In Defense of Warren Buffett
By Benjamin Landy
Billionaire investor Warren Buffett became a controversial figure last week, when his provocative op-ed, Stop Coddling the Super-Rich,” landed prominently on the New York Times editorial page. “My friends and I have been coddled long enough by a billionaire-friendly Congress,” Buffett wrote. “ It’s time for our government to get serious about shared sacrifice.” His suggestion, that the government immediately raise taxes on Americans making more than $1 million — and even more so on those making in excess of $10 million — set off a firestorm of criticism from conservatives.
Among the more misguided attacks was a CNN.com opinion piece by Jeffrey Miron, a senior fellow at the Cato Institute and director of undergraduate studies at Harvard University, who outright dismissed the significance of increased government revenues. “The first problem with Buffett’s view,” Miron writes, “is that the number of super-rich is too small for higher rates to make much difference to our budget problems. […] Imposing a 10% surcharge on this income would generate at most $73 billion in new revenue – only about 2% of federal spending.”
Miron is right that $73 billion won’t solve our “budget problems,” which I take to mean our $14.4 trillion national debt. Nobody is arguing that. But that hardly means $73 billion is inconsequential. In order to illustrate just how much money $73 billion is, I did some research to discover some of the things you could buy with that kind of money. The graphic below shows just a few examples.
If you were more militarily inclined, $73 billion could also buy you 16 Nimitz-class nuclear-powered aircraft carriers — the largest and most powerful capital ship in the world — or 1,327 brand new F/A-18 Super Hornets from Boeing. And $73 billion could quintuple NASA’s operating budget, providing enough funds to develop and maintain an international lunar base for the next five years, according to CSIS cost analysis. Less than half that amount would provide safe drinking water for the entire planet, helping save the nearly 6,000 children who die every day from diseases associated with contaminated water supplies.
No matter how you choose to look at it, $73 billion is a lot of money. With all of the problems our country is facing today, can we afford to turn it down?
Israel’s Settlement Enterprise
By Sarah M. Aoun
With a United Nations vote on Palestinian statehood looming in September, international pressure has been building on Israeli Prime Minister Benjamin Netanyahu. In recent weeks however, a new and internal threat has emerged to challenge the Israeli PM. Since July, thousands of Israelis have been protesting against the rising cost of housing in Tel Aviv and its outskirts, putting an unaccustomed domestic spotlight on the settlement enterprise in occupied territories that has so drained Israeli resources.
While protestors — in what has been considered Israel’s largest demonstrations on any issue in over a decade — criticize what they consider to be the government’s indifference to the incredibly high cost of living, this does not seem to be the case in the West Bank and East Jerusalem. There, government subsidies of Israeli settlements offer economic incentives difficult to refuse.
Indeed, over the past several decades, the Israeli government has adopted an encouraging policy towards population shift and settlement building – globally considered to be a violation of international law. This investment across the Green Line has been intended to, and undoubtedly succeeded in, leading to an exponential settlement growth.
Settlements have been one of the most urgent and worrying elements of the Israeli-Palestinian conflict since 1967. Over the past 35 years, more than 500,000 Israelis have made their homes in the West Bank and East Jerusalem, with leaders of the settler movement aiming to dash hopes of making these territories the core of a future Palestinian state.
Graph of the Day: For the Long-Term Unemployed, Finding a Job is Only Getting Harder
By Benjamin Landy
For the long-term unemployed in America, life is only getting harder. While national unemployment remains high at 9.2 percent, near where the rate has stuck for the last two years, the average number of weeks an unemployed worker has been jobless is still growing. According to the Bureau of Labor Statistics, if you are one of the 14 million unemployed today, the odds are you’ve been unemployed for at least five months, or nine months if you look at the arithmetic mean.
