Posts tagged ows

Graph of the Day: “The Great Divergence”

Yesterday morning, The Century Foundation hosted New Republic senior editor Timothy Noah for the first public discussion of his new book, The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It, which examines the economic and political policies that have widened the income gap between the richest and poorest citizens in our society over the last thirty years. (Click here for video of the event, featuring panelists Dan Alpert, Robert Hockett and Dorian Warren.)

According to Noah, the “Great Divergence”—a term originally introduced by Paul Krugman—describes the dramatic reemergence of income inequality after 1979, following several decades of wage compression and increasing equality that economists sometimes call the “Great Compression.” Before the stock market crashed in 1929, the richest 1% received nearly a quarter of all wage and capital income—until today, the most unequal time in American history. But thanks to New Deal-era policies like progressive taxation, strong labor laws and the GI Bill, the poor and working class were able to share in the benefits of America’s incredible postwar boom in productivity. Wages rose throughout the mid-2oth century, creating a large and dynamic middle class. By 1970, the income share for the top 1% had shrunk to just 9 percent. 

The Great Divergence, Noah writes, “has coincided with a dramatic decline in the power of organized labor;” the result of conservative policies that have weakened unions and allowed wealth from productivity gains to be diverted from labor to capital. Congressional support for labor faltered in the late 1970s, and the Reagan administration was notoriously hostile towards the movement. After peaking in 1954 at about 40 percent of the private sector workforce, union density today stands around 7 percent—the same level as in 1933. “It’s as if the New Deal never happened.”

By 2007, the income share for the top 1% had returned to its 1928 peak of 24 percent—a figure thatresearch suggests may be even higher now, despite the 2007-2009 recession. And the decline of organized labor is just one piece of the puzzle. In his book, Noah explores a whole range of reasons for inequality’s rise, taking time to refute the supposed impact of race, gender (women entering the workforce) and immigration. Better explanations include a rising college wage premium, an increase in corporate lobbying in Washington, regressive tax policies and competition from low-wage labor markets in China and the developing world (Noah estimates trade with low-wage nations is responsible for 12 to 13 percent of the Great Divergence, “and perhaps more”). 

As a result, the United States has one of the highest levels of income inequality in the developed world, and is now one of the least socially mobile as well. Such a society, Noah concludes, is less reflective of our democratic ideals with each passing day. We can, and should, do better.

Video: Timothy Noah on America’s Growing Inequality Crisis

This morning I had the pleasure of helping host New Republic senior editor Timothy Noah for the first discussion of his newly released book, “The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It,” at The Century Foundation in New York City.

Joining Tim were four excellent panelists (from left to right in the photo  above): Greg Anrig, vice president for policy at The Century Foundation; Timothy Noah; Daniel Alpert, Century Foundation fellow and founding managing partner of Westwood Capital; Robert Hockett, Century Foundation fellow and professor at Cornell Law School; and Dorian Warren, assistant professor of International and Public Affairs at Columbia University.

I’ll be posting more about Tim’s presentation and his new book later this afternoon, but in the meantime, check out the video recording of the event below.

Video streaming by Ustream

Student Debt and the Middle Class (Part 3)

Part Three of a three-part series on student debt and the middle class. Click here to read Part One and click here to read Part Two.

With the price of a college education rising three times faster than median family income and total student loan debt exceeding $1 trillion, Congress must act quickly to reign in costs if our high-skill labor market is to remain globally competitive. Already, the United States has fallen behind Canada, Japan, and South Korea in the production of college graduates; experts estimate the U.S. must increase postsecondary access and degree production by 4.2 percent annually just to catch up.

The primary obstacle is the cost: a college degree is expensive, and controlling soaring tuition rates won’t be easy. State schools, which educate 75 percent of all undergraduates, including the 42 percent enrolled at community colleges, are largely dependent on government funding to subsidize what is supposed to be a public good. But when the Great Recession forced states to choose between raising taxes and slashing the budget for higher education, the majority of states chose the latter. According to the Delta Cost Project, nearly all public sector tuition increases in 2009 were the result of cost-shifting to replace declining state funding, raising troubling questions for the future sustainability of the entire public education model. At nearly every one of the 2,000 institutions surveyed in Delta’s eleven-year dataset, increased revenues from student tuition were used to offset disappearing subsidies; almost none was spent on the students or the cost of their education.    

Both public and private colleges must also find ways to cut costs and increase efficiency. Because student loan money is plentiful—and often guaranteed by the federal government—schools don’t necessarily have an incentive to make tough budgetary choices. Many students readily take on $20,000 or more in debt to pay for an undergraduate degree, making the demand for higher education both high and relatively inelastic (unresponsive to price increases). Research shows that private colleges in particular compete for undergraduates’ dollars by overspending on luxurious athletic facilities and residential amenities, helping students relax while the interest on their loans grows higher and higher. Absent government intervention, it is not clear what might change these market forces, which are pushing colleges in the direction of rising tuition, greater inequality, less efficiency, and higher student debt.  

