July 4, 2020

Economix Blog: A Dismal Outlook for Growth

They don’t call it the dismal science for nothing.

In a new paper, the Northwestern economist Robert J. Gordon argues that the United States should get ready for an extended period of slowing growth, with economic expansion getting ever more sluggish and the bottom 99 percent getting the short end of the (ever-slower-growing) stick.

“A provocative ‘exercise in subtraction’ suggests that future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades,” he writes.

To put that in context, American households’ real consumption expanded by about 3 percent a year before the recession hit and has been growing about 2 percent a year during the recovery, according to statistics from the Organization for Economic Cooperation and Development.

Mr. Gordon’s paper joins a growing economic literature that seeks and fails to find new sources of bang-up growth. (See Tyler Cowen’s wonderful “The Great Stagnation” for more on that.)

In the past, the United States economy grew quickly and its citizens got richer, in no small part because of advances made in three consecutive industrial revolutions: steam engines and railroads first; electricity, indoor plumbing and the combustion engine second; and the computing revolution third.

But the productivity and income gains begot by that third revolution have not been as impressive as the productivity and income gains from the first and second, he writes. Moreover, the United States is facing a number of headwinds. We’ve gotten most of the gains from the “demographic dividend.” Inequality is rising. Higher education is getting more costly, and student performance waning. We have high levels of government and household debt. And we have taxes and regulations stifling innovation and businesses.

That leads Mr. Gordon to question the notion that growth is a “continuous process that will persist forever.” We might not stop growing. But he argues we will stall out.

“Doubling the standard of living took five centuries between 1300 and 1800. Doubling accelerated to one century between 1800 and 1900. Doubling peaked at a mere 28 years between 1929 and 1957 and 31 years between 1957 and 1988,” he writes. “But then doubling is predicted to slow back to a century again between 2007 and 2100.”

Of course, there could be revolutionary new sources of growth: from the singularity, maybe, or a new renewable energy source. An article about “The Next Great Growth Cycle” also has some good pushback on the doom-and-gloom economic narrative.

Article source: http://economix.blogs.nytimes.com/2012/08/28/a-dismal-outlook-for-growth/?partner=rss&emc=rss

News Analysis: Why Americans Think the Tax Rate’s High, and Why They’re Wrong

The truth is that most households probably pay a lower rate than Mr. Romney. It is impossible to know for sure, given that he has yet to release his tax return. What is clear, though, is that a large majority of American households — about two out of three — pays less than 15 percent of income to the federal government, through either income taxes or payroll taxes.

This disconnect between what we pay and what we think we pay is nothing less than one of the country’s biggest economic problems.

Many Americans see themselves as struggling under the weight of a heavy tax burden (partly for the understandable reason that wage growth has been so weak). Yet taxes in the United States are quite low today, compared with past years or those in other countries. Most important, American taxes are not sufficient to pay for the programs that many people want, like Medicare, Social Security, road construction and education subsidies.

What does this combination create? An enormous long-term budget deficit.

Together, all federal taxes equaled 14.4 percent of the nation’s economic output last year, the lowest level since 1950. Add state and local taxes, and the share nearly doubles, to about 27 percent, according to the Tax Policy Center in Washington — still lower than at almost any other point in the last 40 years.

As the economy recovers and incomes rise, tax payments will increase somewhat. But they will not keep pace with projected spending, in the form of Medicare, Medicaid and Social Security. And total taxes at current rates would still make up a smaller share of the economy than in virtually any other rich country — not just European nations but also Australia, Canada, Israel and New Zealand.

Obviously, tax increases are not the only way to solve the deficit. Spending cuts can, too. But so far, at least, many voters seem to prefer small, symbolic cuts, like those to foreign aid. Substantial cuts — be they the changes to Medicare that President Obama included in his health care bill or the Medicare overhaul that Republicans prefer — tend to be politically unpopular.

Since the late 1970s, just before the modern tax-cutting push began, total federal tax rates have fallen for every income group. The payroll tax has risen, but declines in the income tax have more than made up for those increases. Nearly half the population now pays no federal income tax.

All told, most households pay less than 15 percent of their income to the federal government because of tax breaks, like the exclusion for health insurance, and because marginal rates apply to only a small part of a taxpayer’s income. On the first $70,000 of a couple’s taxable income, the total federal income tax rate is only 13.8 percent.

That said, taxes have fallen the most for the very affluent. Mr. Romney and his father — George W. Romney, the former automobile executive, Michigan governor and presidential candidate — do a nice job of illustrating the change.

The elder Mr. Romney, who died in 1995, paid an average federal tax rate of 37 percent in the 12 years for which he released his tax returns, according to an analysis by Joseph J. Thorndike, a columnist for Tax Notes magazine. Mitt Romney’s tax rate has been far lower, thanks mostly to the decline in taxes on stocks and other investments. The top marginal tax rate on ordinary income has also fallen sharply.

And George Romney paid a lower tax rate than most affluent Americans in the 1950s and ’60s, mainly because of deductions for his large donations to the Mormon Church. Then, a typical household near the very top of the income distribution would have paid almost 50 percent of its income in direct federal taxes, research by the economists Emmanuel Saez and Thomas Piketty has shown.

In recent years, that number has been below 30 percent.

Besides the drop in tax rates, affluent households have benefited disproportionately from tax breaks and deductions. The mortgage interest deduction, widely considered a middle-class benefit, actually saves a typical middle-income household only about $200 a year, because so many families claim the standard deduction, rather than itemized ones. The average family in the top 1 percent saves more than $5,000 from the mortgage deduction.

Such breaks are probably one reason that so many people feel as if their own taxes are such a burden: they have a sense, and not incorrectly, that others are benefiting from tax breaks unavailable to them. “If we had a simpler tax code,” said Roberton Williams of the Tax Policy Center, “people might be more accepting of what they pay.”

The group for which tax rates have fallen the least is the upper middle class: those households earning between about $75,000 and $300,000 a year. Their tax rates have declined over the past few decades, but only by a couple of percentage points.

Of course, many of the people who talk publicly about taxes — economists, policy experts, journalists — happen to fall into this group, which may be yet another reason that the public debate does not always match reality.

Article source: http://feeds.nytimes.com/click.phdo?i=03786b85cd6c8008d9c35986ce220105