Ever since last year's U.S. presidential election race ended, the much-discussed concerns over Iran's nuclear build-up have vanished from the national debate. Yes, there are occasional press reports about Iranian machinations—for example, is Iran tinkering with new nuclear production techniques or is it conducting cyber-warfare against our banking system or is it shipping munitions secretly to African wars—but they don't seem to rate the blaring headlines or alarmist outcries of 2012.
The biggest reason for this lull may be traced back to remarks made last Fall by the two Israelis who have been the most responsible for driving the crusade against Tehran. First, Israel's Prime Minister Benjamin Netanyahu told the United Nations General Assembly on September 27 that, in his view, the crucial time for possibly mounting any military action against Iran over its nuclear program should not come until sometime in the Spring of 2013. Second, Israel's Defense Minister, Ehud Barak, stated in early November in an interview with the London Daily Telegraph that he does not foresee Iran acquiring enough bomb grade fuel for a primitive atomic bomb at least until at least the summer of 2013, "delaying the moment of truth by 8 to 10 months." Consequently Israel, for the moment, has muted its fears about Iran and is focused on its parliamentary elections next week.
But there are also other causes. President Obama's reelection effectively rebuffed Prime Minister Netanyahu's ambitions to draw the United States into a showdown with Iran in the new year. Netanyahu, on his visit to the United States during Obama's 2012 campaign, sought to box Obama into an endorsement of his policy to bomb Iran's nuclear facilities (Obama promised a U.S. attack but only as a last resort), and made noises in support of the Republican presidential candidate, Mitt Romney. But the outcome of the U.S. election was a riposte of sorts to the Israeli leader. Indeed, since Obama's victory, Obama has nominated former Republican Senator Chuck Hagel, a public skeptic about attacking Iran, to be America's new Defense Secretary.
Obama over the past year has also acted to defuse criticism from Congress over his policy toward Iran. Along with five other nations, including France, Great Britain, China, Russia, and Germany, Obama has sent emissaries to talks with Iranian negotiators in Geneva that began last April to explore how they can end Iran's enrichment of uranium, a move that some think may be preparatory to developing atomic bombs. With his allies, Obama is now discussing a deal to exchange Iran's low-enriched uranium for ready-made fuel rods for a research reactor in Tehran. Sometime this month a fourth meeting is likely to take place. The talks, however, have only inched along.
In addition, Obama has taken unilateral actions of his own to put a further squeeze on Iran. Just this month, he signed into law tougher sanctions against the country, expanding on those which had earlier been authorized by the UN Security Council. These newest measures impose penalties on Iranian insurance, shipping, shipbuilding, and energy sectors. They will hurt Iranian construction, machinery, and auto manufacturing. These sanctions are actually add-ons to other unilateral U.S. moves made in the past that have blacklisted many Iranian banks and severely restricted Iran's ability to sell oil.
All of this international activity has hurt average Iranians in their pocketbooks. Iran's central bank admitted this past week that the annual inflation rate hit 27.4 percent at the end of 2012, one of the highest rates ever recorded by Iranian authorities. Iran's currency now faces collapse. Last October, the Iranian rial lost about 50 percent of its value within a week. Such worries have brought about a precipitous decline in the influence of Iran's lame-duck President, Mahmoud Ahmadinejad.
Internal unrest also unsettles Iran—first, among its Kurdish population and, then, among students and others disenchanted over Iran's fraudulent 2009 presidential election. And then there is the Syrian crisis. Iran's stake in its neighboring country is enormous. But the bloody civil war in Syria has wreaked havoc with Iranian efforts to broaden its influence in the Middle East. All of these distractions make it difficult for Iran to continue to stave off outside pressures over its nuclear program.
A sudden shroud over Iran, however, does not mean that the Iranian dispute is going to go away. The Iranian spectre will pop up again in unexpected ways. The new Geneva talks could fail, the sanctions regime may not pinch enough, Netanyahu is likely to be reelected as Israel's leader—and be prepared to press his case anew, Congress will find other suspicious activities by Tehran, and, Iran, in turn, is going to make further blunders that upset the West. But one can hope that Iran, as the crisis of the day, remains on the back burner, possibly postponing a showdown and giving more time for peaceful outcomes to unfold.
