad Bargain?

According to various media outlets, President Obama will propose, in a speech today, changes to the corporate income tax “so long as the initial revenue generated goes toward job creation.” Increasing corporate tax revenue to fund job creation, infrastructure improvements, and strengthening U.S. manufacturing is very welcome news. The not so welcome news is he is proposing a revenue-neutral corporate tax reform with a one-time corporate tax revenue increase by granting a tax break on foreign earnings of U.S. corporations. The proposed tax break appears to be a low tax on all $2 trillion of deferred foreign earnings. This one-time revenue increase will be used to pay for job creation and infrastructure improvements.

U.S. corporations are holding almost $2 trillion overseas. This income is not subject to the U.S. corporate tax until it is brought back to the U.S. or “repatriated”—this loophole is known as deferral. A common misperception is the firms will pay 35 percent of the repatriated earnings to the federal government. However, because of various deductions and other loopholes (some legitimate, some not), the multinational ultimately pays considerably less to the government. Also, the corporations get a credit for foreign taxes paid. This deferral of taxes on overseas profits is one of the costliest corporate tax loopholes, reducing tax revenue by up to $50 billion per year.

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Social Security is the Most Effective Anti-Poverty Program in the U.S., In One Chart

Tomorrow, the U.S. House Committee on the Budget is holding a hearing on the progress of the War on Poverty. While the United States is still slowly recovering from the worst recession since the Great Depression, fortunately this time around government safety net programs have been in place to keep more people from falling into poverty. The Supplemental Poverty Measure (SPM) shows the strength of the government to mitigate the incidence of poverty.

As the figure below shows, Social Security is, by far, the most effective anti-poverty program in the United States. Without Social Security, an additional 8.3 percent of Americans, or over 25 million more people, would fall below the SPM poverty threshold. Refundable tax credits, such as the Earned Income Tax Credit, kept 2.5 percent, or nearly 8 million Americans above the SPM poverty threshold. Other programs such as SNAP (food stamps), unemployment insurance, Supplemental Security Income, and housing subsidies also have a significant impact on the ability of families to stay afloat.



President Obama Recognizes the Economic Demands of the “Unfinished March”

In a recent New York Times interview, president Obama reminded readers that “there was a massive economic component” to the 1963 March on Washington for Jobs and Freedom. He added, “When you think about the coalition that brought about civil rights, it wasn’t just folks who believed in racial equality. It was people who believed in working folks having a fair shot.”

EPI has been using this 50th anniversary year of the march to make the same point. Our Unfinished March project highlights the fact that most of the marchers’ demands, demands with big economic impacts for working folks, were not achieved. The marchers’ demands for full employment, a living wage, adequate and integrated education, and decent housing have yet to be realized.

The video from our recent Unfinished March symposium can be seen here. Our Unfinished March publications can be found here. Register at the site to be updated about future publications and events.

What We Read Today

The President’s Economic Speech in 10 Charts (And More)

Yesterday, President Obama gave a speech at Knox College outlining his vision for the US economy. As EPI President Larry Mishel notes, the speech did a great job diagnosing the failure of our economy (and our economic policies) to strengthen and reward the middle-class, even if it was a bit light on prescriptions to address these failures. We look forward to hearing the president’s more specific proposals in the upcoming speeches he has planned.

EPI has researched and documented much of what the president described in his speech. (For a great overview on how the economy has not been working for most Americans over the past 35 years, and what you can do about it, visit our new website,

Here’s 10 figures that illustrate many of the president’s points, as well as links to some of EPI’s research on these topics.


Productivity/Wages and Top 1% Income:

Obama: “The link between higher productivity and people’s wages and salaries was severed – the income of the top 1% nearly quadrupled from 1979 to 2007, while the typical family’s barely budged.”

EPI: “The economy’s failure to ensure that typical workers benefit from growth is evident in the widening gap between productivity and median wages. In the first few decades after World War II, productivity and median wages grew in tandem. But between 1979 and 2011, productivity – the ability to produce more goods and services per hour worked – grew 69.2 percent, while median hourly compensation (wages and benefits) grew just 7.0 percent.”

