Comments Guidelines

All comments are pre-moderated. No spam, slurs, personal attacks, or foul language will be allowed.

Tuesday, January 27, 2015

What is Noah thinking? Part 2

Noah Smith has replied to my recent post criticizing his use of median household income to measure middle class living standards. He raises some interesting questions, but some of them still leave me scratching my head.

Smith writes:
I don't understand the idea that "households have had to" compensate for lower weekly wages (also the choice of weekly over hourly wages continues to mystify me, since long workweeks suck, but OK).
Of course, no one literally had to compensate for the fact that their wages were falling, but people do prefer to maintain (if not improve!) their current level of consumption. So, if wages are falling, and you want to maintain your standard of living, you have to adjust something.

Let's make no mistake, real wages were falling (see Table B-15), and even today remain below their all-time peak. The Bureau of Labor Statistics (BLS) likes to use the period 1982-84 as its base period for inflation calculations, so the numbers that follow are in 1982-84 dollars to adjust for inflation. Smith likes to talk about 1980-2000, working from one business cycle peak to another, but he ignores the previous business cycle peak, 1973, which is a very interesting and important one since that is the year of peak real hourly wages (equal to 1972) and real weekly wages were just 37 cents less than 1972. It seems to me that it's more interesting to ask if middle class workers are as well off as they were at their peak than to ask if they are as well off in 1979 or 1980.

What happened to real wages? In inflation-adjusted dollars, the hourly wage peak of 1972-73 was $9.26 per hour; in 1980 it was $8.26 per hour, in 2000 it was $8.30 per hour, and in 2013 it had increased to $8.78 per hour.

But it's actually worse than that. Unlike professors, whose working time is pretty much their own as long as they teach well enough and publish enough to get tenure, most people cannot choose how much they work: Their employer decides that for them. Your paycheck is hourly wage times hours worked, and hours worked by production and non-supervisory workers has fallen from 36.9 in 1972 and 1973 to a low of 33.1 in 2009 and in 2013 was 33.7 hours per week. That is why we can't look at just the hourly wage, but need to use the weekly wage (hours per year would be an even better metric, but BLS does not publish the data that way). By the way, this category of workers is no small slice: It makes up about 62% of the entire non-farm workforce and 80% of the non-government workforce.

Because both hourly real wages and hours per week fell, real weekly earnings fell even more: From $341.73 (again, 1982-84 dollars) in 1972 to $290.80 in 1980, $284.78 in 2000, and $295.51 in 2013. If you're keeping track at home, that's a fall of 15% from 1972 to 1980, a 16.67% fall from 1972 to 2000, and still 13.5% below the 1972 peak in 2013.

But wait! After directly quoting and discussing what I said about real weekly wages, Smith suddenly, with no documentation, rejects that premise: "So, median real wages in America stayed roughly flat in America in 1980-2000, and people worked more - actually, what happened is that many women stopped being housewives and began working." Nothing I said in my post was about median real wages, but weekly real wages of production and non-supervisory workers. And he knows this is my view, because he clicked through, and even linked to, my much longer post, "The best data on middle class decline." He suddenly introduces a different measure entirely, and gives no argument for why it's better.

That's not to say there's no argument one could make for that measure. In fact, Dean Baker in an email a few years back pointed out to me that the real weekly wage measure I have used does not include McDonald's supervisors, who certainly are not well paid by any stretch of the imagination. But likewise, it does not include everyone from CEO on down. To clarify the difference, my preferred measure is the average (mean) of what's close to the bottom 62% of workers, while the median is of course the median of everyone. Which better captures the situation of the middle class?

I submit that my measure is better. Smith is right that real median wages have stayed fairly flat from 1980 to 2000, and in fact they have also varied little from 2000 to 2013. But that does not seem consistent with increasing cries of economic distress, as people have lost jobs, homes, and, too often, their pensions. I have always thought that declining real wages were fairly invisible at first: People might have made less than the previous generation, but for any given individual, that effect was offset by their increasing experience over time, leading to a slightly higher  real income for that person. It was only when large numbers of people began to lose jobs, and could not find anything that paid as much as their old job, that the issue of middle class decline rose more to public consciousness.

