Tag: income

Senator Sanders and the Fixed Pie Fallacy

“The rich are getting richer and the poor are getting poorer.” Senator Bernie Sanders first said those words in 1974 and has been repeating them ever since. Senator Sanders is not alone in his belief. Three out of four Americans agree with the statement, “Today it’s really true that the rich just get richer while the poor get poorer.”

Senator Sanders is half right: the rich are getting richer. However, his assertion that the poor are becoming poorer is incorrect. The poor are becoming richer as well.

Economist Gary Burtless of the Brookings Institute showed that between 1979 and 2010, the real (inflation-adjusted) after-tax income of the top 1% of U.S. income-earners grew by an impressive 202%. He also showed that the real after-tax income of the bottom fifth of income-earners grew by 49%. All groups made real income gains. While the rich are making gains at a faster pace, both the rich and the poor are in fact becoming richer.

In addition to these measurable real income gains, decreases in prices have given the poor increased purchasing power, helping to raise living standards for the worst off in society. As a result of falling prices such as for groceries and material goods, along with gains in real income, Americans have more income left after basic expenses.

Americans Have More than They Realize

According to Gallup, more Americans think of themselves as “have-nots” today than at any point since Gallup began posing the question almost thirty years ago, while fewer Americans see themselves as “haves.” (Please see Emily Ekins’s earlier post for an in-depth analysis from a different angle). But do Americans actually have less in 2015 than in 1988? Let’s dig into the data to see whether Americans might have more than they realize.

2015 is the first year when Americans spent more money dining out than they spent on groceries. Let’s examine why that might be. In 2015, U.S. GDP per person (adjusted for inflation) reached an all-time high. At the same time that average personal wealth is rising, many necessities like food are going down in price. As a result, spending on the basics takes up a smaller and smaller share of an American’s personal disposable income—dropping from 39% in 1988 to 32% in 2013. This means that Americans have more money left at the end of the day, which they can then choose to save, invest, or spend on luxuries like dining out.

Not only are Americans wealthier on average, but they are also working less. The average American worker in 2015 works 30 fewer hours in a year than her counterpart in 1988, and yet is almost $18,000 dollars richer in real terms.

HumanProgress.org advisory board member Mark Perry recently pointed out that today’s young Americans may actually be the luckiest generation in history, based on what they can buy with earnings from a summer job. And increases in real wealth do not capture technological advances, which also contribute to rising living standards. The quality and variety of available goods is improving across the board. Almost no one had a cell phone in the United States back in 1990, but today they’re ubiquitous—and more useful, with an app for just about everything.

In many ways, Americans have more today than ever before: more leisure time away from work, more disposable income left after basic expenses,  more choice in what they buy, and more advanced technologies at their fingertips.  Of course, there are still people who live in genuine need. The Great Recession and various growth-retarding policy decisions have done great harm, especially to the poor. Still, if the many positive trends that we are seeing continue, then hopefully more Americans will come to count themselves among the haves instead of the have-nots. To learn more about improving living standards in the United States and beyond, pay a visit to HumanProgress.org.


President Obama’s Dubious Claims about Incomes of the Top 1% vs. the Bottom 90%

“In the last decade, the average income of the bottom 90 percent of all working Americans actually declined,” Obama said on April 13. “The top 1 percent saw their income rise by an average of more than a quarter of a million dollars each.”

Politi-Fact, partly on the basis of my own research, generously rates the president’s claim as “Half True.”

The truth is that the President’s source, Thomas Piketty and Emmanuel Saez, refer only to pretax, pretransfer income reported on individual tax returns (as opposed to being sheltered inside a corporation or IRA or simply unreported), and they have no data on the bottom 90%. Worst of all, they leave out transfer payments, which amounted to $2.3 trillion last year — 44% as large as all private wages and salaries ($5.2 trillion). The data also excludes refundable tax credits, which added about $170 billion to low and middle incomes in 2009 according to the the Joint Committee on Taxation (the EITC, child credit and Obama’s “making work pay” credit). And the Bureau of Economic Analysis estimates that gross income reported on tax returns is about $1 trillion less than actual income.

As for the top 1%, my research shows that top investors report more capital gains and dividends when those tax rates go down, which is why they paid such a big share of income taxes (up to 40%) in 1997-2000 and 2003-2007.  Raise the tax on dividends and capital gains to 23.8%, as Obama hopes to do by 2014, and somebody else would have to pay the taxes now paid by the top 1%. Using income reported to the IRS to measure actual living standards is foolhardy at best.

