US already has high elder poverty rate; how can cutting Social Security even be on the table?

In the recent debate over the so-called "fiscal cliff," President Obama was reportedly at one point offering to raise the eligibility age for Medicare from 65 to 67 and cut Social Security via "chained CPI.". However, in view of the coming retirement crisis due to the decline in defined benefit plans guaranteeing a specific retirement income, this is a terrible idea. Given that proposals to cut Social Security and Medicare will be repeatedly floated in the coming debt ceiling and related budget fights, we need to understand just how bad an idea this is.

First, let's look at what Social Security and Medicare have done to elderly poverty in the U.S. over time, using the standard poverty line as our measure. Daniel R. Meyer and Geoffrey L. Wallace of the University of Wisconsin have published data on official poverty rates for those over 65:

Official poverty rate for the elderly by year

1968          25.0%
1990          12.1%
2006            9.4%

1968, of course, is just three years after the enactment of Medicare and Medicaid. We can see that elder poverty was halved between 1968 and 1994, and dropped at a slower pace through 2006. In the bad old days, one in four of the elderly lived in poverty: why would we want to go back to that when we are a much richer society today than we were in 1968?

Moreover, before we pat ourselves on the back for how well we have done, we need to consider alternative measures of poverty and the experience of other industrialized democracies. As Arthur Delaney and Ryan Grim report, the Census Bureau has developed a "Supplemental Poverty Measure" (SPM) that includes items such as out-of-pocket medical expenses, which affect seniors more than those under 65. Thus, while the SPM was only slightly higher for all individuals in 2009 than the official poverty measure (15.7% vs. 14.5%), for seniors the increase was from 8.9% to 16.1%.

As Meyer and Wallace relate, when the poverty line was first defined in the United States in 1963, it was approximately equal to 50% of median household income. Today, according to Smeeding et al., it is approximately just 30% of median household income. Meanwhile, the European Union has gone in the opposite direction, defining poverty as 60% of median income. Researchers comparing poverty cross-nationally generally use a 50% of median income standard. How does the U.S. stack up?

Here are Smeeding et al.'s figures for poverty rates in 2000 for all over 65 (figures eyeballed from Figure 1; no table provided):

Country                        Poverty rate

United States                 25%
Australia                        23%
United Kingdom            18%
Italy                              14%
Germany                       10%
Sweden                          8%
Canada                          6%

I guess we can take solace in the fact that Ireland has a substantially (20 percentage points) higher elder poverty rate for households only comprised of the elderly, as Smeeding reports in a separate paper. Otherwise, the comparison is pretty grim.

Yet what do the Very Serious People, as Paul Krugman calls them, want? At the very least, they want to cut Social Security by changing how inflation is calculated, and they want to raise the Medicare eligibility age from 65 to 67. At some points, it appeared the President would go along.

This is lunacy. As David Rosnick and Dean Baker (via David Cay Johnston) show, cuts to Medicare, such as Paul Ryan's plan, shift far more costs to beneficiaries than what government saves through the cuts. In fact, while the Ryan cuts save the government $4.9 trillion over 75 years, the elderly will pick up $34 trillion in new costs. As Johnston puts it, for every dollar in saving for the government, there will be approximately $6 in net losses to the country as a whole.


Where are seniors supposed to find $34 trillion? Fewer and fewer people will have real pensions, 401(k) plans are vulnerable to market swings, and the Very Serious People want to cut Social Security. The simple answer is that seniors will be worse off than seniors today, yet 47% of the electorate voted for people who would have cut Medicare now.

It's time to take these cruel cuts off the table permanently. What we will need in the future is an augmentation of Social Security, not cuts. We've got to make sure politicians get this through their heads.

Cross-posted at Angry Bear.

Appearing on National Progressive Talk Radio Tonight

Sorry for the short notice, but I will be on Lane Prophet's live call-in show on National Progressive Talk Radio at 9pm Eastern/6pm Pacific for one hour. I'll be talking about the so-called "fiscal cliff" and, probably subsidies as well. Here is the announcement from NPTR: http://www.blogtalkradio.com/national-progressive-talk-radio/2012/12/10/the-fiscal-cliff--kenneth-thomas--nptr-29

If you want to call in, the number is 347-326-9690.

What the Fiscal Cliff Means for the Middle Class

Now that the election is over, it seems like all the politicians and pundits can talk about is the so-called "fiscal cliff." But the chatter around the fiscal cliff is deeply weird, so in this post I will explain what it is and what the issues involved mean for the middle class.