Source: Bureau of Labor Statistics
Unfortunately, more and more businesses are using current employment as a proxy for employability, meaning the long-term unemployed face mounting discrimination and ever diminishing prospects compared to their recently laid-off peers. And, unlike discrimination based on race, ethnicity, disability, religion, sex and age, employers are entirely within their legal rights to use unemployment –especially long-term unemployment – as grounds for rejection. So while the number of people unemployed for less than 5 weeks declined by 387,000 in July, the number of people unemployed for over 27 weeks barely changed, holding steady at 6.2 million.
Only New Jersey has outlawed this kind of discrimination, and although several other states are considering similar legislation, the 6 million Americans who have been without work for over six months are still in serious trouble. According to a new report by the National Employment Law Project - an advocacy group for the employment rights of low wage workers - the half-year mark is a watershed moment in the eyes of many employers. Many companies are far less likely, even unwilling, to hire people who have been unemployed for over six months.
Until the unemployed are able to find work, we should extend their jobless benefits for another six months, which studies show generates two dollars of economic growth for every one dollar the federal government spends. Without bipartisan support to continue these unemployment insurance programs, many millions of Americans may find themselves in poverty when their benefits expire at the end of this year.
Graph of the Day: The New Politics of Austerity
By Benjamin Landy
With millions of Americans out of work, slow economic growth, and now Standard and Poor’s downgrade of U.S. debt, consumer confidence is plummeting to new lows, making the prospect of a double-dip recession all the more likely. According to the latest Gallup poll, Americans’ economic confidence fell to -53 this week, a level not seen since the peak of the recession in 2009, while 77 percent now believe that economic conditions are only getting worse – nearly 20 percent more than this time last year. Without fast, meaningful action by Washington, aggregate demand will fall and consumer confidence will further collapse — yet both House Republicans and the Obama administration continue to insist on contractionary austerity measures that will do nothing to create jobs or help ordinary Americans.
When consumer confidence is this low, government spending is generally used to temporarily boost demand, creating a positive feedback loop of economic growth; this is the crux of Keynesian economics. Governments, unlike families, can run large deficits during recessions so long as revenues increase once the economy recovers.
Recently however, it has become clearer that the last 30 years of borrowing have been something of a crutch. We have been artificially bolstering demand that should otherwise have been significantly decreased by the demographic force of the Baby Boomer retirement, and the ever-growing income inequality that has drained the resources of the middle and lower class. By eliminating the Bush Tax Cuts, we could generate substantial new revenues to inject back into the economy. Instead, the bottom 90 percent of American households are deleveraging, painfully, and will continue to do so for some time.
But the United States — again, unlike a household — does not have to do this. As the recent surge in bond prices indicates, there is still massive demand for American debt, despite S&P’s downgrade. In a consumption-driven economy such as ours, we should be spending more now, to create new jobs and self-sustaining growth, not tightening the purse strings even further. Anti-Keynesian fiscal conservatism cannot create growth during a recession. Instead, it will strangle what little demand is left in the economy, and consumer confidence with it.
Graph(s) of the Day: Can Higher Education Solve the Jobs Crisis?
By Benjamin Landy
With the fragile U.S. economy struggling to recover and millions of Americans still out of work, many pundits and policy makers have taken to claiming that high unemployment is a structural, not cyclical problem. In other words, the issue is not that there is low consumer demand — and therefore low demand for workers — but rather that unemployed workers do not have the skills or education that employers require. Further, it is claimed that as the economy returns to full employment, businesses will be stymied by a significant lack of qualified college graduates.
However, a recent report (PDF) by the Economic Policy Institute shows that there is little evidence to support the claim that higher education is the solution to the current jobs crisis, including rising wage and income inequality.
According to Lawrence Mishel, the author of the report, there have been far too few job openings for all of the unemployed looking for work, suggesting the underlyling economic problem remains cyclical low demand. As the above graph from the report shows, the ratio of unemployed workers per job opening remains nearly twice as high as at the peak of the 2001 recession. And the current jobs shortfall is not just in one or two affected industries, like construction, but across all sectors. Neither does one education group account for the increase in long term unemployment, as the structural argument would suggest.
