Thomas Edsall presents some interesting polling results in his NYT column indicating less public support for government policies to redistribute income even as the distribution of income is becoming increasingly unequal. He argues that this presents a paradox for Democrats who are concerned about inequality.
Actually the situation is less paradoxical when we consider the possibility that government policies are largely responsible for growing inequality. This is most obvious is with the bailout of the financial industry in 2008. Without the help of the TARP and the Fed, Goldman Sachs, Citigroup, Morgan Stanley, and most of the other Wall Street behemoths would be out of business. This would have drastically reduced the wealth and income of many of the richest people in the country.
The government has also redistributed income upward by supporting an over-valued dollar that has eliminated millions of manufacturing jobs and put downward pressure on the wages of non-college educated workers more generally. In addition, a Federal Reserve Board policy that raises interest rates to keep people from getting jobs any time the labor market gets tight enough to support wage growth has also had the effect of reducing the wages of most workers.
Also our trade policy of selective protectionism, which exposes manufacturing workers to competition with the lowest paid workers in the world, while largely protecting doctors, lawyers, and other highly paid professionals (who comprise much of the one percent), has the effect of redistributing income upward. Similarly, our policy of patent protection redistributes hundreds of billions of dollars a year from ordinary workers to drug companies and other beneficiaries of these government-granted monopolies.
In these areas and others the government has acted to redistribute income upward. A politician who wanted to reduce inequality could focus on having less government action in these areas. That would be consistent with the polls cited by Edsall indicating that the public wanted a smaller role for the government.
Thomas Edsall presents some interesting polling results in his NYT column indicating less public support for government policies to redistribute income even as the distribution of income is becoming increasingly unequal. He argues that this presents a paradox for Democrats who are concerned about inequality.
Actually the situation is less paradoxical when we consider the possibility that government policies are largely responsible for growing inequality. This is most obvious is with the bailout of the financial industry in 2008. Without the help of the TARP and the Fed, Goldman Sachs, Citigroup, Morgan Stanley, and most of the other Wall Street behemoths would be out of business. This would have drastically reduced the wealth and income of many of the richest people in the country.
The government has also redistributed income upward by supporting an over-valued dollar that has eliminated millions of manufacturing jobs and put downward pressure on the wages of non-college educated workers more generally. In addition, a Federal Reserve Board policy that raises interest rates to keep people from getting jobs any time the labor market gets tight enough to support wage growth has also had the effect of reducing the wages of most workers.
Also our trade policy of selective protectionism, which exposes manufacturing workers to competition with the lowest paid workers in the world, while largely protecting doctors, lawyers, and other highly paid professionals (who comprise much of the one percent), has the effect of redistributing income upward. Similarly, our policy of patent protection redistributes hundreds of billions of dollars a year from ordinary workers to drug companies and other beneficiaries of these government-granted monopolies.
In these areas and others the government has acted to redistribute income upward. A politician who wanted to reduce inequality could focus on having less government action in these areas. That would be consistent with the polls cited by Edsall indicating that the public wanted a smaller role for the government.
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No, that actually is not what the column asked. The question was instead whether people on TANF or food stamps should be able to buy steak or spend their money in other ways that politicians consider lavish.
It seems that if we think the government has a right to dictate people’s spending habits based on giving them $1,600 a year in food stamps (the average benefit per recipient), there should also be a case for dictating their spending habits if we give them thousands of times as much in tax breaks, as would be the case with the fund managers’ tax break.
For those not familiar with it, the fund managers’ tax break (also known as the carried interest tax deduction) allows managers of hedge funds and private equity funds, as well as other types of investment funds, to pay the lower capital gains tax rate instead of the tax rate on ordinary income. In order to get this lower tax rate they have to be paid on a commission, like a car salesperson or a realtor. While other workers who get paid in part on commission still have to pay the same tax rate on their income, because of their enormous political power fund managers like Mitt Romney were able to get Congress to give them a special lower tax rate.