Just what is the fiscal cliff? It is the combination of spending cuts and tax increases set to take place on January 1 based on several different laws. Estimates of the consequences run as high as $800 billion next year, or 5.2% of the country's $15.29 trillion gross domestic product in 2011. Yes, that would mean a recession, with obvious consequences for the middle class. But this is only true if we did nothing after January 1, and that's not going to happen.

To put it another way, $800 billion is a 72.7% cut in the government's budget deficit for the just ended 2012 fiscal year. You would think this would make the people calling for an immediate cut in the deficit happy, but nooooo. Just the opposite, which is the weirdest aspect of the entire debate. I'll come back to that in a minute; first, let's look at the main components of the fiscal cliff.

The biggest chunk is $426 billion from the final expiration of the Bush tax cuts, according to a Bloomberg analysis in July. Of this, $358 billion is for the first $250,000 of all taxpayers' earnings, and the remaining $68 billion is for the tax cuts for income above $250,000 ($200,000 for a single person) that President Obama wants to get rid of. Both Republicans and Democrats want to retain the tax break for 98% of households, but Republicans will try to hold it hostage to the cuts for the other 2%. Since the Bush tax cuts expire if nothing gets done (because they were originally passed through the Senate's reconciliation procedure, which gave them a 10-year lifespan; then renewed for 2 years in 2010), on January 1 the Republicans will have no more leverage on this. Thus, I expect that the middle class tax cuts will be made permanent and, by early January at the latest, the $68 billion will be all that will have expired. Since the wealthy spend less of their income than do the middle class or poor, this tax increase will have little contractionary effect on the economy.

Another set of tax provision affecting couples with over $250,000 and individuals over $200,000 is contained in the Affordable Care Act. These folks will have to pay an extra 0.9% tax on earnings over the thresholds for Medicare, and an extra 3.8% on investment income, starting in 2013. According to an Associated Press estimate, this will raise $318 billion over 10 years, so we'll call it $30 billion for 2013. Since this is part of the funding for Obamacare, the President is highly unlikely to budge on this. Again, as a tax hike on the top 2%, it will have relatively little contractionary effect.

There are $110 billion in automatic spending cuts scheduled in 2013 due to the so-called "sequester." These were triggered last year when no deal was made on long-term deficit reduction. With unemployment still at 7.9%, government spending cuts are definitely harmful to the middle class. To the extent that the $55 billion cut from the defense budget comes from overseas spending, there will be little contractionary effect in this country. That is, if we closed a military base in Germany, it would have more of an effect there than here. In any event, since the United States spends 41% of the world's total military expenditure,* we could afford to redirect quite a bit of this $711 billion annual expenditure (China is a very distant second at $143 billion) to other uses. Nation building at home, as the saying goes.

The other $55 billion would come from domestic discretionary spending, so the middle class would bear the full brunt of this. Of course, neither party wants to see "their" favorite budget items cut, so there is a good chance that these spending cuts will be delayed, which would be a good thing, though not as good as shifting some military spending into the domestic budget.

There's more, of course, but the basic outline is clear: we are seeing a replay of last year's debt ceiling "deal," in which Republicans are trying to pass austerity measures the public does not support and did not vote for in the just concluded election. Indeed, a majority voted not just for a Democratic President and a Democratic Senate, but for a Democratic House of Representatives as well, with Republicans maintaining a majority only due to gerrymandering and compliant Republican courts. As Paul Krugman points out, the self-proclaimed "fiscal hawks" are tying themselves up in knots on why going over the cliff is bad when it achieves their goal of debt reduction. The answer, of course, is that they want to cut "low-priority spending," by which they mean programs benefiting the middle class. As Linda Beale argues, the right course for Democrats is to do nothing until January, when the Bush tax cuts will be gone and we can pass tax cuts more targeted to the middle class as well as redirecting spending from our bloated military to domestic programs.

* Source: SIPRI (Stockholm International Peace Research Institute) Military Expenditure Database 2011, http://milexdata.sipri.org

Cross-posted at Angry Bear.

Romney Tax Plan as Budget Busting as Ever

Seriously, I could just re-post my February 27th post word for word tonight and it would be just as true as it was then. The Romney tax plan blows a $5 trillion hole in the budget via tax reductions and he still hasn't told us anything about the tax breaks he would get rid of to pay for it, which he has to do because he calls it revenue neutral, as he did again in tonight's debate.