– The State of Working America, 12th edition (page 7)

EPI: “Comprehensive income trends show a striking pattern in average income growth by income group: Income growth is strongly positively correlated with a household’s rank in the income distribution, and the gap in income growth between the highest-income households and the rest is enormous. For example, the top 1 percent of households registered cumulative income growth of 240.5 percent between 1979 and 2007, while households in the bottom and middle fifths of the income distribution posted gains of 10.8 and 19.2 percent, respectively.”

– The State of Working America, 12th edition (page 79)

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Government Can Make Internships More Accessible by Paying for Them

Rep. Susan Bonamici of Oregon has a great idea that will simultaneously help young people with limited means pay for college, get them job experience, and stimulate our stumbling economy. She proposes to have the federal government pay for tens of thousands of internships, making them available to low-income, Pell Grant-eligible students who could otherwise not afford to take them. Under Bonamici’s Opportunities for Success Act, H.R. 2659, the federal government would send funds to colleges and universities, which would use them to provide stipends equaling at least the minimum wage, but potentially more in situations where a student was not currently attending school (such as a summer internship) and would have to pay for food, lodging and transportation. The maximum grant would be $5,000.

The need for such a program is clear. Paid internships are increasingly important to the ability of college students to gain skills, make professional connections, and find jobs after graduation. As Rep. Bonamici says in the bill’s “Findings” section:

  • Many students struggle to make ends meet; 66 percent of young community college students dedicate more than 20 hours a week to an outside job, and the need of many students to maintain a part-time or full-time job reduces or eliminates the time available for an internship.
  • Internships often require significant time commitments or temporary relocation, which many students are unable to afford; these additional living expenses include housing, meals, and travel, and these costs make unpaid internships with employers like non-profit organizations and government even more inaccessible for those with low and middle incomes.

Unless we want to exclude students from low-income and middle-income families from important opportunities to participate in government, to make important connections, and to get their foot in the door for future paid employment opportunities, it is particularly important that we provide a means of supporting them financially while they work in government internships. This is not just a matter of economic justice but a way to ensure full democratic participation and to combat economic elitism.

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Mobility and Inequality

In Seattle, San Francisco and Salt Lake City, a child raised in the poorest 20 percent of families has more than a one in ten chance of ending up in the top 20 percent of earners as an adult. In the Atlanta area, by contrast, only one poor child in 25 will make it to that top quintile during adulthood.

Why does geography matter so much to your odds of moving up the economic ladder? One reason may lie in differences in state and local policies. In a new study, which is being presented this week at a conference of the National Bureau of Economic Research, four economists explore the link between intergenerational income mobility, and a particular subset of such policies, tax expenditures. In Monday’s New York Times, David Leonhardt used the authors’ dataset to produce a fantastic interactive piece, painting a picture of economic mobility (and immobility) across America.

The study’s authors—Raj Chetty and Nathaniel Hendren of Harvard, and Patrick Kline and Emmanuel Saez of Berkeley—find that the level and progressivity of tax expenditures are associated with increased economic mobility between generations. Even when controlling for a broad range of local characteristics, the authors find that local and state tax expenditures contribute significantly to the likelihood that a child who grows up poor will experience significant upward mobility as an adult. The economists also identify particular state-level tax expenditures (such as the earned income tax credit) that are associated with greater economic mobility. “Overall,” they conclude, “these results suggest that tax expenditures aimed at low-income taxpayers can have significant impacts on economic opportunity.”

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The President’s Speech Shows He’s Better at the ‘Whereas’ than the ‘Therefore’ Part of the Resolution.

The president did a great job framing the economic problems we face, providing a narrative on what’s happened to the broad middle class.

“…a growing middle class was the engine of our prosperity.  Whether you owned a company, swept its floors, or worked anywhere in between, this country offered you a basic bargain – a sense that your hard work would be rewarded with fair wages and benefits, the chance to buy a home, to save for retirement, and, above all, to hand down a better life for your kids.”