The gains to these fund managers can be enormous; it is not uncommon for successful managers like Romney to pocket $10 million a year. With a tax rate on normal income of 39.6 percent and a capital gains tax rate of 20 percent, this implies a government handout of $1,960,000 a year (@1230 years of food stamps). Some of the most successful fund managers pocket over $100 million a year, which implies a handout of more than $19,600,000 a year (@12,300 years of food stamps). If the government wants to tell people who get food stamps how they should spend their money, it certainly seems reasonable to tell people who can get thousands of times as much through tax breaks how they should spend their money.
For those who have trouble understanding that a tax break is the same as a welfare-type benefit, imagine that we lived in a condo and every unit was required to pay $500 a month to cover the cost of electricity, heating, maintenance, and other normal expenses. If the condo association decided that the people living in one unit did not have to pay their fees, that would be the same as handing them $500 a month, or at least it would be in the land where the laws of arithmetic apply. Of course we have a serious problem of climate change deniers in American political life, why shouldn’t we also have a problem of arithmetic deniers?
Note: typos and calculations corrected, thanks to Robert Salzberg. The calculations in this post ignore the 3.8 percent investor tax from the Affordable Care Act that would be imposed on most capital gains income, as well as the 0.9 percentage point tax that would be applied to most wage earnings of high income individuals. Together these taxes would lower the gap between the tax rate on ordinary income and capital gains income by 2.9 percentage points.
No, that actually is not what the column asked. The question was instead whether people on TANF or food stamps should be able to buy steak or spend their money in other ways that politicians consider lavish.
It seems that if we think the government has a right to dictate people’s spending habits based on giving them $1,600 a year in food stamps (the average benefit per recipient), there should also be a case for dictating their spending habits if we give them thousands of times as much in tax breaks, as would be the case with the fund managers’ tax break.
For those not familiar with it, the fund managers’ tax break (also known as the carried interest tax deduction) allows managers of hedge funds and private equity funds, as well as other types of investment funds, to pay the lower capital gains tax rate instead of the tax rate on ordinary income. In order to get this lower tax rate they have to be paid on a commission, like a car salesperson or a realtor. While other workers who get paid in part on commission still have to pay the same tax rate on their income, because of their enormous political power fund managers like Mitt Romney were able to get Congress to give them a special lower tax rate.
The gains to these fund managers can be enormous; it is not uncommon for successful managers like Romney to pocket $10 million a year. With a tax rate on normal income of 39.6 percent and a capital gains tax rate of 20 percent, this implies a government handout of $1,960,000 a year (@1230 years of food stamps). Some of the most successful fund managers pocket over $100 million a year, which implies a handout of more than $19,600,000 a year (@12,300 years of food stamps). If the government wants to tell people who get food stamps how they should spend their money, it certainly seems reasonable to tell people who can get thousands of times as much through tax breaks how they should spend their money.
For those who have trouble understanding that a tax break is the same as a welfare-type benefit, imagine that we lived in a condo and every unit was required to pay $500 a month to cover the cost of electricity, heating, maintenance, and other normal expenses. If the condo association decided that the people living in one unit did not have to pay their fees, that would be the same as handing them $500 a month, or at least it would be in the land where the laws of arithmetic apply. Of course we have a serious problem of climate change deniers in American political life, why shouldn’t we also have a problem of arithmetic deniers?
Note: typos and calculations corrected, thanks to Robert Salzberg. The calculations in this post ignore the 3.8 percent investor tax from the Affordable Care Act that would be imposed on most capital gains income, as well as the 0.9 percentage point tax that would be applied to most wage earnings of high income individuals. Together these taxes would lower the gap between the tax rate on ordinary income and capital gains income by 2.9 percentage points.
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I hate to get picky on the numbers, but the unemployment rate was 7.8 percent in January of 2009 when President Obama took office. The Labor Department reported that it was 5.5 percent in March. Since 5.5 percent is more than two-thirds of 7.8 percent, the NYT was seriously exaggerating in its article on Hilary Clinton’s announcement of her candidacy when it gave President Obama credit for:
“getting the country out of the worst financial crisis since the Great Depression and cutting the unemployment rate nearly in half.”
