I’m pleased that politicians from both sides of the aisle are focusing on economic mobility. In life, the deck gets stacked fairly early and connections play a big role. In an open and democratic society like the United States, it’s not so much that a person can’t get a hit; it’s that one person steps up to the plate with three balls and no strikes, and the next with no balls and two strikes. The odds that the second person ends up with a higher batting average than the first after 10 times at bat is just about nil.
One reminder of how connections and early stacking of the deck reinforce each other came in the mail a few days ago: a chance to cast my vote for the officers of the American Economic Association (AEA). I’m supposed to select five people from nine candidates. The list shows some diversity along lines now somewhat demanded by society—that is, three women and one person of color. But, seven of the nine—and all six white males—have a connection with the Massachusetts Institute of Technology, or MIT (five PhDs and two faculty), so I have to vote for three MIT-connected economists at a minimum. Harvard lost its usual spot; only five of the nine have a major connection, including three with bachelor’s degrees from there. In fact, only one of the nine does not have a Harvard or MIT connection—though she has taught at Princeton, which usually gets at least token representation in this annual vote.
I know many of these candidates and have great respect for them. But I doubt that most of them believe fully in the hierarchical system from which they are now beneficiaries.
A number of years ago I had two colleagues who had done all but dissertations (ABDs) in history at the University of Virginia, ranked as one of the better schools in the country for that subject. Both were told by an adviser it wasn’t worth the trouble to write their dissertations. Jobs teaching college history and requiring a PhD, they learned, were so rare that they were already doomed: they were from too low-ranked a high-ranked university.
The financial industry has an extensive old boy (and occasionally old girl) network with the Ivy League. One of my daughters went to Princeton; though a biology major, she was recruited to join Wall Street (she didn’t accept). A former research assistant I knew got an MBA from the University of Texas at Austin when it became well-known for its rigor. Despite doing quite well, he later complained that without the Ivy League connection he couldn’t even get interviews with Wall Street firms.
Richard Perez-Pena recently penned a piece for the New York Times detailing the lack of progress among elite colleges in enrolling low-income students (not yet a standard along which politically correct diversification levels are expected). For instance, studies out of the University of Michigan and Georgetown University find that at 82 schools rated most competitive by a Barrons profile, only 14 percent of the student population comes from the poorer half of the nation’s households.
Look at top appointees under this president and former ones. Many come from a very few colleges— particularly the ones with which the presidents are connected (Obama loves Harvard; his predecessor, Yale), or have parents who owned banks, or other crucial connections. Even in sports, which is relatively competitive, think of the quarterbacks (RGIII) or golfers (Tiger Woods) who got a start even before age 10 learning from a parent or other close contact. And do you really think that all the current Hollywood stars with famous actresses or actors as parents just came out of genetically superior material?
I could go on, and I’m sure there is not a reader among you who couldn’t expand the list. In fairness, I should add some of my own early and lucky links, such as attending St. Xavier in Louisville, KY, perhaps the top high school in the state, where my family had gone for generations.
Researchers today work long and hard at trying to figure out which policies could help create a more mobile society, one where of starting at the bottom still left decent odds of making it to the top, or where success didn’t get defined so intensely by early connections or the track on which one started. So far we haven’t been very successful, though there are clearly some government steps that can be made, such as creating more equal access to subsidies for saving. But much is still determined by how we organize ourselves socially outside of government and just what we expect from our institutions. And, in truth, a thriving society should want successful parents to teach their kids all that they can, so simplistic leveling policies can easily start to threaten both their freedom and the wider societal growth that their successful kids can generate.
Still, I think it clear that many of the ways we select and discriminate hurt our society and hinder many from achieving their potential. So do I vote for MIT, or for MIT, or not at all?
I love the NCAA tourneys. I grew up in Louisville at a time when basketball was synonymous with Kentucky, Ohio, and Indiana. I give the NCAA and the networks credit for building up the excitement, tension, and attention in this national event. This year, my interest was especially piqued because five family alma maters (including mine) made it to the Sweet Sixteen of the men’s tourney: Dayton, Wisconsin, Louisville, Kentucky, and Virginia.
My undergraduate school, Dayton, was among the elite in college basketball in the 1950s—and, to some extent, the 1960s. Dayton fell in status over time because, at least relative to some other schools, it started stressing academics more and athletics less. These experiences color the lessons on economic competition, both positive and negative, that I draw from the tournaments each year.
When competition flourishes, it’s hard to establish a monopoly.