Over at Slate, the normally astute Matthew Yglesias has advanced an odd argument about the role of teachers in education. In a post on Friday afternoon, “Teachers’ Curious Embrace of Their Own Irrelevance,” Yglesias takes an article I wrote supporting socioeconomic integration of schools in the current issue of American Educator, published by the American Federation to Teachers, to suggest that if we follow my logic, we should cut salaries for teachers.
He writes: “But if it’s true that socioeconomic integration is much more important for student achievement than teacher quality, then it seems like a no-brainer to reduce expenditures on teachers (accepting that some good ones may leave and be replaced by somewhat worse candidates) and reinvest the funds directly in the key driver of achievement.”
Yglesias seems excited to have caught teacher unions and researchers who believe in teacher voice (like me) in a logical contradiction. This morning, he tweeted: “Again if ‘The real problem with education is poverty’ shouldn't we spend less on teachers and more on transfers?”
But his argument fails to take account of the fact that a central reason I and other individuals advocate for socioeconomic integration policies is that we believe that teacher quality matters a great deal and that economic segregation makes it much less likely that low-income students will be educated by strong teachers.
In the American Educator article Yglesias cites, I outline three reasons why low-income students benefit from attending middle-class schools: they “are surrounded by (1) peers who, on average, are more academically engaged and less likely to act out than those in high-poverty schools . . . (2) a community of parents who are able to be more actively involved in school affairs and know how to hold school officials accountable; and (3) stronger teachers who have high expectations for students” (p. 3).
If you believe that teachers are important, as do I and almost every education policy analyst, then the fact that economic school segregation keeps great teachers away from the low-income students who need them most is deeply troubling.
Polls find that teachers care even more about working conditions—a safe and orderly environment where there is strong parental support and an excellent principal—than salary. Because middle-class school environments are much more likely to provide all these working conditions than high-poverty schools, it is very difficult to recruit and retain high-quality teachers in high-poverty schools.
Stanford economist Eric Hanushek and his colleagues, for example, estimate that in order to get non-minority female teachers to stay in urban schools, school officials would have to provide a salary premium of between 25 percent and 43 percent for teachers with zero to five years experience (p. 5).
Washington, D.C., provides a powerful illustration of the way in which segregation affects the distribution of excellent teachers. If we assume for sake of argument that Michelle Rhee’s teacher evaluation system (IMPACT) accurately determines which teachers are adding the most value, it seems apparent that economic school segregation is keeping great teachers from educating large number of poor kids. According to an August 2011 analysis in the Washington Post, “only 71 of the 663 teachers who received top ratings on this year’s IMPACT evaluation worked in the 41 schools in Wards 7 and 8,” which have relatively high levels of poverty. “By contrast, the 10 schools in [wealthy] Ward 3 have 135 ‘highly effective’ educators.”
Teachers know that poverty concentrations are bad for education, which is part of why teachers unions have supported socioeconomic integration in places like La Crosse, Wisconsin, Raleigh, North Carolina, and Louisville, Kentucky. This support hardly suggests that teachers view themselves as “irrelevant,” or that every dollar for integration should be offset by a reduction in teacher salaries. Surely there is room for our public policies to support teachers and support integration as mutually reinforcing strategies.
All things considered, 2012 was a decent year for employment growth. Despite a global economic slowdown and weak demand at home, the unemployment rate dropped 0.7 points, to 7.8 percent, in December, following thirty-four consecutive months of steady, albeit slow, private sector job creation. The long-term unemployment rate fell, too: last month, the percentage of people out of work more than six months fell below 40 percent of all job-seekers for the first time in more than three years. Yet even as the quantity of jobs has increased, their quality has declined. Many of the newly reemployed have had no choice but to accept part-time jobs with lower wages and fewer benefits.
The shift to a low-wage workforce started during the Great Recession, when businesses began laying off full-time workers and cutting hours to boost profits. By the end of 2009, the number of Americans working part-time for "economic reasons" had doubled to over 9 million—the single largest spike since the Bureau of Labor Statistics began tracking part-time employment in 1955. Although that number has fallen somewhat today, many employers have opted to lock in those productivity gains at the expense of labor, leaving 7.9 million part-time workers unable to find better-paying, full-time jobs.
Although the number of people working part time for "economic reasons" increased in response to the 2007–2009 recession—suggesting that the rise of the part-time worker is temporary—there is also reason to believe that the trends underlying the shift to an increasingly part-time, low-wage workforce are neither short-term nor cyclical.