And then he got to the core issue, “The link between higher productivity and people’s wages and salaries was severed—the income of the top 1% nearly quadrupled from 1979 to 2007, while the typical family’s barely budged.” Couldn’t have said it better, though my colleagues and I have tried many times, (here on the productivity-wage divergence and here on the top one percent).

The question I want to raise is whether the solutions being discussed are of sufficient breadth and scale to overcome the forces driving the dismal outcomes just delineated. Let me identify some issues that stand out for me. The president makes the appropriate case for public investments in infrastructure, in clean energy and in education. In fact, these investments are critical to our future growth. But he shouldn’t pretend that there will be anything but DISINVESTMENT in the future, as  overall spending on domestic programs will be reduced by at least a fifth over the next ten years, even if the sequester is reversed. Looking specifically at public investments, Obama’s FY14 budget had nondefense public investment fall to 1.7% of GDP in 2023—the lowest since 1947—from 2.7% in 2008. And, we’ll never raise the revenues we need for these and other investments if we brag about “locking in tax cuts for 98% of Americans,” as the president did.

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Easily Sharable Minimum Wage Graphics

In a speech today outlining his economic agenda for the next two-and-a-half years, President Obama repeated his call for raising the minimum wage.

At the same time, today was a national day of action in support of a higher minimum wage. Americans throughout the country rallied to support legislation that would raise the minimum wage to $10.10 per hour and index it to inflation.

EPI has long supported raising the minimum wage, and it’s great to see the president, lawmakers and activists making the case for a minimum wage increase. Raising the minimum wage would boost the incomes of millions of Americans, provide a modest economic stimulus, and slow the growth of income inequality.

The inflation-adjusted value of the minimum wage is lower today than it was in 1968. If the value of the minimum wage had kept pace with average wages since then, it would be $10.50 today. If it had increased alongside productivity, it would be $18.75 today. And if it had increased at the same rate as the wages of the top 1.0 percent, it would be over $28 per hour.

In support of the national day of action, we made a series of graphics with facts about who would be affected by a minimum wage increase, and why it’s a good idea. They’re quick, to the point and easily shareable. The data points come from this paper. Check them out:

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President Obama Needs to Ground “Middle-Out” Economics in Broad-Based Wage Growth

Tomorrow at Knox College, President Obama will kick off a series of speeches outlining his vision for rebuilding the U.S. economy. He is expected to talk about how the economy works best when it grows from the “middle-out,” not from the top down.

Growing from the middle out is indeed the right approach to economic growth. I hope that President Obama will get to the heart of the matter, which is that, adjusted for inflation, wages and benefits for the vast majority of workers have not grown in ten years. This is true even for college graduates, including those in business occupations or in STEM fields, whose wages have been stagnant since 2002. Low and middle-wage workers, meanwhile, have not seen much wage growth since 1979. Corporate profits, on the other hand, are at historic highs. Income growth in the United States has been captured by those in the top one percent, driven by high profitability and by the tremendous wage growth among executives and in the finance sector.

The real challenge is how to generate broad-based real wage growth, which was only present during the last three decades for a few short years at the end of the 1990s.

To generate wage growth, we will need to rapidly lower unemployment, which can only be accomplished by large scale public investments and the reestablishment of state and local public services that were cut in the Great Recession and its aftermath. The priority has to be jobs now, rather than any deficit reduction (which under current conditions will sap demand for goods and services and slow job growth). This means an aggressive increase in the minimum wage that eventually grows to half of the average workers’ wage. It means reestablishing the right to collective bargaining for higher wages and addressing workplace concerns. It means not allowing guest workers to undercut wages in both high-wage and low-wage occupations, which can be done by giving full rights to any ‘guests’ and by scaling such programs to the limited situations for which they are needed. It means taking executive action to ensure that federal dollars are not spent employing people in poverty-level wage jobs. Overall, it means paying attention to job quality and wage growth as a key priority in and of itself, and as a mechanism for economic growth and economic security for the vast majority.

If we choose not to take this path, we will fail to achieve shared prosperity and return to relying on debt and asset bubbles to fuel growth. I have seen that movie already, and I didn’t enjoy it.