Okay, Harvard did make it to the men’s tourney this year, but credentials don’t go very far when your accomplishments determine whether you get ahead. This stands in contrast to the politics of academia. High school seniors focus intensely on college admissions because they correctly sense that future success depends not simply on what they learn than but where they can make connections to get onto a faster career track. If you’re an economist, for instance, your odds of a top job in either a Democratic or Republican administration multiply one-thousand-fold if you have a Harvard connection at some point in your education as opposed to, say, a University of Connecticut one. It’s tough finding a job teaching history almost anywhere if your PhD is not from a ranked university, no matter the brilliance of your work. The NCAA appeals to the common person, I think, because we identify with any field where anyone with enough talent and effort can succeed.
Create a level playing field (court), and you’d be amazed at the amount of upward mobility.
Many of my fellow social scientists despair of the lack of upward mobility in American society, with young black men especially singled out as left behind. Yet notice their success in basketball, where there’s pretty much a level playing field from the time of birth. If you can run circles around me on the court, I can’t rise above you by turning to Daddy’s friends or the connections available only in higher-income communities. (Then again, maybe I can succeed in athletics by convincing the Olympic Committee to adopt some new sport played by an elite few. How many kids in inner-city Detroit have access to $100,000 bobsleds or a “playground” for luges?)
Money still matters—a lot.
As the tourney goes on and my position in the office bracket pool falls lower, I start turning to my cynical side and some negative lessons. Though there’s close to true competition among athletes, schools still compete on more than talent. Large state schools have done quite well in recent decades with the move toward big-money sports and huge TV rewards, perhaps even more so in football than basketball because of the expense involved. Multimillion-dollar coaching salaries, extraordinary facilities, the latest in physical therapy, and multiple support staff to develop statistics or simply run around as lackeys—you name it, each of these can add to the probability of success. Given this world, I shouldn’t admit that I’m still thankful to former Wisconsin chancellor Donna Shalala for bringing big-time sports success back to Wisconsin; it’s not surprising that Miami hired her away after her stint in the Clinton administration.
Those who take maximum advantage of the letter of the law often do well.
Consider the new Kentucky style of “one and done”: recruiting players who never intend to study or complete more than a year of school once they become eligible for the NBA draft. It works. It’s easy to cast Kentucky coaches in the same light as those traders on Wall Street who gain by faster computerized trading or better access to soon-to-be public information. Or multinationals that shift their profits with the flip of a switch to some low-tax country. It may all be legal (or almost legal), but dodges like these don’t generate growth in a capitalist economy or additional value for watching sporting events. In many ways, the relative advantage for these winners comes mainly from avoiding having to compete under the same rules as everyone else.
The working stiff still gets shafted.
Everyone knows that there’s big money to be made in major college sports. One way to get rich is to leverage the work of others, then claim a large share of the total rewards from the enterprise for yourself. Perhaps the few college basketball players who make it to the NBA might claim that their college training was a good investment. For many other big-time college sports athletes, the reward can be a 50+ hour workweek at almost no pay and a loss of other educational opportunities (see Joe Nocera’s take on unionization of players as employees).
Suppose society is willing to pay $1 billion to be entertained by the NCAA tournament. The players can’t get paid, though they might get some very nice meals or plush accommodations, so much of the $1 billion is up for grabs by coaches, athletic department personnel, and others—some of whom walk away with huge rewards at their athletes’ expense. The NBA also gets a free training ground and media promotion of its future players.
To be fair, the school receives some of the profits, and it divides the funds among money-losing athletics or (god forbid) academics. Still, the working stiff doesn’t have much say in the matter one way or the other.
President Obama announced only one major new proposal during last night’s State of the Union address. Here’s what he said:
I agree with Republicans like Senator Rubio that it [the EITC] doesn’t do enough for single workers who don’t have kids. So let’s work together to strengthen the credit, reward work, and help more Americans get ahead.
Having worked on the EITC and other wage subsidies for a long time (and having introduced them at a crucial stage of tax reform efforts in the 1980s), I say it’s about time they were back on the table. Particularly since the onset of the Great Recession, policy discussions around helping those with lower incomes have focused on unemployment insurance, food stamps, and government-subsidized health insurance. Employment needs to move toward the front of our public policy agenda.
As necessary as these other social safety net programs might be—and am not trying to assess their merit here—they generally do not encourage people to stay in the workforce. Like the welfare of old, before the onset of reform of what then was Aid to Families with Dependent Children (AFDC), they provide the greatest benefit to those who do not work at all. While it’s debatable whether a simple EITC expansion increases total labor supply, there is almost no doubt that per dollar of cost it increases employment more than many other social welfare provisions.
