Piketty, Poverty, Political Pooh

The 50th anniversary of President Johnson’s War on Poverty has led to a flurry of articles and debates about whether that war succeeded. That debate has been reenergized by Thomas Piketty’s best-selling book, Capital in the Twenty First Century, which argues that inequality is rising because returns to capital have risen relative to average economic growth. A solution to this inexorable force, Piketty claims, lies in some form of worldwide wealth tax.

In both cases, I find the political debate largely unproductive. Many conservatives and liberals pick at pieces of data and history to support their own forgone conclusions. Rather than seek practical margins for making progress, much of the discussion turns to thumbs up/thumbs down rhetoric or totally impractical solutions.

Here’s how the data play out. Since the late 1970s, market-based measures of poverty and the distribution of income (that is, measures of income before taking account of government redistribution through taxes and transfers) improved very little in the first case and got worse in the second. Both did much better a few decades earlier, including up to the mid-1970s. PIketty bases his broad historical conclusions about growing inequality largely on market measures. In turn, researchers ranging from Gary Burtless at Brookings to Tim Smeeding at Wisconsin to Richard Burkhauser at Cornell to Diana Furchgott-Roth and Scott Winship at the Manhattan Institute have shown greater reductions in poverty and less growth in inequality of income or consumption when market-based income is adjusted for government taxes and transfers.

These two different ways of looking at the data make for strange bedfellows as the debate turns political. Conservative critics of the War on Poverty combine with liberal world-always-getting-worse warriors, who like to cite Piketty, to form conclusions based largely on the before-tax, before-transfer measures. They unite to attack the status quo, with one suggesting fewer transfers (the war failed) and the other higher taxes on the rich (the tax system failed). Liberal defenders of social welfare programs and conservative opponents of higher tax rates, in turn, conclude that on an after-tax, after-transfer basis the world is a lot better off than the other side asserts. They defend the status quo.

Here are the statistics that I ponder. In real terms, social welfare spending averaged about $7,500 per household at the time the War on Poverty was declared. By the time that Ronald Reagan was inaugurated in 1981, spending per household had grown to $15,000. And today it has doubled again from the start of the Reagan administration to about $32,000. (These figures do not even include tax expenditures for social welfare, such as pension, housing, and wage subsidies, which averaged about $7,000 per household in 2013.) Meanwhile, GDP per household grew from about $70,000 in 1964 to nearly $140,000 today.

Over this same 50 years the official thresholds for measuring who is in poverty have not grown one dollar in real terms. These measures, adjusted only for inflation, in a sense, are based on absolute poverty, unadjusted for the new goods and services a growing economy provides or, said another way, for whether a household’s income keeps up with average or median income in the economy. For a family of four, for instance, the nonfarm poverty threshold is crossed when a household’s income falls below roughly $23,550 today, essentially the same level as in 1964. For a single person, the poverty threshold equals $11,490

“Wait a second,” you may think. The government spends far more on social welfare than would be required to give every household support above poverty levels. And in almost every year there have been substantial real increases in the amount of transfers made. Why, then, has the poverty rate not fallen more?

There is no single answer. Here are four pieces of the puzzle:

Huge gains at the top. Inequality in market-based income DID grow substantially since the late 1970s, the period when progress against poverty slowed. The ability of high-income individuals at the top of a winner-take-all economy to capture much of the extra rewards that derive from monopoly or oligopoly settings does help explain some of the stagnation in earnings growth for those with average or low earnings.

It doesn’t explain why the public supports, which have continued to grow, haven’t made greater headway in improving the skills of the population enough that their market incomes would rise more. That brings us to the next three pieces of the puzzle: the extent to which the public money has been spent to help providers, help the middle class, and pay for health care.

Providers. Beneficiaries include providers who have captured large portions of government, not just private market, money. Before you start looking elsewhere, just remember that providers include, among others, doctors, drug manufacturers, social workers, lawyers, lenders, other financial intermediaries, builders, housing officials, software developers, tax preparers, government contractors, and, for that matter, researchers like myself.

