Kevin Drum - February 2014

Relearning the Past: Yes, Rising Inequality is Bad for Economic Growth

| Thu Feb. 27, 2014 12:36 PM EST

Does high income inequality lead to lower economic growth? There are two main reasons to think it might. The first is simple: rich people spend a smaller percentage of their income than the non-rich. Thus, as more and more income accrues to the rich, we get less net consumption and thus slower growth.

The evidence on this score turns out to be pretty hazy. It seems logical, but if you look at consumption trends over time you just don't see it. But there's a second theory that's more interesting: as inequality rises, the rich increasingly need to find good places to invest all the money they're accumulating. Eventually concrete business opportunities start to become scarce, so they look around for other places to put their money to work. In practice, this means the rich become net lenders to the middle class. They can hardly be loaning money to each other, after all, since they all have more of it than they can use for current consumption.

So the rich lend money to the middle class, which is an eager recipient because their incomes are stagnant. But as the debt load of the middle class increases, this lending becomes ever more Byzantine and ever more risky. Eventually, the middle class simply can't take on more debt and the whole system comes to a screeching halt. The result is an economic recession as consumers try to work themselves out from under the mountain of debt they've run up.

There's an intriguing amount of evidence to back up this theory, and in a new report released yesterday a team of IMF researchers provides another reason to believe it. They find that high inequality is indeed associated with slower growth, but the mechanism for that slower growth comes in reduced growth spells. That is, it's not that countries with high inequality have steady growth rates that happen to be a little lower than countries with low inequality. Rather, they have shorter spells of economic expansion. In particular, the authors find that a 1-point increase in a country's GINI score (a measure of inequality) is associated with a decrease of about 7 percent in the length of its growth spells.

In other words, countries with high inequality simply can't maintain economic booms as long as countries with lower inequality. This is consistent with the idea that growth in these countries is driven partly by the rich loaning money to the middle class, which is obviously less sustainable than growth driven by an increase in middle-class wages. In high-inequality countries, growth is too dependent on financialization and leverage. When the merry-go-round stops, as it inevitably must, the boom times are over.

The IMF team also found that—within reason—redistribution doesn't seem to harm growth. In fact, just the opposite: "The combined direct and indirect effects of redistribution—including the growth effects of the resulting lower inequality—are on average pro-growth."

To pick up on the theme of the previous post, this is something we all understood back in the era when unions were powerful advocates for the middle class. Of course rising middle-class wages are a prerequisite for sustainable growth in a mixed consumer economy like ours. And the more stagnant those wages are—and the aughts were by far the worst decade for stagnant wages since World War II—the more fragile economic growth is.

Now we have an IMF report to add to the technical evidence that middle-class wage stagnation is bad for the economy. But who has the raw political power to force the business community to listen to it?

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Unions Are Dying. What Will Replace Them?

| Thu Feb. 27, 2014 11:09 AM EST

Last week, Evan Soltas wrote a column that basically told liberals to give up on unions. "Unions can no longer solve labor's woes," he wrote. "That's not terrible, because the way unions gave workers power created its own problems."

In response to criticism from Michael Wasser, he wrote this:

The heart of the matter, it seems to me, is whether union decline is basically irreversible…If the decline is permanent…Wasser's claim about uniqueness has no independent policy implications—it's merely a statement of pessimism.

Yet I still find that pessimism implausible if one considers this graph (via Jared Bernstein) showing the broad increase in wages in the 1990s. Why? Unionization was also low then. How did wages rise so quickly, then, for the bottom half of the wage distribution? You can thank full employment.

Unfortunately, I agree with Soltas: The decline of union power is irreversible. Private-sector unions are all but dead, and public-sector unions are barely hanging on by their fingernails. That doesn't mean liberals should give up on labor, or that labor should give up on organizing new industries. Of course they shouldn't. It just means that as a broad-based force that provides a countervailing force against the power of the business community, labor's day is over. Like it or not, liberals have to figure out something else to play that role.

