December 22, 2024

Economix Blog: The Premium From a College Degree

11:11 a.m. | Updated to include correct chart.

The unemployment rate ticked up to 7.6 percent while employers added about 175,000 new jobs in May, new Labor Department data showed this morning. But the economy feels very different depending on your level of educational attainment. For workers over the age of 25 who have a bachelor’s degree, the unemployment rate is 3.8 percent. For workers without a high school diploma, it is 11.1 percent.

Still, in recent years, the burden of student-loan debt has raised questions about whether college is really worth it – particularly if a given person goes to college, takes on significant amounts of debt, but does not get diploma. New research from the Hamilton Project, a research group based at the Brookings Institution, says that on average, the answer is still yes.

The so-called college wage premium – economists’ fancy way of saying how much more workers with a college degree are paid than other workers without one – has widened over the last three decades. Degree-holders earn more than 80 percent more than their peers with just a high school diploma, up from about 40 percent more as of the late 1970s.

But millions of students attend college without graduating, and the workplace does not reward them nearly as richly. Their unemployment rate is 6.5 percent. And while they tend to earn more than workers with just a high school diploma, they make less than workers with a full degree. (For a nuanced take on this issue, read my colleague Jason DeParle’s long-form article from December.)

“The premium for these workers has experienced little to no growth over the last 30 years, where at the median they have about 15 percent to 20 percent higher earnings,” said an analysis by the Federal Reserve Bank of Cleveland released last year. “Collectively, these results show that over the last three decades, the value of college has increased substantially,” with all of the gains going to those who actually complete the four-year degree.

Still, the Hamilton analysis argues that it’s better to pay something for a little post-secondary education than it is to pay nothing for none – even given the rise in college costs. Students who go to but do not graduate from college still earn about $100,000 more over the course of their lifetimes than their high school-educated peers, the authors calculate.

The rate of return on that investment in school “exceeds the historical return on practically any conventional investment, including stocks, bonds, and real estate,” find the scholars, Adam Looney and Michael Greenstone, who also is a professor at the Massachusetts Institute of Technology.

Granted, that student is still much, much better off with a college degree. Over a lifetime of work, on average, a college graduate would earn over $500,000 more than a worker with just a high school diploma.

Article source: http://economix.blogs.nytimes.com/2013/06/07/the-premium-from-a-college-degree/?partner=rss&emc=rss

News Analysis: Balanced Budget Fight Is Philosophical and Fiscal

That question is at the heart of the warring Republican and Democratic budget plans coming out this week — with Representative Paul D. Ryan of Wisconsin vowing to eliminate the federal deficit within 10 years, and Senator Patty Murray of Washington State setting a more modest goal of bringing spending closer in line with revenue over time.

While economists generally agree that narrowing the government’s deficit and limiting the size of the debt are necessary in the long run, most argue that balancing the budget would not restore the nation’s still-weak economy to health in the near term. Indeed, rushing to do so with unemployment still elevated and the economy growing at only a sluggish pace could even set back the effort to reduce the deficit.

“There’s nothing magic about exact balance,” said Alice M. Rivlin, a Democratic economist at the Brookings Institution who has worked with Republicans like former Senator Pete V. Domenici on bipartisan deficit-reduction proposals. “The really important thing is to keep the debt from growing faster than the economy.”

The question of whether to balance the budget and when is a new staging ground in the long-running fiscal fight between Republicans and the White House. Mr. Ryan, whose previous budget proposals did not bring spending below revenue for decades, vowed this time to do so by 2023, in part to satisfy the demands of the more conservative members of the Republican Caucus.

Democratic proposals — both the Senate Democratic plan to be released on Wednesday and the White House budget coming next month — are both expected to narrow the deficit substantially without balancing the budget or running a surplus.

This week, each side accused the other of fiscal imprudence. Republicans accused the White House of “never” balancing the budget, and Mr. Ryan argued that ending deficits would foster a healthier and faster-growing economy.

“This is an invitation. Show us how to balance the budget,” Mr. Ryan said. “If you don’t like the way we’re proposing to balance our budget, how do you propose to balance the budget?”

Democrats argued that Mr. Ryan’s budget would balance only on the backs of the poor, cutting taxes for the wealthy while eviscerating the social safety net. Mr. Ryan’s plan does not “plausibly deal with deficit reduction,” Jay Carney, the White House press secretary, said Tuesday. “It is important to bring our deficits down and to reduce our deficit-to-G.D.P. But they are part of — those goals are part of the broader purpose here, which is to grow the economy and strengthen the middle class.”

