Who Benefits From Our “Entitlement Society”?
“Even Critics of Safety Net Increasingly Depend on it,” read a recent New York Times headline, capturing in a sentence the uncertain and contradictory sentiment of millions of middle class Americans who say they want the government out of their lives, but admit they count on Social Security, Medicare, and other benefits to stay afloat. Chisago, Minnesota—the archetypal heartland county in which much of the article takes place—is illustrative: a former Democratic stronghold, now with a declining middle class and a decidedly conservative outlook, whose residents struggle to reconcile their resentment with reliance on entitlement programs.
The remaining Republican presidential candidates have seized upon that resentment to construct an alternative narrative to the one President Obama favors. While the administration talks about helping hard-working Americans to get back on their feet after the worst economic downturn since the Great Depression, Mitt Romney has warned that the United States is becoming an “Entitlement Society,” with dependence on government fostering “passivity and sloth.” Rick Santorum talks of social insurance “systematically destroying the work ethic.” And Newt Gingrich has called Mr. Obama a “food-stamp president,” suggesting that “the African-American community should demand paychecks and not be satisfied with food stamps.”
But this racially-charged 
narrative—able-bodied young people collecting government benefits instead of finding honest work—couldn’t be farther from the truth. According to a new report from the Center on Budget and Policy Priorities, more than 90 percent of government benefits went to the elderly, the seriously disabled, and members of working households in 2010. The majority of the remaining 9 percent went to medical care, unemployment insurance (which requires previous work experience), Social Security survivor benefits (for children and spouses of deceased workers), and early Social Security benefits. The CBPP analysis also finds that among entitlement programs that target only low-income households, five out of every six dollars were spent on the elderly or disabled (probably a low estimate, as the data comes from 2010, when the national unemployment rate averaged a historic 9.6 percent).
The CBPP data should also quash the Republicans implication that the poor benefit from entitlement programs at the expense of the middle class. In fact, the graph below shows that the middle class receives a proportionate share of benefits, while only the top 20 percent of the population receives less. Compare that to the distribution of tax credits, write-offs and deductions that are available to the rich: the top fifth of the population received 66 percent of the $1.1 trillion “tax entitlements” in 2010, compared to just 2.8 percent for the poorest fifth.
Unfortunately, the deterioration of the middle class has made many Americans susceptible to the politics of resentment that drive Republican misperceptions. In Chisago County, per capita income has fallen 13 percent in the last decade; nationally, median income remains little changed in over thirty years. But instead of questioning the vast upward redistribution of wealth to the top one percent, or why the 400 richest Americans—who control as much wealth as 150 million people—pay an average tax rate of just 18%, many of Minnesotans quoted in the Times article speak stoically of suffering to reduce the national debt and their own reliance on government:
“How do you tell someone that you deserve to have heart surgery and you can’t?” Mr. Gulbranson said.
He paused.
“You have to help and have compassion as a people, because otherwise you have no society, but financially you can’t destroy yourself. And that is what we’re doing.”
He paused again, unable to resolve the dilemma.
Polls Show Americans Support Higher Taxes
The failure of the super committee fit easily into the prevailing media narrative that holds both parties responsible for the breakdown in bipartisanship. And when nine out of ten Americans disapprove of the job Congress is doing, there is naturally a strong impulse to blame Democrats and Republicans equally. But in truth, the political gridlock over deficit reduction ultimately comes down to the problem of raising taxes. While Democrats remain willing to put costly social programs on the chopping block, Republicans have not budged an inch in their opposition to new revenue.
However, recent polling shows that Americans overwhelmingly support a combination of spending cuts and higher taxes. Despite the obstinacy of the Republican leadership, seven out of ten people now believe that higher taxes should be a part of any deficit reduction plan; less than 20 percent think spending cuts alone would be sufficient.
That’s a remarkable shift from the Reagan years, when those numbers were nearly reversed. So while Congressional Republicans have become increasingly anti-tax over the last thirty years, the public has actually moved further to the left on the question of progressive taxation. That’s not surprising, considering how much income inequality has grown and social mobility has declined since the early 1980s.
