Shapiro on the Economy

Asking about Citizenship Status in the 2020 Census Is Dangerous and Politically Inept

This essay was posted originally at The Pointwww.sonecon.com

Commerce Secretary Wilbur Ross’s decision last week to “reinstate” a question on citizenship status in the 2020 decennial Census (it was last asked in 1950), almost certainly will vastly increase the number of people who ignore or evade the 2020 decennial Census.  The policy will certainly discourage undocumented immigrants from filling out a Census form, and so lower the official population count of nearly every state. Those states that would be most disadvantaged, however, are not those with simply the most undocumented people, such as New York and Illinois, but those 12 states whose undocumented populations account for more than the national average of 3.5 percent. That group is led, in order, by Nevada, Texas, California, New Jersey, Arizona, Florida and Maryland.  For those states, the results could well mean fewer seats in Congress, fewer electoral votes, and smaller shares of more than $800 billion in annual federal funds allocated based in part on Census population data.

This is an offense to a functioning democracy, but the damage could well be even more far-reaching. When Ross announced this decision, he said he did it at the behest of the Department of Justice and Attorney General Jeff Sessions, so DoJ could better enforce the Voting Rights Act by more accurately measuring how many people in each of the nation’s 72,000 Census tracts are eligible to vote. In so doing, Ross and Sessions explicitly tied the collection of 2020 Census information to federal law enforcement. That’s what makes his directive so remarkable and so dangerous.

My arithmetic, detailed below, suggests that some 24.3 million people would have good reason to skip the 2020 Census if they believe their names and addresses could be shared with law enforcement. Moreover, because most of them are not concentrated in the big blue states, and most of the federal funding tied to the Census involves programs like Medicaid, Section 8 housing assistance, and support for school lunches, the new Ross-Sessions policy would target the cuts in federal funding to the 23 mainly solid red states with poverty rates above the national average.

Your Census Answers Are Legally Confidential

To be sure, federal law protects the confidentiality of the personal information collected in the Census in no uncertain terms. Under Title 13, sections 9 and 214 of the federal code, Census employees cannot lawfully share anyone’s name and address with anyone, including law enforcement. The reasoning is clear: Without a guarantee of strict confidentiality, many people would avoid or refuse to respond to the decennial Census.

I witnessed just how seriously the Census Bureau and the law approach this question when I was the Under Secretary of Commerce overseeing the 2000 decennial Census. The Bureau received a filled-out Census form, complete with the respondent’s name and address, and a scrawled threat to the president’s life across the front. We followed the law, informing the Secret Service and telling them that under Title 13, we could not share the name and address. In this case, we thankfully knew that President Clinton’s life was not in danger, since the Census form came from a federal inmate in California. But if the threat had come from someone not behind bars, the Secret Service would have had to find another way to identify him.

But most Americans have never heard of Title 13, so what matters here is their perceptions and beliefs about the confidentiality of their Census information.  In that regard, Ross and Sessions eagerly publicized the change, no doubt appealing to the administration’s anti-immigrant supporters and President Trump’s meme about undocumented voters costing him the popular vote.  But tying the Census data to law enforcement in this way will be a flashing red light for not only undocumented immigrants. Millions of other Americans will be very sensitive to any intimation that filling out their Census forms might help law enforcement officials locate them, including students in default on their federal loans, parents who owe back child support, anyone with an outstanding warrant, and more. Using conservative assumptions, they add up to more than 24 million people.

To be sure, the decennial Census is never 100 percent accurate or 100 percent complete. Certain groups are routinely undercounted for various reasons – native Americans and poor minorities – and the fact that undocumented immigrants or people with outstanding warrants are wary about participating is not new.  But the Ross-Sessions Census policy is virtually guaranteed to greatly exacerbate those issues and lead to unprecedented undercounting across large parts of the country.

Who Would Be Wary About a Census They Believe Could Help Law Enforcement

To begin, the policy will likely cost the Census participation of not only most undocumented immigrants, but also many of the 8.8 million U.S. citizens and legal residents who live in households with 4.3 million undocumented friends and family members.  If half of those households simply misstate the citizenship status of the undocumented person and the other half ignore the 2020 Census, the Census undercount from this issue alone would be 4.4 million. Add them to the other 6.8 million undocumented people in households without anyone with legal status, and the undercount comes to 11.2 million.

Millions of other Americans would have good reason to hesitate about providing their names and addresses, if they believe their data might be shared with federal law enforcement. For example, 43 percent of the 22 million Americans with federal student loans are in default or very behind in their payments arrears, which covers about 9,460,000 young Americans. If we assume, conservatively, that one-third of those in such arrears will opt for discretion and skip the 2020 Census, it comes to 3,120,000 people. Moreover, the Census collects its information from households, and most of those in default or way behind in payments on their federal student loans live in households with people not in such arrears. Again, assume that half simply leave out the household member in arrears (another 1,560,000 for the undercount) and the other half opt out of the Census. Since an average household consists of 2.54 persons, Americans in arrears on their federal student loans could add a total of another 5,522,400 people to the undercount [(1,560,000 + (1,560,000 x 2.54)], bringing the total potential undercount to 16,722,400.

The Census Bureau also reports that in 2015, 48.4 percent of the 6,807,000 parents who had custody of their children did not receive their lawfully-awarded child support. So, 3,292,000 people were in arrears on their child support. Local governments now routinely suspend the driver’s licenses of deadbeat dads (and moms), and sometimes jail those with long records of withholding child support payments. It seems reasonable that two-thirds of those in such arrears (2,195,764 people) would forgo affixing their names and addresses to forms that they believe might be shared with law enforcement. In this case, we would expect that most of their households would opt out with them, adding 5,577,241 people to the undercount. That brings the total potential undercount to 22,299,641 people.