Economists offered more nuanced views. Closing the budget gap over the longer term could be vital to sustaining economic health, some stressed, by ensuring that the government did not crowd out private investment and by helping to keep interest rates low. But that does not make it an immediate necessity.

“Over a long period of time, you’d have a higher standard of living if you moved to a balanced budget and stayed there,” said Joel Prakken, a senior managing director at Macroeconomic Advisers, a forecasting firm in St. Louis. “But you suffer some short-run pain, and you don’t want to inflict that when the unemployment rate is already high, the economy is still recovering from the legacy of the Great Recession, and the Federal Reserve has used up most of what’s in its quiver.”

Other goals — including stabilizing debt as a proportion of economic output, rationalizing the tax code and tackling the long-term fiscal challenge posed by entitlement programs — might prove more important in the coming years, several experts said.

“We need to do fundamental reforms to the system, and if we did fundamental reforms to the system, that would help so much that we wouldn’t need to worry about the deficit as much,” said Kenneth Rogoff of Harvard.

As sensible as a balanced budget might sound — much like a balanced checkbook for a family — countries are generally able to run modest deficits for years on end while still keeping debt stable as a share of economic output. One year’s deficit is effectively paid off by later economic growth, especially if a government is investing in public goods like roads and schools.

But several right-leaning fiscal experts described a balanced budget as a tool to force a fractious Congress to tackle the nation’s long-term budget problems.

Article source: http://www.nytimes.com/2013/03/13/us/politics/balanced-budget-fight-is-philosophical-and-fiscal.html?partner=rss&emc=rss

Economix Blog: College Premium: Better Pay, Better Prospects

CATHERINE RAMPELL

CATHERINE RAMPELL

Dollars to doughnuts.

I’ve written before about the growing wage premium for college degrees: how the wage gap between workers with a bachelor’s degree and workers with no more than a high school diploma has been growing over the years.

But that statistic captures only part of the income premium that people with a bachelor’s degree enjoy as a result of completing college.

As I report in an article in Wednesday’s paper, people with college diplomas are much more likely to get jobs, period, than people without the credential. Part of college graduates’ income premium, then, comes from the fact that they are just more likely to be employed in a typical week. They are probably more likely to work the number of desired hours they wish to work, too, according to Gary Burtless, a senior fellow at the Brookings Institution.

You can see this in the unemployment numbers: The jobless rate for people with a bachelor’s degree was 3.7 percent in January, versus 8.1 percent for those with no more than a high school diploma.

Census estimates of median annual earnings help capture the college income premium. In 2011, the median male college graduate earned 1.95 times as much as the median male whose highest educational attainment was a high school diploma. In 1991, that ratio was 1.76. For women, the ratio is up, but not by as much: It was 2.03 in 2011 versus 1.99 in 1991, and it dipped in the intervening years.

Here’s a chart showing these earnings ratios over the last two decades:

Source: Census Bureau, Current Population Survey, Annual Social and Economic Supplements Source: Census Bureau, Current Population Survey, Annual Social and Economic Supplements

When I’ve written about this subject before, I’ve been criticized for lumping in people with advanced degrees with workers with no more than a college diploma, when the job prospects for those two groups might be very different. But even if you compare the workers with no more than a college degree with workers with no more than a high school diploma, the ratio in their median annual earnings has still been rising. (The darker lines in the chart above refer to the ratio in annual median earnings for workers with exactly a college degree, and no further education, compared to workers with exactly a high school diploma; the lighter lines show the ratio for all college grads compared to those with exactly a high school diploma.)

By the way, the Census Bureau numbers refer only to workers who have at least some earnings; they exclude people who have no earnings at all. Since a higher percentage of college grads than high school grads have at least some annual earnings — and since this differential has increased over the last 20 years, particularly for men — then these Census earnings numbers will actually understate the increase in the total earnings premium from college completion, as Mr. Burtless noted to me in an e-mail.

If recent trends continue — with employers increasingly demanding that job candidates show up to their interview with a sheepskin in hand — we should expect that the wage and employment advantage conferred upon college grads will only grow.

College can bring a lot of debt, yes. But these figures serve as a reminder that college also brings huge returns relative to how you might otherwise invest your tuition money.

Article source: http://economix.blogs.nytimes.com/2013/02/19/college-premium-better-pay-better-prospects/?partner=rss&emc=rss

Bucks Blog: A Tax Calculator for You to Try as Washington Debates

If you’re like me, you have been following the debate over the so-called fiscal cliff with a sort of low-grade headache. With so many variables, it’s hard to keep all the possible outcomes straight.

The Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, has taken a crack at helping individual taxpayers evaluate how various options would affect their overall federal tax burden, including both payroll taxes and income taxes, next year. The center has created a set of calculators that allows you to compare the total tax liability for different sorts of taxpayers in 2013, based on four scenarios. (Wonk warning: The calculator was created by tax policy mavens, so it contains a great deal of detail, perhaps a bit too much for a casual user.)

Still, if you ‘re interested in what might result, or not, from the negotiations in Washington, here are the four tax policy scenarios presented in the tool. The calculator doesn’t reflect the latest proposal made by House Republicans because it lacked sufficient detail about tax rates to model, said Roberton Williams, senior fellow at the Tax Policy Center:

1) 2012 tax law (with an alternative-minimum-tax patch, to limit the number of taxpayers affected by the tax). This is what you’d pay if Congress continued the tax policy in place this year, with an A.M.T. patch, for 2013 income.

2) 2013 tax law. This is what you would pay for all of next year if Congress doesn’t act.

3) The Senate Democratic plan, which would extend the expiring Bush-era income tax cuts for a year for all except the top 2 percent of taxpayers. It would extend the credits originally enacted by President Obama in 2009, but allow the temporary payroll tax cut to expire.

4) The Senate Republican plan, which would extend the Bush-era income tax cuts for everyone but would allow the 2009 credits and the temporary payroll tax cut to expire.

The site offers examples for six basic taxpayer scenarios (single with no children, married with two children under 13, etc.) that you can further tweak with your own information.

Among the various assumptions built into the calculator is that both the employer and employee shares of the payroll tax — the taxes that fund Social Security and Medicare — are assigned to the worker. A note explains, “Economists believe that the employer’s share of the tax is actually borne by the worker in the form of lower wages and therefore the tax calculator assigns both employer and employee shares of the tax to the worker.”

To look at just one example, the calculator shows that a single filer with no children and adjusted gross income of $18,600 would have a total tax liability (including payroll and income taxes) that is $802 higher under the 2013 scenario if Congress fails to act, than under the scenario of continuing the 2012 tax laws with an A.M.T. patch.

The total liability for the same taxpayer, under either the Senate Republican plan or the Senate Democratic plan, would be $372 higher than the patched 2012 scenario, according to the calculator.

Put another way, the taxpayer’s liability would be $430 higher under the 2013 scenario of Congress failing to act, than under either of the Senate plans.

Try out the calculators yourself. Did it help your headache, or did you still have to resort to ibuprofen?

Article source: http://bucks.blogs.nytimes.com/2012/12/05/a-tax-calculator-for-you-to-try-as-washington-debates/?partner=rss&emc=rss

Economix Blog: Who Makes It Into the Middle Class

A new study by researchers at the Brookings Institution shows that about two in three Americans achieves a middle-class lifestyle by middle age — and delves deeply into who makes it there and how.

Isabel V. Sawhill, Scott Winship and Kerry Searle Grannis tackled the question of why some children make it to the middle class and others do not, studying criteria that tend to be indicative of later economic success and examining how race, gender and family income come into play.

The study breaks life down into stages (for instance, adolescence) and gives benchmarks for each of those stages (in that case, graduation from high school with a grade-point average above 2.5, no criminal convictions and no involvement in a teenage pregnancy).

They then studied children over time, analyzing whether they met those benchmarks and projecting whether they would make it to the middle class — defined as the top three quintiles of income — by age 40.

Unsurprisingly, the researchers found that success seems to beget success — meeting each benchmark makes one more likely to meet the next. Moreover, the effect accumulates. A child who meets all the criteria from birth to adulthood has an 81 percent chance of being middle class. A child who meets none has only a 24 percent chance.

(Notably, at each stage of life, a person who failed to meet the given criteria had as high as a 59 percent chance of meeting them in the next round.)

The researchers also found that a number of other factors significantly influenced a person’s likelihood of making it to the middle class.

Family wealth, for instance, matters a lot. The researchers show that children born to rich families have a 75 percent chance of being middle income or better by the time they reach their 40s. For children born to poor families, the chance is just 40 percent.

Children from disadvantaged families are less likely to be ready for school at age 5, less likely to be competent elementary-school students, less likely to graduate from high school without a criminal record or a child, and so on.

Race matters as well. About two in five black adolescents met the benchmark of graduating from high school with a decent grade point average, no children and no criminal record by the age of 19. About two in three white adolescents did.

The researchers also compared boys’ and girls’ outcomes. They found that girls are more likely to meet the given benchmarks through childhood, but they lose ground later in life. Boys become as likely to meet the benchmarks as girls do by the time they are in their late 20s, and pull ahead by their 40s.