Workers’ Wages Fall, Corporate Profits Soar
By Benjamin Landy
Henry Blodget, the Editor-in-Chief of Business Insider, has compiled an excellent series of graphs this week illustrating the various ways that the distribution of wealth has grown more unequal over the last fourty years. Inspired by the Occupy Wall Street protests, Blodget highlights the ongoing economic injustice: middle class wages remain stagnant and the unemployment rate hovers near historic highs, but corporate profits and incomes for the nation’s wealthiest members are reaching levels unseen since the late 1920s.
I combined two of Blodget’s more powerful graphs and reconfigured them to compare the change in wages and corporate profits as a percentage of GDP since 1960.
The data is shocking: with the exception of a brief respite from 1967 to 1972, workers’ wages have been steadily declining as a share of the economy for over fourty years. At just 14 percent, wages have never been lower as a percentage of the economy than they are today.
Corporate profits, meanwhile, have never been better. As a percentage of the economy, today’s profits are surpassed only by a brief period in 2007, just before the stock market crashed, propelling the US economy into the Great Recession. If the current trend continues, they will soon be even higher.
And just in case you were wondering who is benefiting from those skyrocketing corporate profits, here’s a reminder:
It’s not the middle class.
Graph of the Day: An ‘Occupy Wall Street’ Primer
By Benjamin Landy
As the Occupy Wall Street protest builds strength in lower Manhattan, inspiring offshoot movements to “occupy” Boston, Los Angeles, and numerous other cities, the mainstream media are finally beginning to address Americans’ growing discontent over income inequality, debt, corporate greed and corruption—a conversation dominated until very recently by the Tea Party. Unfortunately, class privilege remains an uncomfortable topic in most media circles, and the hard facts about rising income inequality go largely unreported.
Here, for those wondering what all the fuss is about—or those simply wanting to learn more—is the single most important graph concerning U.S. income inequality.
In the graph on the left (click to expand), it is difficult to discern any appreciable increase in real income for all but the top 15 percent of taxpayers since 1979. But while middle class wages have remained stagnant for the last 40 years, top incomes have skyrocketed, more than tripling in the same period. The graph on the right reframes this dramatic shift in terms of percent share of total income, illustrating a stark divergence between the most wealthy Americans and nearly everyone else.
Of course, it wasn’t always this way. For much of the twentieth century, the United States had a strong middle class. Incomes for all Americans were rising as wages tracked producitivity growth. Then, beginning around 1973, these two trends decoupled. Political scientists continue to debate the exact reasons—lower taxes on the rich, deregulation of business, a widening gap between the technological skills of the labor force and available jobs—but productivity soared while only the incomes of the top ten percent continued to rise in tandem. The middle class, as it had existed since the end of the Second World War, began to decline. The top one percent, meanwhile, now control a substantial majority of the nation’s wealth: In 2010, the 400 wealthiest individuals held more assets—in stocks, home equity and other investments—than the bottom 50 percent of Americans combined. The average wealth of the top 1 percent was nearly $14 million in 2009, down from a peak of $19.2 million before the financial crash.
When you look at the data, it’s not hard to see why so many Americans are upset, nor why Republican strategists are so concerned by the effectiveness of the protesters’ populist slogan, “We are the 99%.” It’s hard to defend tax breaks for millionaires when Congress is slashing budgets for social programs that help the poor, especially when the threshold income to join the top 1 percent is $516,633—about ten times median income.
That anger is now beginning to take form. When I walked down to Zuccotti Park in New York’s financial district last Wednesday to observe the thousands who had gathered there to protest, what I repeatedly overheard was some variation of “I’ve been waiting for this to happen.” And while it is too soon to say whether the Occupy Wall Street movement will grow into the Left’s answer to the Tea Party, the mainstream media and the Democratic Party are at least sitting up and taking notice. We’re long overdue for a national conversation about the unprecedented income inequality in this country, and Wall Street—the symbolic center of the financial world—is as good a place as any to start it.