The Middle Class. The middle class rather than the poor has also captured very large portions of the social welfare budget, largely in ways that have for decades encouraged them to retire and work less for greater portions of their lives. Early growth in Social Security benefits, for instance, did a good deal to reduce poverty, but in more recent decades has made less progress because growth—the marginal increase in payments—has been concentrated preponderantly on more years of support and higher levels of benefits for everyone, from rich to poor alike. Remember that a program can on average be successful in meeting some objectives, yet still target its incremental budget poorly. Incremental spending in our public retirement programs in the modern age increasingly operates to decrease the market incomes of the middle class and, despite billions of additional dollars spent each and every year, only modestly increases the transfers received by the poor.

Health Care. A large share of the growth in the income of almost everyone but the rich has come not in cash but in the form of government and employer-provided health care and insurance. One-third of per capita income growth in our economy from 1990 to 2010, for instance, went simply to pay for real increases in health care, as average annual health care spending per household from all sources ballooned to approximately $24,000. Measures of both market income (e.g., Piketty) and most measures of after-transfer income (e.g., the official poverty measure) fail altogether to count this major source of income. Yet for many, particularly those below median income, that item has dominated the way their income has grown for perhaps three decades. The CBO has tried very recently to count health insurance received as income in some of their work, but its efforts are an exception to the rule.

These four pieces interlock in various ways. For instance, more years and money in Social Security support, particularly as people live longer, has encouraged the average worker to retire for more than a decade longer than in 1940, when benefits were first paid, thus reducing their market income. Because many of the government’s expenditures on health care have been captured by providers, the public’s gain in benefits comes out to only a fraction of each additional $1 the government spends, while in the private sector cash compensation stagnates to pay for higher costs of health insurance.

In sum, the debate over poverty and inequality deserves renewed attention. However, it provides a quandary to many in both major political parties, who are largely mired in mid-20th century debates and fighting the thumbs-up, thumbs-down battles that blocks improvement from either side. The times beg for a 21st century agenda (an issue I try to address in my new book, Dead Men Ruling).


Dead Men Ruling

A personal note to you, my readers and friends.

My latest book, Dead Men Ruling, is in many ways the most important that I have ever written. I try not only to diagnose the disease that underlies so many of our economic and political problems today, but also to attack the wrong-headed notion that we live in an age of austerity and limited possibility.

Consider: the gross domestic product per household is $141,000 today and is projected, even with slower growth, to reach $168,000 in 10 years. Over that same period under Republican and Democratic budgets alike, government at all levels is likely to increase spending and tax subsidies from $55,000 to around $65,000 per household. Our budget may be terribly allocated, and the way we tax and spend can be quite inequitable, but do these numbers suggest a nation that must continue to turn its back to the ocean of possibilities that lie right at our feet?

I hope you will read Dead Men Ruling. Even more, I hope that you recommend it to friends and elected officials who want to move beyond yesteryear’s stale debates toward a 21st-century agenda—particularly when it comes to promoting opportunity and mobility, prioritizing children and their future, and creating a government that can be both effective and lean.

If you cover the news, are organizing an event, or have a group interested in the book, I can help. Please contact me.

Because I make no money on the book, my motivation is purely aspirational. I strongly believe that the country is at an inevitable turning point, requiring honest leadership. Though it will take time, together we can make that turn well.

At DeadMenRuling.com, you can order copies directly and find many related recommendations, videos, and interviews. As a Government We Deserve reader, you can use discount code KCD4. Or you can use various book venders (including Amazon).

To tease your interest a bit further, I include the preface below.

PREFACE

Low or zero growth in employment… inadequate funds to pay future Social Security and Medicare bills…declining rates of investment… cuts in funding for education and children’s programs…arbitrary sequesters or cutbacks in good and bad programs alike… underfunded pension plans…bankrupt cities…threats not to pay our nation’s debts… inability to reach political compromise…political parties with no real vision for 21st century government.