We should also count households that include “fugitives from justice.” It’s difficult to know how many Americans have that status, because last year the DoJ purged some 500,000 people from its database of fugitives under a new policy to clean up the data on people who cannot pass background checks to buy a gun. Even so, the FBI says that some 789,000 people are currently evading outstanding warrants for felonies and serious misdemeanors, because their addresses are unknown. It is safe to assume that none of them will respond to the 2020 Census if they believe their whereabouts could be shared with law enforcement officials. When we take account of their households, they add another 2,004,060 people to the potential undercount and bring the total to 24,303,701.

None of these calculations include the normal undercount of poor minorities and others – the Census Bureau acknowledges that the 2010 Census missed, for example, about 1.5 percent of all African Americans – or the double counting of others such as retirees with two homes.   The focus here is on the particular, additional impact of the Ross-Sessions policy on a citizenship-status question in the 2020 Census to help enforce the Voting Rights Act.

Why should we worry about counting people who entered America illegally, welched on their federal loans, or are fugitives from justice?  For starters, Article I, Section 2 of the Constitution mandates a decennial census of “the whole number of free persons,” not just citizens or commendable people. (Alas, the Constitution did count African-Americans as equivalent to 3/5 of a free person and excluded untaxed Indians entirely.) Anyway, failing to count any person or household harms everyone in that person’s or household’s community, since the community’s representation and access to federal funds are tied to its numbers.

The Policy Could Boomerang on 14 Deep Red States

The damage of such an unprecedented undercount will not be distributed evenly or randomly across the states. As we noted, 12 states with disproportionately large undocumented populations will bear the greatest burden when it comes to losing seats in Congress, led by Nevada, Texas, California, New Jersey, Arizona and Florida. While every state has students and parents in arrears and people with outstanding warrants, cuts in federal funding based on Census data also will not be distributed evenly across the states. That’s because most of $800 billion per-year in such funds involve programs for low-income Americans, such as Medicaid, school lunches, and the S-CHIP program. The distribution of those funds across the states is based on their shares of all poor households, so the states with the most at stake are those with above-average shares of poor people. Sixteen states and the District of Columbia had poverty rates above the national average of 13.7 percent over the years 2014 to 2016. Ironically, only two of them (California and New Mexico) plus D.C. are blue states. The other 14 states facing serious cuts in federal funding are solidly red states, led by Mississippi, Louisiana, Kentucky, West Virginia, Georgia, Alabama, and Arkansas.

So, the Ross-Sessions Census policy could be a political boomerang for Donald Trump and the GOP. To be sure, of the 12 states plus D.C. that could lose seats in Congress based on disproportionately large undocumented populations, eight of them plus D.C. are blue states with 143 electoral votes—compared to four red states with 94 electoral votes. However, by vastly expanding the potential pool of uncounted people apart from undocumented immigrants, the Ross-Sessions Census policy also could result in federal funding cuts for 14 red states with 181 electoral votes—compared to two blue states (California and New Mexico) plus D.C. with just 63 electoral votes.

This essay was first posted by The Brookings Institution.

Job Prospects for Working Class Americans Continue to Deteriorate

This essay was posted originally at The Pointwww.sonecon.com

Many political observers still seem flummoxed by the fact that millions of working-class Americans voted for Donald Trump after supporting Barack Obama not once but twice. One important reason may lie in certain large-scale changes in America’s job market over the last decade. The growing role of a college degree in landing a job is well documented. Now, new household employment data reported by the Bureau of Labor Statistics (BLS) show that over the last decade, Americans with college degrees can account for all of the net new jobs created over the last decade. In stark contrast, the number of Americans with high school degrees or less who are employed, in this ninth year of economic expansion, has fallen by 2,995,000.

We use the household employment survey here instead of the business establishment survey, because it tracks the education of everyone who gains or loses a job month by month. In the latest survey covering December 2017, the number of college graduates with jobs jumped by 305,000 – while the numbers of employed Americans with no high school degree fell by 132,000, high school graduates with jobs dropped by 38,000, and employees with some college but no degree declined by45,000. That’s a window into what’s happened across the U.S. economy throughout this business cycle.

The near decade from January 2008 to December 2017 covers every facet of the current business cycle, except its very end. The first five years from January 2008 to January 2013 included the recession and financial crisis followed by a modest recovery, and the second five years from January 2013 to December 2017 have seen a reasonably steady expansion. In a normal cycle from recession to recovery, economists expect to see substantial job losses followed by offsetting job gains. In the aggregate, that is just what happened in the first five years of this cycle: Millions of jobs were lost from January 2008 to December 2010; but by January 2013, the number of employed Americans had recovered to nearly the same level as in January 2008.

But the composition of that workforce – who lost their jobs compared to who landed new jobs – changed in decisive ways. From January 2008 to January 2013, millions of people without college degrees lost jobs and never regained them, while all of the job gains went to the one-third of the labor force (as of January 2008) with at least a B.A. degree. (See the Table below.) So, while total employment in January 2013 was just 341,000 less than in January 2008, the number of Americans without a high school diploma who were employed fell by more than 1.6 million, the number of high school graduates with jobs fell by more than 2.8 million, and the number of working people with some college training but no BA degree fell by 227,000. Over those same five years, the number of college-educated Americans with jobs increased more than 4.3 million.

In the following five years of economic expansion, employment rose rapidly. From January 2013 to December 2017, the BLS household data show that the number of Americans with jobs increased by 10,997,000, for net job growth of 10,656,000 (10,997,000 – 341,000). Every educational group saw net job gains – but the distribution of those gains very badly short-changed Americans without college degrees.