Graph of the Day: Income Inequality Weakens Economic Growth
By Benjamin Landy
Soaring income inequality may be holding the United States back from a broader economic recovery, according to a newly released study by the International Monetary Fund. Although political scientists have long debated whether social justice comes at the expense of social product—theoretically by reducing incentives to work and invest—the report provides strong evidence that an unequal distribution of wealth actually causes economies to experience deeper recessions and weaker recoveries. “Sustainable economic reform,” the authors warn, “is possible only when its benefits are widely shared.”
The report’s authors studied a wide range of international data spanning nearly sixty years, and found that there was a positive correlation between the equality of a society and the strength and duration of its economic growth during expansionary periods. Based on their model, a 10 percent decrease in income inequality could actually extend U.S. economic growth by a full 50 percent. Higher levels of income equality were also found to correspond more strongly to sustained economic growth than any other factor, including trade openness, political institutions, and lower debt levels.
Perhaps most importantly, the study found that “igniting growth is much less difficult than sustaining it.” Sustained economic growth, the authors suggest, requires the participation and involvement of an entire economy—not just its most affluent members. When there is high income inequality, the risk of future financial crises and political instability increases substantially, undermining economic confidence. Moreover, a highly unequal distribution of wealth “may make it harder for governments to make difficult but necessary choices in the face of shocks, such as raising taxes or cutting public spending to avoid a debt crisis.”
Although incomes for the top 1 percent are growing faster than ever, this data suggests that no broad economic recovery will be possible if the wages of the bottom 90 percent of Americans continue to stagnate or decline. For a time, this lopsidedness was obscured by the mountain of household debt ordinary Americans took on to maintain their customary high levels of consumption. Now, with the collapse of the housing bubble, the illusion of easy credit is behind us. Without a truly revived middle class—once the core of U.S. economic strength—it seems less and less likely that we will experience more than anemic growth.
June 6, 1985: Ronald Reagan, erstwhile patron saint of the Republican Party, makes the case for higher taxes.
The “Buffett Rule” Is Simple Math
By Benjamin Landy
After going before Congress to declare that “millionaires and billionaires” should pay their “fair share” of taxes, President Obama was swiftly condemned by conservatives for engaging in what House Republicans Paul Ryan and John Boehner have unapologetically termed “class warfare.” To most Americans, however, the principle behind what Obama is now calling the “Buffett Rule” seems pretty straightforward: there is no reason why the ultra-rich—like the eponymous Warren Buffett—should ever pay less taxes than their secretaries. Or, as the White House puts it, no household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. “This isn’t class warfare,” Obama insists. “This is simple math.” Numerous polls show the American people agree.
Unfortunately, nothing about increasing taxes is ever that simple: in the three weeks since Obama first unveiled his jobs plan, the conservative commentariat have been unrelenting in their distortions of the facts about tax progressivity and income inequality in this country. It is not uncommon to hear, for instance, that the 10 percent of households with the highest incomes pay more than half of all federal taxes and contribute over 70 percent of income taxes. This is true. But it ignores the crucial fact that this same “top ten” also controls more than 70 percent of all U.S. wealth, while the bottom 50 percent holds barely 2 percent.
The most recent distortion making the rounds is that Obama was lying when he claimed that some millionaires are getting away with paying lower tax rates than their secretaries, since those in the top tax brackets pay more on average than middle-class Americans. But that “average” conceals a reality obvious to anyone who bothers to check the IRS data: many millionaires are cheating the system. A quick glance at the effective tax rates of the 400 richest Americans reveals that the majority of them paid between zero and 20 percent of their income in 2007, less than most families making just $50,000 a year.
In the table above, you can see the approximate number of millionaires paying less than middle-income families; highlighted in yellow are any rates that appear regressive relative to similar rates at other income levels—the most egregious examples are highlighted in blue. This allows us to see that in 2011, 40 percent of taxpayers with incomes between $30,000 and $40,000 paid more than 12.9 percent of their income in taxes, while a full quarter of millionaires paid less than 12.6 percent. That’s 108,293 people in the top 1 percent of income earners who paid less than the average for a median income household. Close to 50,000 of them paid less than 5 percent.