I’ve come to a strong belief that these and a whole host of seemingly separable economic and political problems are symptoms of a common disease, one unique to our time and shared widely throughout the developed world. Unless that disease and the history of how it spread over time is understood, it’s easy to fall prey to believing in simple but ineffective nostrums, hoping that a cure lies merely in switching political parties or reducing the deficit, expanding our favorite program, or hunkering down to protect it. My first purpose in writing this book is to accurately diagnose that disease so we can attack it at its roots

But my fonder hope is that we reawaken to the extraordinary possibilities that lay right at our feet and restore the American can-do spirit that has prevailed over most of our history. Despite the despairing claims of many, we no more live in an age of austerity than did Americans at the turn into the 20th century with the demise of the frontier. Conditions are ripe to advance opportunity in ways never before possible, including doing for children and the young in this century what the 20th did for senior citizens, yet without abandoning those earlier gains. Recognizing this extraordinary but checked potential is also the secret to breaking the political logjam that, as I will show, was created largely by now dead (and retired) men.

 

 


The Budget Deal: A Tentative Step Forward

In a recent Washington Post article, I characterized any forthcoming budget deal as two parties who had dug a hole for themselves deciding to stop throwing shovels at each other. Despite this skepticism, I must admit that this December 2013 agreement is certainly better than throwing shovels—or, more formally, threatening another government shutdown, along with its attendant costs on the workings of government, the well-being of citizens, and economic growth.

This budget agreement also takes a couple of baby steps forward. For the first time in a while, it includes modest reforms to mandatory programs, not just discretionary programs. It cuts back slightly on the silly sequester. Perhaps more important, it gets the two budget committees functioning again. Traditionally, members of these committees have had to fight with the rest of Congress as much, if not more, than with their opponents within the committees—partly because committee members, regardless of affiliation, shared the objective of getting the budget into some sort of order.

If the committee members have really decided to restore their status, and if they are constrained by other congressional leaders from making significant headway on the budget in the months leading to the next election, I hope at least they will start working on bipartisan budget process reforms, such as reducing the game-playing in future budget agreements. One example is greater constraints on future legislation that increases long-term deficits. A trick still possible (but not used in this deal) is to avoid scoring or counting costs against a bill when they fall outside an arbitrary ten-year budget window.


Sixteen Days in January: A Story of the Next Shutdown

Dateline: January 2014. Federal government shuts down completely.

Day 1. Mall, Washington, DC. Park Police decide shutdown again requires barring access to war memorials and the grounds of the Washington, Lincoln, and Jefferson monuments. Veterans rise up in anger and push back barricades. “If you’re furloughed, how can you keep us from entering the parks?” asks Joe Laploski, an Iraqi veteran from New Rochelle, NY. Park Police assign unpaid legal interns to determine whether Park Police should arrest themselves for working.

Day 2. White House. In hastily called press conference, President Obama announces major plan to deal with the national emergency. Enforcement on malls will be sustained, lest someone fall in the Tidal Basin and sue the government. Government debt will thereby be reduced, since Park Police cost less than those future lawsuits, at least on an expected basis.

Day 3. Capitol. Lights go out. Speaker Boehner lost underground. Democrats offer to fund search party, but, invoking the Hastert rule (requiring agreement by a majority of the majority party to act) and unable to decide whether they want to find him, Tea Party refuses.

Day 4. Longworth House Office Building. Democrats send search party after Boehner anyway. Find flasks of aged whiskey hidden by the late former Ways and Means Committee Chair Wilbur Mills two levels below the committee room where he presided. Debate ensues over whether imbibing is an essential government function. Inspired by former Occupy Wall Street supporters, Democrats decide to represent the activity as unity with the “99 percent,” who normally can’t afford such expensive booze.

Day 5. Treasury Department. Electronic payments of billions of government checks and bills stop. Secretary Lew called to emergency meeting at the White House to determine how much blame to assign to Republicans.

Day 6. Oklahoma City. Local Tea Party members claim the IRS is targeting them, citing delayed refund checks as proof. Back in Washington, House Oversight and Government Reform Committee decides to hold hearings in the dark.

Day 7. Near Capitol. Republican staffers gather at a local bar to debate how to get work done during the impasse. Consider asking the guy in charge of the lights for help, until they discover that position no longer exists because of the sequester. Boehner still missing.