Consider, to start, the country’s high school graduates. In January 2013, they comprised 27.3 percent of the labor force – but their job gains of 720,000 from that time to last month account for only 6.8 percent of all employment growth. Similarly, Americans who attended college but didn’t earn a B.A. degree accounted for 27.9 percent of the U.S. labor force in January 2013, and they claimed only 15.3 percent of the subsequent job gains. Strikingly, people without high school diplomas found jobs in this period at a rate that more nearly reflected their share of the labor market: They comprised 8.2 percent of the workforce in January 2013 and claimed 7.0 percent of net new jobs created from that time to the present. The only big winners were college graduates. They accounted for 36.5 percent of the U.S. labor force in January 2013; yet, they claimed 71.0 percent of the net new jobs created since then: Of the 10,656,000 net new jobs created from January 2013 to the December 2017, 7,564,000 went to college graduates.

Changes in the Employment of Americans, by Education, 1/2008 to 12/2017

As these above show, the skewed distribution of job opportunities has affected the composition of the labor force. As job opportunities have increased for college-educated Americans, their share of the U.S. labor force climbed from 33.6 percent in January 2008 to 36.5 percent in 2013 and 39.9 percent in December 2017. Similarly, as job opportunities narrowed for non-college educated people, more became discouraged and bailed out of the labor force. Over the last decade, the share of the U.S. labor force comprised of people without high school diplomas fell from 9.3 percent to 7.3 percent, the share with no more than a high school degree fell from 28.9 percent to 25.7 percent, and the share with some college training but no B.A. fell from 28.2 percent to 27.1 percent. Too often, the downward spiral has not ended with joblessness. Researchers have found that nearly half of working-age men who have left the labor force use pain killers on a daily basis. Moreover, new research shows that on a county by county basis, each percentage-point increase in unemployment is now accompanied by a 7.0 percent increase in hospitalizations for opioid overdoses and a 3.6 percent increase in opioid-related deaths.

 Americans without college degrees, who continue to comprise 60 percent of the labor force, are now effectively penalized in every phase of the business cycle. From the first month of the last recession in January 2008 to December 2017, well into year nine of this expansion, the number of employed Americans with high school diplomas contracted by 2,095,000, and the number of people working without a high school diploma fell by 900,000. Further, the share of all job gains claimed by Americans with some college but no B.A. degree was just over half their share of the labor force. Through it all, the number of college-educated Americans with jobs jumped by 11,909,000. That’s 1,253,000 more than the total 10,656,000 net new jobs created across the economy, suggesting that college grads are also now claiming new jobs that used to go to people without a B.A. degree.

Does Science Prove that the Modern GOP Favors the Rich?

This essay was posted originally at The Pointwww.sonecon.com

Virtually everyone outside the Trump administration agrees that the GOP tax plans passed by the House and the Senate will aggravate income inequality. In fact, the party-line votes on both plans are the latest instance of a remarkable fact: Over the last 40 years, income inequality has accelerated when Republicans held the White House, the Congress or both, and slowed when Democrats were in charge.

No one is claiming that the GOP created America’s dramatic increase in income inequality. In a recent study issued by the Center for Business and Public Policy at Georgetown University’s McDonough School of Business, our analysis showed that changes in the U.S. and global economies and technology did most of that.

Between 1977 and 2014, the average pre-tax income of the bottom 50 percent of Americans—everyone below median income – increased just 1.7 percent, inching up from $15,948 to $16,216 (2014 dollars). Over the same years, the average pre-tax income of the top one percent soared 207 percent, jumping from $424,631 to $1,305,301.

During these years, Washington stepped in with new spending and tax credits that modestly helped the bottom half of Americans: Their average post-tax income rose 22 percent, from $20,390 in 1977 to $24,047 in 2014. But tax and spending changes had little effect on the top one percent, whose average post-tax incomes still rose 196 percent, from $342,328 to $1,012,429.

Partisan politics also played a major role: The actual income paths of both groups from 1977 to 2014 depended on whether Republicans or Democrats controlled the White House and/or Congress. For example, when Republicans held the presidency, the top one percent’s rising share of all post-tax income accelerated on average by 0.4 percentage-points, while under Democratic presidents their rise correspondingly slowed by 0.4 percentage points. Similarly, the bottom 50 percent’s falling share of post-tax income accelerated under GOP Presidents by an average of 0.5 percentage-points – and again, their decline decelerated by that much under Democratic presidents. 

The story is the same with Congress. During years of GOP control, the decline of the bottom half’s share of national income accelerated, on average, by more than 0.5 percentage-points – and then slowed by about that much when Democrats were in charge of Congress. Party control of the legislative branch had the least effect on the income path of the top one percent: Their rising share of post-tax income accelerated by an average of 0.3 percentage-points during GOP Congresses, and decelerated by that much during years of Democratic control.

Finally, the results when either party controlled both the White House and Congress were the sum of the results for each branch.

This isn’t conventional wisdom dressed up as science; it is a scientific demonstration of how much elections matter. To test the limits, we also conducted a thought experiment: What would the incomes of the bottom half and the top on percent look like, if one or the other party had controlled both branches of government for the entire 37 years? We assume here that the economy’s course was unaffected by our hypothetical one-party government, and that each party maintains the distributional tendencies in tax and spending policy uncovered in our analysis.

With these assumption, we calculate that if Democrats had been in charge the entire time, the post-tax income of the bottom 50 percent, on average, would have been an estimated $526 higher per-year or a total of $19,539 more for the whole period. Moreover, the top one percent would have taken home $14,226 less per-year, on average, or $526,373 less for the whole period.

Operating on the same assumptions, we calculate that Republican control of both branches for the entire period would have increased the post-tax income of the top one percent by $28,029 per year, on average, or $1,037,086 for the whole period; while the incomes of the bottom 50 percent of Americans, on average, would have been $563 less per year, or $20,848 less for the entire period..

