Sociological Images

While some austerity advocates really fear (although incorrectly) the consequences of deficit spending, the strongest proponents are actually only concerned with slashing government programs or the use of public employees to provide them.  In other words their aim is to weaken public programs and/or convert them into opportunities for private profit. One measure of their success has been the steady decline in public employment.  Floyd Norris, writing in the New York Times notes:

For jobs, the past four years have been a wash.

The December jobs figures out today indicate that there were 725,000 more jobs in the private sector than at the end of 2008 — and 697,000 fewer government jobs. That works into a private-sector gain of 0.6 percent, and a government sector decline of 3.1 percent.

In total, the number of people with jobs is up by 28,000, or 0.02 percent.

How does that compare? It is by far the largest four-year decline in government employment since the 1944-48 term. That decline was caused by the end of World War II; this one was caused largely by budget limitations.

The chart below, taken from the same post, also reveals just how weak private sector job creation has been over the past 12 years (compare the top three rows — the presidencies of Obama and Bush — w This graphic from the New York Times highlights just how significant the decline in public employment has been in this business cycle compared with past ones.  Each line shows the percentage change in public sector employment for specified months after the start of a recession.  Our recent recession began December 2007 and ended June 2009.   As you can see, what is happening now is far from usual.

It is also worth noting that despite claims that most Americans want to see cuts in major federal government programs, the survey data show the opposite.  For example, see the following graphic from Catherine Rampell’s blog post. As Rampell explains:

In every category except for “aid to world’s needy,” more than half of the respondents wanted either to keep spending levels the same or to increase them. In the “aid to world’s needy” category, less than half wanted to cut spending.

Not surprisingly, this assault on government spending and employment will have real consequences for the economy and job creation. All of this takes us back to the starting point — we are talking policy here.  Whose interests are served by these trends?

Dylan Matthews, blogging in the Washington Post, discusses a very interesting paper that provides evidence showing that politicians seriously underestimate the progressivity of their constituents.

David Broockman and Christopher Skovron, the authors of the paper, “surveyed every candidate for state legislative office in the United States in 2012 [shortly before the November election] and probed candidates’ own positions and their perceptions of their constituents’ positions on universal health care, same-sex marriage, and federal welfare programs, three of the most publicly salient issues in both national-level and state-level American politics during the past several years.”  They then matched the results with estimates of the actual district- and issue-specific opinions of those residing in the candidates’ districts using a data set of almost 100,000 Americans.

Here is what they found:

Politicians consistently and substantially overestimate support for conservative positions among their constituents on these issues. The differences we discover in this regard are exceptionally large among conservative politicians: across both issues we examine, conservative politicians appear to overestimate support for conservative policy views among their constituents by over 20 percentage points on average… Comparable figures for liberal politicians also show a slight conservative bias: in fact, about 70% of liberal office holders typically underestimate support for liberal positions on these issues among their constituents.

The following two charts illustrate this bias when it comes to universal health care and same sex marriage.

As Matthews explain:

The X axis is the district’s actual views, and the Y axis their legislators’ estimates of their views. The thin black line is perfect accuracy, the response you’d get from a legislator totally in tune with his constituents. Lines above it would signify the politicians think the district more liberal than it actually is; if they’re below it, that means the legislators are overestimating their constituents’ conservatism. Liberal legislators consistently overestimate opposition to same-sex marriage and universal health care, but only mildly. Conservative politicians are not even in the right ballpark.

The authors found a similar bias regarding support for welfare programs.  Perhaps even more unsettling, the authors found no correlation between the amount of time candidates spent meeting and talking to people in their districts while campaigning for office and the accuracy of their perceptions of the political positions of those living in their districts.

One consequence of this disconnect is that office holders, even those with progressive views, are reluctant to take progressive positions.  More generally, these results speak to a real breakdown in “the ability of constituencies to control the laws that their representatives make on their behalf.”

Cross-posted at Reports from the Economic Front.