Global competition has pushed businesses to cut labor costs, either by boosting productivity with technologies that replace workers, or by cutting hours, wages, and benefits to create a more "flexible" workforce. Without strong consumer demand to drive hiring or unions to defend their interests, workers have little leverage in the global economy. Rising income inequality has also contributed to this trend, creating a positive feedback loop of lower consumption, falling wages, sharper inequality and a growing population of part-time "working poor."
Glenn Kessler of the Washington Post Fact Checker took Bill Clinton to task on gun-control statistics today. On January 9, Clinton gave a speech at the Consumer Electronics Show in Las Vegas where he claimed, “Half of all mass killings in the United States have occurred since the assault weapons ban expired in 2005, half of all of them in the history of the country.” Kessler and the Fact Checker column come down on this with “Three Pinocchios”—the statement is false and Clinton, apparently, refused to comment on where he got his facts.
Putting the veracity aside for the moment, Kessler is missing the big picture here. It has been only eight years and three months since the Assault Weapons Ban expired on September 14, 2004. In those eight years, we have seen 28 mass shooting events. (See The Century Foundation's timeline on mass shootings.)
If we look from September 2004 all the way back to 1900 (104 years), as the Washington Post lays out, there were 118 mass shooting. That breaks down to 1.13 mass shooting incidents per year, on average, from 1900 to 2004. In the eight years since the Assault Weapons Ban has expired, there have been 28 mass shooting events. That equals an average of 3.5 a year—an increase of over 200 percent. That is a startling jump, by any measure.
If we further break down the years both Mother Jones and the Washington Post use, the statistics remain similar. From 1982 to 1994 (12 years), there were 19 shootings, an average of 1.5 shootings a year.
From September 1994 to September 2004—the duration of the Assault Weapons Ban—there were 15 mass shootings over 10 years; again, an average of 1.5 a year. While some will point out that the ban did not reduce the number of shootings, on average, it is important to bear in mind that the ten-year period of the ban is a small sample size. There were five incidents in 1999 alone; the Columbine Massacre occurred in April 1999, and four other mass shooting incidents followed soon after. There is evidence that events like Columbine can inspire other mass shootings, so without Columbine and the following “copy-cat” events, the number of shooting incidents during the Assault Weapons Ban would have been significantly lower.
What is an undeniable truth is that we have seen an incredible uptick of mass shootings since the ban expired on September 14, 2004. To be fair, it also is a small sample size, and 2012 was an exceptionally tragic year, but the fact remains that the number of shootings has gone up over 200 percent since the ban expired.
So, was Clinton accurate? Have half of the nation’s mass shootings occurred since the Assault Weapons Ban expired? No, it’s more like a quarter.
The Washington Post, however, is splitting hairs where they don’t need to be split. The facts are that since the Assault Weapons Ban there have been 28 mass shooting events in eight short years. Seven of these shootings took place in 2012; at Sandy Hook, 20 students and 6 faculty members lost their lives.
Do we have to nitpick on an embellishment by President Clinton in which he makes an important point? President Clinton is essentially correct—since the Assault Weapons Ban expired mass shootings have grown rapidly in frequency and fatalities. Shouldn’t we focus on ensuring the frequency of these tragic incidences falls, rather than cavil over the smaller stuff?
See The Century Foundation's timeline on mass shootings.
On Tuesday, Iowa City’s school board is slated to vote on a new diversity plan that would set goals for balancing enrollment by socioeconomic status at schools throughout the district. Iowa City Community School District, which encompasses Iowa City and several surrounding communities, serves a mostly middle-class population of about 12,000 students, but concentrations of poverty currently vary widely among the district’s schools, particularly at the elementary level, where the economic makeup of schools ranges from 6 percent to 79 percent low-income.
If Iowa City’s diversity plan passes, it will be great news for supporters of school integration, in Iowa City and across the country. Sarah Swisher, a member of the Iowa City school board, ran for office on the issue of addressing economic disparities among schools and has spent the last three and a half years fighting for a new diversity plan. She says the district was in danger of avoiding the problem of low achievement in their high-poverty schools or treating it as unsolvable. “There are ways out of this dilemma,” she said. “The community can make a difference.” Under the new diversity plan, all students in the district would be guaranteed mixed-income learning environments.