Helping the rich and letting those in the bottom half fend for themselves, it seems, is now part of the modern GOP’s DNA – and moderate resistance to that course seems to be embedded in the Democrats’ genes.

Will Cutting Corporate Taxes Raise Wages?

This essay was posted originally at The Pointwww.sonecon.com

Real disputes among professional economists rarely make their way into political debates. But that’s what’s happened with the issue of whether the Trump administration’s proposal to cut the corporate tax rate from 35 percent to 20 percent would mainly benefit shareholders or workers. Both sides make coherent arguments – but in the end, the evidence supports the proposal’s opponents.

Those opponents start with a traditional tenet of public finance: Taxes on assets are borne by the owners of those assets, so cutting taxes on corporations would mainly benefit their shareholders.

The proponents cite another tenet of public finance: Taxes are borne by those unable to escape them or, in more technical terms, corporate taxes fall on the least mobile factors of production. U.S. multinational companies have shifted substantial capital assets to other countries, from their patents to factories;. But American workers are stuck here. This suggests that much of the burden of U.S. corporate taxes could fall on workers – and consequently cutting corporate taxes should benefit them.

Economic researchers have found support for both tenets, but most of the economic literature has estimated that 70 percent to 85 percent of the burden of corporate taxes falls on shareholders and 15 percent to 30 percent on workers. A 2012 study by the U.S. Treasury – one recently excised from the Department’s website – calculated those proportions at 82 percent for shareholders and 18 percent for workers.

Conservatives insist that globalization has rendered those findings outdated. Citing research by Kevin Hassett, chair of the Council of Economic Advisers (and my friend) and others, they point to strong statistical associations between reductions in corporate tax rates over the last two decades and strong wage gains, especially in Eastern and Western Europe. Their logic is as follows: As U.S. and native corporations sited more production in low-tax countries, those capital investments raised both the demand for and productivity of workers in those places, driving up their wages.

I have no doubt that those findings are correct – but it does not follow that cutting U.S. corporate taxes would drive up investment and the wages of American workers.

First, the studies do not show that U.S. companies invested in those countries to avoid high U.S. corporate taxes. Certainly, the large U.S. software and pharmaceutical companies that transferred the ownership of their patents and copyrights to their Irish subsidiaries did so to elude U.S. taxes – transfers which created very few jobs in Ireland. By contrast, U.S. foreign direct investments that involve building factories and setting up new organizations in other countries occur to serve foreign customers in the regions of those investments. Lowering our corporate tax rate will not change that.

Similarly, U.S. and foreign companies invest here to serve the world’s largest national market. Moreover, taxes are not a barrier, since Congress provides a cornucopia of tax breaks to reduce corporate tax burdens well below 35 percent. According to a 2016 Treasury study, the effective corporate tax burden averaged 22 percent over the period 2007 to 2011. Some of that certainly reflected U.S. companies’ foreign earnings that remain untaxed by the United States. But some industries with few foreign operations also paid below-average rates. For example, the effective tax burden on U.S. utilities and real estate companies averaged, respectively, 10 percent and 20 percent. Right now, then, companies can operate in the United States at an effective tax rate equal to or lower than the administration’s proposal.

In the end, the only real issue is whether the tax proposal would induce U.S. or foreign companies to expand their American operations in ways that raise the demand for and productivity of U.S. workers. We cannot know for certain. Nevertheless, the 2016 Treasury study does provide on-point support for its opponents.

The Treasury found that while the effective corporate tax rate averaged 22 percent from 2007 to 2011, it actually fell substantially over those years — from 26 percent in 2007 to 20 percent in 2011. We did experience four years of strong employment gains from 2013 to 2016, which mainly restored jobs lost in the financial collapse and deep recession. Yet, alas, the falling corporate tax burden did not ignite the surge in business investment and wage gains predicted by the administration’s logic. That’s game, set and match for its opponents.

Blame the Economy for Widening Inequality – And Washington for Doing Little about It

This essay was posted originally at The Pointwww.sonecon.com

America’s widening income inequality has become a subtext across most debates in domestic policy. GOP plans to repeal and replace Obamacare failed in large part because virtually every expert warned that the changes would end coverage for millions of people with modest incomes and cut taxes for high-income people. President Donald Trump’s push to cut business taxes will likely meet a similar fate. He shouldn’t be surprised: The populist revolt that helped elect him has been fueled by popular anger over Washington’s incapacity to do anything about how the economy skews its rewards towards those at the top and away from most everyone else.

Ask the right questions, and the income data reveal a great deal about how this inequality took hold over the last 40 years. It is given that the American economy and politics both changed dramatically over this period. But how did each of those forces affect the distribution of incomes? In a new study just issued by the Center for Business and Public Policy at the McDonough School of Business at Georgetown, I used statistical analysis to explore this question. It turns out that we can track the economy’s role in growing inequality by following the changing distribution of all pre-tax income, and then track the role of politics and the government by following the changing distribution of all post-tax income.

It also turns out that the new populists, or at least their feelings, are justified: As economic changes have produced widening income inequality, the government has remained largely though not entirely on the sidelines.

To begin, the data show that rising inequality in the United States began in 1977, and the same data series ends with 2014, giving us 37 years of income information on both a pre-tax and post-tax basis. Over those years, the share of pre-tax national income going to the bottom 50 percent of Americans – that is, not taking account of changes in taxes and government transfers – slumped from 20 percent to 12.5 percent. This was the doing of a changing economy as globalization and technological advances steadily squeezed the wages and working hours of tens of millions of low, moderate and middle-income Americans.

