Sunday, February 13, 2011

A Terrible Divide

"A Terrible Divide," the division between "the have and the have nots" is an interesting OP-ED about our country's economic crisis and the effects it has on the livelihood of the American people. Herbert says that there are not enough tax revenues to pay for basic public services. He blames the wars in Afghanistan and Iraq, the "rich not sharing their fare share of the tax burden," and the lack of available jobs that pay decent wages....which makes it impossible to increase the tax rate among ordinary workers. Herbert believes the budgets cuts to Medicaid, Social Security and public schools will be detrimental.

While Herbert states that "new ideas on a grand scale" need to be proposed and enacted to aid American workers, he does not provide readers with suggestions for improvement. Perhaps we can look abroad to countries such as Japan, Britain, and France, that believe that services such as health care for example are a public good. Even with the recent health care reform, our philosophy in the United States is certainly not rooted in this idea. So what should be do to prevent citizens from permanently living a low standard of living? How can Republicans and Democrats come together and make change before we face complete "social destabilization"?

[P.S. Patty Landers- Herbert uses the Center on Budget and Policy Priorities as a reference!]


Anna Mikhailovich said...

that's why they make chocolate and vanilla....

Patrick_Landers said...

Haha- thanks Anna for the shoutout! In response to the editorial, I have a few points. Generally Herbert's writing bores me, and like most commentators his analysis of the issues is simplistic. Still he touches on a few good points.
The idea of an economic divide in American society is obviously debated. While skeptics are right to point out the flaws in the exaggerated claims about increasing inequality, it is true that median wages and nearly every measure of low- and moderate-income success have either stagnated or declined in recent decades. This increasing divide in incomes will eventually trickle down to wealth disparities, which we are starting to see. This eventually impacts social mobility, which the United States has always had less of than our peers (Western Europe and Commonwealth nations). What we actually have is less mobility for those moving up from the very bottom of American society and those moving down- we have “more stickiness” in our class extremes, while our middle mobility is comparable to our peers. This problem appears to be getting worse. Back to the economic divide point, we talked about this in my Economics of Poverty and Income Distribution class at Hamilton with Professor Hagstrom (which by-the-way is definitely not a hotspot of liberal ideas on the issues, the class primarily was a mainstream economics approach so there was a lot of skepticism for government programs and real-world problems). Economic downturns have always disproportionately hurt the poor, working, and middle-classes. It isn’t surprising that their economic standing is more tied to the business cycle, since they naturally are closer to scraping by and are more dependent on the strength (or tightness) of a labor market (full employment, high wages, etc.). However, they’ve always recovered during economic growth periods. Anyway, starting in the 2000s and maybe even before, we've seen this pattern change in that the poor and middle-class don’t recover or prosper during economic booms. This is a major problem not only for the declining living standards for most Americans, but also because it’s questionable whether sustainable economic growth is possible unless it’s based on a broad base that includes the middle- and working-classes. Some respected economists even wonder whether the 2000s concentration of wealth and prosperity gains among the most affluent (even as all American workers’ productivity increase- which should result in wage gains, which they never got) may have partially instigated increasing economic volatility and risk-taking (as seen in the housing and financial sectors). So that’s a problem. Also, this was discussed at an Aspen Institute Roundtable I attended this week featuring Obama’s Chairman of his Council of Economic Advisers Austan Goolsbee. People discussed how there is a thriving debate among many economists (not just among strongly liberal ones) that rising inequality could threaten the viability of stable economic growth. If 95% of the United States population is either treading water or declining during an economic boom like the 2000s, that is a point of concern which points to major economic structural problems. In conclusion, this idea of a growing economic divide is important in that we may just be seeing the full effects of decades of stagnant gains for most Americans, how this a problem as their standards of living decline comparatively, and how this might be a problem for the entire country’s economic growth.

(more points forthcoming…)

Megan said...

Any suggestions for how to fix it?

Patrick_Landers said...