Hope and Cash, Investment and Policy: Jeep and the Future of Detroit

I just finished complaining in an earlier blog that the media wasn’t telling enough manufacturing and supply chain stories when Bill Vlasic proved me wrong with his piece on Chryslers’ Jefferson North Assembly Plant in Detroit: Last Car Plant Brings Detroit Hope and Cash.

Only two days later, the City of Detroit filed for the nation’s largest ever municipal bankruptcy. “Hope and cash” suddenly sounded like too little too late. It’s not. In fact, the story suggests what it takes to make recovery work.

We can all picture a Jeep. But Vlasic’s piece gives the new Jeep Grand Cherokee a powerful backstory:

“There is a section of Detroit’s east side that sums up the city’s decline, a grim landscape of boarded-up stores, abandoned homes and empty lots that stretch all the way to the river.

And in the middle of it stands one of the most modern and successful auto plants in the world.” 

The article paints a picture of today’s high-quality, high-tech manufacturing that can’t be underscored enough: making 300,000 vehicles a year with $2B a year in profit, the unionized Detroit facility is “on par with the most efficient luxury car plants in Germany and the best factories operated by Japanese automakers in the southern United States.” It’s a positive story for the auto industry and for Detroit: jobs at the plant have more than tripled, from 1,300 to 4,600, a third of employees live in the city, and its property taxes send $12 million a year to the city coffers.

Calling it the “last car plant” in Detroit is a bit misleading, however. Not only is GM’s Hamtramck facility arguably within the city limits, as are two engine plants, but from an industrial perspective, Chrysler’s plant is hardly alone. It is part of a huge cluster of automotive parts and assembly facilities in the greater Detroit area that still make up a significant share of US manufacturing output. If we’re going to bridge the gap between the auto industry’s recovery and Detroit’s, it would be more helpful to think of Jefferson North as a leader in a new generation.

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Of Final Candidates, Yellen Should Be Next Fed Chair

The choice for Ben Bernanke’s replacement as the next Chair of the Federal Reserve seems, in DC’s conventional wisdom, to have come down to Janet Yellen (Bernanke’s current deputy) or Larry Summers (a former official in both the Clinton and Obama administrations, including a stint as Treasury Secretary).

For those who think that the U.S. economy remains too weak and needs as much policy support as it can get, this seems like a pretty good choice. Both Summers and Yellen have consistently argued in the past couple of years that the primary problem facing the U.S. economy currently is slack demand.

I’d argue, however, that Yellen is the clearly correct choice for the job right now.

For one, she has been far ahead of the policymakers’ curve when it comes to diagnosing macroeconomic trouble. Recently released minutes from Federal Reserve Open Market Committee meetings in December 2007 show that Yellen was nearly alone in warning that a recession was imminent—a warning that proved correct.

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The Compensation/Productivity Link Is Indeed Broken for the Vast Majority of American Workers

On Wednesday, Jim Tankersley reported on a new study from the Heritage Foundation claiming that the apparent broken link between wages and productivity is actually just a statistical artifact.

Most of the report simply notes that compensation, not just wages, matters to American workers, that productivity and wage (compensation) growth are often calculated using different price deflators, and that one should take depreciation into account while calculating productivity.

All these are fair enough as matters of arithmetic (though we may have more to say on our interpretation of these issues, which differs a lot from the Heritage report1), and we have generally taken these factors into account in our work showing the growing gap between wages and productivity (and so have other careful analysts). So what’s the big difference between our work and the Heritage report? It’s something they spend a lot less time on.

At EPI, we don’t look simply at average compensation, but (generally) at median compensation, the compensation of a worker in the middle of the pack who makes more than half the workforce but less than the other half. This really matters;  when, say, LeBron James walks into a bar average compensation rises a lot even though  the compensation of the median person in the bar is likely unaffected.

So, average compensation does indeed track productivity growth much more closely (though not perfectly) than does median compensation. But this is just another way to make what is the entire point of the compensation/productivity gap analysis: rising inequality has kept typical Americans from seeing their compensation  track productivity.

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