Article source: http://economix.blogs.nytimes.com/2012/09/20/who-makes-it-into-the-middle-class/?partner=rss&emc=rss

Economix Blog: Nancy Folbre: Welfare Reform Revisited

U.S. Census Bureau, Economic Report of the PresidentDESCRIPTION

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

Fifteen years have passed since changes in welfare administration imposed tighter restrictions on poor families with children that were seeking cash assistance.

Today’s Economist

Perspectives from expert contributors.

Many Republicans now advocate similar restrictions and cuts in other forms of assistance to the poor on the grounds that they discourage work. Newt Gingrich asserts that janitorial employment for poor children would improve their work ethic.

Yet as the chart above shows, the poverty rate among children now closely follows the unemployment rate, because many parents depend more heavily on paid employment but are unable to find it. (From 1997 to 2010, the correlation between the two rates was 0.78, compared with 0.42 from 1964 to 1996.)

As its name suggests, the Temporary Assistance for Needy Families program, or TANF, established in 1996, was devised on the presumption that mothers who were willing to work would not need more than temporary help. It was never intended to function effectively under conditions of high unemployment.

Indeed, caseloads and outlays in the program have increased much less than those in other forms of public assistance, like food stamps, which have less stringent work requirements. A recent Urban Institute report shows that TANF has proved largely unresponsive to the recession.

The program no longer provides much of a safety net at all. The Center on Budget and Policy Priorities notes that only 27 percent of families in poverty received any cash assistance from TANF in 2009.

Its limited coverage of the poor does not seem to trouble fans of TANF. In a video marking welfare reform’s 15th anniversary, Ron Haskins of the Brookings Institution fails to mention that the child poverty rate now exceeds that of 1996. His only comment on the slow growth of assistance in a period of intense need is, “It makes you wonder.”

Indeed, it makes one wonder whether the real purpose of reform was, as claimed, to help poor families, or simply to minimize spending on them. TANF benefits, adjusted for inflation, are now worth much less than they were in 1996 in most states. They are not sufficient in any state to raise a family’s income above 50 percent of the poverty line.

The much-acclaimed commitment to help poor mothers make a transition to paid employment has also weakened. Arizona and South Carolina have made particularly sharp cuts in child-care subsidies.

Census reports based on the Survey of Income and Program Participation indicate that poor families that pay for child care spent about 40 percent of their income for that purpose in 2010, up from 29 percent in 2005. Expenditures for other families purchasing child care in 2010 was 7 percent.

The combination of child care and other work-related costs, including transportation, further reduce the net benefits of public assistance. Many families may conclude that these benefits are not worth the time, effort and humiliation required to get them. This harsh treatment doesn’t help them find a job.

Welfare reform is in dire need of … reform. A bill recently introduced by Representative Gwen Moore, Democrat of Wisconsin, the Rewriting to Improve and Secure an Exit Out of Poverty Act, would provide permanent funding, modify work requirements so that education and training would qualify, and guarantee child care for TANF work-eligible recipients.

A more likely scenario for the near future is further cuts in TANF spending, driven by fiscal austerity measures that will contribute to persistent unemployment. Pressure to allow extended unemployment benefits to expire puts many children at immediate risk.

A work ethic doesn’t help much when there is no work to be had.


This post has been revised to reflect the following correction:

Correction: December 12, 2011

An earlier version of this post misstated the affiliation of Ron Haskins. He is with the Brookings Institution, not the Urban Institute.

Article source: http://feeds.nytimes.com/click.phdo?i=795b6d2222c4e2f83c53c2fafd8b0a89

Economix: Producing More Primary-Care Doctors

Today's Economist

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

In “Why Medical School Should Be Free,” a recent commentary in The New York Times, Peter B. Bach, M.D., and Robert Kocher, M.D., proposed that medical school be tuition-free for all students.

Dr. Bach, director of the Center for Health Policy and Outcomes at Memorial Sloan-Kettering Cancer Center, was a senior adviser at the Centers for Medicare and Medicaid Services in 2005-6; Dr. Kocher is a guest scholar at the Brookings Institution and was a special assistant to President Obama on health care and economic policy in 2009-10.

The two estimate that the annual tuition for medical students would be roughly $2.5 billion, given current tuition levels that average about $38,000 a year — although these vary among medical schools and are lower at public universities than at private universities.

The authors would not, however, burden taxpayers with that $2.5 billion, trivial though that sum may be at 0.017 percent of our gross domestic product of $15 trillion.

Instead, they would raise the $2.5 billion by forcing medical-school graduates who choose residency training in specialties other than primary care to forgo much or all of their annual salary – currently about $50,000 – during their residency training, which may span four years or more. Residents in primary-care specialties would continue to receive their salaries.