Day 8. White House. President Obama plans national address during primetime. He asks the Democratic Party to pay for the speechwriters. Local TV stations refuse to broadcast the president’s speech unless their invoices for airing “Army Strong” recruiting commercials are paid.

Day 9. Treasury Department. Secretary Lew tries to issue checks to TV stations. In a 5-4 decision, the Supreme Court bars him from doing so until he lays out the precise legal priority for billions of unpaid bills.

Day 10. Princeton, NJ. Despite the worldwide recession induced by the shutdown, foreigners still flock to outstanding US obligations, and interest rates on US government securities tumble instead of rise. In a New York Times op-ed, Paul Krugman argues that at this low rate we should borrow all we can—unless it would pay for a Republican tax cut.

Day 11. Treasury Department. In response to the House Oversight Committee’s hearings, Treasury’s Inspector General issues report that Republicans were indeed targeted, indicating as proof that their delayed refund checks were bigger on average than those for Democrats. However, no crime was committed, he asserts.

Day 12. White House. President issues a statement that IRS targeting of Republicans is inexcusable. Fires top IRS data processing personnel and replaces commissioner with top executive from Avon Products with an unblemished record in taxes and data processing because she has never worked in either field.

Day 13. Sacramento. Governor Brown announces that millions of Californians are now insured under Obamacare. He asks that no penalties be assessed on those getting thousands of dollars in excess benefits since recordkeeping was impossible. On Meet the Press, Senator Cruz expresses amazement that the shutdown he favored affects every government program but Obamacare.

Day 14. White House. President Obama launches new peace initiative. He asks Hassan Rouhani of Iran and Bashar al-Assad of Syria to hire their own nuclear and chemical weapons inspectors, claiming that the U.S. shouldn’t have to pay to clean up other countries’ messes. President Putin offers to mediate and contribute Russian oil revenues.

Day 15. Capitol. Boehner found. Claims, like always, he knew exactly where he stood. Negotiates agreement with president on a continuing resolution to fund government until after congressional elections. Congress then shuts itself down until December 2014.

Day 16. Russell Senate Office Building. Before departing, Chairman Camp of the Ways and Means Committee and Chairman Baucus of the Senate Finance Committee issue a 6,700-page document with complex details on how to structure a major tax reform. Congressional leaders promise to take up issue immediately…in the next Congress.


The Baucus-Hatch “Blank Slate” Approach to Tax Reform Could Be Revolutionary

No one quite knows what exactly Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT) mean when they say they will rely upon a “blank slate” as the starting point for tax reform discussions. But done carefully and with political artistry, taking advantage of their unique power, Baucus and Hatch could revolutionize how members of Congress negotiate the future of taxes.

But it’s all in the practice, not the theory. Done right, the strategy could reenergize the tax reform debate. Done wrong, it will be just another dead-end.

The idea of reforming the tax system from a “zero base” or building up from a blank slate is hardly new. And lawmakers always talk about everything being on the table. The challenge is in making it happen.

Baucus and Hatch must accomplish two goals. First, they must shift the burden of proof from those who favor reform to those who would retain the status quo. Second, they must force members to pay for their favored subsidy, denying them the opportunity to pretend it is free.

As a veteran of the Tax Reform Act of 1986, I always emphasize the crucial role of process. Sure, serendipity smiles or frowns unexpectedly on any endeavor, but the ’86 effort took off when Treasury, President Reagan, House Ways & Means Chair Dan Rostenkowski (D-IL), and Finance Committee chair Bob Packwood (R-OR) all put forward proposals that started with specific rate cuts and removal of many tax preferences.

Their plans were all somewhat different, but each changed the burden of proof. Lobbyists won many later battles, but now they were forced to explain why they needed to retain special preferences when others would not be so favored. Moreover, given a fixed revenue target, restored preferences had to be paid for. Lawmakers had to acknowledge that the price of adding back tax preferences was a higher tax rate.