Of course the unemployment did continue rising through President Obama’s first year in office, eventually peaking at 10.0 percent in October of 2009. President Obama certainly cannot be blamed for this increase since the direction of the economy was already set at the time he entered the White House. But by the same token, he cannot be given full credit for the subsequent reduction in unemployment, since much of this would have happened regardless of what policies were pursued.
So if we take the statement literally about cutting unemployment nearly in half, it’s wrong. If we try to honestly award credit, based on what President Obama’s policies accomplished, it is also wrong.
Furthermore, it is worth noting that the real problem was the collapse of the housing bubble that was driving the economy, not a financial crisis. There was and is no easy source of demand to fill the gap created by the collapse of the bubble. The underlying gap in demand is in turn attributable to the $500 billion trade deficit (@ 3.0 percent of GDP), which is in turn due to the over-valued dollar. The over-valued dollar has its origins in the high dollar policy and the bailout from the East Asian financial crisis that was engineered by Treasury Secretary Robert Rubin during the Bill Clinton administration.
The piece also errs when it tells readers:
“And she [Secretary Clinton] intends to address stagnant wages and income inequality in new ways; one potential proposal would offer incentives to corporations that allow employees to share in profits.”
The NYT does not know that Clinton really sees incentives for profit sharing as a way to address wage stagnation and inequality. There are much more obvious and direct ways, like a full employment policy by the Fed and a financial transactions tax which would hit many of the top incomes on Wall Street. The NYT just knows that Clinton says she intends to address stagnant wages and income inequality with incentives for profit sharing. It should stick to reporting what it knows, and refrain from presenting its speculation as truth.
I hate to get picky on the numbers, but the unemployment rate was 7.8 percent in January of 2009 when President Obama took office. The Labor Department reported that it was 5.5 percent in March. Since 5.5 percent is more than two-thirds of 7.8 percent, the NYT was seriously exaggerating in its article on Hilary Clinton’s announcement of her candidacy when it gave President Obama credit for:
“getting the country out of the worst financial crisis since the Great Depression and cutting the unemployment rate nearly in half.”
Of course the unemployment did continue rising through President Obama’s first year in office, eventually peaking at 10.0 percent in October of 2009. President Obama certainly cannot be blamed for this increase since the direction of the economy was already set at the time he entered the White House. But by the same token, he cannot be given full credit for the subsequent reduction in unemployment, since much of this would have happened regardless of what policies were pursued.
So if we take the statement literally about cutting unemployment nearly in half, it’s wrong. If we try to honestly award credit, based on what President Obama’s policies accomplished, it is also wrong.
Furthermore, it is worth noting that the real problem was the collapse of the housing bubble that was driving the economy, not a financial crisis. There was and is no easy source of demand to fill the gap created by the collapse of the bubble. The underlying gap in demand is in turn attributable to the $500 billion trade deficit (@ 3.0 percent of GDP), which is in turn due to the over-valued dollar. The over-valued dollar has its origins in the high dollar policy and the bailout from the East Asian financial crisis that was engineered by Treasury Secretary Robert Rubin during the Bill Clinton administration.
The piece also errs when it tells readers:
“And she [Secretary Clinton] intends to address stagnant wages and income inequality in new ways; one potential proposal would offer incentives to corporations that allow employees to share in profits.”
The NYT does not know that Clinton really sees incentives for profit sharing as a way to address wage stagnation and inequality. There are much more obvious and direct ways, like a full employment policy by the Fed and a financial transactions tax which would hit many of the top incomes on Wall Street. The NYT just knows that Clinton says she intends to address stagnant wages and income inequality with incentives for profit sharing. It should stick to reporting what it knows, and refrain from presenting its speculation as truth.
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The National Journal reported that roughly 0.000008 percent of Social Security benefits over the years 2006-2008 were paid to people who had been committed to institutions as sexual predators. Under the law, these people (18 were uncovered, in total) are ineligible for Social Security benefits.
The National Journal and its reporters are now waiting for the Pulitzer Prize.