Amazingly, Romney kept denying that his tax reductions reduce revenue by $5 trillion over 10 years when considered by themselves, even accusing the President of lying about it! He kept insisting that his plan was revenue neutral and that he would not adopt a plan that would reduce the share of taxes paid by the rich. Trust him. We have his word on it.* (Apparently, that is how CNN does fact-checking.)

Given his insistence on his proposal's revenue neutrality, let me repeat my 5-step plan, "How to Read a Republican Tax Proposal."

Step 1: Assume revenue neutrality.
Step 2: Look at what income is no longer taxed.

In the Romney plan, according to conservative economist Josh Barro, there is a $1 trillion reduction in corporate income tax, $3 trillion from the 20% reduction in tax rates (again, not 20 percentage points: the top rate falls from 35% to 28%), and $1 trillion from miscellaneous tax reductions, notably abolishing the Alternative Minimum Tax.

Step 3: Determine how much of that income you have.
Step 4: Ask what taxes have to be raised to get to revenue neutrality.
Step 5: Look in the mirror to see who pays them.

That would be the end of the story, except that the Romney budget is also raising military spending by $2 trillion, as the President pointed out in the debate. So that has to be offset, too.

Again, the bottom line is that if we cut taxes for the wealthy and corporations, it will impact the budget elsewhere, in some combination of tax increases on the middle class, program cuts, and deficit increases. Regardless of the spin surrounding it, if a proposal reduces some taxes but doesn't reduce your taxes, you will lose out via these three methods of compensating for the lost revenue.


* If you aren't old enough to remember, this is a reference to a great series of Isuzu car and truck ads featuring "Joe Isuzu," whose signature line was "You have my word on it."

More New Books Highlight Plight of Middle Class

The situation of the middle class is a hot topic these days, and rightly so. In addition to James Carville and Stan Greenberg's recent book, It's the Middle Class, Stupid, new books are out by Donald Barlett & James Steele, Jeff Faux, and Mike Lofgren.Together, they advance our understanding of middle class issues significantly.

Barlett and Steele have been sounding the alarm about middle class decline since they wrote the first newspaper articles forming the core of 1992's America: What Went Wrong? In The Betrayal of the American Dream, they tell the stories of everyday Americans, many of whom they kept up with after interviewing them for previous books. They date the beginning of the decline of the middle class to the 1970s, which I think is correct since that is when real wages for production and non-supervisory workers began their forty year decline. They emphasize the central role of Congressional and Presidential decision-making that has given us tax rules favoring the 1%, laws allowing private equity and other corporate raiders to raid pension funds and break contracts with unions and retirees, trade agreements, industry deregulation (which they see as highly destabilizing for the middle class), the destruction of retirement via the assault on pensions and their replacement with 401(k)'s, and the devastation of offshoring.

Their proposed solutions include raising taxes on the rich, and to consider instituting a financial transactions tax (also known as a Tobin tax, after its first proponent) or a gross receipts tax, which would be harder to dodge than the corporate income tax. Barlett and Steele argue further that we need to rebuild manufacturing and reduce the trade deficit, with high tariffs if necessary. They propose massive investments in infrastructure and education, including job training. Finally, they argue that the financial fraudsters who caused the 2008 financial crisis need to be prosecuted. Surprisingly, they say little about getting money out of politics, though they do mention it in their prologue as well as the well-funded corporate propaganda machine.

Jeff Faux, founder of the Economic Policy Institute, was fighting trade agreements long before mainstream economists were willing to admit that maybe free trade isn't always good for everybody, especially workers in the United States. His book, The Servant Economy, is a dystopian vision of the future of the middle class if present trends are not reversed. His basic argument is what he calls an "end-of-empire story," that the U.S. can no longer sustain subsidized capitalism, global military dominance, and middle class prosperity. He argues that the country's former economic and military dominance gave it a "cushion" that was able to sustain the middle class, but that the pressures of international trade and global competition have eroded that cushion along with the nation's ability to achieve all three of the goals mentioned above.

For Faux, much of the problem stems from the increasing U.S. trade deficit, which figures in prominently throughout the book. The rise of finance relative to manufacturing is a key problem as well, one which has made the Democratic Party more dependent on Wall Street Money, which led to Clinton ending Glass-Steagall and Obama treating bankers with kid gloves after he came into office. Worse, as we saw in the 2011 debt negotiations and other instances, the President has made it clear that he thinks there needs to be cuts to Social Security.