Taxing the Poor
By Benjamin Landy
However bad the debt ceiling deal may look to progressives, we can at least be relieved that the government has avoided default, for now. What was once the far right of the Republican Party, and is now its center, managed to rein in its more eschatological elements, who were actively inviting default. At the end of the day, senior citizens will continue to collect their Social Security checks, and children on Medicaid will be able to see a doctor. Still, the drama of the past several weeks has revealed just how radical and polarized the debate over the economy has become, with many Republicans even suggesting that taxes aren’t high enough… on the poor.
It began last April, when House Majority Leader Eric Cantor (R-VA) was asked about the debt ceiling on CNBC. Redirecting attention from the question of whether taxes should be raised on the rich, Cantor interjected, “we also have a situation in this country where you’re nearing 50 percent of people who don’t even pay income taxes.” The talking point was quickly picked up by Cantor’s colleagues, and broadcast throughout conservative media. “The place where you’ve got to get revenues has to come from the middle class,” Senator Orrin Hatch (R-UT) told MSNBC. “[We have] to make sure that there’s a civic duty on the part of every one of us to help this government to, uh, to be better.” And Senator Dan Coats (R-IN) reiterated the talking point just last week, arguing that “everyone needs to have some skin the game… we all have a stake in this country and what needs to be done. I think it’s important that this burden not just fall on 50 percent of the people but falls on all of us in some form.”
This statistic, while not technically wrong, is purposefully misleading — based on a selective definition of taxes that excludes about three fifths of all revenues. While it is true that 51 percent of tax filers do not make enough money to qualify for even the lowest income tax bracket, they are still subject to payroll, state, local, and sales taxes.
Source: Congressional Budget Office, 2005
Payroll taxes, which are deductions for Social Security, Medicare and unemployment insurance, are mostly paid by the bottom 90 percent of earners; about 75 percent of all American households actually pay more in payroll taxes than in income taxes. And although around a quarter of Americans pay no taxes at all, they are mostly students, the elderly, or the unemployed.
Source: Office of Management and Budget
As the above graph shows, employment taxes have been growing as a proportion of total US revenues for at least the last fifty years, and will soon eclipse income taxes if the current trend continues. Corporate taxes have also fallen dramatically as a percentage of revenues, from a high of 32 percent in 1952 to just 6.6 percent in 2009.
Throughout the debt ceiling crisis, Republicans have employed the “51 percent of Americans pay no taxes” meme to shift blame towards the poor and middle class, at a time when populist anger might have been directed against the wealthy. The truth is that when payroll taxes are factored in atop federal and local income taxes, the effective tax rate for people earning over $370,000 a year is nearly identical to those middle class households earning between $43,000 and $69,000. America’s richest citizens, despite Republican protestations, are paying far less of their share than they were a generation ago, leaving the United States with one of the greatest income gaps in the developed world.
Reposted from my Graph of the Day Series at Taking Note.
The Debt Ceiling: When Raising Taxes is Fiscally Responsibile
By Benjamin Landy
As the debate over the debt ceiling slogs along in Washington, it’s instructive to step back and look at how the federal balance sheet has evolved since the end of World War II. Until the 1970s, tax revenues and spending levels were fairly closely aligned. Significant deficits began to arise in the aftermath of the OPEC oil shocks, which sent the economy into a period of high inflation and low growth. But deficits became much larger during the Reagan administration, caused mainly by his huge tax cuts and escalation of defense spending. Even though he was subsequently forced to raise taxes eleven times, Reagan was still unable to make a dent in the staggering $2.3 trillion debt that the United States accrued during his tenure.
Source: Office of Management and Budget, Historic tables
Large deficits persisted through the George H.W. Bush administration, despite the tax increases he approved. But after the budget deal that Bill Clinton signed into law in 1993 without a single Republican vote in Congress, which included tax increases and spending reductions, deficits began to decline. Aided by a vibrant economy in the second half of the decade, deficits actually transformed into surpluses. Contrary to what supply-side ideology predicted, real GDP growth averaged 4 percent for the rest of the 1990s.
