In testimony yesterday before a joint hearing of two House subcommittees, I urged Congress to modernize the nation’s social welfare programs to focus on early childhood, quality teachers, more effective work subsidies, and improved neighborhoods. One way lawmakers can shift their gaze is by considering the effects of combined marginal tax rates that often rise steeply as people increase their income and lose their eligibility for benefits.
While some talk about how we live in an age of austerity, we are in fact in a period of extraordinary opportunity. On a per-household basis, our income is higher than before the Great Recession and 60 percent higher than when Ronald Reagan was elected President in 1980.
A forward-looking social welfare budget should not be defined by the needs of a society from decades past. Two examples of how our priorities have shifted: Republicans and Democrats didn’t always agree on the merits of Aid to Families with Dependent Children (AFDC) or the Earned Income Tax Credit, yet they agreed on the need to shift from welfare to wage subsidies. Ditto for moving from public housing toward housing vouchers.
I sense that both the American public and its elected representatives are united in wanting to create a 21st century social welfare budget. That budget, I believe, should and will place greater focus on opportunity, mobility, work, and investment in human, real, and financial capital.
However, for the most part, our focus has been elsewhere. As I show in my recent book Dead Men Ruling, we live at a time when our elected officials are trapped by the promises of their predecessors. New agendas mean reneging on past promises. Even modest economic growth provides new opportunities, but the nation operates on a budget constrained by choices made by dead and retired elected officials who continue to rule.
For instance, the Congressional Budget Office and others project government will increase spending and tax subsidies by more than $1 trillion annually by 2025, yet they already absorb more than all future additional revenues—the traditional source of flexibility in budget making.
I am concerned about the potential negative effects of these programs on work, wealth accumulation, and marriage of combined marginal tax rate imposed mainly on lower-income households. To see how multiple programs combine to reduce the reward to work and marriage, look at this graph.
For households with children, combined marginal tax rates from direct taxes and the phasing out of benefits from universally available programs like EITC, SNAP, and government-subsidized health insurance average about 60 percent as they move from about $15,000 to $55,000 of income. This is what happens when a head of household moves toward full-time work, takes a second job, or marries another worker.
Beneficiaries of additional housing and welfare support face marginal rates that average closer to 75 percent. Add out of pocket costs for transportation, consumption taxes, and child care, and the gains from work fall even more. Sometimes there are no gains at all.
While there is widespread disagreement on the size of these disincentive effects on work and marriage, there is little doubt that they exist. One solution: Focus future resources on increasing opportunity for young households. Make combined tax rates more explicit and make work a stronger requirement for receiving some benefits.
This post originally appeared on TaxVox.
The ultimate goal of educational policy must be progress for every child. Not standards. Not attainment of grade level proficiency. Not college readiness. But progress toward developing each young person’s potential to the fullest extent possible every year. Not only is this the right educational goal, but it is the only one that pulls parents, teachers, and administrators together politically in a shared vision of helping every child, disadvantaged and advantaged alike, to grow into smarter and more capable citizens. With rare exception, each student’s progress, no matter how high or low the base level of attainment, eventually benefits others in society.
While most teachers and parents adhere to that goal, they also care deeply about their own children and protégés, and many top-down requirements ignore that legitimate and natural impulse. When my children were in school, governments and school boards devoted additional resources to the “gifted and talented.” Others felt left out. Later, the focus shifted: the schools needed to do more for “special education” students, then those for whom English was a second language (ESL). Next efforts were made to pull more students into advanced placement AP courses, then to mainstream a larger share of students with different abilities. Later, standards became the focus du jour, culminating partly in 2001 in the No Child Left Behind (NCLB) law, and more recently in new fights over the “common core” level of achievement agreed to by state officials.