"Hope is not a strategy," according to Faux, and he devotes an entire chapter to what he calls "the shaky case for optimism." He foresees a "politics of austerity" that will mean cuts to middle class programs, the continuing loss of good jobs to the trade deficit, and slowly declining living standards and economic security for the vast majority of Americans for decades to come.. He calls cuts to Social Security and Medicare "a done deal." To me, perhaps the single most depressing statistic in the book relates to the much hyped "onshoring" phenomenon: GE has moved some production from China to Louisville, but the workers there make $13/hour compared to the $22/hour they formerly made.

What, then, is to be done? In a talk Faux gave at the Economic Policy Institute August 15th, he explained that he didn't see the need to give a laundry list of policy proposals because, first, he had done so in previous books, and second, there was no point in it unless we change government decision-making. Thus, it is essentially a one-point program, a constitutional amendment that ends corporate "personhood" permanently. This would also have the effect of overturning Citizens United. Without that, he argues, there is no hope.

Lofgren's book, The Party Is Over, is a Republican-eye view of what went wrong, beginning with Newt Gingrich's takeover of the Republican Party. While highly critical of the rightward, anti-science turn of his party, he argues that the Democrats are not much better, and have suffered from extremely bad messaging (he says the stimulus act should have been called the "jobs bill," for example). Interestingly, his major recommendation is to cut trillions from defense spending and redirect it to infrastructure. Of course, he wants to get the money out of politics, too, but cutting defense is his most distinctive policy proposal.

Taken together, these books are largely complementary, though each has its own distinct emphasis. Faux's book, in my opinion, is the best of the three, though also the most depressing. His vision of a likely future is far too plausible to take lightly.

It's the Middle Class, Stupid! (Review)

When I saw that James Carville and Stan Greenberg had just published It's the Middle Class, Stupid! (Blue Rider Press), I knew that I would want to read it. I had always liked Carville's We're Right, They're Wrong and wanted to know his take on approaching the declining fortunes of the middle class.

While this book includes some diagnosis of the problems and has a very detailed and very good set of policy proposals, primarily it is a work on political strategy. Based on polling and focus groups the authors have conducted over the last several years (as well as their long experience running campaigns and polling), Carville and Greenberg analyze what they consider some of the political failures of the Obama Administration, particularly with regards to messaging.

For example, they argue that Americans are not persuaded by Team Obama's continuing emphasis on the fact that the President inherited a mess from the Bush Administration (Chapter 11). Although voters place much of the blame for the Great Recession on President Bush, Greenberg reports that his focus groups reacted very negatively to President Obama's car-in-the-ditch metaphor ("I'm still in the ditch!" many told Greenberg) and the participants expressed strong opinions that we needed to look forward, not backward.

As one said, "[Obama] is trying to say things are turning around, but the numbers are still bad." The premature declaration of victory by the Administration described here has been strongly criticized by Paul Krugman, among others. Economically effective policy is the best talking point. Carville and Greenberg also give a compelling litany of sophisticated responses to even "good" job creation news on pp. 103-7.

The second big, non-obvious, point is that Americans really are concerned about the deficit and debt (Chapter 8). Again, even though they recognize the role of the Bush tax cuts and unfunded wars in creating that debt, they are still leery about the possibility of spending our way to more economic growth, though not by huge majorities. Too many of them are convinced of the false analogy between households and governments, although Paul Krugman is doing his best to convince them with his new book, End This Depression Now! The framing the authors found most persuasive to middle class voters was an emphasis on "investments that will get our country back on track." Tellingly, as Carville and Greenberg note, their respondents did not see the debt as a reason to cut Social Security or Medicare.

Third, but more obvious, middle class voters don't see government as the solution because they consider it to be captured by elite interests. The focus groups showed that this view led to some tendency to paralysis and disengagement from politics. It is from this point that Carville and Greenberg pivot to their most important policy recommendation: Amend the Constitution or obtain a Supreme Court that will overturn Citizens United and end corporate personhood. In addition, they call for public financing of elections, disclosure of campaign contributions, requiring broadcasters to cut the price of political ads, and ending the revolving door of office holders and lobbyists. All this is in support of a politics that makes rebuilding the middle class Job 1 for government, and for a consistent framing of all issues (including foreign policy) in terms of their impact on the middle class.

