Annals of the Great Recession V.

From the late 19th Century “Gilded Age” to the early 20th Century “New Era,” America lived with a lot of income inequality.[1] The Great Depression of the 1930s and the policies of the New Deal closed that range of incomes. This new order continued from the 1930s through the 1970s. From the 1980s to the financial crisis income inequality rose sharply once again.   The financial crisis and the subsequent Great Recession dented this inequality, but did not reverse it. Nor does it seem likely that it will be substantially reduced under foreseeable conditions.

The low and middle-income groups suffered limited losses from the recession in comparison to upper income groups. The financial crisis and subsequent recession hit upper income group harder than other groups; federal government responses helped lower income groups more than upper income groups, the wealthy still haven’t made up their losses, and inequality has decreased.

The one-percent suffered the largest fall in pre-tax income during the Great Recession. Between 2007 and 2012-2013, the income of the top one ten-thousandth of earners fell 26 percent; the income of the “one-percent” fell 21 percent; the income of the top five percent fell 15 percent; and the bottom 90 percent fell 13 percent. For most poor and middle-class groups, the average income decline was about 10 percent.

In 2007, the pre-tax income of the highest one ten-thousandth of earners peaked at $39.4 million. In 2009 it fell to $21 million. That’s a 46.6 percent drop in income. Most of these losses came on falling stock-prices, so the run-up of the stock market in recent years has done much to restore the income of this group. In 2012 and 2013, it reached $29.2 million. This group is back at about 74 percent of its pre-recession income. Overall, the income of the “one percent” is still about 20 percent below its pre-recession peak.

Long-standing federal government counter-cyclical policies—unemployment payments, food stamps—helped off-set the effects of the Great Recession for low-income groups. The stimulus bill helped as well. After-tax and after-transfer incomes for the middle quintile of income earners fell by 2 percent in comparison to pre-recession levels. After tax and after transfer incomes for the lowest quintile income group actually rose 2.6 percent.

These facts run against the common perception. “Maybe [people haven’t perceived this truth] because many liberals are tempted to believe inequality is always getting worse,…”

Leonhardt sees middle-class incomes as having been “damaged” by income inequality. This, in turn, “has caused wide-spread frustration.” The implications for American politics should be obvious.

It’s hard to sympathize with people whose incomes dropped from almost $40 million a year to barely $20 million a year. They’ll get by, somehow.

Nevertheless, there are issues that are worth some thought.

First, is inequality as such a durable political issue or would most people be satisfied if they experienced a moderate rise in income each year?

Second, why have upper-incomes grown so much since the 1980s while most incomes have stagnated? The answers here are likely to be more complex and the problems less tractable than the political ideologies of left and right would lead us to believe. Increasing inequality has coincided with globalization, two recessions, the aging of the “Baby Boom” generation, problems in adapting the American labor force, and political near-paralysis. What to do?

[1] David Leonhardt, “Since the Financial Crisis, A Little Less Inequality,” NYT, 17 February 2015.

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Inequality 1.

In December 2013 President Obama called income inequality “the defining issue of our time.” He’s agin it. Soon afterward Thomas Piketty, Capital in the Twenty-First Century (2014) garnered many accolades and some readers. This added academic fuel to the populist fires.

Already by Summer 2014, however, there were reasons to doubt the substance behind the passions aroused by the issue. Eduardo Porter raised two issues.[1] First, the problem of income inequality isn’t that important compared to other problems facing the United States. Social scientists have been trying to demonstrate that the rise of the “One Percent” has harmed society. They haven’t been able to prove it. Second, it may not be a problem with a practical solution.

What we think of as “globalization” (technology + open world markets) has polarized people toward the extremes of income: high-earners and low earners, but fewer and fewer people in between. The relationship between one’s job and technology is key. Someone who has a job that is not easily replaced by a machine, but which requires the manipulation of technology, is in a good place. In contrast, anyone with a job that can—or one day could be—done by a machine is in a bad place.[2] Generally, higher incomes are flowing toward people with higher education.[3] That’s true both within the United States and within the global economy. From this perspective, the “defining issue” is how to promote enough economic growth to insure a rising standard of living for the low-earners. Gregory Mankiw, a Harvard economist who served as an economic advisor to both George W. Bush and Mitt Romney, argues that raising the amount of education of American workers offers the best path to higher incomes.

Seen dispassionately, the best solution would be to help the people at the bottom of the income ladder without preventing the people at the top of the income ladder from doing the stuff that generates income for all. Allowing the gains from growth to flow only to those at the top of the income pyramid will not head off political trouble.  More could be done to take the rough edges off the state in which we find ourselves. For one thing, cuts in public aid to state colleges and universities has shifted a heavier burden onto parents and students seeking the higher education that is supposed to allow them to climb out of the pit. Restoring that aid would be a valuable step. Increasing the Earned Income Tax credit is another way. Developing policies to make the urban cores of the dynamic cities affordable to low-income workers by is another way. Still, reducing inequality by higher taxes on the well-off and an ever more generous social welfare system[4] cannot turn back the tsunami of change.