Having shifted measures in midstream, Smith's final comments are rather less compelling. He has via  this shift precluded the answer that women entered the workforce in large numbers from 1980 to 2000 to help maintain consumption, a position buttressed by the finding of Elizabeth Warren and co-researchers that private debt has increased sharply. I would also point out that women entered the workforce more rapidly in the 1973-79 period (when incomes were falling the most consistently) than in 1980-2000, as a close inspection of this FRED chart will show. Finally, going back to Warren's work, she argues that the rapid rise of home prices swallowed up the nominal income increase due to women entering the workforce, and that the average house grew in size by less than half a room in over 20 years, even while new single-family houses were growing by the much larger percentages Smith gave in his initial article.

Hence, Smith's claim that I'm saying increased women's labor force participation "represents a deterioration in the living standards of the average American" is mistaken, based on his using a different measure of middle class income than I do. I have tried to indicate why I think my measure is better, which would make women's labor force participation indeed at least in part a response to the falling incomes his measure doesn't show.

Monday, January 26, 2015

Greece may be first head-on challenge to Eurozone austerity

Yesterday Greece elected a new anti-austerity party, Syriza, to lead its next government. New prime minister Alexis Tsipras has pledged to end the austerity measures forced on Greece in the wake of the world financial crisis. Syriza is two votes shy of a majority in the Greek parliament, and announced a coalition last night with a right-wing Euroskeptic party, the Independent Greeks.

Syriza campaigned on a platform of ending the austerity measures and renegotiating its debt with the so-called "troika" of the International Monetary Fund, European Central Bank, and the European Union. The German government is strongly opposed to any debt forgiveness, but supporters of Syriza, such as the Jubilee Debt Campaign, are quick to point out that in 1953 it was Germany that received substantial debt forgiveness, with half its debt written off. And let's also not forget that despite Germany's self-image of economic virtue, a large part of its current world-topping trade surplus comes from the fact that the euro is undervalued for Germany.

As Paul Krugman points out, while critics inside and outside Greece routinely refer to Syriza as "hard left," "left-wing," etc., "it’s actually preaching fairly conventional economics, while the supposedly responsible officials of Brussels and Berlin have been relying on radical doctrines like expansionary austerity and a growth cliff at 90 percent." He quotes Francesco Saraceno: "On closer inspection, it seems far more radical the position of those who, despite having grossly underestimated the negative effects of austerity, ask for more of the same; of those who insist on advocating supply-side reforms to cope with a chronic lack of demand..."

 This lack of demand is reflected in Greece's unemployment rate, which has been above 25% since July 2012. It has retreated to 25.8% from a high of 28% in 2013, but because its gross domestic product has fallen so much, the country's debt/GDP has continued to increase despite its austerity policies. Indeed, the ratio has increased because of austerity.

It remains to be seen how successful Syriza will be. But it is already serving as an inspiration to other anti-austerity parties, notably Podemos in Spain, which still has an unemployment rate of 23.7%.

Austerity policies remain very much in play in the United States, with us today seeing an announcement of a bipartisan House committee on Social Security "reform" (read: cuts). It is good to finally see some hope that Europe is beginning to reject the politics of austerity.

Tuesday, January 20, 2015

What is Noah thinking?

Noah Smith put up a post Sunday purporting to show that things aren't so bad for the middle class. Then he immediately shows us a chart of median household income. Stop right there. As I have argued before, this is always going to give you a rosier picture than reality. We need to look at individual data, aggregated weekly (because average hours per week have fallen for non-supervisory workers), to know what's going on.

Because the individual real weekly wage is still below 1972 levels, households have had to compensate by having more incomes and going into debt. They have traded time and debt for current consumption. This is not an improvement in the middle class lifestyle. Commenter Richard Serlin points out that we also need to consider risk as well as average incomes, and he is right. The middle class is less secure than it was in 1972.

Noah has lots of interesting things to say, and you should check out his blog if you haven't already. But this is an error on his part, and I don't understand what he's thinking.

Thursday, January 15, 2015

My GASB Comments

Well, I should have taken my own advice and not waited until the last minute to submit my own comments on the proposed standards for government accounting of subsidies. But, at long last, they are in. Below please find them in their entirety.



Director of Research and Technical Activities
Project No. 19-20E
Government Accounting Standards Board

January 14, 2015

Dear Director:

I am writing to comment on the proposed standards for reporting the “tax abatements” given by state and local governments as part of their Comprehensive Annual Financial Reports (CAFRs). Let me begin by saying that I welcome this proposal and want to urge the Board to be sure these standards are truly comprehensive.