Currently, over 80 districts across the nation have responded to research on student achievement by giving more students the chance to attend mixed-income schools. Research shows that while students’ own socioeconomic backgrounds have a big effect on their achievement, so do the socioeconomic backgrounds of their peers. Numerous sources—including the famous 1966 Coleman Report, data from the National Assessment of Educational Progress, and a recent meta-analysis—show that poor students at mixed-income schools do better than poor students at high-poverty schools.
Some opponents of the socioeconomic integration plan in Iowa City have argued that this relationship is correlational not causational, and that instead of focusing on student composition, the district should focus on the resources they are providing schools. But research shows socioeconomically diverse learning environments provide benefits that extra resources do not. A 2010 Century Foundation study looked at outcomes for students in public housing who were randomly assigned to public housing units, and corresponding school attendance zones, throughout Montgomery County, Maryland. Those public housing students assigned to the most-advantaged schools performed significantly better than those who attended the least-advantaged schools, despite the fact that the county provided the least-advantaged schools with extra resources, including reduced class size, increased professional development, and increased math and literacy instruction.
In order for socioeconomic integration to gain steam in more districts, two groups in particular need to be convinced: the traditional education reform community and middle-class families. We saw new progress gaining support from the former last week. Jay Mathews, an education columnist for the Washington Post who supports reforms that try to make high-poverty schools work, expressed interest in using socioeconomic integration as another strategy to help boost low-income achievement. Iowa City’s new diversity plan could represent an important step forward in gaining support from the latter group, middle-class families.
Iowa City’s proposed plan sets diversity goals but leaves most of the mechanics of balancing school enrollment to be determined. Although figuring out the next steps in the process will not be easy, Iowa City has the potential to integrate schools in a way that improves educational offerings and outcomes for all students. Currently, there are big disparities in the socioeconomic makeup of schools, but the district overall is only 33 percent low-income, providing ample opportunity to alleviate poverty concentrations. Since Iowa City is home to the University of Iowa, the district could partner with university departments to create exciting magnet programs in areas such as language immersion, STEM, or music that could entice families from across the district to move schools, helping achieve socioeconomic balance with minimal changes to attendance zones.
Socioeconomic integration requires a whole community to take responsibility for the achievement of their most disadvantaged students, which can be a hard sell for middle-class families who are happy with their children’s current schools. But in Iowa City, the diversity plan could bring new magnet school options to families of all backgrounds and put pressure on the district to bring all schools up to a higher standard. “It just seems as though, in a college community, with all of the resources we have available to us,” Swisher said, “we can do a lot better.”
About twenty-five years ago, Jason Epstein, then the editorial director of Random House and one of publishing’s most far-sighted visionaries put forward the notion in conversations that someday prominent authors might decide to create their own portals to sell books, sidestepping publishers and booksellers. At the time, the concept seemed unlikely because the writers would have to subsidize the expensive infrastructures of sales, promotion, and accounting. But as was so often the case with Jason’s insights, he was on to something. As a young editor, he had devised what became known as the “quality” or trade paperback. In the 1960s, he was one of the founders of the New York Review of Books. He was a co-founder of the highly regarded Library of America. In addition, a decade ago, he began the company that markets the Espresso Book Machine, which prints books on demand in bookstores and other venues.
Now, Jason’s idea of the writer breaking away from a formidable backer to strike out on his own is about to have a major test in a way appropriate to the digital age. Andrew Sullivan’s announcement that he will be leaving the Daily Beast, his base since February 2011, to launch an independent site, completely reliant for revenue on reader subscriptions and contributions, caused a mighty stir in the media world—as well it should have. Sullivan’s blog the Dish is enormously popular, with an average of 1.5 million unique visitors a month during last fall’s political season. What’s more, his readers tend to stay for longer periods than most digital readers. Sullivan’s concept of a community of loyal fans willing to pay $19.99 a year (or more if they choose) for total access to his blog on politics and whatever else he fancies is an important breakthrough in the emergence of personal “brands” that have no need for association with a major (i.e., corporate) parent.
In his declaration of independence, Sullivan wrote, “if this model works, we’ll have proof of principle that a small group of writers and editors can be paid directly by readers, and that an independent site, if tended to diligently can grow an audience large enough to sustain it indefinitely.”
Sullivan’s initiative got off to an exciting start. In only two days, he said he had received nearly $400,000 in subscriptions and donations, close to half of what he (and others knowledgeable on web economics) had estimated it would cost to sustain his small team of staffers and interns for a year. At the $19.99 price point, that means something like 16,000 subscribers, a very good beginning.