Not everything in the book is persuasive. At one point Greenberg says the popularity of raising taxes on the rich "is as close to an absolute truth you can have in polling" (p. 144). I have two problems with this. First, you could say the same thing for other industrialized democracies. Sven Steinmo, writing in the mid-1990s, has cited polling results for the U.S., U.K., and Sweden, all of which showed publics that thought the rich should pay more taxes, yet in none of these cases has that been the direction of policy over the last 30 years. To me, this suggests there is an international dimension that helped make government capture possible, but the book does not address globalization very much at all.

Second, the book devotes relatively little attention to another issue that also is overwhelmingly supported in poll after poll: raising the minimum wage. Yes, making work pay is an important theme in the book and the authors acknowledge that increasing the minimum wage is part of that, but they say nothing about how putting the issue on many state ballots helped increase Democratic turnout in 2006. In Missouri, for example, the minimum wage Proposition B passed by a 76-24 margin, helping Claire McCaskill squeak out a U.S. Senate win with less than 50% of the vote.

The other weakness of the book is that the authors are too close to President Clinton to give a completely objective view of his Presidency. While they make a single parenthetical reference about how NAFTA may not have been such a great idea for the middle class after all, they say nothing about how "ending welfare as we know it" was bad for the middle class. This can best be seen by thinking about income determination as a massive bargaining situation. Anything that takes away one side's options reduces its bargaining power, and the 1996 welfare reform did just that. In addition, they seem blind to the fact that income inequality (top 1% vs. the 20th-80th percentiles) took off during the Clinton Administration far in excess of what had been seen under President Reagan, as a glance at their chart on p. 52 shows.

Finally, the book has no index, which is very annoying when you have 296 pages of text and 25 pages of endnotes.

Those caveats aside, this is a very good book that deserves a careful reading by progressive activists. I certainly learned something from it, and I'm sure you will, too.

Cross-posted at Angry Bear.

New Report Highlights Flaws of North Carolina Mega-Incentives

My new report for the North Carolina Budget and Tax Center, Special Deals, Special Problems--An Analysis of North Carolina's Legislature-Approved Economic Development Incentives, has just been published. It covers a range of issues I've emphasized here before as well as some basic considerations reporters really need to pay more attention to.

North Carolina has some of the best economic development practices in the country, in terms of online transparency, performance requirements, use of clawbacks for non-performance by companies, sunset clauses for tax expenditures, hard caps for many tax credit programs (see my report on these points), etc. The state publishes an economic development inventory I consider to be of very high quality and consistent with international definitions of a subsidy. The most recent edition shows that in the 2008-9 fiscal year the state spent about $1.2 billion on economic development, enough to hire 24,000 people at $50,000 a year in wages and benefits.

At the same time, however, the state has persistently had problems in overvaluing potential investments and consequently offering wildly excessive subsidies for them. The best known case is Dell in 2004, when Virginia offered the company a $37 million incentive package, while the state and local bid from North Carolina came to almost $300 million on a nominal basis ($174 million present value). Other deals discussed in the report are Google ($260 million nominal value, $140 million present value), Apple ($321 million over 30 years nominal value, no present value calculation available), and a provision in a 2011 special incentives bill to allow Alex Lee Inc. to keep $2 million it should have forfeited for not keeping job promises. This last case illustrates how special legislative deals weaken the state's performance requirements; this case will make future companies think that there may be no penalty for non-performance.

Reporters take note! This publication describes useful techniques for comparing the size of incentive packages regardless of project size or payout period of the incentive. From the European Union I borrow the term "aid intensity," which measures the size of the incentive relative to the amount of the investment or the number of jobs created. The idea is that a $1 million incentive would be large for a call center but a rounding error for an automobile assembly plant. As a result, we need a standardized way of comparing incentives.

While in this country one can sometimes find cost per job analyzed for some subsidy packages, the EU actually uses the subsidy/investment metric as its primary measure of aid intensity. In my last post I discussed a mall redevelopment which could conceivably have an aid intensity of 96%. For comparison purposes, we should note that the highest aid intensity allowed for large firms anywhere in the European Union, is 50%, and that is only allowed in the poorest regions of the EU, mainly in eastern Europe. (Richer regions have lower allowable maxima.) A region's maximum is cut by half for large projects over 50 million euro, and by 66% for spending over 100 million euro.

The other important concept is present value, a familiar one to accountants and economists, but not widely understood among the general public. The basic idea is simple: receiving a dollar today is worth more than receiving a dollar next year, which is worth more than receiving a dollar in two years, etc. Since incentive packages can pay out immediately (with a cash grant) or over a period of 30 or more years, we need to use present value to properly compare the size of incentives with different payout periods. This requires finding a a "discount rate" by which to reduce future payments. We then use the present value as the numerator in calculating aid intensity to be able to compare across different sizes of projects.