I write from a unique vantage point because my best-known academic work consists of making estimates of the value of subsidies given to companies by state and local governments. This includes two books: Competing for Capital: Europe and North America in a Global Era (Georgetown University Press, 2000) and Investment Incentives and the Global Competition for Capital (Palgrave Macmillan, 2011). In my latter book, I estimate that in 2005 state and local governments gave just under $50 billion in business attraction subsidies and perhaps another $20 billion in subsidies not tied to making an investment. In addition, I have written numerous journal articles and book chapters on tax incentives and other forms of subsidies to attract investment. The proposed standards, if done correctly, would put me out of the estimation business, and that would be a great thing. In the United States, there is a terrible lack of transparency in the use of these incentives, which makes informed policy analysis very difficult and, in some cases, impossible. Not only that, the lack of transparency hinders the ability of bond and other financial analysts to determine the true long-term financial position of a government entity that may be seeking to borrow through the bond market.

I am regularly interviewed by, and have my work cited in, well-known publications such as The Wall Street Journal, Bloomberg, The St. Louis Post-Dispatch, Los Angeles Times, etc. I have consulted on these issues for the Organization for Economic Cooperation and Development (OECD), the International Institute for Sustainable Development, the North Carolina Budget and Tax Center, and the Missouri chapter of the Sierra Club. I hold the position of Professor of Political Science at the University of Missouri-St. Louis, where I have taught for 23 years. Let me note for the record that the comments which follow are my own personal recommendations and my views are not necessarily shared by my employer or consulting clients.

Let me begin by highlighting an important terminological problem caused by the Board’s use of the term “tax abatement” as its catch-all term for the policies under discussion. In fact, a “tax abatement,” properly so called, is only one form of subsidy to attract investment to a state or locality, and most likely not the most important one, depending on the governmental entity in question. A true tax abatement relieves its recipient from having to pay certain taxes that would otherwise be due, most usually the local property tax. It is merely one form of a broader category of support for business investment that I generally call an “investment incentive,” “location incentive,” or “location subsidy.” I define all three of these terms as “a subsidy to affect the location of investment.”

What, then, is a “subsidy”? To answer this question, we can turn to the “Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, April 15, 1994,” which was adopted into U.S. law via Public Law no. 103-465. Thus, the definition of a “subsidy” established in the Uruguay Round’s “Agreement on Subsidies and Countervailing Measures” (SCM) is in fact a provision of U.S. law. This is important to keep in mind in the discussion that follows.

Article 1 of the SCM defines a subsidy as follows:

1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if:

            (a)(1) there is a financial contribution by a government or any public body [note that his means this section applies to all state and local governments within the United States] within the territory of the Member (referred to in this Agreement as “government”), i.e. where

                        (i) a government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees);

                        (ii) government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits); [footnote omitted]

                        (iii) a government provides good or services other than general infrastructure, or purchases goods;

                        (iv) a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments; [an anti-evasion rule]

                                    Or

            (a)(2) there is any form of income or price support in the sense of Article XVI of GATT 1994;

                                    And

(b) a benefit is thereby conferred.

To sum all this up, the Agreement on SCM establishes a definition of “subsidy” that includes any potential subsidy mechanism, carried out by any level of government (for example, the Washington B&O tax reduction that was a major element of the European Union’s complaint against subsidies to Boeing, a case the EU won), one not evaded by simply claiming that it was a private body carrying out the subsidy. In effect, if the subsidy exists in law or in fact, the subsidy rules come into play.

This principle that a subsidy existing in law or in fact must be counted is an important one when examining the Board’s proposed rules. Some tax measures that are obviously subsidies under the SCM definition (again, something incorporated into U.S. law) might not be considered “tax abatements” using a strict reading of the definition of that term. Consider the case of tax increment financing (TIF). In the states with which I am most familiar, a TIF recipient is legally considered to have paid its property tax even though its payment flows immediately back to its own benefit. If the entity has legally paid its property tax, how can one say that government has “foregone” the revenue? The answer, of course, is to look at the facts as well as the law. GASB’s rules must ensure that they follow the facts and ignore legal fictions. Otherwise, huge swathes of tax-based subsidies will not be counted, and bond analysts and other researchers will not have the facts they need to establish the true financial situation of a government. This is similarly true of situations where the tax foregone is not due from the subsidy recipient. For example, many states allow companies to keep personal income tax withholding from their employees. In Missouri, local taxing districts called transportation development districts collect an extra sales tax from customers, but keep the money until they have received the entire subsidy they negotiated from a municipal government. It does not matter whose taxes are foregone; the rules must capture the subsidy itself in order to be useful. These are not small programs, either. In California, by 2010 TIF was generating $8 billion a year in tax increment for local governments, which was largely plowed back into paying the subsidies they were tied to (or equivalently, paying off bonds which funded the subsidies). In the much smaller Missouri economy, both TIF and transportation development districts see hundreds of millions of dollars of new subsidies committed annually by municipal governments.