Sullivan’s subscription model is definitely a different version of commitment than those of the past. In the first place, it is much more flexible than just an annual fee for any access, with periodic reminders that a deadline for renewal is approaching. Readers will still be able to reach most of the Dish through links on social media and search results, as well as through his RSS feed. Sullivan’s use of a metering system, the practice adopted by hundreds of newspapers in the past year or so, is in line with the widespread efforts to develop a sustainable revenue stream while so much on the Internet remains available for free. Sullivan is counting on his most fervent of fans to pay for total, unfettered, access.
What Sullivan expects—and the indications are that he is right—is that a substantial number of his current readership care enough about what he and his colleagues write that they will pay to join what amounts to a club. Public radio and television make a similar type of appeal to their audience with pledge drives, but after fifty years of experience in building their national and local structures, it would be impossible to shift now to any form of fee-for-service plan of the sort that Sullivan has chosen.
What Sullivan has also done is opt to work without advertising. In devising his independence model, Sullivan wrote, “the decision on advertising was the hardest.” He was persuaded by the consistent complaints of readers about how “distracting and intrusive” advertising can be and “often it slows down the page painfully.” Ultimately, these considerations were probably secondary to what is the core message of Sullivan’s move: to fulfill the promise of the Internet without becoming co-opted “by large and powerful institutions” and the inevitable burdens of advertising support. “We want to build a new media environment that is not solely about advertising or profit above everything,” Sullivan wrote, “but that is dedicated first to content and quality.” By Sullivan’s count, the Daily Dish produced 13,000 separate posts last year. How the new incarnation will evolve depends on its output, supplemented—assuming that the money flows in—with longer form pieces and possible spin-offs designed for tablets, or featuring video.
Jason Epstein’s prediction that leading writers will favor the benefits and accept the risks of independence came long before the Internet era. In addition, the fact remains that few of the authors and journalists with followers numbering in the millions have launched anything as bold as Sullivan’s new venture. Having a website of one’s own is standard now for writers, but the distinctive feature of Andrew Sullivan’s move is that it anticipates viability solely through a direct connection with its community supported by their willingness to pay. Sullivan’s strength is his opinions and the reporting he does. It is not, I am guessing, his business acumen. He will not employ a publisher, so keeping track of cash flow and reiterating the regular call for contributions will be a significant responsibility.
In all the reams of commentary I read about the February 1 launch (using the address www.andrewsullivan.com), the consistent tone is one of support. One of the best descriptions came from Jack Shafer on Reuters: “Even when his fans don’t agree with his pulpit thumping, or the pyrotechnics of his righteousness, they still respond to his style. He’s their priest. They’re his parishoners. As tithings go, $19.99 a year is pretty cheap.” If Andrew Sullivan succeeds, he will doubtless be joined by other web-based bloggers in striking out on their own. But they should be forewarned: matching Sullivan for bravado and insight will not be easy.
My colleague Ben Landy has been cranking out an excellent series of blog posts delving into the least defensible "dirty dozen" tax expenditures on the books, as identified by TCF’s 2002 Working Group on Tax Expenditures report Bad Breaks All Around. For all the handwringing about the difficulty of comprehensive tax reform, Ben’s series illustrates that the tax code contains some low hanging fruit ripe to be axed—and these dozen had been selected for being so indefensible that bipartisan support might be mustered for elimination. But in thinking about dedicating the related revenue to either deficit reduction or revenue-neutral tax reform (i.e., reducing marginal rates while broadening the tax base), it’s worth noting how markedly the pertinent economic and budgetary context has shifted over the last decade.
Three stark differences stand out. First off, the United States is currently mired in a depression and liquidity trap following a severe eighteen-month recession and financial crisis, rather than the anemic recovery of the early aughts following a relatively mild eight-month recession. Second, the United States has since embarked on what can only be described as a costly, failed experiment with cutting top capital gains, dividends, and ordinary income tax rates—exacerbating both the structural budget deficit as well as pre- and post-tax income inequality. Lastly, the middle class has struggled through a lost decade of falling real wages and widening income inequality instead of emerging from the robust Clinton economy. This swayed economic context has important ramifications for the pace and composition of deficit reduction, as well as how the burden of deficit reduction is distributed—all compelling against revenue-neutral tax reform.