President Obama has advanced several policies that could break that cycle. One proposal would divert federal aid from colleges that raise tuition excessively, and would include performance reviews of schools’ success at enrolling and graduating low-income students, their job placement rates for recent graduates, and students’ ability to repay their loans. At the same time, the president would expand funding for Federal Work Study, Supplemental Education Opportunity Grants, and the Perkins loan program by $10 billion, increasing the incentive for colleges to comply with the new standards. “You can’t assume you’ll just jack up tuition every single year,” Obama told a crowd at the University of Michigan in January. “If you can’t stop tuition going up, your funding from taxpayers will go down. We should push colleges to do better; we should hold them accountable if they don’t.”

Plenty of questions remain. Would the policy punish public colleges that hike tuition rates to compensate for reduced state subsidies? Could the plan end up hurting the low-income students it is designed to help, or lead to even greater disparities in quality between rich and poor institutions? It’s even less clear how the private market for student lending should be reformed. Virtually unlimited private loans ensure broad access to higher education for students willing to take the risk, leaving few incentives for colleges to increase productivity and reduce costs.

The president’s carrot-and-stick approach may increase experimentation and yield results. But in the short term, the fundamental question is whether the public is willing to consider increasing spending on higher education as a matter of civic duty. State tax revenues account for the majority of subsidies for the public and community colleges that educate three-fourths of all U.S. undergraduates. Until congressional legislation reforms the market for higher education, funding these programs remains the surest way for us to sustain the vibrancy of our nation’s middle class and invest in its future. 

Student Debt and the Middle Class (Part 2)

Part Two of a three-part series on student debt and the middle class. Click here to read Part One.

A trillion dollars of student loans may not be the next subprime crisis, but it is delaying traditional middle-class aspirations like home ownership. Around one million students will graduate college in debt this spring, with an average $23,000 to be paid off over a period of ten to twenty years; more than enough to discourage young people who might otherwise have taken on a mortgage on their first house.

According to Census data, less than half of those aged 25–34 years old are homeowners today, the lowest percentage since 1999. Despite a brief upsurge in young homeowners signing subprime leases during the heady days of the mid-2000s, on net nearly all of the 11 million unit household growth of the last ten years occurred among older households, while Millennials—children of the Baby Boomers born between 1982 and 2000—are now overwhelmingly choosing to rent or move home with their parents. That’s problematic because first-time buyers are critical to the health of the housing market, which depends on new blood to finance older sellers’ movement into the higher ranges of the market. It’s also a major contributing factor in the continued weakness of the construction sector: single-family housing starts for February were down 12.5 percent from the same time two years ago, while renter-friendly housing was up 197.5 percent.   

Although housing prices have fallen by about a third from their 2006 peak, and interest rates are near historic lows, just 9 percent of those aged 29–34 years old got a first-time mortgage from 2009 to 2011, compared to 17 percent a decade earlier. Of course, much of the slowdown in Millennial’s household formation is due to the recession: their employment-to-population is near 45 percent, the lowest it’s been in sixty years, and many of those with jobs are working part-time or at jobs that don’t require a college degree. But a trillion dollars in student loans has added an unprecedented debt overhang to the mix, worsening generational problems such as underemployment and low consumer spending. Those loans will be “a drag on the economy for the foreseeable future,” according to National Association of Consumer Bankruptcy Attorneys vice president John Rao. ”Just as the housing bubble created a mortgage debt overhang that absorbs the income of consumers and renders them unable to engage in consumer spending that sustains the economy, so too are student loans beginning to have the same effect.”

Century Foundation Fellow Dan Alpert also worries that student loans, which act as a tax on future wages, will cost the economy down the road: “Just as during the mortgage crisis, the increases in consumer debt—assuming limited growth over the next few years—is pulling forward consumption from future periods that will not be repeated because of the increased debt load.” Unfortunately, Americans have done a poor job of deleveraging since the recession; total consumer credit has actually increasedabout 9 percent since this time last year. But much of the increase in outstanding consumer credit has been driven by the outsized rise of student loan debt, which last year surpassed total credit card and auto loan debt. Experts believe this confluence of factors—debt overhang, high unemployment, changing patterns of consumer behavior—may lead to a “spending void” that Millennials will be unable to fill as their Baby Boomer parents retire. So while a trillion dollars of student debt may not be enough to topple Wall Street, the impact of Millennial debt on traditional middle-class consumer behavior—purchasing a home, buying a car and starting a family—may be more insidious and long-term than we yet realize.  

A Recovery for the One Percent

The top 1% captured 93% of the income gains in the first year of recovery.