The reaction? I think it can be summed up well by the story of the school superintendent who in response to No Child Left Behind essentially told his principals to focus on that group, let’s say 20% of students, with the highest probability of being brought up to the standard. As for the other 80 percent of students, those above the standard and those more likely to never achieve it, well, they implicitly had to accept relatively fewer resources if relatively more were devoted to the 20%. A more extreme reaction came to light with the “racketeering” conviction of several Atlanta school teachers and officials for feeding students answers to standardized tests and changing test sheets.
These various reform efforts didn’t necessarily fail. They responded partly to past areas of neglect. But one can also see that if each program’s success depends mainly upon shifting attention and resources, and if there are narrowly circumscribed measures of success, then it’s quite possible to come full circle on these efforts, succeed modestly with the targeted population each time, and then at the end of the day advance not at all with any one of them as the targets rotate into and out of view. To me that partly explains why our school systems have fallen behind those of many other countries.
The literature on performance measures, successful organization, and statistics gives us many lessons that need to be heeded. Among those most relevant here: no organization succeeds unless it engages in a process of continual improvement. Those who are on the ground must buy into and have ownership of the process. Tests should occasionally shift to areas that haven’t been checked. For instance, if success in math comes about because extra time to it came out of fewer recesses, one had better check on whether active students become more out of control and if obesity is increasing. Finally, it’s all right to teach to a test if we know that the test incorporates much of what we want to succeed. A great example in the school systems are the advanced placement tests, where teachers often follow a fairly rigorous but also standard way to advance a selected group of students on a subject matter eventually to be tested.
Teaching to the test is bad enough when it discourages educators from teaching necessary skills that those tests neglect. But it is even worse when state governments, school boards, or school superintendents grade a school, or principal, or teacher primarily on the percentage of students reaching some minimum standard. Such judgments ignore both other sources of knowledge and the potential progress of many students above or below the standard.
Though No Child Left Behind may have failed on some fronts, it did help set in motion more rigorous efforts to track students over many years. These tracking systems often provide the types of data by which progress can be measured along several (but, of course, far from all) useful dimensions. The potential of these data for first empowering teachers and parents with multiple measures of each student’s progress, not just attainment, has yet to be realized.
Senators Lamar Alexander and Patty Murray, chair and ranking member of the Senate Committee on Health, Education, Labor, and Pensions, have recently released a bill known as the Every Child Achieves Act. The label at least suggests a focus on every child, rather than NCLB’s focus on a subset of students who are “behind.” Many experts call the bill a step in the right direction because it tries to maintain some accountability even while allowing states much greater flexibility in setting standards.
Still, whether the states advance our still-mediocre educational system—either on their own or with the help of federal incentives—remains to be seen. A crucial telling point will be whether enough schools and jurisdictions start to recognize how to better use measures of progress, not just attainment, and then aim to develop each and every student’s potential regardless of whether they fall well below, near to, or well above any particular attainment standard.
When it comes to how we spend our money, we seldom dwell on what we’re not buying. But money spent in one place cannot be spent in another. With the release of Kids’ Share 2014, the eighth in an annual series, my fellow Urban Institute researchers and I assess what share of the federal budget goes for kids and what shares go to other priorities. The word “share” is chosen deliberately: it forces us to recognize that a larger piece of the pie for someone must mean a smaller piece for someone else.
One major conclusion: despite several years of modest economic recovery and some budgetary successes for kids in previous decades, our elected officials—Democrats and Republicans, conservatives and liberals alike—have decided that kids must take it on the chin for the foreseeable future. Meanwhile, the rest of us will continue to gain, mainly when we hit older ages. Our retirement and health benefits will continue to grow, and we will continue to keep our taxes too low to pay for these benefits and the rest of government, no matter how well the economy is doing. Not that we or our elected officials would ever say this directly: you’ll be lucky to hear any discussion of these choices in any 2014 campaign.
No one votes formally to cut the kids’ share of the pie. They simply allow other shares to increase, driven by laws set in motion years and decades ago. Our priorities mainly revolve around ever more money for health, retirement, and tax subsidies, along with taxes so low that our children also get left with those bills and the higher interest costs that accompany them.