Deficit Reduction in the Context of Depression
In the aftermath of the 2001 recession, the worst outlook for the labor market—which lags behind changes in the real economy—was real GDP falling $212 billion (1.5 percent) below the Congressional Budget Office’s estimate of potential (noninflationary) output in fiscal 2003.1 Closing this “output gap” is the barometer for restoring full employment. For the recently ended 2012 fiscal year, the output gap was $971 billion (5.9 percent of potential output). Based on this broad metric, the economy is performing roughly four times worse than a decade ago. And unlike a decade ago, Congress has been toying around with inducing an austerity recession and a slide into deeper depression. Intrinsically, deficit reduction is inversely related to restoring full employment, and the severity of the persisting jobs crisis means that obsessing with deficits rather than jobs is more misguided today than a decade ago—particularly given the inability of the Federal Reserve to cushion austerity today versus a decade ago (the Fed’s primary policy rate oscillated between 1 percent and 1.25 percent in fiscal 2003, whereas today the Fed Funds rate has been ostensibly floored out at zero since December 2008).
That said, eliminating inefficient tax preferences for businesses and upper-income households is, per dollar, the least economically harmful approach to deficit reduction. To the degree Congress is now misguidedly fixated with enacting deficit reduction (as opposed to Vice President Dick Cheney’s stance that “deficits don’t matter”), substituting repeal of tax expenditures for otherwise deeper spending cuts—and shifting the compositional balance more toward revenue increases—is a net economic positive. In this more nuanced context of tradeoffs, looking toward tax reform is unquestionably merited but should not be mistaken for embracing premature austerity.
Changes in Tax Policy since 2002
When TCF’s Working Group on Tax Expenditures was working on its report, the top statutory income tax rates were 38.6 percent for ordinary income, 38.6 percent for qualified dividends (still taxed as ordinary income), and 20 percent for capital gains. The Jobs and Growth Tax Relief Reconciliation Act of 2003 subsequently cut the top statutory rate on both capital gains and qualified dividends to 15 percent, while the top ordinary income tax rate fell to 35 percent, as already legislated. The Congressional Research Service (CRS) has found that reductions in capital gains and dividends tax rates—and, to a lesser extent, ordinary income rate reductions—have had a statistically significant impact increasing the income share of the top 0.1 percent of earners and the top 0.01 percent, that is, exacerbating inequality. Reductions in these tax rates have also had a statistically significant impact increasing the share of national income accruing to capital—heavily concentrated at the top of the income distribution—at the expense of labor income. CRS also found that the rising share of capital income was the single largest driving force behind widening income inequality over 1996–2006, followed by changes in tax policy. While the increasingly skewed market distribution of income would have increased inequality without any tax or budget changes, regressive tax cuts have exacerbated both pre- and post-tax income inequality.
Today, ameliorating income inequality is more of a policy priority and imperative than in 2002, and the tax policy levers to do so are starker because of the failed experiment with the Bush tax cuts, particularly with respect to capital income. In 2002, the capital gains preferences made the TCF Working Group’s “troublesome ten” list of problematic but partially justifiable expenditures—meriting reevaluation, given recent research—and as noted above the dividends preference did not exist. While the American Taxpayer Relief Act (ATRA) of 2012 (i.e., the lame-duck budget deal) raised the top rate on capital gains and dividends to 20 percent and the top rate on ordinary income to 39.6 percent for households earning above $400,000 ($450,000 for joint filers), the tax code remains less progressive than in 2002 and the market distribution of income is more greatly concentrated among upper-income households, justifying an even more progressive code at the very top of the income distribution. Eliminating numerous tax expenditures can increase revenue and improve progressivity, but the tax preferences for capital gains and dividends are unequivocally the two whose elimination would most directly push back against inequality.
A Lost Decade for the Middle Class
The Bush economic expansion from November 2001 through December 2007 was the weakest economic expansion—as measured by growth in real GDP, nonresidential fixed investment, employment, wages and salaries, compensation—since World War II. The dominant economic policy presiding over the Bush economy—regressive, supply-side tax cuts—produced lackluster, unevenly shared growth. With this precursor to the Great Recession and Lesser Depression, the past decade has not been kind to the middle class. Inflation-adjusted median income for working-age households (under the age of 65) peaked in 2000 at $63,535 in 2000, and has since fallen 12.4 percent to $55,640 (both in constant 2011 dollars); by this most basic indicator of living standards, the middle class has not made real gains since 1994. Excluding volatile capital gains and dividends income, the total share of pre-tax labor income accruing to the bottom 90 percent of the income distribution fell to 53.7 percent in 2010—the lowest share since 1932, and down 3.9 percentage points since 2002. With capital income, the total pre-tax income share of the bottom 90 percent of earners fell to 52.1 percent, down a comparable 4.1 percentage points since 2002. The rising share of income accruing to top earners has effectively crowded-out real middle class wage increases for well over a decade—with changes in tax policy aggravating income shifting away from labor income and further exacerbating post-tax inequality by decreasing progressivity of the tax and transfer system.