The National Journal reported that roughly 0.000008 percent of Social Security benefits over the years 2006-2008 were paid to people who had been committed to institutions as sexual predators. Under the law, these people (18 were uncovered, in total) are ineligible for Social Security benefits.
The National Journal and its reporters are now waiting for the Pulitzer Prize.
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I see that Bloomberg has apparently decided to give Megan McArdle infinite space to tell its readers that she doesn’t like the Social Security trust fund. Well, they have to fill their website with something.
Just to keep things short and simple, there are two ways to think about the trust fund. First, we can follow the law as written. Under the law, designated Social Security taxes and only designated Social Security taxes can be used to pay Social Security benefits. Money from the taxes that is unspent in the year collected is put in the trust fund for further use. The law is pretty clear on this. I have not heard even Antonin Scalia attempt to argue otherwise.
The other way to think about the trust fund is that it is an irrelevancy. At some time in the past the politicians in Washington thought it would be cute for us to pay for Social Security out of its designated tax and the trust fund, but hey, who cares? There is only one government, so it really doesn’t matter which pocket the money comes out of, so the trust fund is irrelevant to anything.
While there are good reasons for choosing one or the other of these views, both have the advantage of being consistent. Both also have the advantage of telling us that there is no necessary reason to worry about Social Security’s finances just now. In the first case, the projections show the fund will be able to pay full benefits through 2033 with no changes whatsoever. We could of course worry about Social Security’s finances sooner if we want, but some folks might think that problems like unemployment and stagnant wages are more pressing.
By the second view there is no reason to worry about Social Security’s finances because the premise is that it doesn’t have its own finances. Hey, there’s just one government, who cares which pocket the money comes out of? In this view it makes no more sense to worry about Social Security’s finances than it does to worry about the finances of the defense or state departments. It’s all part of the government.
There can only be an issue if we let people just make it up as they go along, effectively saying that Social Security has to be financed by its own taxes, but the program doesn’t get to use surpluses from prior years to pay current year’s benefits. There is not any obvious logic to this position, and it has no basis in current law, but its proponents are welcome to lobby their representatives in Congress to have the law re-written as they would like it. Until then, we need not worry about the status of the trust fund or the solvency of Social Security.
Note: The spelling of Antonin Scalia has been corrected, thanks Ken.
I see that Bloomberg has apparently decided to give Megan McArdle infinite space to tell its readers that she doesn’t like the Social Security trust fund. Well, they have to fill their website with something.
Just to keep things short and simple, there are two ways to think about the trust fund. First, we can follow the law as written. Under the law, designated Social Security taxes and only designated Social Security taxes can be used to pay Social Security benefits. Money from the taxes that is unspent in the year collected is put in the trust fund for further use. The law is pretty clear on this. I have not heard even Antonin Scalia attempt to argue otherwise.
The other way to think about the trust fund is that it is an irrelevancy. At some time in the past the politicians in Washington thought it would be cute for us to pay for Social Security out of its designated tax and the trust fund, but hey, who cares? There is only one government, so it really doesn’t matter which pocket the money comes out of, so the trust fund is irrelevant to anything.
While there are good reasons for choosing one or the other of these views, both have the advantage of being consistent. Both also have the advantage of telling us that there is no necessary reason to worry about Social Security’s finances just now. In the first case, the projections show the fund will be able to pay full benefits through 2033 with no changes whatsoever. We could of course worry about Social Security’s finances sooner if we want, but some folks might think that problems like unemployment and stagnant wages are more pressing.
By the second view there is no reason to worry about Social Security’s finances because the premise is that it doesn’t have its own finances. Hey, there’s just one government, who cares which pocket the money comes out of? In this view it makes no more sense to worry about Social Security’s finances than it does to worry about the finances of the defense or state departments. It’s all part of the government.
There can only be an issue if we let people just make it up as they go along, effectively saying that Social Security has to be financed by its own taxes, but the program doesn’t get to use surpluses from prior years to pay current year’s benefits. There is not any obvious logic to this position, and it has no basis in current law, but its proponents are welcome to lobby their representatives in Congress to have the law re-written as they would like it. Until then, we need not worry about the status of the trust fund or the solvency of Social Security.