In terms of public workers, I’d note that Herbert is correcting in citing CBPP data which shows that the public sector has experienced major declines in workforce during the recent recession. (Full disclosure- I intern there for those of you who don’t know). This is going to get worse over the next year or two as states face what I believe people at my center have referred to as possibly the worst fiscal year for states since the Great Depression (major state structural problems in how money is spent, increasing population and demand for certain government services [education, health care], a horribly antiquated and inefficient revenue system that could collect the same amount of money in a much less distortive manner, combined with short-term cyclical problems of economically depressed revenues while spending on little things like poverty assistance goes up during a recession, combined with a pull-back of federal government assistance that existed for the last two years through the federal stimulus package).
I believe Herbert is pointing out that even public sector workers are suffering. This touches on a debate which has recently flared up- public vs. private sector workers pay and benefits. Quick points on this: public sector workers do better, though it’s important to note that historically speaking their trends aren’t unusual. Basically workers in the private sector have seen their relative situation to the value of capital or other factors decline in recent decades, while public sector workers have been able to maintain their positions (largely due to unions).
Public works with low or moderate amounts of skills and education may do better than comparable private sector workers (this point is contested), while the many high-skilled government workers do way worse than their private sector counterparts (generally there’s a consensus on this across the political spectrum and economic field). You also have to control for two factors when making private vs. public comparisons. Public workers are generally more educated, older, more experienced and have other factors in their favor which need to be controlled for in order to make an apples to apples comparison. (I know CEPR and EPI (left-wing think tanks) have released reports recently on these questions, while I know the Heritage Foundation is releasing conservative responses shortly [and Cato has stuff as well]). Public workers do make out better in terms of benefits and retirement pensions and the like than private sector workers (also generally not disputed, though a better and more accurate comparison which reveals less disparity is between government and employees of large firms).
There is a debate about whether the private sector has seen its relative strength decline in comparison to the other economic input, capital. (Labor is a proxy for the interests of low and moderate-income workers, while capital is largely controlled and benefits the rich and ultra-rich). This would explain the problems workers (and the bottom and middle spectrums of Americans) have seen in their living standards in recent decades while the wealthiest 2% (or some argue just 1% of just .1% or even just .01%) have done very well. This might be a problem if broad-base distribution of economic improvements (ala productivity gains and such) is essential for robust, sustainable economic growth.
Please let me know if you want sources for any of my statements.
P.S Megan, I'm getting to possible solutions I swear. I just want to work through each point because I think Herbert( and Anna in her commentary) touched on some really important issues!!!)

Patrick_Landers said...

Next Herbert discusses spending cuts related (implicitly) to balancing our budgets. I'm just going say he's right-on-the-money when he says:
"Standards of living for the people on the wrong side of the economic divide are being ratcheted lower and will remain that way for many years to come. Forget the fairy tales being spun by politicians in both parties — that somehow they can impose service cuts that are drastic enough to bring federal and local budgets into balance while at the same time developing economic growth strong enough to support a robust middle class. It would take a Bernie Madoff to do that."

Serious spending cuts are being implemented which will have a serious impact on millions of Americans. I accept that spending cuts are necessary in addition to revenue increases in order to balance our nation's fiscal situation at the state and local levels of government. However, we need to be smart about what programs we cut since those decisions have serious impacts on basic items like food, health care, housing, education, and other necessities for millions of Americans- many children.

Now onto the tax system (and then hopefully how to address our problems)
Btw, I encourage people to criticize my comments or offer their thoughts.

Patrick_Landers said...

Taxes: Everyone agrees our tax system sucks and could be more efficient even if we just wanted to raise the same amount of revenue. Many people like to cite how small percentages of Americans pay most of the taxes and many Americans pay few or no taxes. A) That ignores how incomes and wealth is incredibly concentrated in the hands of a few, so even a flat income-based taxation system would see huge variations in taxes paid. B) Those figures ignore other taxes- federal payroll taxes and state and local taxation systems which are all less progressive than the federal income tax system. C) You can't look at taxes in a a vacuum- you should also look at the value of benefits distributed and economic decisions distorted- the poor aren't making out like bandits in terms of services provided, and the economic interests of the wealthiest 2% or less of our country are dramatically better served by our current taxation system. Even if we collected the same amount of revenue, there are lots of ways we could broaden our taxation system (more people paying into it) that would actually not effect it's progressivity because the high tax rates of the rich are moderated by their credits, exemptions, and deductions which allow them to pay much lower effective taxation rates.
So clearly revenue-neutral reform is needed and supported by most Republicans in Congress. They shy away from saying it often, but one thing I do at work is track media coverage and multiple senate and house hearings on these issues each week, and I can tell you many Republicans accept that we will need to see revenue increases as well as spending cuts in addressing our nation's fiscal situation (Bowles-Simpson which attracted 5 Republicans, 5 Democrats, and 1 independent had 66% spending cuts, 33% revenue increases to address our nation's fiscal problems, while the other major deficit bipartisan reduction plan Domenici-Rivlin suggested a 50/50 split. A non-partisan report from policy experts- the most exhaustive report by the way- see also found that a mix was necessary.)
Why do Republicans accept the need for revenue increases from an improved tax system? This poll ( shows how even Republicans are against most spending cuts. Most people think there is lots of waste in government spending, but love all these problems. There is not nearly enough waste to cut that could address our problems, and programs that Republicans (but not everyone) hates like foreign aid contain relatively small amounts of money. People hat this because they think it's 10% of our budget and think it should be less (say 5?). However, it's actually less than 2% so polls of Americans actually policy preferences would suggest massively increasing spending on this one area- one of the few areas where Americans, when not informed of facts, actually want to cut. Smart Republicans like Boehner know that people hate spending cuts with a passion in reality (while loving it in the abstract)- there is probably a medium point of spending cuts and revenue increase that will be needed to address our nation's problems and satisfy the desires of Americans on this issue. You are about to see a massive firestorm over the cuts Republicans in the House have proposed- just you wait.

Patrick_Landers said...