This is where I depart a bit from both Soltas and Wasser—in emphasis if not in detail. Their focus is primarily on what unions do specifically in the workplace: balancing power between employers and workers and providing a voice for workers that management can hear. Both of those are important, and both are problematic: You can reasonably argue about whether they're a net positive, or whether unions are the only way of obtaining them. But I view the primary strength of unions differently: They're a broad-based force that represents the interests of the middle class in the American political arena. Here's how I put it a couple of years ago after a quick review of the ways in which the past three decades have been disastrous for American workers:

This didn't all happen thanks to a sinister 30-year plan hatched in a smoke-filled room, and it can't be reined in merely by exposing it to the light. It's a story about power. It's about the loss of a countervailing power robust enough to stand up to the influence of business interests and the rich on equal terms. With that gone, the response to every new crisis and every new change in the economic landscape has inevitably pointed in the same direction. And after three decades, the cumulative effect of all those individual responses is an economy focused almost exclusively on the demands of business and finance. In theory, that's supposed to produce rapid economic growth that serves us all, and 30 years of free-market evangelism have convinced nearly everyone—even middle-class voters who keep getting the short end of the economic stick—that the policy preferences of the business community are good for everyone. But in practice, the benefits have gone almost entirely to the very wealthy.

…The heart and soul of liberalism is economic egalitarianism. Without it, Wall Street will continue to extract ever vaster sums from the American economy, the middle class will continue to stagnate, and the left will continue to lack the powerful political and cultural energy necessary for a sustained period of liberal reform. For this to change, America needs a countervailing power as big, crude, and uncompromising as organized labor used to be.

And that is a statement of pessimism, because no one on the left seems to have any serious ideas about what this countervailing power might be now that labor is a shadow of its former self. Organized labor really is unique, as Wasser suggests, and for all its problems, that's why I mourn its decline. There's no longer any serious countervailing power against the interests of business interests and the finance community, and we're paying a high price for that.

The decline of labor is simply a fact at this point, and there's not much point in sticking our heads in the sand and pretending we can turn this around in any serious, sustained way. Liberals should continue to support the cause of labor whenever and wherever we can, but we should also understand that our most urgent task is figuring out how to replace what they used to do. That's not something we've made much progress on.

Software Patents Finally on the Supreme Court Docket For First Time in 33 Years

| Thu Feb. 27, 2014 1:56 AM EST

One of the reasons that software patents have run rampant over the past couple of decades is because the Federal Circuit Appeals Court—which handles all patent cases—has been effectively ignoring Supreme Court precedent. Over the past few years the Supreme Court has pushed back on this, but only around the edges in cases with fairly specialized applications. Next month, however, for the first time in 33 years, they'll finally hear a case that explicitly gives them an opportunity to rein in the Federal Circuit and restate existing precedent that puts substantial restrictions on the ability to patent a software process.

Will they do it? Or will they shy away because it would strip billions of dollars in assets from software companies with huge patent portfolios? Tim Lee examines the possibilities here.

Second Look: Tax Reform Act of 2014 Turns Out to Be a Pretty Good Effort

| Thu Feb. 27, 2014 1:14 AM EST

Credit where it's due department: I was pretty skeptical of Dave Camp's tax reform proposal last night, figuring that it would just be the usual Republican mush of lower tax rates on the rich combined with some handwaving about elimination of tax breaks that would theoretically make it revenue neutral.

But I was wrong. It turns out that Camp's plan specifies the tax breaks he wants to close in considerable detail. And according to the analysis of the Joint Committee on Taxation, which is usually fairly reliable, it would be both revenue neutral and distributionally pretty neutral too. Over ten years it would raise about $3 billion more than present law, and the chart on the right shows how tax rates would be affected. Generally speaking, effective tax rates would go down for the poor and the middle class, and would go up a bit for the affluent. (These are estimates for 2015. They change slightly in subsequent years.)

Needless to say, this all depends on his plan being passed as is, which isn't likely. In fact, it seems unlikely to pass at all. Nonetheless, Camp's plan isn't just a Trojan Horse to cut taxes on the rich. There are, unsurprisingly, aspects of it I don't like, but it seems to be a tolerably serious effort at tax reform that both parties could live with. It's certainly a lot better than I expected.