Using Google as an example, this $600 million project will receive $260 million over 30 years and create 210 jobs. As mentioned above, this is its nominal cost, before discounting the future dollars. Following the practice of a 1990s study by the Organization for Economic Cooperation and Development to compare subsidies among its then 23 members, I used a discount rate equal to the 10-year Treasury bond yield to come up with a present value of $140.6 million. Then the aid intensity is $140.6 million/$600 million, or 23%, and the cost per job at present value is $669,489. We can then use these two measures of aid intensity to compare the incentive to that given for other projects and inform our judgment of whether it was a better or worse deal than other states have made, in the current context where states make such deals all the time. Of course, I believe there should be limits placed on state and local governments so we can sharply reduce net incentive spending, which has few national benefits--but that is a long time in the future.

North Carolina provides an intriguing case study because it does so much right in economic development, but it makes special deals outside its statutory incentive programs. The result is high costs and weakened bargaining position in the future. It's a case we can learn a lot from.

Romney Tax Plan Blows Hole in Budget, Remains Short on Specifics

Mitt Romney unveiled his tax plan today, but it revealed few surprises except for surprisingly few specifics. Via Chris Hayes (@chrislhayes), conservative economist Josh Barro estimates that the Romney plan consists of $5 trillion in tax cuts over 10 years, divided as follows:

$1 trillion from cutting the corporate income tax
$3 trillion from cutting all personal income tax rates by 20% (not 20 percentage points, by the way)
$1 trillion from miscellaneous tax cuts like abolishing the alternative minimum tax (AMT)

According to the Romney plan, the corporate income tax rate would fall from 35% to 25% and the U.S. would stop taxing countries on their foreign profits. Contrary to Romney's claim, making foreign profits tax-free would not encourage their investment in the U.S., but would instead give companies an incentive to make more of their profits appear to be foreign by creative use of transfer pricing to make profits show up in tax havens instead of the U.S. Under the Romney plan, companies would then be free to bring that money back to the U.S. without facing any tax, anywhere in the world.

Among the other non-surprises in the plan, Romney would not increase the 15% tax rate on his own main source of income, capital gains. He would repeal the Affordable Care Act, even though his version of it in Massachusetts gave the state the highest level of insurance coverage in the country at 95%. He would raise the eligibility age for Social Security and end Medicare as we know it a la the Ryan Plan, two staples of conservative talking points that would negatively affect the middle class.

As Barro points out, Romney has said before that he will increase American military spending (already tops in the world by far). This makes it even more difficult for him to offset the $5 billion in tax cuts without huge cuts to programs that the middle class depends on. Thus, I think the inescapable conclusion is that of Benjy Sarlin: "Romney's Tax Plan Still a Boon to the Rich, Despite 1% Talk."

Expensive Subsidies Help State and Local Governments Drag Down Recovery

The release of gross domestic product data on Friday highlighted how the contraction of state and local governments has been a drag on economic recovery since the end of the official recession. As Nicholas Johnson of the Center on Budget and Policy Priorities explains, 2011 was the third straight year that state and local government output has fallen, reaching -2.3% in 2011, the worst since 1944, as shown in the chart below.




Paul Krugman amplifies this point, noting that investment in physical capital by state and local governments has fallen from over $290 billion (constant 2005 dollars) in 2008 to a little over $250 billion today, well over 13%. He further emphasizes that a lot of the cuts on current spending by governments has fallen on education. State and local governments, constrained by balanced budget requirements, are not doing their part to "win the future." This is precisely what Krugman predicted in December 2008 when he said that "50 state governors who are slashing spending in a time of recession" would counteract the stimulus that would be enacted at the federal level in 2009.

As readers of this blog know, a big chunk of state and local deficits could be offset by cutting corporate subsidies rather than cutting programs. My estimate of these subsidies comes to as much as $70 billion per year, more than enough to pay for the 656,000 state and local jobs Johnson reports have been lost since their peak employment in 2008.