Let’s be clear: this scheduled hit on the kids’ budget does not derive from living in an age of austerity, an idea vying for first place on the list of really stupid interpretations of our current circumstances. We live in an age of extraordinary opportunity, not austerity. Despite the Great Recession, our total GDP per household (over $140,000) has never been higher. Ditto for measures of our national wealth, though those are perhaps inflated by current monetary policy. And there’s more to come. Within a little over a decade, despite lower economic growth, the budget offices project an increase in GDP per household of another $25,000 or so and increases in total government spending and tax subsidies of more than $10,000 per household.
And the kids? Well, they get close to none of it. Actually, less than none if you count out their very modest sharing in the large growth in health care spending.
It doesn’t have to be that way. For over twenty years, a consensus of sorts has developed that early educational and similar interventions, if done well, are a solid investment in our future. Yet progress here has been extremely slow. Child advocates are told that even $20 billion a year is out of reach in our “time of austerity.” But $20 billion is only about 1/40th of the expected growth in annual spending on Social Security, Medicare, and Medicaid (excluding the children’s share) by 2024. There’s also a growing consensus on creating a budget more oriented toward mobility and opportunity, but it’s still mainly rhetoric.
The simple question I’d like to ask is whether the numbers below, taken from Kids Share 2014, represent the direction that you want the government to take with the total increase in spending scheduled by 2024, a large share of which is made possible by economic growth. You can up that total or reduce it, depending upon your view of the optimal size of government. But either way, consider how you would assign the shares over the next 10 years or so. My guess is that almost none of you would allocate them this way.
Share of Projected Growth in Federal Outlays from 2013 to 2024 Going to Children and Other Major Budget Items (billions of 2013 dollars, except where noted)
Major budget items
|2013||2024||Growth, 2013–2024||Share of growth|
|Social Security, Medicare, and Medicaid||1,472||2,259||+787||58%|
|Interest on the debt||221||714||+493||36%|
|All other outlays||777||881||+104||8%|
|Total federal outlays||3,455||4,821||+1,366||100%|
Federal Expenditures on Children as a Share of GDP, by Category, 2013 and 2024
My colleagues and I recently published research showing that younger age groups are falling behind their parents in wealth accumulation and explaining the story behind our numbers. Some have raised questions about how we use our data, and I want to take some time to further explain our research.
Our study shows that the average wealth, or net worth, of these younger age groups has fallen fairly dramatically relative to older age groups. In response, some have said that median wealth is more important than average wealth. In fact, both are important. Average wealth tells us how a group is prospering as a whole relative to other groups; median wealth tells us how some “typical” person might be doing. One complication with focusing on median wealth is that it doesn’t show where all the remaining wealth goes. In a similar vein, if you were studying small business ownership by age or race, the median value might be zero for all groups. The average values would be greater than zero and thus would allow comparisons by groups.
Consider the median household age 56–64 in 2010. True, it is only slightly richer than the median household of a similar age in 1983 ($179,400 versus $143,150). Still, the median household age 29–37 in 1983 had $46,234 in wealth, but the median household in that age group in 2010 had only $15,900, less than half compared to their parents.
Median and average net worth by age is reported here. Come to your own conclusion.
Another footnote: Our study did not look at the decline in defined benefit wealth. However, the availability of such wealth has declined more for younger than older groups. Moreover, the valuation of defined benefits and annuities goes up for those who have them when interest rates go down. Older individuals with more defined benefit wealth technically saw the value of wealth go up after the Great Recession.
You can slice and dice these data in many ways, but the empirical data speak for themselves: younger age groups have fallen behind in relative terms. All sorts of factors are involved: the Great Recession and its impact on housing, student debt, wages, and so forth. Each is worthy of our attention.
The young have been faring poorly in the job market for some time now, a condition only exacerbated by the Great Recession. Now comes disturbing news that they are also falling behind in their share of society’s wealth and their rate of wealth accumulation.