While newspapers give a lot of ink to arguments about whether reducing the budget deficit will boost or reduce growth, they seem to have little interest in the related issue of whether economic growth really benefits the great majority.

David Cay Johnston, the Pulitzer Prize winning financial journalist, recently addressed this issue drawing on the work of economists Emmanuel Saez and Thomas Piketty:

In 2011 entry into the top 10 percent… required an adjusted gross income of at least $110,651. The top 1 percent started at $366,623.

The top 1 percent enjoyed 81 percent of all the increased income since 2009. Just over half of the gains went to the top one-tenth of 1 percent, and 39 percent of the gains went to the top 1 percent of the top 1 percent.

Ponder that last fact for a moment — the top 1 percent of the top 1 percent, those making at least $7.97 million in 2011, enjoyed 39 percent of all the income gains in America.

So, 81 percent of all the new income generated from 2009 to 2011 was captured by the top 1 percent income earners, where income is defined as adjusted gross income, which refers to income minus deductions or taxable income.  In other words, growth, even accelerated growth, is not going to do the majority much good if the economic structure remains the same.

Johnston highlights the problem with our existing economic model with perhaps an even more shocking example.  He compares the average income growth of the bottom 90 percent with the average income growth of the top 10 percent, 1 percent, and top 1 percent of the top 1 percent over the period 1966 to 2011.

It turns out that the average income of the bottom 90 percent rose by a miniscule $59 over the period (as measured in 2011 dollars).  By comparison, the average income of the top 10 percent rose by $116,071, the average income of the top 1 percent rose by $628,817, and the average income of the top 1 percent of the top 1 percent increased by a whopping $18,362,740.  In short, growth alone means little if the great majority of people are structurally excluded from the benefits.

In an effort to highlight this extreme disparity in adjusted income growth rates, Johnston suggests plotting the numbers on a chart, with $59, the amount gained by the bottom 90 percent, represented by a bar one inch high.  As the chart below shows, the bar representing average gains for the top 10 percent would be 163 feet high, that for the top 1 percent would be 884 feet high, and that for the top 1 percent of the top 1 percent would be 4.9 miles high.

In sum, the real challenge facing the great majority of Americans is not figuring out how to make the economy growth faster.  Rather, it is figuring out how to create space for a real debate about how to transform our economy so that growth will actually satisfy majority needs.

Cross-posted at Reports from the Economic Front.

The British economy is a disaster.  Oddly enough most analysts find it difficult to explain why.

Actually the reason is quite simple. The British government responded to its own Great Recession by cutting spending and raising taxes.  The result, which is anything but mysterious, is that the county remains in deep recession.

Matthew O’Brien, writing in The Atlantic, describes the situation as follows:

…public net investment — things like roads and bridges and schools,  and everything else the economy needs to grow — has fallen by half the past three years, and is set to fall even further the next two. It’s the economic equivalent of shooting yourself in both feet, just in case shooting yourself in one doesn’t completely cripple you. Austerity has driven down Britain’s borrowing costs even further, but that’s been due to investors losing faith in its recovery, rather than having more faith in its public finances. Indeed, weak growth has kept deficits from coming down all that much, despite the higher taxes and slower spending. In other words, it’s economic pain for no fiscal gain.

Below is a chart taken from The Atlantic article.  It shows that:

Britain’s stagnating economy has left it in worse shape at this point of its recovery than it was during the Great Depression. GDP is still more than 3 percent below its 2008 peak, and it hasn’t done anything to catchup in years. At this pace, there will be no recovery in our time, or any other time.

In other words, while the British economy suffered a deeper decline during the Great Depression period of 1930 to 1934 than to this point in the Great Recession which started in 2008, the economy recovered far more quickly then than now.  In fact, it doesn’t seem to be recovering now at all.

Perhaps the most surprising thing about the situation is that political leaders appear determined to stay the course.

Cross-posted at Reports from the Economic Front.

The stock market looms large in our understanding of the economy.  The business news is often little more than a report on the movement of the market.  High school economics classes often introduce the study of the economy to students by encouraging them to pick and follow a favorite stock.  Managers of corporations are judged by how well their actions result in higher stock prices.