However, dispassionately isn’t how most engaged people are seeing the issue. Both the political parties have a stake in stirring up passions by misrepresenting the realities. The Right sees President Obama as an anti-business zealot. The Left sees Republicans as pawns of corporations.

How long will it take to make a more educated and better educated workforce? In the meantime, how does the country manage the social costs of the transition?

[1] Eduardo Porter, “Income Inequality And the Ills Behind It,” NYT, 30 July 2014.

[2] A 2012 poll of economists showed that the great majority believed that the uneven impact of technological change best explained the rise of income inequality. Reagan, Bush II, “deregulation,” and the other usual suspects didn’t figure

[3] Scholars have compared the college graduation rates for those born in the early 1960s with those for 1979-1982. People in the top 20 percent of incomes rose from 36 percent to 54 percent, while it rose from 5 percent to 9 percent for those in the bottom 20 percent. Furthermore, even the real incomes of people with a BA have hardly risen since the mid-1970s. NB: There is a lot you can do with this basic set of statistics.

[4] “Free sandals for foot fetishists,” as the Democratic columnist Mark Shields once described the policy prescriptions of the Democratic Party of the 1980s.

The Tax Wars.

Should the rich pay their “fair share”? In 1992 there were three tax brackets: 15%, 28%, and 31%. In 1993 the Democrats created two additional tax brackets on higher incomes: 36% and 39.6%. Thus, the Democrats imposed higher tax rates on high incomes.[1]

In 2001 the Republicans cut federal income taxes on all Americans.[2] Single tax-payers with taxable income up to $6,000, heads of households with taxable income up to $10,000 and people filing jointly with taxable incomes up to $12,000 had their tax rate reduced from 15% to 10%. Those in the 15% bracket had the lower threshold indexed to the new 10% bracket. The tax rate on people in the next bracket was reduced from 28% to 25% by 2006. The rate on the next bracket would be lowered from 31% to 28% by 2006. The rate on the next bracket was reduced from 36% bracket to 33% by 2006. The rate on the highest bracket was reduced from 39.6% to 35% by 2006. The biggest percentage cuts in the tax rates were at the bottom end of the tax brackets, the smaller cuts at the high end. The two highest brackets still were taxed at a higher rate than in 1992.

These taxes continued through 2012, when the 2001 cuts on the two top brackets were allowed to expire, while the rates on the other brackets were made permanent. To illustrate, the rate for single filers making up to $8,925 is 10%; on $8,925 to $36,250 is 15%; on $36,250 to $87,850 is 25%; on $87,850 to $183,250 is 28%; on $183,250 to $398,350 is 33%; on $398,350 to $400,000 is 35%; and on $400,000+ is 39.6%. So, most Americans live under the Bush Administration tax cuts, while the wealthiest Americans live under the Clinton Administration tax increases.

Under these systems, what do different income groups pay as a percentage of federal income taxes?[3] In 1991, before the Clinton tax increases on high incomes, the top one percent of income earners paid 24.82% of the income tax bill; the bottom 50% paid 5.48%. In 2000, before the Bush tax cuts, the top 1% percent of income earners paid 37.42% of the income tax bill; the bottom 50% paid 3.91%. In 2011, under the Bush tax cuts, the top 1% of tax payers paid 35.1%; the bottom 50% of tax-payers paid 2.89% of taxes. (The top 50% paid 97.1%; the top 25% paid 85.6%; and the top 10% paid 68.3%.)

Across three very different administrations and under very different economic situations, the tax burden has been continually shifted from the bottom 50 percent of taxpayers onto the top one percent of tax payers. The Democratic mantra that the Bush tax cuts “favored the rich” is absolutely untrue. (In all likelihood, the Republican mantra that tax cuts will stimulate economic growth is equally untrue. That needs to be the subject of a different jeremiad.)

If tax rates favor the bottom 50%, income distribution favors the top 50%.

The “hard times” experienced by many Americans don’t have anything to do with tax-dodging by the rich. They are more likely to be the product of big shifts in the American economy within a globalized world economy since the 1970s. Fighting over shares of a shrinking pie isn’t going to fix the problem. We need broadly shared economic growth.

[1] For the sake of comparison, in Canada the highest rate of national taxation—on incomes over $132,000—is 29%.

 

[2] Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

 

[3] Kyle Pomerleau, “Summary of Latest Federal Tax Data,” Table 6. http://taxfoundation.org/article/summary-latest-federal-income-tax-data