Employment has been a vexing and growing challenge for the American economy. The share of all adults who work—also called the employment rate— was declining even before the Great Recession, particularly among the young and the near-elderly. Indeed, a declining employment rate represents a far bigger and longer-term issue than unemployment, since the NON-employment rate includes both those who are unemployed and those who drop out of or never join the labor force.
Concern over employment makes wage subsidies fertile ground for bipartisan consensus, if—and this is a big “if” in these partisan times—both sides can claim victory from the deal.
Consider the history the EITC. Almost every president since Richard Nixon has signed legislation establishing the EITC, expanding it, or making some provisions permanent. And it’s been bipartisan. The initial enactment and the largest increases all occurred under Republicans—Ford, Reagan, and George H.W. Bush, while the expansion during the Democratic Clinton administration was also quite significant.
Many who backed these legislative changes did not view the credit in isolation. They often favored it over some alternative—welfare for Senator Russell Long (the EITC’s first champion) and a minimum wage increase for President George H.W. Bush. Or they accepted the EITC as part of a broader tax or budget package. The EITC was never the subject of stand-alone legislative action.
That leads us to today, and what compromises might be supported by both political parties. I suggest two possibilities.
One, following our historical pattern, is to expand the EITC as an alternative to other efforts. At some point, recession-led unemployment insurance expansions will end. A bill to increase the minimum wage might go nowhere. Might an expanded wage subsidy be a compromise? A broader tax or budget bill always presents possibilities. The EITC offers one way to mitigate the net impact on lower-income populations, whether offsetting losses from new deficit reduction efforts, or ongoing cutbacks due to sequestration or dwindling appropriations.
The other is to tweak the EITC so it interacts better with other policy goals, such as reductions in marriage penalties—a cause often advocated by Republicans. The childless single workers identified by the president are not the only ones left out of any significant wage support. So also are many low-income married workers. Despite recent changes, the EITC still creates marriage penalties, particularly if a low-wage worker marries into a household already receiving the maximum credit. Such a low-wage worker often fares worse than a single person who gets nothing or almost nothing: once added to the household, the additional worker’s income can phase out his partner’s’ EITC benefits and reduce or eliminate any previous eligibility for other public benefits. Current government policy announces that it is more advantageous to stay unmarried.
Simply expand the current, very small, credit for childless single people, and marriage penalties would multiply in spades. I suggest including in any expansion low-wage workers who decide to marry or stay married, not only those single persons left out. Such an expansion would proceed largely along the same lines as the president’s, but also reduce marriage penalties .
In sum, the president’s best path to bipartisan support for the EITC is to stress more policies that favor employment, offer the expansion as a compromise from other efforts less favored by his opposition, and reduce marriage penalties.
If we want successful companies to contribute to the economy fairly, what should we be asking them for? More corporate income tax? A higher minimum wage? Health insurance for employees? More profit-sharing for employees? Restricted-stock payments of highly paid executives, so they can’t succeed individually when they fail their workers and shareholders?
We’ve tried all these approaches, but at different times and in a discombobulated way.
The corporate income tax, which once raised far more revenue than the individual income tax, now applies mainly to multinational companies, which find ways to hide their income in low-tax countries. Domestic firms often avoid the tax altogether through partnerships or similar organizational structures.
The minimum wage has been allowed to erode substantially. I earned $1.25 an hour while in high school in the mid-1960s; if that amount had grown at the same rate as per capita personal income, high school kids and others would now be earning $20 instead of $7.25.
Health insurance mandates for many employers is our new form of minimum wage. The ACA’s $2,000-per-employee penalty for larger employers that do not provide insurance is essentially an additional “minimum wage” requirement of at least $10 an hour, either in the form of a penalty or health insurance.
Profit sharing was at one time touted as the way to instill better work habits and allow employees to share in a firm’s success. Many employees, however, put all their savings in that one investment and got stuck with huge losses when their firms declined.
A 1993 Tax Act limited to $1 million annually the amount of cash and similar compensation that could be paid to top executives and still get a corporate tax deduction. Post-reform, stock options flourished, as did a more uneven distribution of income within firms.
More recent proposals to reform the corporate income tax set minimum taxes on multinational companies, regardless of the country in which the income was earned; increase the minimum wage on all firms; bump up or reducing the mandate on larger employers to provide health insurance (by adjusting either what services the insurance must provide or the size of the penalty for not providing insurance); regulate companies to disclose how unequal their compensation packages are; and require executives, particularly in financial companies, to invest more in the stocks and bonds that couldn’t be sold immediately and would fall in value should their companies falter.