Rapidly restoring full employment would be the single most effective policy lever for boosting middle-class living standards and reducing inequality, because excess slack in the labor market exerts downward pressure on real wages—with proportionally bigger decreases lower down the income distribution. The most effective policy lever for doing so remains deficit-financed stimulus spending in the near-term, but to the degree that policymakers are determined to pay for any job creation measures, regressive tax expenditures are ideal offsets. On the other hand, cutting social insurance and income support programs would exacerbate inequality and declining living standards for the vast majority, as government transfer programs have been a key source of income support buoying these measures as the market-based distribution of income has grown more lopsided: over 50 percent of real income gains for the middle income quintile over 1979–2007 came from Medicare, Medicaid, and cash transfers, versus 6 percent from after-tax wages. Increasing progressivity of the tax and transfer system is far from a panacea for ameliorating inequality and restoring shared prosperity, but these central economic challenges may prove insurmountable if tax and budget policy continues exacerbating inequity instead of pushing back against it, everything else being equal.
Tax reform and related deficit reduction must be framed in both economic context and budgetary tradeoffs. While there are many tax expenditures ripe for elimination, the priority must be deficit reduction rather than marginal rate reductions—which are inherently regressive. Tipping the balance of long-term deficit reduction further toward progressive revenue sources, particularly economically inefficient or distortionary preferences, is a net positive for near-term economic recovery, income inequality, and middle class living standards. As Ben’s posts demonstrate, the “dirty dozen” are a great starting point for sensible, evidence-based deficit reduction (or, better yet, stimulus “pay fors”). But as the ATRA underscored by permanently enacting a new preferential rate on dividends (locking in well over half the Bush-era top statutory rate cut), policymakers must also bear in mind the economic and budgetary context of the last decade—which the middle class simply cannot afford to repeat.
1 Fiscal 2003 nominal dollars have been adjusted to fiscal 2012 dollars using CPI-U-RS for an apples-to-apples comparison.
States, unlike the federal government, cannot run deficits. So when tax revenues dropped during the Great Recession, state and local governments were required to downsize rapidly—cutting spending, reducing salaries, and laying off more than half a million public sector workers between late 2008 and 2012.
The American Recovery and Reinvestment Act (ARRA) of 2009 helped soften the blow, providing federal aid to states that helped close 30 percent to 40 percent of their budget gaps in 2010. According to the Department of Education, ARRA funding for state fiscal relief preserved or created more than 240,000 education jobs and about 44,000 other jobs during the fourth quarter of 2009. But because the Obama administration was ultimately unable to secure as large a stimulus as was needed, less than 30 percent of Recovery Act aid to states remained by the end of 2010. Public sector layoffs continued unabated through 2011 as stimulus funding dried up, creating a massive drag on the nascent economic recovery before leveling off in late 2012.
That trend is set to reverse in 2013, according to the Pew Center on the States. "Through a combination of downsizing, changes in tax policy and sometime[s] the luck of having energy and commodities, some states have weathered the recession better than others. Iowa is looking at an $800 million surplus. Florida's is more than $400 million." Even California, infamous for its budget shortfalls, is projecting a $1 billion surplus by 2014-2015.
The National Associating of State Budget Officers (NASBO) is also projecting a turnaround in the coming year, with state general fund revenues expected to grow 3.9 percent from fiscal 2012, surpassing pre-recession levels for the first time since 2008. According to their 2012 survey, nearly every state government expects they will need fewer budget-reduction strategies, like benefit cuts or layoffs, to fix budget gaps in 2013.
The shift from budget shortfalls to budget surpluses means the improving state and local fiscal outlook should be a net positive for overall economic growth in 2013, after years in which state-level austerity policies lowered both GDP and employment. Mark Zandi, chief economist at Moody's Analytics, predicts state and local payrolls will expand by 220,000 in 2013, helping to offset the effect of federal tax increases and spending cuts, and keeping the current economic expansion on course.