Signe Mary McKernan, Caroline Ratcliffe, Sisi Zhang, and I recently examined how different age groups have shared in the rising net wealth of the U.S. economy. Despite the recent recession, our economy in 2010 was about twice as rich both in terms of average incomes and net worth as it was 27 years earlier in 1983. But not everyone shared equally in that growth.
Younger generations have been particularly left behind. Roughly speaking, those under age 46 today, generally the Gen X and Gen Y cohorts, hadn’t accumulated any more wealth by the time they reached their 30s and 40s than their parents did over a quarter-century ago. By way of contrast, baby boomers and other older generations, or those over age 46, shared in the rising economy—they approximately doubled their net worth.
Older Generations Accumulate, Younger Generations Stagnate
Change in Average Net Worth by Age Group, 1983–2010
Source: Authors’ tabulations of the 1983, 1989, 1992, 1995, 1998, 2001, 2004, 2007, and 2010 Survey of Consumer Finances (SCF).
Notes: All dollar values are presented in 2010 dollars and data are weighted using SCF weights. The comparison is between people of the same age in 1983 and 2010.
Households usually add to their saving as they age, while income and wealth rise over time with economic growth. If these two patterns apply consistently and proportionately, then one might expect to see, say, a parent generation accumulate $100,000 by the time its members were in their 30s and $300,000 in their 60s, whereas their children might accumulate $200,000 by their 30s and $600,000 by their 60s.
This normal pattern no longer holds for the younger among us. However, this reversal didn’t just start with the Great Recession; it seems to have begun even before the turn of the century. The young increasingly have been left behind.
Potential causes are many. The Great Recession hit housing hard, but it particularly affected the young, who were more likely to have the largest balances on their loans and the least equity relative to their home values. If a house value fell 20 percent, a younger owner with 20 percent equity would lose 100 percent in housing net worth, whereas an older owner with the mortgage paid off would witness a drop of only 20 percent.
As for the stock market, it has provided very low returns over recent years, but those who hung on through the Great Recession had most of their net worth restored to pre-recession values. Bondholders usually came out ahead by the time the recession ended as interest rates fell and underlying bonds often increased in value. Also making out well were those with annuities from defined benefit pension plans and Social Security, whose values increase when interest rates fall (though the data noted above exclude those gains in asset values). Older generations hold a much higher percentage of their portfolios in assets that have recovered or appreciated since the Great Recession.
As I mentioned earlier, however, the tendency for lesser wealth accumulation among the younger generations has been occurring for some time, so the special hit they took in the Great Recession leaves out much of the story. Here we must search for other answers to the question of why the young have been falling behind. Likely candidates for their relatively worse status, many of which are correlated, include
- a lower rate of employment when in the workforce;
- delayed entry into the workforce and into periods of accumulating saving;
reduced relative pay, partly due to their first-time-ever lack of any higher educational achievement relative to past generations;
- their delayed family formation, usually a harbinger and motivator of thrift and homebuilding;
- lower relative minimum wages; and
- higher shares of compensation taken out to pay for Social Security and health care, with less left over to save.
When it comes to conventional wisdom and media attention to distributional issues, there’s a tendency simply to attribute any particular disparity, such as the young falling behind in wealth holdings, to the growth in wealth inequality in society. But the two need not be correlated. Disparities can grow within both younger and older generations, without the young necessarily falling behind as a group.
Whatever the causes, we should also remember that public policy now places increased burdens on the young, whether in ever-higher interest payments on federal debts they will be left or the political exemption of older generations from paying for their underfunded retirement and health benefits. At the same time, state and local governments have given education lower priority in their budgets; pension plans for government workers now grant reduced and sometimes zero net benefits to new, younger hires; and homeownership subsidies post-recession increasingly favor the haves over the more risky have-nots.
Maybe, more than just maybe, it’s time to think about investing in the young.