The sizable budget surplus of the Clinton years was intentionally erased by the Bush tax cuts of 2001 and 2003, reducing revenue by at least $2.9 trillion over the last decade, according to a recent Congressional Budget Office report; another $3.5 trillion in lost revenues is attributable to slowed economic growth. The additional cost of two wars and an unfunded Medicare drug benefit combined to create shortfalls that were even wider then during the Reagan era. According to conservative economist Bruce Bartlett, the interest cost on the deficits created by the Bush tax cuts are responsible for increasing the national debt by $3.2 trillion, or “27 percent of the fiscal deterioration since 2001.” With the Great Recession, government revenues have crashed further even as spending on social safety net programs has risen, leading to even deeper deficits.
Still, the GOP continues to hammer away at the same, disproved talking-points. “There’s no evidence whatsoever that the Bush tax cuts actually diminished revenue,” Mitch McConnell (R- Kentucky) said last year. “They increased revenue because of the vibrancy of these tax cuts in the economy.” Former Minnesota Governor and Republican presidential candidate Tim Pawlently recently echoed the sentiment: “Keep in mind, whether it be the Bush tax cuts, the Reagan tax cuts, or other tax cuts, they always produce an increase in revenue.” But if that were true, you would expect tax revenues to be on the rise. Just the opposite: this year, in spite of some of the lowest tax rates in the nation’s history, the CBO estimates that revenues will be just 14.4 percent of GDP, the lowest percentage since 1950.
Reposted from my Graph of the Day Series at Taking Note.
The Return of the Gilded Age, Ctd.
By Benjamin Landy
Although we primarily looked at the United States yesterday, increasing income inequality is undeniably a global trend. Economists and politicians frequently cite the inexorable process of “globalization” as the driving mechanism for this change. As low-wage labor in Asia and the third world became available to world markets, multinational corporations had little reason to maintain their manufacturing bases in America and Europe. The blue-collar jobs that supported much of the middle class disappeared overseas, causing wages to decline for less educated workers. A corollary hypothesis is that we have experienced “skill-biased technological change,” with advances in information technology shifting demand toward highly skilled and better educated labor. The profits from consequent gains in productivity likewise filtered to the top.
(Source: Piketty and Saez, 2005)
However, while the entire world has been affected by globalization, not all first world nations have suffered equally. In fact, the increase in income inequality in several European countries has been mild in comparison to the United States, suggesting that the economic impact of globalization can be mitigated by effective policy, including taxes and social transfers.
Although we will be looking more closely at the so-called “social market economies” of Europe in later posts, it is worth noting here that the higher taxes and lower income inequality of the SMEs has not adversely affected their GDP growth, as is often claimed would happen in the United States if we were to adopt similar policies. In his 2005 “Inequality and Prosperity: Social Europe vs. Liberal America” (a Century Foundation book), Princeton University professor Jonas Pontusson demonstrated that GDP growth rates for European SMEs actually outpaced liberal market economies (LMEs) like the United States from 1960 to 1980, and remained at nearly the same rate through 2000.
The above graph, which compares national Gini coefficients (a measure of inequality wherein ‘1’ represents all the money in the economy going to one individual, and ‘0’ indicates complete equality), shows that the United States is by far the most unequal society of its peers. (Social scientists often cite a Gini coefficient between 0.4 and 0.5 as a tipping point for potential social instability, though no such fears have yet manifested themselves in the United States.) Although several nations have comparable levels of inequality before taxes and transfers — including a few with even higher levels of inequality, like Italy and France – the United States continues to do the least to redistribute wealth to the poor and middle class.
Reposted from my Graph of the Day Series at Taking Note.