Baucus, ideally with the support of Hatch, can put forward a “chairman’s mark” from which committee members can debate amendments. As both senators have suggested, that mark can be a relatively clean slate. Further, Baucus can require that amendments must not add to the deficit or change his revenue target, effectively requiring members to offer what are called “pay-fors.”

Normally, members debate items one at a time. Each adds a new subsidy without worrying about who pays for it—perhaps those currently too young to vote or the yet-unborn.

In dark times, politicians try to reduce the deficit by figuring out what tax increases or spending cuts will restore order to the budget. But identifying losers is immensely unpopular among voters, and politicians shy away from it. Worse, they blast those from the other party brave enough to provide details.

But if Baucus sets a revenue target at the beginning of this tax reform exercise, the dynamic shifts—from simply identifying winners and losers to explicit trade-offs. Winners and losers march together. With a blank slate or zero base, every restoration of a tax break requires higher rates (even an alternative tax), especially if there are few or no alternative preferences to sacrifice.

This process not only gives new life to a broad rewrite of the tax code but also makes it much easier to reform specific provisions. For instance, tax subsidies for homeownership, charity, and education can be much more effective and provide more bang per buck out of each dollar of federal subsidy. But politicians largely ignore such ideas because they create losers who scream loudly. Thus, the default for elected officials who fear negative advertising and loss of campaign contributions is to do nothing to improve these tax subsidies.

But when the burden of proof changes, a lobbyist can appear to be helping his masters simply by saving a subsidy, even if the net benefit is smaller than in the old law. After all, preserving a preference in some form is success relative to a zero baseline. Of course, as we learned in 1986, this argument grows stronger as the probability of tax reform grows.   Can Baucus and Hatch change the burden of proof and force members to pay with higher rates for the subsidies they want to keep? They can certainly lead their committee and Congress in that direction, but only by specifying precisely a chairman’s mark that sets revenue and rates while slashing tax preferences.

If they do, Baucus and Hatch may force fellow senators to acknowledge that every subsidy must be paid for. And that, in turn, will open a window to design alternative tax subsidies that are fairer and more efficient. This sort of process revolution could remake policy in ways that extend well beyond tax reform.


Austerity, Stimulus, and Hidden Agendas

Nothing better exemplifies our gridlock over the future of 21st century government, as well as how to recover from the Great Recession, than the false dichotomy of austerity versus stimulus.

The austerity thesis, reduced to its simplest form, suggests that government has been living beyond its means for some time, only exacerbated by the actions that accompanied the recent economic downturn. Sequesters, tax increases, and spending cuts become the order of the day.

The stimulus hypothesis, reduced also to simplest form, suggests that more government spending and lower taxes puts money in people’s pockets and helps cure a country’s economic doldrums. Once the economy is doing better, government spending will naturally fall and taxes rise.

The debate then plays out largely over deficits: do you want larger or smaller ones?

But reduced to this form, the debate is a fallacy, for several reasons.

First, one must define larger or smaller relative to something. Last year’s spending or taxes or deficits? What’s scheduled automatically in the law? The public debate often glosses over these issues. Which is more expansionary when keeping taxes at the same level: an economy whose growth in spending is cut from 6 to 4 percent or one whose growth is increased from 1 to 3 percent?

Second, a country’s ability to run deficits depends on its level of debt. A recent debate over whether at some point higher debt starts to slow economic growth doesn’t change the fact that lenders want to be repaid. People won’t loan to Greece now, but they still find the U.S. Treasury securities a safe haven for their money.

Third, and by far the most important, what timeframe is involved? Is the Congressional Budget Office pro-austerity or pro-stimulus when it concludes that sequestration hurts the economy in the short run, but is better in the long run than doing nothing about deficits? No one on either side suggests that debt can grow forever faster than the economy. Everyone implicitly or explicitly believes that to accommodate recessions when debt grows faster there are times when debt must grow slower.

So where’s the rub? Here you must understand the emotional systems, usually veiled, that lie behind those on both sides trying to force the problem to an either/or solution.