What drives all these proposals, I think, is the notion that large organizations only become that way by being successful and that they owe the public something in return for this success. At some point, almost all companies achieve their size by generating above-average profits and sales growth. The Wal-Marts and Apples and Mercks of today, the General Motors and U.S. Steels and Pennsylvania Railroads of yesterday, have or had more power and money than most. Did they get there only through the hard work and ingenuity of a few people who deserve most of the rewards? Or were they also lucky? The first out of the block? The beneficiaries of scale economies, where only a few companies would survive or the winner would take all? Did they get government help along the way, perhaps taking advantage of the basic research that served as a prelude to their development? Or the protections of a developed legal system, along with a bankruptcy law that limited their losses? If so, doesn’t that legitimize the discussion of how their gains might be shared, either with their own employees or the public?
If we truly want to create a 21st century agenda, I wonder if we could come up with better, more efficient, and fairer policies by asking the broader question than by piecemeal approaches. The corporate income tax, for instance, has been put forward by the chairs of the congressional tax-writing committees, as well as the president, as a ripe candidate for reform. Yet, however much I might favor such reform as a pure tax issue, it’s only a piece of these broader redistributional questions. Might it be better, for instance, to abandon the attempt to assess any extra layer of corporate income tax, and instead ask larger firms to take a greater role in accepting apprentices, hiring workers during a downturn, sharing profits with workers, providing minimum levels of compensation but not necessarily all in health insurance, and restricting the ability of their higher-paid managers to walk away with bundles even while their firms fail?
Obviously, the devil is in the details. But we should at least have the conversation.
Advocates for many social policies—health care insurance, asset development for the poor, charitable deductions for those currently ineligible, child care subsidies, and countless others—often base their arguments on distributional grounds. Typically, lower-income households cannot avail themselves of these benefits or subsidies, and advocates deride the unfairness of it all.
We must be very careful when framing the issue this way. True, many incentives apply disproportionately and inappropriately to higher-income individuals. However, extending these incentives to those with lower incomes does not, by itself, create better policy or even increase fairness.
Put simply, if Congress grants additional incentives to low- and moderate-income households, it decides simultaneously to distribute more to them and to distribute it through a particular subsidy or incentive—and, in the case of incentives, that the benefit should go only to those who opt to use it. Each of these choices, not just any one of them, must be justified in its own right.
Take health insurance under the Affordable Care Act. This legislation offers some lower-income households subsidies of nearly $20,000 and some middle-income households subsidies of $10,000. These households must, however, use this subsidy to buy health insurance, not more education or food or transportation. Those who don’t buy health insurance get none of this subsidy, even if they are poor.
Another aspect of this legislation imposes a minimum burden on many employers who do not purchase health insurance of $2,000 per full-time worker. That’s equivalent to increasing the minimum wage by about $1.25 an hour for someone who works 1,600 hours a year. But, the mandate is to pay the government that money or give employees health insurance. The mandate cannot be met by bumping up the employee’s cash earnings by an equivalent amount.
In effect, we must distinguish between the distribution of benefits or taxes and their allocation or efficiency. Even if we conclude that it would be fairer to give more benefits to those with lower incomes, it does not follow that any benefit they receive is the best use of that money. If a housing ownership subsidy, a housing rental subsidy, and handing out money have the same overall distributional consequence and cost, we still need to decide which, if any, of these options is most effective use of that money.
To give another example, over many years Congress increased the standard deduction in the tax system in order to help lower- and middle-income taxpayers. The standard deduction was higher than what most households would get if they itemized available deductions—in 2013, a $12,200 standard deduction for a couple is far more valuable than $6,000 in mortgage interest and charitable deductions. Increasing the standard deduction increased progressivity, even while it reduced the share of homeownership and charitable deduction benefits received by those with lower incomes. One can hardly say these increases were “unfair.”
Proposals to provide various benefits or incentives to lower-income households, as opposed to simply giving them more money or providing other benefits, must rest on some grounds other than progressivity. Some work and saving policies that give a “hand up” rather than a “hand out” might provide better incentives for work and saving, with side benefits to the rest of society. More asset-development incentives at lower income levels might create more democratic ownership of wealth, enhance retirement security more optimally, or grant extra benefits to society when homeowners take better care of their living quarters than renters. Requirements to spend subsidies on health insurance may reduce the number of people able to game the system by seeking free care when they get sick and avoid any contribution to the cost of their health care. Many of these choices are not easily assessed quantitatively, but they are primarily efficiency arguments, not fairness arguments.