Over the same years, the share of all pre-tax income going to the top one percent of Americans soared from 10.7 percent to 20.1 percent. The economic drivers were the same. In their case, the rapid progress of globalization and new technologies boosted both the returns on capital – think of soaring stock markets – and the compensation of millions of American business executives and professionals.

“Income shares” are economist-speak, so let’s translate them into the average incomes for each group. The results are sobering. The average pre-tax income of the bottom 50 percent of Americans, in 2014 dollars, inched up from $15,948 in 1977 to $16,216 in 2014, for a raise of $268 or 1.7 percent over 37 years. The top one percent lived in a different economy: Their average pre-tax income in 2014 dollars jumped from $424,631 in 1977 to $1,305,301 in 2014, a raise of $880,670 or more than 207 percent.

To see what the government did about all this, we shift the analysis to the two groups’ income shares and average incomes on a post-tax basis. The data show, first, that the government took some steps to soften the blow for the bottom 50 percent of the country and were modestly effective. After taking account of changing tax and spending policies since 1977, the share of all post-tax income going to the bottom half of the country fell from 25.6 percent in 1977 to 19.4 percent in 2014. So, their income share dropped 24.2 percent on a post-tax basis, compared to 37.5 percent on a pre-tax basis.

The difference tells us what the government actually accomplished: Washington managed to offset a little over one-third of the adverse impact of globalization and new technologies for the bottom 50 percent of Americans [1 – (24.2 / 37.5) = 0.355]. Their relief came mainly from government steps to expand the earned income tax credit, broaden access to Medicaid, and provide subsidies for health insurance under Obamacare. Other tax changes made the federal income tax moot for most of this group, but increases in payroll tax rates offset those gains.

Turning to actual incomes, we find that the average post-tax income of the bottom half of the country increased over this period, in 2014 dollars, from $20,390 in 1977 to $24,925 in 2014. That signifies a raise of $4,535 or 22 percent over 37 years – not much, but better than the 1.7 percent gains in average pre-tax income.

Washington has been more solicitous of the top one percent of the country. After taking account of changes in tax and spending policies, their share of all post-tax income jumped from 8.6 percent in 1977 to 15.6 percent in 2014. So, the income share going to the top one percent of Americans increased 81.4 percent on a post-tax basis, compared to 87.8 percent on a pre-tax basis.

Once again, the difference tells us what Washington did: 37 years of tax changes and spending offset about 7 percent of the fast-rising income gains claimed by the top one percent [1 - (81.4 / 87.8) = 0.073]. In more concrete terms, the average post-tax income of the top one percent of Americans increased, in 2014 dollars, from $342,328 in 1977 to $1,012,429 in 2014. That’s a sweet raise of $670,101 or 196 percent over 37 years.

Over nearly four decades, then, Washington demonstrated moderate concern about the declining position of the bottom half of the country while affirming the rising position of those already at the top.

This record tells us it is time to address the real drivers of widening inequality: Shift our focus from half-hearted redistribution to serious economic reforms – aggressive anti-trust for all concentrated industries, for example, and universal access to free retraining at community colleges – that can put average Americans in a better positions to capture the rewards of globalization and technological change. 

The Three Choices for Tax Reform

This essay was posted originally at The Point, www.sonecon.com

Trump administration officials and GOP leaders in Congress are still putting together their tax plan. Nevertheless, the early signs point to decisions that could sink the project or produce changes that would jeopardize economic growth.

Congress can approach changing the corporate tax in one of three ways. It can try to simplify the code, it can reform it, or it can cut it back. The GOP’s current approach appears to start with simplification. Simplifying the corporate tax normally means phasing out a package of tax preferences for particular industries or business activities, and using the revenues to bring down the current 35 percent tax rate to 28, 25 or even 20 percent. This model shifts the burden of the tax among industries but not among income groups, since shareholders continue to bear most of the burden. Such simplification can also attract bipartisan support and produce real economic benefits. At a minimum, it lowers tax compliance costs for most businesses; and if it’s done thoughtfully, it can increase economic efficiency. To be sure, any efficiency benefits will be marginal unless the simplifications are fairly broad and sweeping.

The record also shows that serious tax simplification is very hard to achieve. Support from President Obama and congressional GOP leaders wasn’t enough to advance it in 2014, for the simple reason that most companies prefer their tax preferences to a lower tax rate. They’re not wrong economically: The Treasury calculated in 2016 that tax preferences lower the average effective corporate tax rate to 22 percent, and companies in many industries pay substantially less. Why give up those preferences for a 28 or 25 percent rate? A 20 percent rate could solve the problem for most industries, if anyone had a plausible way to pay for it. Of course, financing a deep rate cut was the border adjustment tax promoted by Speaker Paul Ryan, and which the White House and big importers and retailers quickly squashed.

The second option is genuine reform, where Congress changes the structure of the corporate tax. Economically, the most promising reform would give U.S. companies a choice of tax treatments when they invest in equipment. They could deduct the full cost of those investments in the year they make them (“expensing”) while giving up the current deduction for interest on funds borrowed to finance the investments. Or they could stick with the current depreciation system for their investments, including the deduction for interest costs. If enough companies choose the first route, as they likely would, this reform would spur investment and sharply reduce the tax code’s nonsensical bias towards financing business growth with debt rather than equity. Such a structural reform would make sound economic sense. It also seems as unlikely as serious simplification, because it foregoes the pixie dust of marginal tax rate cuts that GOP supply-siders demand.

That leaves the Trump administration and Republican leaders with option three: Cut the corporate tax rate without paying for it. The President seems to favor this approach. He has called repeatedly for slashing the corporate rate to 15 percent, a multi-trillion dollar change, and paying for a small piece of it by limiting a few personal tax deductions for higher-income people. It’s also catnip for GOP supply-siders who continue to proclaim that a deep rate cut will boost economic growth enough to pay for itself. We’ve tried this t several times already, so we now have hard evidence to evaluate those claims. The actual record shows, beyond question, that such turbo-charged dynamic effects do not occur. The most recent example is George W. Bush’s 2001 personal income tax cuts. His “success” enacting them produced huge deficits and ultimately contributed to the financial collapse that closed down his presidency.