It's important to emphasize that from a national point of view, this spending actually creates very few new jobs. While a multi-hundred-million incentive may appear to attract a new automobile assembly plant in one state, this will be offset by reduced sales from existing plants, which eventually leads to one closing (James Rubenstein, in 1992, indeed found a one-to-one relationship of auto plants opening and closing in North America). Similarly, local governments in the St. Louis metropolitan area poured over $2 billion in subsidies to retail between 1990 and 2007, with the net increase in jobs, 5400 ($370,370 per job!) not exceeding the percentage increase in local income, according to a report by the regional planning organization, the East-West Gateway Council of Governments. In other words, no jobs were actually created by these incentives, as the growth in retail would have occurred anyway due to income growth.

While it would not offset the entire state/local budget deficit, cutting subsidies would go a long way toward that goal, allowing the "Fifty Herbert Hoovers" to rehire workers and cut less from their budgets. Moreover, it would reduce income inequality slightly by ending these transfers from average taxpayers to subsidy recipients who are richer on average.

Republicans Prepare Ground to Renege on Debt Reduction Agreement

Looks like Markos Moulitsas was right, as I suspected. Ali Gharib is reporting at Think Progress Security that Congressional Republicans, including Senators John McCain and Pat Toomey, are laying the groundwork for weaseling out of the August debt ceiling accord provisions that if the Super Committee reaches no agreement, it triggers $600 billion in defense cuts over 10 years. Gharib quotes McCain yesterday (emphasis Gharib's):

The sequestration is not engraved on golden tablets. It is a notional aspiration. And those of us — and I think we’d have sufficient support to prevent those kind of cuts from being enacted because of the impact it would have on national security.

We are looking at a stand-alone bill to negate what Republicans supposedly gave up in the debt ceiling negotiations, canceling the $600 billion in defense cuts. If it passes, Democrats will have given up $600 billion in cuts to domestic programs -- for exactly nothing in return. Yet another Lucy pulls away the football moment. Gharib recommends that President Obama issue a veto threat against such a bill now, but it's not like $1.5 trillion in cuts is good policy in a jobs recession. But Gharib may be right, on the grounds that the President needs to hold Republicans to their deals. Will the President hold his ground? Get ready for the cries of "You don't support the troops."

How to Read a Republican Tax Proposal

We've been hearing about Herman Cain's 9-9-9 Plan for a few weeks and now Governor Rick Perry has released his tax proposal, supposedly a 20% flat tax. We will undoubtedly hear more as the Presidential campaign kicks into higher gear. As a public service, I am providing a simple way to understand the impact of these tax plans.

Step 1: Assume revenue neutrality.

Don't laugh; Cain's “9-9-9 Scoring Report” claims to be revenue neutral and Perry says he will keep federal revenue at 18% of gross domestic product. 

Step 2: Look at what income is no longer taxed.

For example, the 9-9-9 Plan “features zero tax on capital gains and repatriated profits,” eliminates the estate tax, and cuts the corporate income tax from 35% to 9%, while Rick Perry's tax plan eliminates taxes on capital gains, dividends, Social Security, estates, repatriated profits, and cuts the corporate income tax from 35% to 20%.

Step 3: Determine how much of that income you have.

If you're not rich, you've got very little of it, except Social Security in the Perry plan. If you're not retired, you'll get virtually no reductions under either plan.

Step 4: Ask what taxes have to be raised to get to revenue neutrality.

Step 5: Look in the mirror to see who pays them.

Comments: As I argued in Competing for Capital, if you cut one group's tax burden, one of three things has to happen to offset the reduction: someone else's tax burden increases, government runs higher deficits, or programs must be cut. If you maintain revenue neutrality, the first of these options is the only one possible, as flat tax pioneers Robert Hall and Alvin Rabushka admitted as far back as 1983: “It is an obvious mathematical law that lower taxes on the successful will have to be made up by higher taxes on average people” (h/t James Carville, We're Right, They're Wrong).

But in fact, Perry's proposal clearly is not revenue neutral. How could it be, when people have the option of filing under the current tax system or his new system? People who would pay more under the new plan would pay under the old plan and people who would save money under the new plan would pay under the new plan: this necessarily means less revenue. Rich people would save quite a bit of money, as Seth Hanlon at Think Progress has shown. Using published tax returns of famous people and the tax form on the Perry website, he shows that Warren Buffett's tax rate would fall from 11% to 0.2%, former Vice-President Cheney's rate would drop from 19.1% to 6.4%, President Obama would get a $60,000 tax cut, and Governor Perry's rate would fall from 18.6% to 15.8%.