The Return of the Gilded Age
By Benjamin Landy
The way you feel about the above graph, a version of which sits telling on the eleventh page of the Obama administration’s 2010 budget proposal, “A New Era of Responsibility,” is somewhat unique in its effectiveness as a test of your political and moral outlook. Unlike charts that illustrate issues of bipartisan concern, like lingering unemployment or the national debt, the above depiction of our rapidly increasing income inequality is something of an ideological watershed; either you believe that the current disparity in wealth – unseen since the pre-New Deal, laissez-faire era of the Gilded Age and the Robber Barons – is ultimately a positive development for America, or you don’t.
The liberal French economists who compiled this data, Thomas Piketty and Emmanuel Saez, are naturally objects of scorn among many in the Republican Party, dominated as it is by ideologues of the Randian and radical libertarian Right. (The Wall Street Journal‘sDaniel Henninger backhandedly dismisses them as “rock stars of the intellectual left.”) To their mind, Piketty and Saez’s inequality research is tantamount to an incitation of class warfare, or at the very least a moral argument for redistribution.
And, in a sense, they’re right. That almost half of all income goes to the top ten percent of earners, with nearly a fifth of all wealth flowing to the top one percent should constitute a moral argument for more progressive taxation. That is why President Obama’s inclusion of a Piketty and Saez graph in his 2010 budget immediately set off alarm bells throughout the conservative blogosphere (although the administration’s recent capitulations have proved those worries to be largely unfounded) and provided hope to liberals.
But redistribution is not a punitive measure. It is an essential part of the American social contract, which has provided for the poor and supported the middle class since the birth of modern liberalism in the 1930s. Redistribution provides the revenue that allows the government to build roads and schools, put police and firemen on the streets, and protect consumers by regulating industry. It is also, fundamentally, the logic behind unionization - increasingly a relic of the past.
It is that moral vision – of an equitable, middle class America – that is under siege as the line representing the wealthiest members of society surpasses the inequality of the 1920s.
The GOP insists that lower taxes, less regulation of financial markets, and the piecemeal dismantling of social safety nets will return the nation to its former glory. Couched deceptively in the patriotic rhetoric of a mythologized 1776, skyrocketing inequality is rebranded as an expansion of liberty, freedom as the renunciation of civic duty.
The trend lines of these graphs should be a warning and a call to action. As Paul Krugman pointed out in 2002 (in a very worthwhile NYT article), it appears increasingly obvious from the data that “the middle-class America of my youth is best thought of not as the normal state of our society, but as an interregnum between Gilded Ages.” Let us hope that it is not yet too late to reverse the trend.
Reposted from my Graph of the Day Series at Taking Note.
America’s Prison Problem, Ctd.
By Benjamin Landy
Following Tuesday’s post on America’s disturbing incarceration rate – the highest in the world by a wide margin – it is worth taking a closer look at the true economic cost of keeping one out of every 48 working-age men in prison or jail.
According to a 2010 report by the Center for Economic and Policy Research (CEPR), federal, state, and local governments spent about $75 billion on corrections in 2008, most of which paid the high cost of keeping inmates incarcerated. CEPR estimates show that reducing the number of non-violent offenders in prisons and jails would lower this cost by almost $17 billion per year, with most of the savings going towards the most financially strapped states and local governments. And, according to the report, “every indication is that these savings could be achieved without any appreciable deterioration in public safety.” This is because, as the below graph demonstrates, while incarceration rates have remained unacceptably high, the violent crime rate has been dropping since 1992.
The gap between the number of people in U.S. prisons and the violent crime rate has been diverging significantly since violent crime peaked in 1992. While the incidence of violent crime has been decreasing for almost two decades, incarceration rates have continued to rise, reaching nearly 600% of their 1975 levels in 2008. Currently, non-violent offenders make up over 60 percent of the prison and jail population, with drug offenders accounting for about a quarter. That is a staggering 250% increase since 1980, when less than 10 percent of the prison population were non-violent drug offenders.
The cost of housing each individual inmate, according to the Center for Effective Public Policy, is approximately $35,000 a year. With the recession taking a particularly harsh toll on local governments, many states have been forced to reconsider the policies that lead them to imprison so many people. Appearing “tough on crime,” usually an uncomplicated position for politicians during election years, has begun to look increasingly unsustainable.