That is the shocking new statistic from income inequality expert Emmanuel Saez, whose latest data for the World Top Incomes Database shows that America’s richest 1 percent survived the Great Recession just fine. Back in 2011, some commentators,Megan McArdle among them, suggested that the financial crisis might have affected the trend toward greater inequality. No data was yet available to substantiate a claim either way, although a slew of dramatic trend pieces from the New York Times seemed to suggest the party was over for the 1 percent. Saez’s new data should put that claim to rest. Income inequality is indeed back, and rising as fast as ever.    

Jeffrey Sachs and Niall Ferguson Debate Occupy Wall Street

CNN:

On GPS this weekend, historian Niall Ferguson squared off against economist Jeff Sachs on occupy Wall Street. Here’s a transcript of what they had to say (you can also watch the lively debate in the video above):

Fareed Zakaria: Jeff, you were at Occupy Wall Street. You’ve in a sense lent it support. Why do you do that? What do you think is going on there?

Jeffrey Sachs: Well, I think they have a basically correct message that when they say “we are the 99 percent,” that they’re reflecting the fact that the top one percent not only ran away with the prize economically in the last 30 years, but also took the power, manipulated it, twisted it, broke the law. Brought the world economy to its knees actually, and it’s time to correct things. And I think that that’s what Occupy Wall Street is really about. The fact that every marquee firm on Wall Street broke the law in a major way, it’s now paying a series of fines. Some people are going to jail. People are disgusted about this. 

Fareed Zakaria: But isn’t what has caused the one percent or five percent of the top to do well, these very broad forces of technology, the information revolution which have empowered global knowledge workers, which have empowered capital rather than labor? So if it’s all these much bigger structural forces, is it going to be remedied by some kind of political solution like a Buffett tax?

Read more »

Graph of the Day: Has the Decline of Unions Made America Less Equal?

By Benjamin Landy

Last week, The Century Foundation hosted author and labor lawyer Tom Geoghegan and Senior Fellow Richard Kahlenberg for an informal panel discussion about their upcoming book, “Labor Organizing as a Civil Right,” which is being co-written by civil rights layer Moshe Marvit. TCF plans to release the book in April to coincide with the anniversary of the assassination of Martin Luther King Jr., a champion not only of civil rights, but also economic justice and the rights of labor.

King’s last act, before his untimely death in 1968, was to support the Memphis sanitation workers, who were striking for higher wages and equal treatment. In their forthcoming book, Geoghegan, Kahlenberg and Marvit aim to expand upon King’s legacy as a labor leader by proposing an amendment to the Civil Rights Act that would improve legal protections for workers trying to unionize. By framing the issue as a matter of civil rights, the authors hope to reenergize the debate over labor law reform, which is too often perceived as benefiting only “special interests” at the expense of the public.

Part of the problem is that union participation itself has fallen dramatically since King’s day, from a high of around 35 percent in the private sector during the 1950s to less than 7 percent today. And as the power of labor has declined, wage inequality, predictably, has shot up—40 percent since 1973. In fact, according to a recent study by Bruce Western and Jake Rosenfeld, published in American Sociological Review, income inequality today would be 20 percent lower if union density had remained  at 1973 levels, and a full third lower if you account for the effect of union wages on nonunion employers, who often raise wages to stay competitive.

Source: Western and Rosenfeld, 2011 

That shouldn’t come as a surprise to most Americans. Until the early 1970s, working class families shared in the increased prosperity created by rising productivity. But as union participation began to decline, the link between productivity gains and rising wages decoupled. As a result, 33 percent of all income gains since 1979 have gone to the top 1 percent, while the household income for most middle class families has stagnated. That trend, Western and Rosenfeld argue, has been intensified by the weakening of institutionalized norms of equity.  

[Our] analysis suggests that unions helped shape the allocation of wages not just for their members, but across the labor market. The decline of US labor and the associated increase in wage inequality signaled the deterioration of the labor market as a political institution… The de-politicization of the US labor market appears self-reinforcing: as organized labor’s political power dissipates, economic interests in the labor market are dispersed and policymakers have fewer incentives to strengthen unions or otherwise equalize economic rewards.

[Prior to 1973,] unions offered an alternative to an unbridled market logic, and this institutional alternative employed over a third of all male private sector workers. The social experience of organized labor bled into nonunion sectors, contributing to greater equality overall. As unions declined, not only did the logic of the market encroach on what had been the union sector, but the logic of the market deepened in the nonunion sector, too, contributing to the rise in wage inequality.

There are a number of theories that help explain the decline of labor over the last half century. Tom Geoghegan places much of the blame on the Taft-Hartley Act, which imposed limits on unions’ ability to strike, while others point to shifting cultural and business norms and the evolving structure of the market, from a manufacturing to a post-industrial consumer economy. More important, though, is to focus on what we’ve lost: a crucial economic and political institution that has been a relentless advocate for workers’ rights and middle class families throughout America’s history. If Congress can be convinced that labor rights constitute a civil right (as the UN Declaration of Human Rights already acknowledges), perhaps we can reduce the income gap and once again expand the middle class.