At the same time, we still want to look at the distribution of any benefit to see just who receives it and how any program allocates its monies. For instance, if homeownership creates positive gains for society, might it not be better to spend the same amount of money to encourage homeownership among all income classes than to spend disproportionate amounts on those buying second homes or McMansions? Looking at distributional results helps us make such judgments by assessing the actual rather than intended impact of the policy.
Recent stories about Chicago’s pension crisis represent only the latest in a long series of announcements about poorly funded state and local pension plans. Detroit’s declaration of bankruptcy shows one possible consequence of such neglect, with many of the city’s retirees fearing drastically reduced pension payments. This isn’t the first time that retirees and workers have found their financial stability threatened, either: many private pension plans have failed in such industries as steel production and airlines.
While there’s often no easy or right answer for who should pay for these uncovered burdens, as a society we’ve pretty much decided that in this arena, as in so many others, the young should get the shaft.
Often poorly funded or badly designed to deal with risk, many pension plans need only some catalytic economic change, whether from greater competition or an economic downturn, to start sinking rapidly. A promise for the future, underfunded from the past, shifts liabilities forward in time, where they get passed around like a hot potato. No one—employer, worker, or taxpayer—wants to get burned with the cost of past mistakes, or even part of it. But the money that should have been set aside has long been spent, so someone at some time must cover the shortfall.
Consider why government or private employers underfund a plan in the first place. In a private plan, underfunding allows higher wages to current workers, bonuses to top managers, and cash withdrawals to partners and dividend recipients. In a public plan, elected officials can give higher current compensation to workers or more services to the population while letting taxpayers off the hook–temporarily, of course.
When people see this inadequately supported edifice begin to crumble, they make a run on the bank. Given the increased threats to future wages, job security, and dividend payments, everyone has an incentive to get what they can while the getting is good. Keep wages up as long as possible, even if that means further weakening pension plans. Increase those bonuses to top managers, who suggest their skills are needed now more than ever to dampen the firm’s or agency’s fall. Lobby Congress and state legislators to allow employers to defer better funding of their pension plans so these other cash outflows can continue. And maintain pension payments for current and near-retirees regardless of the hit on those not yet retired.
Traditional actuarial calculations—the formulas by which actuaries determine whether employers adequately fund their plans—make matters worse. These formulas often allow employers to play Wall Street with their pensions. A firm or government borrows at low interest rates on one side of the ledger, then invests in riskier assets with higher expected returns on the other side. Even dodging the question of when such practices generally make sense, employers often push their actuaries to use outrageous assumptions about rates of return on those risky assets.
For instance, many state and local governments today assume a return of around 8 percent on a mixed portfolio of bonds and stocks in a world where interest-bearing bonds often yield only 3 or 4 percent at best and the earnings-to-price ratio (the effective rate of return earned by corporations relative to the price of their stock) is about 6 percent in real terms. If these employers want to play the markets with their pension plans, then the plans should be overfunded enough to handle the risk. Alternatively, governments and firms should make their projections assuming a less risky but lower rate of return. If the risk-taking strategy works, then future (not current) funding payments can be lowered.
When the firm or government declares bankruptcy, many bondholders, pensioners, and remaining workers deserve sympathy. Certainly the retiree who might have to rely on less than expected, the bondholder who accepted a lower rate of return in exchange for what she thought was a less risky investment, and the taxpayer who often gets caught covering everyone else’s problems. Sometimes these are the same people who benefited from the excessive payments (made possible, first, when inadequate funds were put into the pension plan, and then, during the delay between recognizing the problem and taking some later action such as bankruptcy). But often they are not.
While these claimants may battle each other, they almost always collude against the young. The use of unreasonable actuarial assumptions establishes this pattern by forcing future workers and taxpayers to cover shortfalls. In addition to covering some of those losses, new workers for the state or the firm, if it survives, will be granted far fewer pension or retirement plan benefits than even current workers, not merely those already retired.
Unequal pay for equal work becomes the new standard. Age discrimination against the old is illegal, but not the young. State pension plans now typically provide tiered benefits, with successively lower benefits for newer workers. In fact, states are now starting to provide negative employer benefits to the young by giving them back less in benefits than their contributions plus some modest rate of return.
The same holds in different ways in private industry. We are all familiar with the higher cash and pension benefits being paid to older airline pilots and automobile workers, among others. Almost no one addresses the consequences for wealth-building, including retirement adequacy, for today’s young. That’s tomorrow’s problem.
Or is it? Seems like we’ve heard that claim before.