However, the problem of America’s overcrowded prisons represents not only a fiscal crisis, but also a humanitarian one. On May 23rd, the Supreme Court upheld in a 5-4 decision the ruling of a lower court that ordered California’s prisons to reduce their number of inmates by 30,000, citing the Eighth Amendment’s ban on cruel and unusual punishment. The lower court had written that “an inmate in one of California’s prisons needlessly dies every six or seven days due to constitutional deficiencies.”
A gym used as a dormitory in an overcrowded prison in Chino, California, in 2007. Source: NYT.
Reposted from my Graph of the Day Series at Taking Note.
America’s Prison Problem
By Benjamin Landy
According to the New York Times, the United States has less than 5% of the world’s population, but holds almost a quarter of the world’s prisoners.
The reasons for this incredible discrepancy are myriad, complex, and fiercely debated. However, we do know that prison sentences tend to be far longer in the United States than in most other countries, and that Americans are habitually locked up for petty crimes (like abusing drugs or writing bad checks) that would rarely result in time behind bars elsewhere.
Looked at as a graph, the numbers are shocking. Only Russia and Rwanda come close to the incarceration rate of the United States, which is easily the highest in the world. Amazingly, there are nearly eight times as many prisoners per capita in America than in Europe.
Adam Liptak considers some of the numerous explanations:
“Criminologists and legal experts here and abroad point to a tangle of factors to explain America’s extraordinary incarceration rate: higher levels of violent crime, harsher sentencing laws, a legacy of racial turmoil, a special fervor in combating illegal drugs, the American temperament, and the lack of a social safety net. Even democracy plays a role, as judges – many of whom are elected, another American anomaly – yield to populist demands for tough justice.”
Many experts further attribute America’s extreme incarceration rate to the easy availability of guns, which contributes to a murder rate four times that of Western Europe, and the DEA’s efforts to combat drugs. While the American incarceration rate held relatively stable from 1925 until 1975, at around 110 prisoners per 100,000 people, that ratio began to increase rapidly in the late 1970s, as politicians competed to appear “tough on crime.”
In 1980, before the so-called “War on Drugs” shifted into high gear, there were only about 40,000 people serving time for non-violent, drug-related crimes in the United States. Today, that number is close to half a million, and still climbing.
Reposted from my Graph of the Day Series at Taking Note.
America’s Rigid Class Structure
By Benjamin Landy
Social mobility in the United States has fallen as the country’s income distribution has grown more unequal, meaning that it is now less likely that children of the lower and middle classes will grow up to live better lives than their parents did. According to the Center for American Progress, children from low-income families in the United States now have only a 1 percent chance of reaching the top 5 percent of the income distribution, while the children of the rich have about a 22 percent chance. Children born into families in the middle quintile of the income distribution (the 40th-60th percentile) actually have a higher chance of ending up in a lower income bracket (39.5 percent) than a higher one (36.5 percent), while their chance of reaching the top fifth percentile is under 2 percent.
International comparisons show that along with Italy and the United Kingdom, which also have relatively rigid class structures, the United States ranks among the least socially mobile countries in the OECD, and has the highest income inequality to boot. This graph looks at various countries based on a measurement of intergenerational income elasticity in which a level of one indiciates that the average child’s eventual income will be the same as that of his or her parents, ranging to zero when there is no correlation between family background and adult earnings.
Source: OECD
Although the “American Dream” has long been a critical facet of our national identity, by international standards, the United States actually has an especially poor degree of intergenerational mobility - worse than France, Germany, Canada, and Australia, not to mention the “social” market economies of Sweden, Norway, and Finland.
The Center for American Progress also found that education, race, health and state of residence were the four key factors in determining to what degree economic status was transferred from parents to children, with race and education being particularly important. In the United States, African American children born into the bottom quartile are nearly twice as likely to remain in that position as their white peers, and four times less likely to advance into the top quartile.
Reposted from my Graph of the Day Series at Taking Note.