UPDATE: On the other hand, Jared Bernstein says there's a little too much smoke and mirrors in Camp's plan:

The real problem is on the revenue side. There are far too many timing gimmicks that temporarily increase tax revenues in the scoring window (the first 10 years) to create the impression of lasting revenue neutrality and positive economic incentives. But once these gimmicks expire, the plan will collect significantly less revenue, leading to all kinds of headaches for both deficits and growth.

More details at the link.

Is the Right's "Religious Liberty" Campaign About to Backfire?

| Wed Feb. 26, 2014 6:37 PM EST

At the state level, Republican legislating comes in waves. After the 2010 midterms, there was a big wave of voter ID laws. For a while, it seemed as if every Republican-controlled state in the union had suddenly decided to pass the exact same laundry list of provisions designed to minimize the turnout of Democratic voters. That was followed by a wave of anti-abortion laws, again eerily similar. Now there's a new wave: "religious freedom" laws designed to allow businesses to discriminate against gays. It's the latest frenzy among conservative legislatures. "By my count," says Steve Benen, "there are now 15 states — nearly a third of the country — where Republican state lawmakers have at least proposed a right-to-discriminate measure."

In some cases, the similarity of the laws is easy to explain: a group like ALEC writes model legislation, and that becomes the basis for laws all over the country. It's all a very well planned operation. Other times, it's apparently more organic. That seems to be the case with right-to-discriminate measures, which are mostly a case of conservatives getting a whiff of something that appeals to the tea party and then all trying to one-up each other.

Ed Kilgore and Josh Marshall suggest that the "religious liberty" campaign represents a sort of Waterloo for right-wing nutbaggery. These laws tend to "elicit less sympathy than ridicule from the non-aligned," says Kilgore. "The whole thing appears to have collapsed under the weight of its own ridiculousness in Arizona," says Marshall, "and not just its ridiculousness but the fact that resisting the changing mores of acceptance and equality is bad business and bad politics." But a friend emails to push back on this. The best evidence that right-wing cultural overreach isn't backfiring, he writes, is when pundits on the left all start speculating that a big backlash is coming without any objective evidence that it's really happening:

To me, the AZ and MO and other bills are not some indication of last gasp, panic, or something else. No, they are a sign of strengthening radicalism and a demonstration, once again, of the relatively nonexistent societal penalty for advocating heinous laws. We've made advances and broken barriers, but those aren't the end of the struggle, nor the turning of the tide. They are just a changing of the battlefield.

Andrew Sullivan's article "Goodbye to All That" was a classic of this effort. Sullivan interpreted Obama's promise as essentially closing the door by rendering irrelevant the cultural wars of the 60s that have been fought for decades now. Instead, we get a rise in voter suppression laws; a reactionary political party that brings the country to a grinding halt; and a continuous, deeply problematic inability to grapple with and confront the growing radicalism on the right side of the spectrum.

We just have to be sober about this stuff and not wish it away — as appealing as that may seem, especially for content producers looking for any kind of social cues to let them write dramatic, eyeball snagging announcements of enormous societal shifts.

The AZ law is not a victory for the left. It's a sign that the left either isn't being heard or has a glass jaw.

I'm not actually sure who I agree with here. On the one hand, I think my friend is right: even if these religious liberty laws fail, and even if they generate some ridicule, it won't have any real effect. The tea partiers will just move along to a new fight as soon as one of them gets a bright idea. On the other hand, there really is a point where the Old Testament wrath starts to backfire—or, at the very least, distracts attention from potentially election-winning strategies.

If this year's midterms get fought on the battleground of hating on gays rather than on Obamacare or lower taxes, Republicans are going to perform pretty poorly and tea partiers are going to get the blame. It's already pretty obvious that the GOP leadership is fed up with the tea party faction leading them into unwinnable battles, and doing it again when control of Congress seems within their grasp might be the final straw. If right-wing Kulturkampf really is starting to backfire, November will tell the tale.