Ok, next I'll quickly cover an argument why we need revenue increases even if we just want to maintain the provision of services we currently expect (this goes against the argument Republicans put forth for spending caps based on historical averages of government spending). Basically, people point out how government spending was about 20% of GDP over the last few decades, so we should set spending and revenue levels to get us to that point. However, my place of work has put out a really good report showing out those historical averages don’t hold up for the government over the next few decades. If we lower spending and revenue amounts that low, we’ll have to implement massive cuts in government provision of so many services (Basically the most essential ones, our long-term fiscal problems are due to 2 factors: 1, the aging of our population, and 2-our country’s ridiculously high health care costs per person, which in Medicare are the same as the private sector and in Medicaid are actually less. It’s not a government program problem, it’s a health care sector problem which needs to be addressed. Otherwise all of our cuts are going to come from basic programs that Americans love like Food assistance and education.) Back to the point, here’s CBPP’s report on this issue.
Basically, “That’s because the proposal, which would take effect in 2013 and phase in over 10 years, does not account for fundamental changes in society and government: the aging of the population, substantial increases in health care costs, and new federal responsibilities in areas such as homeland security, veterans’ health care, and prescription drug coverage for seniors. These factors make the spending levels of an earlier era inapplicable for today’s discussions about how to reduce looming budget deficits and put the budget on a sustainable path in the coming years.”
“Simply put, aiming to limit spending to the recent historical average of 20.6 percent of GDP might be appropriate for the years ahead:
 If the age distribution of the population remained the same as it was in recent decades,
 If health care costs grew no faster than the economy,
 If Medicare had no drug benefit,
 If we were willing to leave more than 30 million Americans without health coverage,
 If there were no terrorist threats and hence no need for homeland security spending,
 If no wounded veterans of Iraq and Afghanistan needed medical care and income support; and
 If decisions and events over the last decade had not nearly doubled the national debt as a share of GDP.
“But that’s not the world in which we live, and it’s not the target at which we should aim.”

Patrick_Landers said...

Ok. I'll finish off Herbert's article (and then move onto the points Anna and Megan introduced). We'll see (and need) spending cuts and revenue increases to address our nation's fiscal problems while supporting private sector innovation and maintaining a basic social safety net for the poor and working class (about 14% of federal government spending is for safety net programs, plus another 6 or 7% (roughly) for Medicaid). That doesn't include the roughly 33% we spend on programs (Social Security, Medicare) for the elderly which Americans of all political-stripes overwhelmingly love. Plus 20% we spend now on defense, 6% on debt interest payments, and the other 19% we spend on programs like scientific/medical research (2%), transportation infrastructure (3%), education (3%), and international aid (1%).
Herbert (and more importantly) Obama are correct in that we can't afford to cut investments in key areas of our economy which are essential to generating robust economic growth which is key to allowing us to control our deficits and give us breathing room to implement massive changes to bring our government's fiscal situation into balance.
We also need to make sure that this future economic growth is broad-base (aka includes the 95% of Americans we’d consider to be middle- or working-class or poor), otherwise it will be unsustainable (many economists are analyzing this question). I think I’ve discussed this already, but growth concentrated in the hands of the few is a problem because it creates volatility (in the financial sector), promotes frustration (as most Americans see themselves slipping further behind), and makes the growth unsustainable as there aren’t enough Americans doing well enough to maintain demand. Our current problems with joblessness and a divide among Americans between those doing well and those falling behind must be addressed so that way our entire nation can prosper into the future.

Patrick_Landers said...

Okay- so on to actual ideas. in terms of addressing out nation's fiscal situation we can do a few things: 1) modernize our tax system by broadening the base (cutting tax expenditures). You can then lower rates to make the reform revenue-neutral, or if necessary (as I think likely) you can raise the rates to maintain certain government programs and spending as determined by negotiations between Republicans and Democrats on this issue 2) reform Social Security to make it deficit-neutral on its own (and not use cuts in SS to help balance the unified budget's imbalances). This reform will require cuts in benefits provided (either raising the retirement age, lowering COLAs and other automatic formulas, making benefits progressive, or something else) and increases in revenue into the system (increase the % of income affected by SS taxes for instance). 3) Make the defense (not really defense- more accurate title is security and military spending) budget more transparent and eliminate waste (there is actually a lot of it in this portion of the federal budget) while enabling hard decisions to be made about what it takes to secure our national security priorities. See George Will's recent editorial on this (and he's very conservative, it's not just liberals who realize this is necessary) .
We also need to ensure strong, robust economic growth (see my previous comments) This is the second most important point (or maybe the most...)
But most importantly (and the issue Anna rightly touched on) is health care costs! We need to get them under control and comparative to other developed nations. How do we do this (looking after health care reform, aka ACA, aka ObamaCare).

Ryan Karerat said...

TJE said...

TJE said...

Two Americas:

TJE said...

Anna, I removed by snide comments about Mr. Herbert. Just before I read your post, I had read this Facebook comment by my older son about a more recent Herbert column:

"Only the tortured analysis from Herbert could make Egypt's "lower-case democrats" fighting for freedom seem an obvious analogue for American "Capital-D-Democrats" fighting for justice. This has every red herring in the book including the notion that conservatives triumph through high-priced lobbyists; in fact, the lobbying class does as much to advance the reverse-mercantilism of today's modern liberalism."

Mr. Herbert does seem to represent the old hat wing of NYT liberalism, while Paul Krugman represents the tin foil hat wing.