Who Is For Change?

Many expected that the severity of the Great Recession, recognition that the prior expansion was largely based on unsustainable bubbles, and an anemic post-crisis recovery, would lead to serious discussion about the need to transform our economy.   Yet, it hasn’t happened.

One important reason is that not everyone has experienced the Great Recession and its aftermath the same. Jordan Weissmann, writing in the Atlantic, published the following figure from the work of  Edward Wolff.  As of 2010, median household net worth was back to levels last seen in the early 1960s.  In contrast, mean household net worth had only retreated some ten years.

The great disparity between median and mean wealth declines is a reflection of the ability of those at the top of the wealth distribution to maintain most of their past gains.  And the lack of discussion about the need for change in our economic system is largely a reflection of the ability of those very same people to influence our political leaders and shape our policy choices.

 

The Social Safety Net Under Attack

One of the subthemes of current discussions about how best to reduce our national debt is that we must reign in out-of-control spending on federal safety net programs.   The reality is quite different.

The chart below shows spending trends in terms of GDP for the ten major needs-tested benefit programs that make-up our federal social safety net. The programs, in the order listed on the chart, are:

• The refundable portion of the health insurance tax credit enacted in the 2010 health care reform law
• Medicaid and the Children’s Health Insurance Program (CHIP)
• The Supplemental Nutrition Assistance Program (SNAP)
• Financial assistance for post-secondary students (Pell Grants)
• Compensatory Education Grants to school districts
• Assisted Housing
• The Earned Income Tax Credit (EITC)
• The Additional Child Tax Credit (ACTC)
• Supplemental Security Income (SSI)
• Family Support Payments

As Jared Bernstein explains:

for all the popular wisdom that programs to help low-income people are swallowing the economy, the truth is that like so much else that plagues our fiscal future, it’s all about health care spending.  The figure shows that as a share of GDP, prior to the Great Recession, non-health care spending was cruising along at around 1.5% for decades.  It was Medicaid/CHIP (Medicaid expansion for kids) that did most of the growing.

The takeaway from this: we need a new health care system—think single payer.

Regardless, the recent explosion in the ratio of Medicare/CHIP spending to GDP is largely due to the severity of the Great Recession, not the generosity of the programs. The recession increased poverty and thus eligibility for the programs, thereby pushing up the numerator, while simultaneously lowering GDP, the denominator.   Moreover, spending on all non-health care safety net programs is on course to dramatically decline as a share of GDP. Even Medicare/Chip spending is projected to stabilize as a share of GDP.

These programs are essential given the poor performance of the economy and in most cases poorly funded. Cutting their budgets will not only deny people access to health care, housing, education, and food, it will also further weaken the economy, in both the short and long run.

The Distressed Labor Market

The following two charts taken from a Center for Economic Policy and Research Center study by John Schmitt and Janelle Jones highlight the distressed nature of the U.S. labor market and the need for raising the minimum wage and strengthening union organizing.

 

Schmitt and Jones define low wage work as that work paying $10.00 an hour or less in 2011 dollars.  As the charts show, low wage workers are far more educated and older in 2011 than in 1979.    Said differently, education and experience are not sufficient to ensure a living wage.

Not surprisingly, growing numbers of low wage workers at Walmart and at chain fast food restaurants have begun engaging in direct action for higher wages and better working conditions.   They deserve our support.

The Tax Burden

The New York Times published a very interesting article on taxes.  Most importantly it is accompanied by great graphics illustrating the changing tax burden of households by income bracket over the period 1980 to 2010. The taxes covered include federal taxes, payroll taxes, state and local taxes, and corporate taxes.

The screen shot below highlights the share of yearly income paid in combined federal and state and local taxes by households in different income brackets.   As one can see, the tax burden fell for every income bracket, with those at the top enjoying the greatest reduction.   There is no getting around the fact that tax rates, at least for the wealthy, must go up if we are to adequately fund necessary programs.

This combined view of our tax burden masks a striking difference between the trends in federal and state and local tax burdens.  While the federal tax burden went down over the period 1980 to 2010 for households in every income group, the state and local tax burden rose for households in every income group.

Significantly, and perhaps explaining the strength of the anti-tax movement, state and local tax burdens rose most for households in the lowest income brackets.  The same is true for the payroll taxes.  The screen shot below shows the trends in both state and local and payroll tax burdens for all income groups.

As the Times article notes, “Public debate over taxes has typically focused on the federal income tax, but that now accounts for less than a third of the total tax revenues collected by federal, state and local governments.” Clearly, tax reform needs to take place at all levels of government.  But that is only one side of the picture. Attention must also be given to the pattern and beneficiaries of government spending.