Similarly, Cain's 9-9-9 Plan would raise far less than current taxes do, even as it increases taxes on the middle class and the poor. Michael Linden at Think Progress estimates that it would only bring in 14% of gross domestic product, well below the current low revenue that's giving us a $1 trillion deficit. In addition, many analysts think his corporate income tax is actually a value-added tax in disguise (h/t Michael Linden).

 The bottom line is that if we cut taxes for the wealthy and corporations, it will impact the budget elsewhere, in some combination of tax increases on the middle class, program cuts, and deficit increases. Regardless of the spin surrounding these and other tax plans that may come down the pike, if a proposal reduces some taxes but doesn't reduce your taxes, you will lose out via these three methods of compensating for the lost revenue.

S&P Downgrades U.S. Debt

As you have probably heard by now, Standard and Poor's has downgraded U.S. debt one notch from AAA to AA+ with a negative outlook. This will be bad for the country because it will likely increase borrowing costs; in turn, this is bad for the middle class because it increases the deflationary pressures on the government.

The go-to analysis of the rating agencies in political science is the work of Timothy Sinclair of the University of Warwick, especially his book The New Masters of Capital (Cornell University Press, 2005). (Disclosure: he and I co-edited Structure and Agency in International Capital Mobility, Palgrave, 2001, and have known each other for over 15 years.)

Sinclair argues that credit rating has become a form of "private regulation," which governments have had to pay increasing attention to since the rapid internationalization of financial markets. This regulatory power is based on the agencies' perceived expertise, which comes into occasional question after spectacular failures like Enron (analyzed in his book) or the 2008 financial meltdown but persists after those analytical disasters.

As Sinclair has long argued, the role of the agencies is not neutral politically. They have pushed for market liberalization in Latin America, put enormous pressure on city governments like those of New York, and shown favor to financial orthodoxy generally. We have seen this in S&P's recent statements that a $4 trillion package of debt reduction was necessary to prevent a downgrade; and S&P has now followed through on its implied threat.

As Paul Krugman has discussed, most of the reasoning behind the downgrade stems from the ungovernability of the United States due to the intransigence of Congressional Republicans on increased tax revenue. He argues that after the failure of S&P on mortgage derivatives, it has no right to pass judgment on the US. However, Sinclair's analysis of the credit raters' failures on Enron, WorldCom, etc., suggests that S&P's power has probably remained intact despite its failure on mortgages.

Krugman is right to challenge the legitimacy of S&P's decision; this is an enormously important moment in the battle against deflationary policies being undertaken during a jobs crisis. Indeed, the agency has complained about the country's "ungovernability," while at the same time rewarding the very people who are making it ungovernable with a decision that ultimately promotes their preferred policies. We cannot afford for this to stand.

It's Gotten to Where I Can't Turn on the TV

Or the radio, or look at news on the Internet. The reason, of course, is the debt ceiling “negotiations.” I think Calculated Risk is correct that the debt ceiling will get raised on time, but I don't think it is inconceivable that the Tea Partiers in the House could screw things up.

I know Paul Krugman is right that negotiations are in la-la land where the negotiators are talking about cutting government spending when the economy needs more demand. How do I know this? Because elementary macroeconomics tells us so. It's the most basic equation in macroeconomics: Y = C + I + G + (X-M). In English, national income (gross domestic product) equals private consumption plus investment plus government spending plus net exports. If you reduce government spending, you reduce GDP, all other things equal. And right now, with companies sitting on trillions of dollars in cash, government spending is not crowding out private spending and investment, so cutting government spending really will reduce GDP.

The losers from those government spending cuts will be middle class and poor people. With Social Security, Medicare, and Medicaid all potentially on the chopping block, the cornerstones of middle class economic security are under assault (and it's a self-inflicted wound for Democratic negotiators, starting with the President, to allow this). Reduced GDP means that unemployment will go up even faster than it already is. It's a multidimensional defeat for the middle class unless, by some miracle, a clean debt ceiling increase passes.

Who wins? Perhaps the biggest group is what Paul Krugman calls the “rentiers,” individuals “who derive lots of income from assets, who lent large sums of money in the past, often unwisely, but are now being protected from loss at everyone else’s expense.” These finance types benefit from low inflation, which maximizes the value of the interest they receive and the assets they hold, so they fight any policy which might increase inflation enough to expand the economy and reduce middle class debt loads. I'll have more to say about who wins and who loses from moderate inflation in a future post.

I hurt my head every time the debt ceiling gets discussed, from banging it against the wall. I wonder if I can self-nominate for the Order of the Shrill.

Wake me up on August 3^rd.