Start with hardline austerity advocates. Many of them don’t just want smaller deficits. They want smaller government—or, at the very least, they want to prevent the government from taking ever larger shares of the economy, even given changing demographics. Essentially, austerity advocates don’t trust their pro-stimulus adversaries, some of whom can almost always find an economy going into a recession, in a recession, coming out of a recession, or attaining a lower-than-average growth rate and, therefore, needing some form of stimulus. Austerity advocates have learned from long experience that once government spending is increased, it’s hard to reduce. So they feel they have to get what deficit reduction they can now that the public’s attention to recent large debt accumulations is creating pressure to act.

Now for many the hardline stimulus advocates, their support for additional temporary government intervention cannot be entirely disentangled from their sympathy for a larger future government. Else why not agree to cut back now on the scheduled acceleration of entitlement programs, particularly fast-growing health and retirement programs? That would bring the long-run budget, at least as currently scheduled, back toward balance. It would simultaneously please many of their austerity opponents and allow for more current stimulus.

The hidden agendas are complicated further by inconsistencies on both sides. Many hardline austerity advocates, at least in the United States, don’t want cuts to apply to defense spending. For their part, many hardline stimulus advocates would be glad to pare growth in tax subsidies.

Regardless, the dichotomy falls apart once one realizes that a solution can involve a slowdown in scheduled growth rates in spending and a higher rate of growth of taxes, accompanied by less short-run deficit reduction and an abandonment of poorly targeted mechanisms such as sequesters.

Consider the buildup of debt during World War II, the last time we saw U.S. levels above where they are today. Debt-to-GDP fell fairly rapidly after the war all the way until the mid-1970s. While the growing economy certainly helped, tax rates that were raised substantially during the war were largely maintained afterward, and spending had essentially no built-in growth (actually huge declines when the troops came home). Just the opposite holds now even with recovery: there are limited tax increases to pay for past accumulations of debt or wartime spending, and spending is scheduled to grow long-term, even after temporary recession-led spending and defense spending on Afghanistan declines.

Both sides—pro-austerity and pro-stimulus—want desperately to control an unknown future, either by not paying our current bills with adequate taxes or by maintaining built-in growth rates in various programs, mainly in health and retirement. The false dichotomy between austerity versus stimulus has fallen by the wayside, and what we see through the veil are two sides in mutual embrace trying to control our future, whatever the cost to the present.


When Policy Meets Statistics: The Reinhart and Rogoff Study on Excessive Debt

Knowing how many of us economists toil away in obscurity on most research, I’m always intrigued by what catches the press’s and public’s attention. Take, for example, the significant attention paid to a 2010 study by Harvard economists Carmen Reinhart and Kenneth Rogoff that concluded that countries with debt levels above 90 percent of GDP began showing slower rates of growth. When Thomas Herndon, Michael Ash and Robert Pollin, scholars at the University of Massachusetts at Amherst, recently had trouble replicating Reinhart and Rogoff’s results, the debate played out in national news outlet.

Unfortunately, this discussion quickly devolved from substance to politics to arguments ad hominem. Without getting into the extent to which I or others can validate Reinhart and Rogoff’s (R&R’s) original findings, I offer six cautions for anyone witnessing this or a similar statistical debate with significant policy implications: (1) statistics should never be interpreted as showing more than simple but potentially useful correlations; (2) healthy skepticism is required for all social science research, which seldom gets replicated for validity; (3) all empirical economic work is based on history that will not repeat in the exact same form; (4) research can certainly contradict conventional wisdom but not reason; (5) arguments ad hominem, particularly by those with their own agendas, are unhelpful; and (6) be careful with labels and straw men.