Note: The spelling of Antonin Scalia has been corrected, thanks Ken.
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That’s the question Megan McArdle raises in her Bloomberg column condemning efforts to raise Social Security benefits. McArdle tells readers:
“Now, I don’t want to get mired in the tired old arguments about whether the trust fund is “real” — whether it’s a stupid accounting abstraction or a profound moral promise on the part of the U.S. government — because this obscures the actual point we need to be concerned with: If we want to pay Social Security beneficiaries more money than we are collecting in payroll taxes, the money has to come from somewhere, and ultimately, that “somewhere” is the United States taxpayer. It is supremely irrelevant whether that money flows through the “trust fund” or Uncle Sam holds an annual ceremony in which the trustees are handed one of those giant checks they present to lottery winners; we still need to find the money to make good on that check.”
Of course we would all like those who disagree with us in major debates to simply disregard their arguments and accept what we are saying as true. But most of us just don’t possess the power to force our opponents to concede the truth of our position, even when if we use ad hominems to belittle their arguments.
In the case of the Social Security trust fund, the tired old argument stems from the legal structure of the program whereby it is financed exclusively by its designated tax, including the surpluses from taxes in prior years. McArdle tells us that bonds purchased with prior years’ surpluses don’t matter, the government still has to cough up the money in the current year. The same logic applies to the bonds held by rich people like Peter Peterson. The government has to cough up the money to pay him the interest this year on whatever bonds he holds.
If McArdle wants to declare it “supremely irrelevant” that the payments for Social Security come from bonds held by the trust fund, then with equal validity we can declare it supremely irrelevant that Peterson paid for the bonds he owns. After all, this would just get us into tired old arguments about moral obligations to bondholders.
McArdle could contend that we have to pay Peterson his interest because otherwise no one would ever buy U.S. government bonds again, but this point actually is directly in line with tired old arguments about moral obligations. The logic of this assertion is that if we don’t meet obligations to past bondholders, then no one will trust us to meet our obligations to future bondholders.
Suppose people apply the same logic to the taxes they pay for Social Security benefits. If we don’t follow the law and pay people the benefits they have earned, then they may be more likely to try to avoid paying Social Security taxes in the future. They certainly will be less likely to approve tax increases to fund the program, if they have no reason to believe that the taxes will actually be used for the program, as required under law.
But McArdle doesn’t want to have this sort of discussion. Readers are just supposed to accept her pronouncements as true.
That’s the question Megan McArdle raises in her Bloomberg column condemning efforts to raise Social Security benefits. McArdle tells readers:
“Now, I don’t want to get mired in the tired old arguments about whether the trust fund is “real” — whether it’s a stupid accounting abstraction or a profound moral promise on the part of the U.S. government — because this obscures the actual point we need to be concerned with: If we want to pay Social Security beneficiaries more money than we are collecting in payroll taxes, the money has to come from somewhere, and ultimately, that “somewhere” is the United States taxpayer. It is supremely irrelevant whether that money flows through the “trust fund” or Uncle Sam holds an annual ceremony in which the trustees are handed one of those giant checks they present to lottery winners; we still need to find the money to make good on that check.”
Of course we would all like those who disagree with us in major debates to simply disregard their arguments and accept what we are saying as true. But most of us just don’t possess the power to force our opponents to concede the truth of our position, even when if we use ad hominems to belittle their arguments.
In the case of the Social Security trust fund, the tired old argument stems from the legal structure of the program whereby it is financed exclusively by its designated tax, including the surpluses from taxes in prior years. McArdle tells us that bonds purchased with prior years’ surpluses don’t matter, the government still has to cough up the money in the current year. The same logic applies to the bonds held by rich people like Peter Peterson. The government has to cough up the money to pay him the interest this year on whatever bonds he holds.
If McArdle wants to declare it “supremely irrelevant” that the payments for Social Security come from bonds held by the trust fund, then with equal validity we can declare it supremely irrelevant that Peterson paid for the bonds he owns. After all, this would just get us into tired old arguments about moral obligations to bondholders.