Rand Paul Not So Hardcore On Farm Subsidies

Rand Paul, after setting the newswires alight with his controversial stance on the Civil Rights Act, is busy touting his “moderate” credentials.

Moderate, in this case, being a euphemism for “laughably timid.”

In a recent interview with a Kentucky radio station, Paul rejected the charge of his political opponent that he was opposed to farm subsidies. Not true, sayeth Paul. He is “much more moderate than that.”

According to an article in yesterday’s  Lexington Herald-Leader, Paul’s less-than-radical view on farm subsidies is that, well, maybe dead people should not receive them:

Let’s just agree that we will get rid of subsidies for dead farmers first,” he said.

After that, Paul said, the government should restrict subsidies to farmers who make more than $2 million a year.

Paul said 2,007 farmers last year whose income was greater than $2 million received subsidies.

“Let’s agree that maybe we can cut them out,” he said.

Despite his “ideologically pure” stance on the CRA, Rand Paul can compromise on issues of freedom when he wants to, for example on drug laws and gay marriage, as Tim Lee points out.  And now, apparently, he is to the left of Barack Obama (who favored a $500,000 adjusted gross income limit) when it comes to farm subsidies. Paul’s choice of when to be ideologically pure is curious indeed.

HT: Don Carr at the Environmental Working Group

Six Reasons to Downsize the Federal Government

1. Additional federal spending transfers resources from the more productive private sector to the less productive public sector of the economy. The bulk of federal spending goes toward subsidies and benefit payments, which generally do not enhance economic productivity. With lower productivity, average American incomes will fall.

2. As federal spending rises, it creates pressure to raise taxes now and in the future. Higher taxes reduce incentives for productive activities such as working, saving, investing, and starting businesses. Higher taxes also increase incentives to engage in unproductive activities such as tax avoidance.

3. Much federal spending is wasteful and many federal programs are mismanaged. Cost overruns, fraud and abuse, and other bureaucratic failures are endemic in many agencies. It’s true that failures also occur in the private sector, but they are weeded out by competition, bankruptcy, and other market forces. We need to similarly weed out government failures.

4. Federal programs often benefit special interest groups while harming the broader interests of the general public. How is that possible in a democracy? The answer is that logrolling or horse-trading in Congress allows programs to be enacted even though they are only favored by minorities of legislators and voters. One solution is to impose a legal or constitutional cap on the overall federal budget to force politicians to make spending trade-offs.

5. Many federal programs cause active damage to society, in addition to the damage caused by the higher taxes needed to fund them. Programs usually distort markets and they sometimes cause social and environmental damage. Some examples are housing subsidies that helped to cause the financial crises, welfare programs that have created dependency, and farm subsidies that have harmed the environment.

6. The expansion of the federal government in recent decades runs counter to the American tradition of federalism. Federal functions should be “few and defined” in James Madison’s words, with most government activities left to the states. The explosion in federal aid to the states since the 1960s has strangled diversity and innovation in state governments because aid has been accompanied by a mass of one-size-fits-all regulations.

For more, see DownsizingGovernment.org.

The Paucity of Poor Kids in Many Public Schools

There’s a widespread belief that public schools are homogeneous and all inclusive while private schools are bastions of the elite. This was proven to be a myth decades ago by the renowned sociologist James Coleman, and as far as I know, that pattern of findings hasn’t changed in recent years.

Nevertheless, the myth continues. A new Fordham Institute paper provides a partial antidote, pointing out that quite a few public schools enroll virtually no low-income kids, making them bastions of the elite. Where the Fordham paper trips up a bit is in calling these elite public schools “private public schools.” As already noted above, private schools are, on average, better economically integrated than their government counterparts, so this phrase is exactly backwards and, as Sara Mead points out, is quite a slap in the face to the many private schools that do yeoman’s work serving large numbers of low-income students. Still, good to have folks taking note of these data.

Time to Lose the Trade Enforcement Fig Leaf

During his SOTU address last week, the president declared it a national goal to double our exports over the next five years.  As my colleague Dan Griswold argues (a point that is echoed by others in this NYT article), such growth is probably unrealistic. But with incomes rising in China, India and throughout the developing world, and with huge amounts of savings accumulated in Asia, strong U.S. export growth in the years ahead should be a given—unless we screw it up with a provocative enforcement regime.