A largely-unfunded cut in the corporate tax rate in 2018 would boost corporate profits as well as budget deficits, but it won’t increase business investment, productivity or employment. Prime interest rates in this period have been lower than at any time since the 1950s, so companies have had easy and cheap access to funds for investment for years. At a minimum, this tells us that there’s no real economic basis to expect businesses to use their windfall profits from a big tax cut to expand investment.

Instead, they’re likely to use some of their additional profits to fund stock buy-backs. The rest will flow through as dividends and capital gains, mainly for the top one percent of Americans who hold 49.8 percent of stock in public companies, and the next nine percent who own another 41.2 percent of all shares. Those lucky shareholders will use much of their windfall gains to buy more stock; and coupled with the corporate stock buy-backs, the boost in demand for stocks will pump up the markets. To be sure, those shareholders will also spend some of their unexpected gains, which will modestly stimulate growth. Once that stimulus dissipates, as it will fairly quickly, the ballooning budget deficits will drive up interest rates and slow the economy for everyone else.

The worst scenario is that large, deficit-be-damned cuts in the corporate tax rate could produce a stock market bubble that could take down the economy when it bursts. The good news is that the current Congress would never enact it. The odds of Democrats supporting Donald Trump on a tax plan to make shareholders richer are roughly the same as winning the Powerball; and the certainty of soaring budget deficits should scare off enough conservative Republicans to sink the enterprise.

The Trump Administration is Disrupting the 2020 Census

The decennial Census is a genuinely powerful institution in American life. I didn’t understand its impact until I oversaw the Census Bureau as it prepared and carried out the 2000 decennial Census, when I was Under Secretary of Commerce for Economic Affairs. Believe me, the upcoming 2020 decennial Census will matter more than you think. Yet, Congress and now the Trump administration have set the 2020 decennial on a course that threatens its basic accuracy. In so doing, they put at risk the integrity and effectiveness of some of the national government’s basic missions.

Normally, the Census Bureau spends the first six years of each decade planning the next decennial Census. The Bureau’s funding ramps up in years seven, eight and nine of the decade, when it tests and purchases its technologies, conducts a nationwide inventory of residential addresses, orders forms, letters and advertising, and begins to lease local offices and train temporary workers. It is expensive to accurately locate and count 325 million people in 126 million households (2016). That’s why, for example, Census funding jumped 96 percent from 1997 to 1998, and more than 60 percent from 2007 to 2008.

The problems began in 2014, when the Congress decreed that the 2020 Decennial Census should cost no more than the 2010 count without adjusting for inflation, or some $12.5 billion. The Obama administration objected, but to no effect – although it’s worth recalling that Bill Clinton took a different tack in 1998, when he vetoed an omnibus budget bill and risked a government shutdown to get rid of a provision that would have barred the Census Bureau from using statistical sampling to verify the 2000 count.

The Census Bureau did what it had to do to live within its new budget constraints: it drew up new plans to cut costs by replacing thousands of temporary Census workers and hundreds of temporary offices with new technologies and online capacities. It also had to do what it shouldn’t have done: To save money, the Bureau aborted a planned Spanish-language test census and didn’t test or implement new ways to more accurately count people in remote and rural area. Census also ended its plans to test a range of local outreach and messaging strategies to get people to fill out their census forms, which are crucial to minimizing undercounts in many minority and marginalized communities.

Even so, the Census Bureau prepared to ramp up funding in 2017 and 2018, as it normally did, under the $12.5 billion cap. Enter the Trump administration, which cut the Obama administration’s 2017 budget request for the Census Bureau by 10 percent and then, this past April, flat-lined the funding for 2018. It is no coincidence that the Director of the Census Bureau, John Thompson, resigned in May, effective in June. It’s a serious loss, since Dr. Thompson directed the 2000 decennial count and is probably the most able person available to contain the coming damage to the 2020 count. For its part, the administration hasn’t even identified, much less nominated, his successor. It is no surprise that the Government Accountability Office recently designated the 2020 Census as one of a handful of federal programs at “High Risk” of failure.

The costs of starving the decennial Census could be great. It not only paints the country’s changing demographic and geographic portrait every 10 years. Its state-by-state counts determine how the 435 members of the House of Representatives are allocated among the states; and its counts by “Census block” (roughly a neighborhood) shape how members of state legislatures and many city councils are allocated in those jurisdictions. That’s just the beginning.

Consider as well that every year, the federal government distributes about $600 billion in funds to state and local governments for education, Medicaid and other health programs, highways, housing, law enforcement and much more. To do so, the government uses formulas with terms for each area’s level of education, income or poverty rate, racial and family composition, and more. The decennial Census provides the baseline for those distributions by counting the people with each of those characteristics in each state and Census block. Similarly, the Census Bureau conducts scores of additional surveys every year on behalf of most domestic departments of government, to help them assess the effectiveness of their programs. Here again, the decennial Census provides the baseline for measuring each program’s progress or lack of it.

Without an accurate Census, many states and cities will be denied the full funding they deserve and need, and the federal government will have to fly blind for a decade across a range of important areas. Moreover, many businesses also rely on decennial data, from retailers and commercial real estate developers to the banks that finance them. Data on the demographics and locations of potential customers not only inform their planning and investments. In some cases, the data actually make their projects possible, for example, when an investment qualifies for special tax treatment if it occurs in places with certain concentrations of low or moderate-income households.