In light of the fact that investment incentives may not be entirely tax-based, I believe it to be important to at least cross-list cash grants paid to companies with the “tax abatement” they receive. From anecdotally talking to reporters calling me about various incentive packages they are covering, it appears to me that there is an increasing trend for cash to make up a significant chunk of these packages. If the new rules require such cross-listing, we can then see in one place how much money a state or local government is committing in subsidies to attract businesses. This information gives us important clues about future fiscal trends from a government, as heavy users of incentives tend to remain such well into the future; however, there is no telling from one year to the next what the split will be between cash and tax-based subsidies.

On a related point, the rules absolutely need to include future amounts committed for tax incentives. Once again, without such transparency it is impossible for bond or other analysts to derive a true financial picture for a particular government.

Last, I would urge that the reporting of location subsidies be made on a firm-specific basis. If a single company is receiving tens of millions of dollars in tax breaks per year from a given municipality, with many more tens of millions committed in the future, it could signal that the municipality is highly vulnerable to anything which adversely affected the recipient. A city like Flint, Michigan, was devastated when the numerous subsidized General Motors facilities in the city began to go out of business in the 1980s.

In summary, then, the most important principle to consider is that transparency must be comprehensive. If the rules have loopholes allowing governments to not report certain types of subsidies, those subsidies will not be reported, and everyone relying on data reported under the new rules for accurate financial information – from citizens to investors – will be misled by numbers that don’t reveal a government’s true financial situation. Please require the most comprehensive reporting possible, for your efforts to live up to their potentially game-changing value.

Sincerely,
Kenneth P. Thomas
Professor of Political Science
University of Missouri-St. Louis

Wednesday, January 7, 2015

New Social Security Crisis Set for 2016

The House Republicans, in their eagerness to find a way to cut Social Security benefits, on Tuesday passed a new rule preventing the reallocation of monies between the Social Security Trust Fund and the Social Security Disability program.

No, don't let your eyes glaze over! This is a big deal. The disability portion of Social Security, with 11 million beneficiaries receiving an average $1146 a month in benefits, is expected to exhaust its separate trust fund in late 2016. When that has happened in the past, Congress has reallocated money between the two programs to keep them both solvent. Now, the new House rule prevents it from approving such a reallocation unless "it is included in a proposal that 'improves the overall financial health of the combined Social Security Trust Funds.'"

Of course, that means either raising payroll taxes or cutting benefits. Which do you think House Republicans will support?

As Joan McCarter points out, the strategy behind this is to pit retirees against the disabled. How long will it take older Republican voters to see the endgame of this strategy ("First they came for...")? With the crisis scheduled for the 2016 election season, we may soon find out.

Monday, December 29, 2014

Travel break

I'm on the road for a few days, so no new posts for just a bit. Like Middle Class Political Economist on Facebook for links to important articles elsewhere.

Wednesday, December 17, 2014

Eleven Richest Americans Have All Received Government Subsidies

A new report by Good Jobs First shows how the very wealthy in America have benefited from government subsidies as one element in building their fortunes. According to the study, the 11 richest Americans, and 23 of the 25 richest, all have significant ownership in companies that have received at least $1 million in investment incentives.

The study compares the most recent Forbes 400 ranking of wealthiest Americans with the Good Jobs First Subsidy Tracker database. Not only do Bill Gates, Warren Buffett, Larry Ellison, the Koch Brothers, the Waltons, Michael Bloomberg, and Mark Zuckerberg own companies that have received millions or even billions in taxpayer funds, 99 of the 258 companies connected with the Forbes 400 have such subsidies.

As I argued theoretically in Competing for Capital, the new report points out that subsidies for investment increase inequality as average taxpayers subsidize wealthy corporate owners. Location incentives directly put money into their pockets, which then has to be offset by higher taxes on others, reduced government services, or higher levels of government debt. Moreover, as the study notes, despite the huge amount of these subsidies given in the name of economic development, there has not been enough payback to raise real wages even back to their 1970s peak. In other words, if economic development has created so many new jobs, why haven't wages risen?

Of course, subsidies don't account for the biggest part of inequality. Read Thomas Piketty for the big picture on the subject. But the new report shows that large numbers of America's wealthiest (or not so wealthy, like Mitt Romney) have benefited handily from government subsidies.

Cross-posted at Angry Bear.