CBO Gives Flunking Grade to Republican Plan on Obamacare Mandate

| Wed Feb. 26, 2014 3:47 PM EST

"Ouchy ouchy," says Ed Kilgore today. "No conservative love for CBO this week, I suspect."

There was plenty of conservative love for the CBO last week, of course, because they estimated that an increase in the minimum wage might reduce employment. This week, however, the subject is a conservative plan to eliminate the Obamacare requirement that employers with health plans cover everyone working more than 30 hours a week. Republicans have been bellyaching forever that this is going to cause employers to reduce hours in order to get workers just under the 30-hour minimum, thus causing enormous pain to hardworking real Americans throughout the country. There's not much evidence that this is actually happening, but whatever. They want to get rid of the 30-hour mandate anyway.

Sadly, the CBO's opinion of a Republican bill to do this was not good. The bill would reduce the number of workers covered by employer healthcare by about a million people; increase use of Medicaid and CHIP; and increase the budget deficit by about $74 billion over ten years.

That's some bill. I think Kilgore is right that Republicans aren't going to be giving the CBO a lot of love this week.

UPDATE: And while we're on the subject, Republican attacks on Obamacare just generally don't seem to be doing well lately. In the latest Kaiser survey asking Americans if they want to keep Obamacare or repeal it, the keepers are ahead by a margin of 56-31 percent. That's up from last year, when they were up by only 47-37 percent. Greg Sargent has the deets here.

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Dave Camp's Tax Reform Plan May Be DOA, But It Should Be Fun Anyway

| Wed Feb. 26, 2014 2:28 PM EST

Speaking of Dave Camp's tax reform plan, it's out now. It may be DOA, but it's out. In a nutshell, it reduces rates, reduces the number of tax brackets, and increases both the standard deduction and the child tax credit. As a result, many fewer people would have to file 1040 long forms. To make up for this, Camp proposes limiting or eliminating a raft of deductions and tax breaks. Here's my favorite:

  • Preventing makers of violent video games from qualifying for the R&D tax credit.

Boo-yah! That's the way to play culture war politics in a boring tax reform proposal. There are also references to "Wall Street tycoons"—not a phrase you normally hear from a Republican—and a proposal to end tax breaks that allow university presidents to live in mansions tax free. Populism!

Joking aside, I'll give Camp credit for going after a long laundry list of very specific deductions. On the other hand, he also appears to finance his plan partly through an effective cut in the Earned Income Tax Credit. I can't say that for sure without more details, but it sure looks that way on first inspection. The plan also "consolidates" higher education tax breaks, which might be a good idea, though it's hard to tell without more details. If it's just an excuse to reduce financial aid, it's not so good.

There's also a proposal for a small change to the mortgage interest deduction—a brave act even if it's fairly paltry—and a proposal to partially end the carried interest loophole. Camp also proposes a 0.035 percent tax on big banks, which is probably a good idea. Camp repeals the AMT, which is a great idea, and funds it by eliminating the tax deduction for state and local taxes. This is a longtime favorite of conservatives because, as Camp says, "This deduction redistributes wealth to big-government, high-tax states from small-government, low-tax states." In other words, it benefits blue states more than red states, so why not get rid of it?

He also wants to get rid of the NFL's tax exemption. Sounds good to me.

Camp's plan is long and includes upwards of a hundred specific tax deductions that he wants to reform or eliminate. There are enough caveats that it's hard to tell exactly how far his proposals go, but again, kudos to him for making specific proposals at all. His plan may be DOA precisely because he was so specific, but kudos anyway. I'll be interested in following the reaction as everyone figures out just whose ox would be gored by his various bullet points. Should be fun.

Quote of the Day: Tax Reform Is Dead On Arrival

| Wed Feb. 26, 2014 1:42 PM EST

From Senate Republican leader Mitch McConnell, commenting on his House colleague Dave Camp's tax reform bill:

I think we will not be able to finish the job, regretfully. I don't see how we can.

And....that's a wrap, folks. Tax reform is officially a dead letter before poor old Dave Camp even had a chance to unveil his plan.