  1. Correlation versus causation. It’s long been stressed that statistical tests never prove causation, not simply because they can’t but because researchers make many choices and assumptions, often of statistical convenience. This doesn’t mean statistics are useless. Just accept that any result merely shows that A and B seem to occur together even after trying to account for other influences under a huge range of never-fully-tested assumptions.
  2. Skepticism. A growing body of “research on research” shows that few social science experiments, and even many medical studies, are replicated. Also, positive results get published; negative results usually do not. R&R’s study was replicated mainly because it got an unusual amount of attention.
  3. History. The past never repeats itself exactly—or, as Heraclitus warns, “You could not step twice into the same river.” That historical interpretations are contained and sometimes couched in data analyses doesn’t mitigate this well-known caution.
  4. Reason versus conventional wisdom. The R&R debate mainly revolves around two reasonable notions. One is the simple arithmetic conclusion that debt can’t rise forever relative to national income, along with the related economic conclusion that higher levels of debt can and have been shown in many places to have consequences for investment, interest rates, ability to borrow, and how government revenues are spent. The other is that institutions, times, places, and circumstances matter greatly, and they affect how one should interpret past data, such as those presented by both R&R and their critics.
  5. Ad hominem arguments. R&R published some of their work with the Peterson Institute for International Economics, so some of those who attacked R&R may have considered the authors guilty by association because of Peter George Peterson’s concern about deficits and his contributions to that Institute. Peterson’s own “guilt” on budget issues seems to be that he became rich on Wall Street, although he favors higher taxes on what he calls “fat cats” like himself. Still, while many of those who engage in these attacks themselves fail to represent their own or their institution’s sources of funding, let’s be honest. Much social science research is funded in ways that doesn’t necessarily bias how the research is done, but rather what is researched in the first place. So, unless one fully engages and thoroughly analyzes every study, even the careful academic reader must often try to determine trustworthiness in other ways, such as whether the researchers report results only consistent with some special interest or political party.
  6. Labels and “straw men.” While we all use labels and straw men at times to set up the stories we tell, they at best simplify greatly. In this case, R&R are identified as advocates of “austerity” and their opponents as “Keynesians” advocating stimulus, both of which are nothing more than labels. Most budget analysts I know worry about deficits but vary widely in whether they would engage in more short-term stimulus or in how strongly they believe that a path toward long-term balance even requires austerity. For instance, is reducing some rate of growth of spending, no matter what its level, austerity? Is the Congressional Budget Office an advocate of austerity or Keynesian when it asserts that sequestration hurts the economy in the short run, but has long-run benefits relative to doing nothing about deficits?

The bottom line: use extreme caution no matter which economist you read or believe.

Full disclosure: I have spent most of my career at the Urban Institute or the Treasury Department, brief periods each at the Brookings Institution, American Enterprise Institute, and the Peter G. Peterson Foundation (which differs from the Peterson Institute for International Economics). I also serve or have served on many advisory groups and boards for such organizations as the Committee for a Responsible Federal Budget and the Comptroller General of the United States. As a consequence, je m’accuse of being among the many economists limited more than I would like by what research is supported by those institutions or their funders.


Should Social Security Taxes Affect All Wages? A Modest Rise Is Fine, but It’s Not a Panacea

Arithmetic tells us we must either decrease the growth of Social Security spending or increase taxes as a share of gross domestic product.

But we should do it with an eye on fairness, growth and efficiency. We’re all in this together, so higher-income families must give up something to deal both with Social Security shortfalls and those in the budget more generally. A modest increase in the wage base for Social Security has some justification since that base has eroded in recent years. But if extended too far, it exacerbates the squeeze on other government programs. How? On the tax side, it tends to preempt other tax increases for non-Social Security purposes. On the benefit side, it attempts to maintain a growth rate of Social Security and other elderly programs that absorb more than all of the scheduled growth in government spending for decades to come, thus continuing a downward spiral in the share of the overall budget devoted to children, education and investment more generally.

Under current Social Security formulas, ending the cap on income would mean that some fairly wealthy individuals would get benefits in excess of $1 million. Though no one thinks that that makes sense as a benefit schedule, capping benefits goes against the Social Security tradition of being paid back for additional contributions. On the technical front, an unlimited Social Security tax would also encourage individuals to reclassify labor income as capital income not subject to Social Security tax. This would be a special problem for the self-employed and owners of partnerships, since Social Security now taxes both their capital and labor income as labor income.

Finally, the Social Security Administration’s Office of the Actuary found that even with a cap on benefits, the wage base expansion would still leave the program running future deficits. We shouldn’t pretend that it does otherwise.

This column was reposted from New York Time’s Room for Debate.