The Trump administration cavalier approach to the 2020 decennial Census is evident in ways other than its funding deficit. A draft executive order, leaked but not issued so far, would direct the Census Bureau, for the first time in over 200 years, to “include questions to determine U.S. citizenship and immigration status.” The Census Bureau is legally required to protect the privacy of all Census data from requests by anyone, including government officials. Unsurprisingly, many people remain skeptical and avoid answering the Census out of fear that other government agencies will access their information. Requiring that Census 2020 probe each respondent’s citizenship and immigration status would turbo-charge those fears among Hispanics and other immigrant groups. The result would be systemic undercounting and underfunding of states, cities and towns with substantial populations of Hispanics and other immigrants.

There is still time for a course correction that could rescue the 2020 decennial Census, in next month’s negotiations over the 2018 budget. With some GOP members of Congress exhibiting a measure of newly-found independence from the Trump administration, Paul Ryan and Mitch McConnell could need Democratic support to pass a budget. A wide range of minority advocacy and business groups, along with most big city mayors, have vital interests in an accurate decennial Census. It’s up to them to pressure Nancy Pelosi and Chuck Schumer to make adequate funding for the Census one of their top priorities. Otherwise, one of the basic mechanisms for fair and competent governance could be disabled for a decade.

This post was originally published on Dr. Shapiro's blog.

It’s Still the Economy, Stupid!

Republicans know that the terrain for next year’s midterm elections could be treacherous. Off the record, they bemoan their inability to enact their agenda and mourn President Donald Trump’s unpopularity. In principle, the GOP still might get its act together and pass a tax reform with new tax breaks for middle class taxpayers. Events unforeseen and unimagined could offer Trump a platform to renew his poplar appeal. Even so, they’re ignoring the signs that a sagging economy next year will dominate the 2018 campaigns.

The current expansion is old – it turned eight years old this month – and its fundamentals are weak. Neither Trump nor Congress has done anything to perk it up. Only the 1990s expansion lasted longer, and it expired two years after its eighth birthday. Comparing the two will not cheer Republicans. At a comparable point in the expansion that defined the Clinton era, March 1999, GDP was growing at nearly a 5 percent rate; over the last year, GDP has edged up barely 2 percent.

The most important difference is what was happening then with productivity, and what’s happening now. In the three years leading up to each expansion’s eighth birthday, productivity had expanded at a 2.4 percent annual rate in the 1990s, compared to 0.7 percent this time. Without decent productivity gains to lift wages and fuel demand, incomes stall and growth slows.

The main reason we’re not in a recession today is the strong job gains of the last three years, and the current 4.4 percent unemployment rate is comparable to the 4.2 percent rate in March 1999. Full employment normally presages a slowdown in job creation. We avoided that in the late 1990s, because the strong productivity growth supported more demand by raising wages. The best measure of that is personal consumption spending, which increased at a 5.9 percent rate in the year leading up to March 1999. But our current predicament includes such weak productivity gains that personal consumption spending edged up just 2.6 percent over the last year.

It’s the same story with business investment, the other domestic source of new demand. In the year preceding the eighth birthday of the 1990s expansion, fixed business investment rose 8.5 percent; over the past year, it grew 4.2 percent or half that rate.

All of these measures presage a slowdown in the U.S. economy next year – GDP gains of 1.5 percent in 2018 is a fair guess – and we could slip into a recession if some adverse event provides the trigger.

Last October, I cautioned Hillary Clinton that she would face these same conditions if she won, but that three initiatives could breathe new life into this old expansion. The first order of business is a dose of demand stimulus, preferably through large infrastructure investments paid for down the line. Trump promised the same thing; but he and the GOP Congress moved quickly beyond it.

The second initiative would focus on energizing productivity growth. My own recommendations last October started with measures to help average Americans upgrade their skills, by giving them free access to training courses at local community colleges. The Trump and GOP budget proposals would cut the inadequate training programs already in place.

The third initiative is a companion piece to promote higher productivity: Jumpstart business investment in new technologies and equipment. That will be harder for Trump than it would have been for Secretary Clinton, because it requires setting aside the supply-siders’ faith in the power of cutting marginal corporate tax rates. Instead, we should focus for now on lowering businesses’ upfront costs to purchase the new technologies and equipment that make skilled workers even more productive.

The measure would offer businesses a choice: deduct the full cost of those new purchases in the year they buy them – it’s called “expensing” – or stick with the current system where businesses depreciate the cost and deduct the interest on funds borrowed to cover it. Expensing is a feature of the Trump and GOP tax proposals, but both plans offer more sweeping and much more expensive changes that appear headed for the same fate as Trumpcare.

The election of Trump and the GOP Congress buoyed business confidence precisely because investors believed they would follow through quickly with an infrastructure stimulus and business tax reforms. Neither seems likely today; and even if one or the other somehow passes in some form late this year, it will probably be too little and too late to revive growth and wages by November 2018. If neither happens, it will take more than tweets to explain to voters why Republican control of both branches of government has failed to improve their lives.

This post was originally published on Dr. Shapiro's blog.

How to Raise Incomes and Delay the Next Recession

Last October, mulling over the economic environment the next President would face, I sent Hillary Clinton memos on how she should provide some stimulus to sustain the current expansion and raise incomes by boosting business investment and productivity. Alas, she did not become President; but that didn’t change our current economic challenges. To be sure, President Trump’s manifold troubles may preclude Congress from doing anything meaningful until after the 2018 elections. But if that’s not the case, here’s some advice for both sides.