The president said:

If America sits on the sidelines while other nations sign trade deals, we will lose the chance to create jobs on our shores. But realizing those benefits also means enforcing those agreements so our trading partners play by the rules.

Ah, the enforcement canard!

One of the more persistent myths about trade is that we don’t adequately enforce our trade agreements, which has given our trade partners license to cheat.  And that chronic cheating—dumping, subsidization, currency manipulation, opaque market barriers, and other underhanded practices—the argument goes, explains our trade deficit and anemic job growth.

But lack of enforcement is a myth that was concocted by congressional Democrats (Sander Levin chief among them) as a fig leaf behind which they could abide Big Labor’s wish to terminate the trade agenda.  As the Democrats prepared to assume control of Congress in January 2007, better enforcement—along with demands for actionable labor and environmental standards—was used to cast their opposition to trade as conditional, even vaguely appealing to moderate sensibilities.  But as is evident in Congress’s enduring refusal to consider the three completed bilateral agreements with Colombia, Panama, and South Korea (which all exceed Democratic demands with respect to labor and the environment), Democratic opposition to trade is not conditional, but systemic.

The president’s mention of enforcement at the SOTU (and his related comments to Republicans the following day that Americans need to see that trade is a two way street – starts at the 4:30 mark) indicates that Democrats believe the fig leaf still hangs.  It’s time to lose it.

According to what metric are we failing to enforce trade agreements?  The number of WTO complaints lodged? Well, the United States has been complainant in 93 out of the 403 official disputes registered with the WTO over its 15-year history, making it the biggest user of the dispute settlement system. (The European Communities comes in second with 81 cases as complainant.)  On top of that, the United States was a third party to a complaint on 73 occasions, which means that 42 percent of all WTO dispute settlement activity has been directed toward enforcement concerns of the United States, which is just one out of 153 members.

Maybe the enforcement metric should be the number of trade remedies measures imposed?  Well, over the years the United States has been the single largest user of the antidumping and countervailing duty laws.  More than any other country, the United States has restricted imports that were determined (according to a processes that can hardly be described as objective) to be “dumped” by foreign companies or subsidized by foreign governments. As of 2009, there are 325 active antidumping and countervailing duty measures in place in the United States, which trails only India’s 386 active measures.

Throughout 2009, a new antidumping or countervailing duty petition was filed in the United States on average once every 10 days.  That means that throughout 2010, as the authorities issue final determinations in those cases every few weeks, the world will be reminded of America’s fetish for imposing trade barriers, as the president (pursuing his “National Export Initiative”) goes on imploring other countries to open their markets to our goods.

Rather than go into the argument more deeply here, Scott Lincicome and I devoted a few pages to the enforcement myth in this overly-audaciously optimistic paper last year, some of which is cited along with some fresh analysis in this Lincicome post.

Sure, the USTR can bring even more cases to try to force greater compliance through the WTO or through our bilateral agreements.  But rest assured that the slam dunk cases have already been filed or simply resolved informally through diplomatic channels.  Any other potential cases need study from the lawyers at USTR because the presumed violations that our politicians frequently and carelessly imply are not necessarily violations when considered in the context of the actual rules.  Of course, there’s also the embarrassing hypocrisy of continuing to bring cases before the WTO dispute settlement system when the United States refuses to comply with the findings of that body on several different matters now.  And let’s not forget the history of U.S. intransigence toward the NAFTA dispute settlement system with Canada over lumber and Mexico over trucks.  Enforcement, like trade, is a two-way street.

And sure, more antidumping and countervailing duty petitions can be filed and cases initiated, but that is really the prerogative of industry, not the administration or Congress.  Industry brings cases when the evidence can support findings of “unfair trade” and domestic injury.  The process is on statutory auto-pilot and requires nothing further from the Congress or president. Thus, assertions by industry and members of Congress about a lack of enforcement in the trade remedies area are simply attempts to drum up support for making the laws even more restrictive.  It has nothing to do with a lack of enforcement of the current rules.  They simply want to change the rules.

In closing, I’m happy the president thinks export growth is a good idea.  But I would implore him to recognize that import growth is much more closely correlated with export growth than is heightened enforcement.  The nearby chart confirms the extremely tight, positive relationship between export and imports, both of which track similarly closely to economic growth.

U.S. producers (who happen also to be our exporters) account for more than half of all U.S. import value.  Without imports of raw materials, components, and other intermediate goods, the cost of production in the United States would be much higher, and export prices less competitive.  If the president wants to promote exports, he must welcome, and not hinder, imports.