Naturally, McConnell blames this sad state of affairs on Democrats, because what else would he do? But I think everyone understands the real truth here: Republicans have no stomach for debating tax reform in an election year. Why? For the usual reason: everyone loves lower rates, but no one has the guts to so much as discuss the tax breaks they'd close to make up for the lower rates. Paul Ryan refuses to do this on an annual basis when he releases his latest budget roadmap. Mitt Romney famously tap danced around the subject for months in 2012. No one wanted to open this can of worms during either the fiscal cliff negotiations or any of the sequester standoffs.

Nothing has changed since then. If you talk about the mortgage interest deduction, you piss off millions of homeowners. If you talk about the carried interest loophole, you piss off billions of dollars worth of hedge fund managers. If you talk about the charitable deduction, every church in America will go ballistic. If you talk about 401(k)s, you piss off old people. If you talk about the exclusion of healthcare benefits from taxation, you piss off every middle-class worker in America. If you talk about capital gains rates, you might as well just kiss off your membership in the conservative movement.

"Broadening the base" sounds great when you use bloodless terms like "broadening the base." But when you translate that into actual tax deductions you want to get rid of, it doesn't sound so great at all. Mitch McConnell knows this perfectly well, and he wants this particular Pandora's Box to stay well and truly sealed for at least the next eight months. His mama didn't raise no fools.

Obesity Drop Among 2-5-Year-Olds Is Even More Baffling Than I Thought

| Wed Feb. 26, 2014 12:39 PM EST

Last night I wrote about a new CDC study showing a 43 percent drop in obesity rates among 2-5 year-olds. It seemed inexplicably large to me, especially because no other age group showed any decline at all. Today, Zachary Goldfarb helpfully publishes a bit more of the data, and I've extracted two lines from his chart. This only deepens the mystery.

As you can see, there's a fair amount of noise in the chart, and it's possible that this explains the whole thing. But if we take the data seriously, you can see something even more dramatic than a 43 percent drop over a decade. Between 2003-04 and 2005-06, there's a 25 percent drop. That's a gigantic decline over the space of two years.

But there's more. If there's anything real going on here, you'd expect to see some kind of correlation between 2-5 year-olds and 6-11 year-olds with a time lag of a few years. But I don't see anything. The 2005-06 cohort of 2-5 year-olds is noticeably less obese, but the 2007-12 cohort of 6-11 year-olds shows barely any change at all.

So this whole thing is very strange. As I said, it's possible that noise is responsible for a lot of this. But even if there really is something going on, it doesn't seem to be having any impact at all once children get a few years older. That's both strange and disappointing. I wouldn't expect miracles, but the whole point of obesity interventions in small children is that it prevents a lifetime of bad habits. As the New York Times put it, "New evidence has shown that obesity takes hold young: Children who are overweight or obese at 3 to 5 years old are five times as likely to be overweight or obese as adults." But if that's true, it sure isn't showing up in the data. As near as I can tell, reducing obesity among 2-5 year-olds has precisely zero effect on obesity later in childhood.

Last Weekend, a 10-Second Airport Delay Went Viral

| Wed Feb. 26, 2014 12:00 PM EST

Today the Washington Post brings us the perfect tale of modern viral hysteria. Apparently Ashley Brandt had a problem with her DC driver's license at the Phoenix airport, and social media went wild after her boyfriend tweeted about it. Here is the entire story:

According to Brandt, an agent with the Transportation Security Administration took a look at her D.C. license and began to shake her head. “I don’t know if we can accept these,” Brandt recalled the agent saying. “Do you have a U.S. passport?’

Brandt was dumbfounded, and quickly grew a little scared....Brandt says the agent yelled out to a supervisor, working in adjacent security line. Are D.C. licenses valid identification?

Brandt says she could hear the response, “Yeah, we accept those.”

And that was it. A TSA agent was unsure about something, and then cleared it up in a few seconds. And the twitterverse went crazy.

I get it: we all hate TSA, and TSA agents sometimes do dumb things. And social media encourages mob reactions based on 140-character rants. But honestly, folks. Chill. Not every minor inconvenience in the world deserves to go viral.