The main reason the effective tax rate appears so low for millionaires is that wealthy Americans tend to make more of their income from capital gains than the midde class; in fact, 93 percent of all financial wealth in the United States is held by the top quintile. Since long-term capital gains are taxed at a maximum of 15 percent, we now have a situation where 40 percent of people making more than a million dollars a year pay nearly the same rate as those making a tenth of that. The graph to the right illustrates how the effective tax rate for the ultra-rich drops dramatically as their share of income coming from capital gains increases.
Of course, legislating a “Buffett Rule” would not by itself solve the problem of income inequality, as it fails to address the abundance of tax loopholes and deductions that also enable higher-income earners to dodge taxes. But as an alternative minimum tax, it would effectively end at least one major loophole—the preferential treatment given to those wealthy few who make their money from non-labor income—and would act as a powerful symbolic gesture to the 90 percent of Americans who should never be asked to pay more than the nation’s millionaires and billionaires. That’s not class warfare. It’s simple math.
Graph of the Day: IMF Warns Global Economy Needs Stimulus, Not Austerity
By Benjamin Landy
Despite CBO estimates that prove the American Recovery and Reinvestment Act raised real GDP by as much as 4.2 percent in 2010 and created as many as 3.3 million jobs, Republicans continue to argue that fiscal austerity, not stimulus, must be the key to economic recovery. “To put it simply,” House Majority Leader Eric Cantor stated last spring, “less government spending means more private-sector jobs.”
Unfortunately, Cantor’s solution is not only simple, but wrong. According to a new report published this week by the International Monetary Fund, less government spending during periods of economic contraction “lowers incomes in the short term” and “raises unemployment, particularly long-term unemployment.” The report’s authors reached this conclusion after examining 173 episodes of government-imposed fiscal austerity over the last 30 years, with the average deficit reduction equal to 1 percent of GDP. They found that a 1 percent deficit cut had the effect of reducing real incomes by about 0.6 percent and raised unemployment by nearly 0.5 percent. In a liquidity trap situation like the one the United States finds itself in right now—where the Federal Reserve can’t cut interest rates any further—those losses were magnified twofold.
And it gets worse. The IMF report also found that in cases where governments chose to pursue austerity programs instead of deficit spending, income and employment levels frequently didn’t return to pre-recession levels “even after five years.” Recovery was even more painful when multiple countries tried to impose austerity measures simultaneously—as is currently happening in the eurozone—since not every country can devalue its currency to boost exports at the same time.
In order to determine how austerity measures affect different sectors of the economy, the report’s authors also looked at the differences between wages, profits, and rents during periods of fiscal contraction. Although this division “harks back to the times when the roles of workers, capitalists, and landlords were fairly distinct,” which have “eroded somewhat over time,” the separate analysis of different forms of income still functions as “a starting point for describing how income is divided between Main Street and Wall Street.”
The results aren’t pretty. According to the IMF’s research, real wages, which most lower class people rely on for their income, typically decreased by 0.9 percent for every 1 percent of GDP reduced by fiscal consolidation. Those who made their money from profits and rents, meanwhile, saw their inflation-adjusted income reduced by just 0.3 percent—and for a much shorter duration. That means that austerity measures tend to impact low-income earners at least three times more than their higher-income peers.
Of course, the report does not suggest that fiscal consolidation is never necessary. The IMF has frequently been the subject of criticism for its controversial “Structural Adjustment Programs,” which include sometimes brutal austerity measures for Third World countries as a precondition for receiving financial aid. Greece, for instance, is a clear example of a country whose sovereign debt has grown far beyond the bounds of a healthy debt-to-GDP ratio. But while the report acknowledges that all advanced economies need to reduce their debt in the medium term, it warns that “slamming on the brakes too quickly will hurt incomes and job prospects.” Deficit-reduction plans, it suggests, should only be implemented “when the recovery is more robust.”
The economic jargon obscures what should be a fairly obvious point: the report’s conclusion that “fiscal consolidations are contractionary, not expansionary” only means that you can’t throttle an economy and expect it to grow. If only more politicians could be made to understand that point.