In last week’s State of the Union speech, President Obama put great emphasis on expanding early childhood education. He’s not alone in recognizing the vital role of education as the launching pad for 21st century growth. George W. Bush wanted to be known as the “education president,” and so did his father, George H.W. Bush.
Many governors have similar aspirations. Jerry Brown, for instance, has gotten headlines for his efforts to restore the California university system to its former high status. State support for higher education has fallen dramatically there, particularly as a share of the budget and of Californians’ incomes but also in real terms. Brown even supported a tax increase to try to reverse this trend.
While I strongly support these types of effort, right now pro-education governors and the president are fighting a losing battle. Their new initiatives merely slow down their retreat against a health cost juggernaut.
California isn’t much different from many other states. The college bound and their parents witness this declining state support in the form of ever-rising costs and student debt. Less recognized is the fall in academic rankings of the nation’s leading public universities, such as many of the formerly extolled California universities and my own alma mater, the University of Wisconsin–Madison.
State support of education hasn’t just declined at postsecondary schools. In recent years, legislators have assigned K–12 education smaller shares of state budgets as well. During the recession, teachers were laid off and not replaced in many states. Efforts to expand early childhood education have also stalled, although the president’s initiative may give it some temporary momentum.
Federal spending policies only reinforce the longer-term anti-education trend. An annual Urban Institute study on the children’s budget suggests future continual declines in total federal support for education as long as current policies and laws hold up.
Education spending will continue to decline as long as health costs keep rising rapidly and eating up so much of the additional government revenues that accompany economic growth. The figure below, prepared by National Governors Association (NGA) Executive Director Dan Crippen and presented by his deputy, Barry Anderson, at a recent National Academy of Social Insurance conference, tells much of the state story: health costs essentially squeeze out almost everything else.
Fiscal 2011 data based on enacted budgets; fiscal 2012 data based on governor’s proposed budgets
Source: National Association of State Budget Officers, as presented by Dan Crippen, National Governors Association
These rising health costs don’t just place a squeeze on government budgets; they also are one source of the paltry growth in median household cash income over recent decades.
Within states, health costs show up primarily in the Medicaid budget. As the NGA numbers demonstrate, recent federal health reform did little and is expected to do little to control these state costs, despite large, mainly federally financed subsidies for expanding the number of people eligible for benefits.
With populations aging, state and federal governments now also face demographic pressures to increase their health budgets. Large shares of the Medicaid budget go for long-term and similar support for the elderly and the disabled. This budgetary threat also extends to revenues as larger shares of the population retire, earn less, and pay fewer taxes.
The next time someone tells you that we should wait another ten years to control health costs because we’ll be so much smarter and less partisan then, remind him or her that this procrastinating implicitly advocates further zeroing out state and federal spending on education—and the children’s budget more generally. Presidents and governors will never succeed with their education initiatives until they stop the health cost juggernaut in its tracks.
In theory, a household may be eligible for a broad range of government supports. Some are universally available, such as earned income tax credits and SNAP (formerly called food stamps) to a household with children if earnings are low enough. (See a previous short on this subject.) Others are only available to some people. For instance, government establishes waiting lists for programs like rental housing subsidies and limits number of years of participation in the traditional welfare program, now called Temporary Assistance to Needy Families or TANF.
The figure below assumes a single parent with two children is receiving almost all these benefits, an extreme case. It includes the more universally available programs, like SNAP. It also assumes the availability of the new Exchange subsidy provided by health reform. Benefits add up to close to $27,000 when this household fails to work and fall to about $8,000 as earnings increase to $40,000. Note that the graph does not take into account free child care support or income and Social Security taxes. When these are added to other benefit reductions, the household can sometimes even lose net income by earning more.
For further detail see my testimony before the House Subcommittees on Human Resources and Select Revenue Measures on June 27, 2012, “Marginal Tax Rates, Work, and the Nation’s Real Tax System.”