McArdle could contend that we have to pay Peterson his interest because otherwise no one would ever buy U.S. government bonds again, but this point actually is directly in line with tired old arguments about moral obligations. The logic of this assertion is that if we don’t meet obligations to past bondholders, then no one will trust us to meet our obligations to future bondholders.
Suppose people apply the same logic to the taxes they pay for Social Security benefits. If we don’t follow the law and pay people the benefits they have earned, then they may be more likely to try to avoid paying Social Security taxes in the future. They certainly will be less likely to approve tax increases to fund the program, if they have no reason to believe that the taxes will actually be used for the program, as required under law.
But McArdle doesn’t want to have this sort of discussion. Readers are just supposed to accept her pronouncements as true.
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That’s what Yahoo Finance effectively told us in the headline of a piece on the Labor Department’s release of new data from its Job Opening and Labor Turnover Survey. The headline said, “U.S. jobs opening data points to skills mismatch.” The evidence was a modest rise in the overall rate of job openings from 3.4 percent to 3.5 percent. But if this is evidence of a skills mismatch then the biggest problem is in the restaurant sector where the jobs opening rate was 5.1 percent. Apparently there are just not enough people who know how to wait tables and wash dishes.
If we used the standard economist measure, we would be looking for rising wages as evidence of skills mismatch. There is not much evidence of that anywhere, as is pointed out later in the article.
That’s what Yahoo Finance effectively told us in the headline of a piece on the Labor Department’s release of new data from its Job Opening and Labor Turnover Survey. The headline said, “U.S. jobs opening data points to skills mismatch.” The evidence was a modest rise in the overall rate of job openings from 3.4 percent to 3.5 percent. But if this is evidence of a skills mismatch then the biggest problem is in the restaurant sector where the jobs opening rate was 5.1 percent. Apparently there are just not enough people who know how to wait tables and wash dishes.
If we used the standard economist measure, we would be looking for rising wages as evidence of skills mismatch. There is not much evidence of that anywhere, as is pointed out later in the article.
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The NYT article discussing Republican efforts to limit the Fed’s power to boost the economy presented an overly narrow view of the issue of the Fed’s independence. It contrasted efforts by Democrats to make the Fed more accountable to the president and the Congress, with Republican efforts to make the regional Feds stronger by giving the banks more control. The latter was described as increasing Fed independence.
In fact, the Republican path would make the Fed more dependent on the financial industry. This has been a serious problem in the past. Undoubtedly the Fed’s failure to crackdown on the housing bubble was due in part to the fact that the financial industry was making a fortune on the issuance and securitization of junk mortgages.
A Fed that is overly dependent on the financial industry is also likely to be more prone to raise unemployment in order to reduce the risk of inflation. The cost of this policy would be millions of fewer jobs and lower wages for tens of millions of workers.
If we want a Fed that can act in the interest of the general public it makes sense to try to increase its independence from the financial industry. The Fed is an unusual regulatory agency in that members of the regulated industry sit directly on the board of its regulator. By contrast, other industries have to hire lobbyists to influence their regulators.
The NYT article discussing Republican efforts to limit the Fed’s power to boost the economy presented an overly narrow view of the issue of the Fed’s independence. It contrasted efforts by Democrats to make the Fed more accountable to the president and the Congress, with Republican efforts to make the regional Feds stronger by giving the banks more control. The latter was described as increasing Fed independence.
In fact, the Republican path would make the Fed more dependent on the financial industry. This has been a serious problem in the past. Undoubtedly the Fed’s failure to crackdown on the housing bubble was due in part to the fact that the financial industry was making a fortune on the issuance and securitization of junk mortgages.
A Fed that is overly dependent on the financial industry is also likely to be more prone to raise unemployment in order to reduce the risk of inflation. The cost of this policy would be millions of fewer jobs and lower wages for tens of millions of workers.
If we want a Fed that can act in the interest of the general public it makes sense to try to increase its independence from the financial industry. The Fed is an unusual regulatory agency in that members of the regulated industry sit directly on the board of its regulator. By contrast, other industries have to hire lobbyists to influence their regulators.
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