Perspectives on 9/11: The Price of War
Nobel laureate and Columbia economics professor Joseph Stiglitz calculates the cost of 9/11:
The attack on Afghanistan that followed the 9/11 attacks was understandable, but the subsequent invasion of Iraq was entirely unconnected to Al Qaeda – as much as Bush tried to establish a link. That war of choice quickly became very expensive – orders of magnitude beyond the $60 billion claimed at the beginning – as colossal incompetence met dishonest misrepresentation.
Indeed, when Linda Bilmes and I calculated America’s war costs three years ago, the conservative tally was $3-5 trillion. Since then, the costs have
mounted further. With almost 50% of returning troops eligible to receive some level of disability payment, and more than 600,000 treated so far in veterans’ medical facilities, we now estimate that future disability payments and health-care costs will total $600-900 billion. But the social costs, reflected in veteran suicides (which have topped 18 per day in recent years) and family breakups, are incalculable.
Even if Bush could be forgiven for takingAmerica, and much of the rest of the world, to war on false pretenses, and for misrepresenting the cost of the venture, there is no excuse for how he chose to finance it. His was the first war in history paid for entirely on credit. As America went into battle, with deficits already soaring from his 2001 tax cut, Bush decided to plunge ahead with yet another round of tax “relief” for the wealthy.
Full article here. More perspectives on 9/11 to come.
The GOP’s “Boundless Cynicism”
James Fallows over at The Atlantic has some harsh words for the GOP’s “boundless cynicism”:
Through the artificial debt-ceiling “crisis,” through the Moonie-like spectacle in Iowa of candidates […] raising hands to promise never to accept any tax increase, the Republican field has been absolutist and inflexible about not letting any revenue increase, in any form, be part of dealing with debts and deficits.
Except, it now turns out, when the taxes are those that (a) weigh most heavily on the people who are already struggling, and (b) would have the most obvious “job-killing” effect if they went up.
When it comes to those taxes — hell, we’re easy! According to the AP and Business Insider, Rep. Jeb Hensarling of Texas, the Republican co-chair of the all-powerful budget Super Committee, is dead set against letting the Bush-era tax cuts expire for anyone, including millionaires. But he sees no problem in letting the current cut in payroll-tax rates — you know, the main tax burden for most Americans — run out.
It’s time we stopped talking about the Republicans as the party of low taxes and started seeing them for what they are: not merely “pro-rich” but actively anti-poor. Two months ago, when Democrats were still talking about raising taxes on the rich as part of a debt-reduction deal, Republicans balked, and the country nearly defaulted. But when it comes to extending the payroll tax cut – which overwhelmingly favors low income workers – Republicans want rates to go back up. Why?
It’s ugly politics, plain and simple. Republicans don’t want to be seen siding with the Obama administration on any issue, even if it’s lower taxes – the GOP’s modus operandi . The payroll tax break is also considered a stimulative measure, which offers little benefit to the wealthy, instead putting more money into the pockets of lower and middle class workers – what the Tea Party is increasingly identifying as the “moocher class.” Not to mention that any kind of stimulus is anathema to the Tea Party base these days, even if it comes in the form of a tax cut.
The Republicans are showing their true colors now more than ever; this is precisely the kind of hypocrisy that Democrats should be exploiting as the 2012 election cycle shifts into high gear.
Ezra Klein gets to the heart of the ideological divide:
Republicans believe, either implicitly or explicitly, that the economy is really driven by well-compensated, wildly productive geniuses at the top, and so the true aim of tax policy is keeping their tax burden low so they have sufficient encouragement to unleash their potential. Democrats believe those folks have so much money that they’re no longer primarily driven by monetary concerns and that, either way, the key question for the economy is how to get more demand into it quickly, and for that, tax cuts to the poor are clearly superior, as the poor spend the money they get.
If Democrats can effectively communicate that underlying dichotomy, my sense is that the American people will listen.
Another powerful example of the Daily Show’s complete mastery of its format. Always good to see Jon Stewart and the DS writers using the medium to speak truth to power.
My own take on the Warren Buffett backlash here.
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?
While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.
These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places.
Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.
If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine — most likely by a lot.
…My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice.