All this could easily lead one to think that the great majority of Americans are stockholders.  In fact, as the chart below shows, very few Americans own significant shares of stock and therefore directly benefit from the market’s rise.

It is easy to understand why the top earners are happy with this identification of the economy with the stock market.  It ensures that economic activity is largely organized and outcomes evaluated with their interests in mind.  What is not so easy to understand is why the great majority of working people continue to accept this identification.

Cross-posted at Reports from the Economic Front.

There are those that argue that lowering the top marginal tax rates on “ordinary” income (from wages or salary) and capital gains will stimulate economic growth.  Thomas L. Hungerford, in a Congressional Research Report, tests and rejects this claim.

He finds no statistical relationship between changes in either of these top tax rates and private savings, investment, productivity, or real per capita GDP growth.  However, he does find a strong statistical relationship between changes in these tax rates and income inequality.  More specifically, raising top tax rates can be expected to promote greater income equality without causing harm to the economy.

Tax Trends

There are two main tax concepts: the marginal tax rate, which is the tax paid on the last dollar of income received, and the average tax rate, which is the proportion of all income that is paid in taxes.  How much a person pays on the last dollar received depends on whether it is classified as ordinary income or capital gains.

Most importantly, as the chart below shows, the very top tax payers have enjoyed a steady decline in their average tax rate.

The next chart shows trends in top marginal tax rates on ordinary income and capital gains.  The top marginal tax rate on ordinary income has clearly been on the decline: from 91% in the 1950s, 70% in the 1960s and 1970s, to a low of 28% in 1986.  It now stands at 35%.  The top marginal capital gains tax rate has not changed as much.  It was 25% in the 1950s and 1960s, 35% in the 1970s, and is now 15%.

The Tests

Hungerford used econometric methods to test whether changes in top marginal tax rates affect private savings, investment, productivity, and/or per capita GDP growth.  Simply plotting the movement of top tax rates and each of these variables suggests that a decline in top tax rates is associated with a positive movement in each of these economic variables.

However, as Hungerford correctly states, correlation is not the same as causation.  Using regression analysis, he found that the relationships were only coincidental or spurious; there was no statistically significant connection between changes in the top tax rates and movements in any of the variables.

Hungerford also tested to see if changes in top marginal tax rates had any effect on the distribution of income.  The first chart below shows the scatter plot of top tax rates and the share of income going to the top 0.1% for the years 1945-2010.  The second shows the same with the top 0.01% of income earners.

As we can see the fitted lines suggest a very strong relationship between the variables.  As before, Hungerford used regression analysis to determine whether the relationships were statistically significant.  This time his answer was yes in both cases; changes in top marginal tax rates do affect income concentration.  In other words, lowering the top rates increases income inequality, raising them reduces it.

It is time for us to start agitating for raising the top tax rates.

Cross-posted at Reports from the Economic Front.

Politicians always seem to be talking about the middle class.  They need some new focus groups.  According to the Pew Research Center, over the past four years the percentage of adult Americans that say they are in the lower class has risen significantly, from a quarter to almost one-third (see chart below).

Pew also found that the demographic profile of the self-defined lower class has also changed.  Young people, according to Pew, “are disproportionately swelling the ranks of the self-defined lower classes.”   More specifically some 40% of those between 18 to 29 years of age now identify as being in the lower classs compared to only 25% in 2008.

Strikingly, the percentage of whites and blacks that see themselves in the lower class is now basically equal.  The percentage of whites who consider themselves in the lower class rose from less than a quarter in 2008 to 31% in 2012.  This brought them in line with blacks, whose percentage remained at a third.  The percentage of Latinos describing themselves as lower class rose to 40%, a ten percentage point increase from 2008.

And not surprisingly, as the chart below shows, many who self-identify as being in the lower class are experiencing great hardships.   In fact, 1 in 3 faced four or all five of the problems addressed in the survey.

In short, there is a lot of hurting in our economy.