Still, "states aren't talking about new extravagant array[s] of new programs," according to a senior fiscal analyst at the Council of State Governments quoted by the Pew Center on the States. "'State Medicaid bills are continuing to surge, so whatever little surplus states might have generated will likely go back into that,' as well as programs that were put on the backburner during the recession, such as their unemployment insurance trust funds, pensions and infrastructure."
More worrisome is the prospect of a second "fiscal cliff." Although state and local governments were granted a temporary reprieve when Congress delayed some $7.5 billion in planned spending cuts for education, health care, and other programs, they are unlikely to avoid both these and further cuts when budget negotiations resume next month.
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I haven't said anything about the platinum coin option, until now, because I am of two minds about it. One part of me says this is a very bad idea. We all understand the intent of the law that would allow this, to permit commemorative coins to be minted. Do we really want leaders who are willing to take advantage of any loophole to do things that are contrary to the intent of a law just because it suits their purposes? How can the public trust Democrats to be responsible if they are willing to do things like this? What other stunts might they pull? If they want to go to war, attack Iran for example, does this mean they will take a Bushian approach and 'just do it' no matter what the intent of the constitution is on these matters? I don't want those kinds of leaders.
But what do you do if the other side refuses to play by the traditional rules? What if they are already using tactics that push far beyond the intent of congressional rules to impose their will? If one side is ignoring the traditional rules of engagement and hiding behind trees rather than marching in straight battle lines, is it okay to do so yourself? If the other side tortures, does that mean you should?
For torture, the answer is no, but in this case I think the answer is different. The Republicans will not play by fair rules of engagement, and worse they have taken members of the public hostage as a way to win/influence the battle (Saddam's human umbrellas come to mind). If we don't get our way, we'll crash the economy and hurt people -- the threat is clear. Obama, in his role of leader of all, not just Democrats, has chosen to, in effect, pay the ransom by giving in on key issues. But if the hostages can be freed another way, one that avoids giving in to the hostage-takers, it ought to be considered.
So perhaps it's okay to match ridiculous tactics with ridiculous responses. Mint the coin, but make absolutely sure the public knows that it is only being done because the other side refuses to play fair, refuses to play by the explicit and implicit rules of political engagement. That's key to winning the battle for public. Putting John Boehner's face on the coin, as Paul Krugman suggested this morning, would certainly be a step in that direction.
This was originally published on Thoma's blog, Economist View.
In 2002, The Century Foundation convened the Working Group on Tax Expenditures to examine and propose reforms to the tax code. The resulting report, Bad Breaks All Around, identifies twelve tax breaks with little or no economic justification. These "dirty dozen" are no less ripe for the chopping block a decade later, as Congress finally takes up the task of simplifying the tax code. Follow along at Blog of the Century and on the "Dirty Dozen" expenditures homepage as we reintroduce each of the "dirty dozen" and explain why it's long past time to eliminate these costly tax breaks.
If asked, most people would likely say that someone who pays cash for their life insurance or monthly parking expenses should not be asked to pay more than someone who gets fringe benefits through their employer. And yet, absent any organized political interest to counter this unfair treatment, employees covered by so-called "cafeteria plans" through their workplaces are allowed to withhold otherwise taxable income for eligible expenses. For the millions of Americans without these fringe benefits, expenses like meals, bus passes, and child care can cost up to 35 percent more, depending on the individual's marginal income tax rate.
"Tax policy analysts have long complained about the disparity between cash wages and benefits," write the authors of Bad Breaks All Around, The Century Foundation's 2002 report on tax expenditures. Even setting aside the question of economic fairness, there is the issue of market distortion: "Tax subsidies for certain kinds of spending may encourage it at the expense of otherwise more satisfying outlays." A tax break for employer-sponsored accident and disability insurance, for instance, may encourage a less efficient distribution of resources than the market would otherwise sustain.
Tax subsidies for employee compensation paid in fringe benefits cost the federal government billions of dollars each year in lost revenue. (The graph below highlights eight common tax-exempt employer-provided benefits, which together cost nearly $16 billion in 2012.) As the nation grapples with ways to simplify the tax code and reduce the deficit, policymakers should consider whether there are compelling reasons to subsidize certain consumer behaviors, and whether the billion-dollar price tag is justified.
Learn more about the "Dirty Dozen" tax breaks here.