The White House, above all, should appreciate the stakes: Without some form of serious stimulus, the U.S. economy almost certainly will slip into recession well before 2020. From Trump’s recent statements about “priming the pump,” he already understands that the eight-year-old expansion needs a boost. The GOP plan for sweeping tax cuts won’t work here, even if it could pass Congress. To begin, it devotes most of its resources to high-income people and shareholders, who will just save most of their tax savings. More important, the plan would vastly expand federal deficits on a permanent basis. If that happens, the Federal Reserve almost certainly will hike interest rates considerably higher and faster than they now contemplate, and those rate hikes would likely end the expansion.

Washington needs to prime the pump in a way that directly supports employment over the next two years and carries no long-term costs for the deficit. As it happens, Trump and Democrats already support a reasonable way to do just that – enact a large, two-year increase in public investments in infrastructure. But the plan will attract Democratic support only if Trump gives up the idea of using tax breaks to leverage private investment in new infrastructure projects. Democrats won’t (and shouldn’t) go along, because that approach tilts the program towards infrastructure projects in high-income areas that can generate strong profits for its investors.

I assume that the President’s economic advisors also have briefed him on the recent, serious slowdown in business investment and productivity growth. Unless Trump addresses those problems as well, most Americans will make little income progress. The challenge here is to focus on changes that will boost business investment in way that strengthen productivity, and do it without raising deficits on a permanent basis.

One approach that congressional Republicans and some Democrats could support entails allowing businesses to “expense” their investments in equipment – that is, deduct the entire cost in the year they purchase the equipment. This change focuses on equipment investments, because they have the greatest impact on growth and productivity. The catch is that this approach still costs the Treasury many tens of billions of dollars per-year, especially if it covers both corporations and privately-held businesses (like the Trump Organization), as it should.

Trump could draw some support for the plan from congressional Democrats by insisting that Wall Street pay for it. First, he could deliver on his campaign promise to end the notorious “carried interest” loophole that lets the managers of private equity, venture capital and hedge funds use the capital gains tax rate to shelter most of their income from their funds. Fund managers certainly can afford to pay the regular income tax like the rest of us: In 2016, the top 25 hedge fund managers altogether earned $11 billion or an average of $440 million each.

To pay for the rest of equipment expensing, Trump should support the call by many Democrats for a small tax on financial transactions – three one-hundredths of one percent of the value of all stock, bond and derivative purchases should do it. (Stock and bond IPOs and currency transactions would be exempt.) Wall Street will howl in protest – music to most Americans’ ears – but the economics are sound. On the plus side, the tax would reduce market volatility by discouraging short-term speculation and ending most high-frequency computer trading. Moreover, today’s short-term speculators and high-frequency traders will have to invest those resources in more productive ways. The negative is that the tax would raise transaction costs and thus dampen investment on the margins. But since the tax would finance a serious reduction in the cost of business investments in equipment, the overall impact on the markets will be positive.

This plan is far from the dream agenda of either party. A Hillary Clinton presidency would have included many other measures to boost productivity and incomes, from access to tuition-free college for young people and greater access to bank loans for new businesses, to broad retraining opportunities for adults and a path to citizenship to expand job opportunities for immigrants. For their part, congressional Republicans still believe in their trinity of huge tax cuts, drastic deregulation, and deep cutbacks in Medicare, Medicaid and Obamacare benefits. But the economics of stimulating an aging expansion and restoring business investment are non-partisan, and both parties should have an interest in reviving income progress for most Americans.

For President Trump, this plan has three simple parts consistent with his positions: Increase public infrastructure investments, lower the cost of business investments, and make Wall Street pay more of its fair share. If he can cut this deal, nearly everybody will win – but if he can’t, no one will lose more than he will.

This post was originally published on Dr. Shapiro's blog.

Backgrounder: Budgets, Health Care and Trump's Great Betrayal

With attention returning to budgets and the US economy, NDN has assembled some of our work on these matters over the past few months.  We hope you find these analyses helpful.  

Trump's Tax Plan is Aimed at the 2018 and 2020 Elections, Not U.S. Competitiveness, Rob Shapiro, NDN.org, 4/26/17. Trump's claims that damage from higher deficits will be minor compared to the benefits for US competitiveness, economic efficiency, and tax fairness are nonsense, and the real agenda here is the 2018 and 2020 elections.

Release: Still no 2017 budget from GOP, or proposal from White House, Simon Rosenberg, NDN.org, 4/26/17. While the President’s revenue outline today is a late but welcome development, it cannot be given serious consideration outside the eventual full budget proposal that is usually submitted to Congress in February.

Trump puts foreign investors first by supporting the Republican tax plan, Rob Shapiro, The Hill, 3/28/17. Rob weighs in on the very real problems of the House GOP's proposed border adjustment tax.  

Trump's Great Betrayal, Simon Rosenberg, NDN.org, 3/23/17. President Trump is pursuing policies deeply at odds w/his pledge to help every day Americans. It should become known as "The Great Betrayal."

Column: 5 Ways Trump Could Stop Obama's Expansion, Simon Rosenberg, US News & World Report, 3/23/17. There just isn't a lot of justification for the market's optimism that Trump's economic policies - Maralagonomics - will keep the Obama expansion going.

Memo: In A New Global Age, Democrats Have Been Far Better for the US Economy, Deficits, and Incomes, Chris Murphy and Simon Rosenberg, NDN.org, 2/21/17. In a new memo NDN finds that over the past generation of American politics Democrats have been far better for the economy, deficits and incomes. 

Steve Bannon, Meet Russell Pearce, Simon Rosenberg, US News & World Report, 2/21/17. If history is a guide, Trump's efforts to institutionalize xenophobia and ramp up immigration enforcement could disrupt businesses, hurt the US economy and tear apart families. The blowback could be significant and cause lasting damage to his Presidency.

If you would like to read more of Rob's other recent work, be sure to review our backgrounder, "Rob Shapiro on the Economy."

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