The goal of this proposal is to alleviate the much-lamented shortage of primary-care physicians in many parts of the nation. It would do so by relieving all medical graduates of their heavy, accumulated debt burden after medical school –- estimated at about $200,000 a graduate –-and by providing powerful financial incentives to steer them to primary care rather than other specialties.

Would hard-working residents in the non-primary specialties hold still for this forfeiture of their salaries? They might.

First, the forfeiture would be offset to some extent, although not wholly, by the waiver of medical-school tuition. More importantly, any medical-school graduate bent upon becoming a specialist would have little choice — because any resident is, in effect, an indentured laborer, a circumstance that society has long exploited to its advantage.

By the time someone graduates from medical school and enters residency training, he or she already has made a huge investment of time, effort and money. From the perspective of many medical students, tuition tends to be the smaller part of the total monetary cost of attending medical school.

The much larger part, often double or triple the level of tuition, is the forgone income that medical students might have earned had they taken a job right after graduating from college.

It is reasonable to assume, for example, that given their intelligence and drive, college graduates able to gain acceptance to an American medical school could find a lucrative job elsewhere, perhaps in finance – maybe even in what millions of undergraduates now seem to view as the apex of human existence, trading derivatives at Goldman Sachs.

Fortunately for humanity – and especially for the sick — monetary reward is not the only factor, or the main one, that drives occupational choice among young people. If it were, few bright college graduates today would choose a medical career.

Given the huge investment of time and money that medical students have sunk into their chosen careers by the time they complete medical school, the only way they can reap the financial and non-pecuniary rewards from that huge investment is to undergo the arduous apprenticeship called “graduate medical education” or “residency.”

In this boot camp through which all doctors must pass, residents can be made to work long hours at very low pay, making them among the cheapest forms of labor in any teaching hospital.

For years, medical educators have tried to rationalize these long hours on pedagogic grounds. I am not persuaded. Teaching hospitals have also argued for years that residency programs cost them money. Congress seems persuaded by that argument, currently bestowing on teaching hospitals $10 billion a year in subsidies toward graduate medical education.

But at least some economists, including me, are not persuaded by that argument, either.

A more plausible theory is that residents themselves amply reimburse teaching hospitals for the cost of training by the long hours they work at wages far below what these residents add to the hospitals’ revenue. With proper managerial accounting, I maintain, residency programs would be found to produce net profits at teaching hospitals — as the hospitals would quickly learn if they had to replace the labor of residents with regular, similarly skilled employees.

To be sure, teaching hospitals probably use the profits from residency programs to subsidize the charity care they routinely render the low-income uninsured. So I see the indentured-labor story as one in which society exploits residents to finance health care for the poor that society does not wish to pay for up front. The teaching hospitals merely function as a vehicle for that exploitation. (There must come in the life of every resident the moment when, exhausted, she or he exclaims: “Where is Karl Marx when we need him?”)

If, by law, teaching hospitals were prohibited from paying residents in some specialties any stipends, these residents might view the need to borrow $50,000 or so annually for living expenses as a sound investment, at least in theory.

Drs. Bach and Kocher appear to believe that an adequate number of medical-school graduates would see it that way — but also that some now choosing specialty training would opt for primary-care training instead.

But such forfeiture of their salaries for several years might alter the attitudes these specialists would subsequently bring to medical practice — and the fees they might charge for services and care. In medical parlance, the Bach-Kocher treatment might have unintended and untoward side effects. It behooves policy makers to think of them.

In the meantime, we may all ponder whether simpler solutions are available to address the shortage of primary-care physicians. I am eager to hear the ideas of others, and I will return to this issue in a while.

Article source: http://feeds.nytimes.com/click.phdo?i=5b5c0e6d5ed4f3fd2288699fc27fecf8

In Lifeline to Greece, a Risk for the Rescuers

VENICE — As European leaders move toward a second bailout for Greece, some economists are warning that a new rescue will simply kick the country’s problems further down the road, and may not halt an eventual default that could strain the rest of the euro monetary union.

A year after providing an aid package of €110 billion, or $161 billion at current exchange rates, that has failed to help Greece mend its tattered finances, officials are considering whether to lend the country an additional €50 billion or €60 billion to give it more breathing room while it struggles with a deep economic downturn that has made it harder to avoid a restructuring of its debt.

Even if Greece is pulled from danger again, economists say, European leaders are faced with the prospect of providing more aid over the next several years if Greece cannot swiftly overhaul its economy and stoke the necessary growth to get it off a long-term lifeline.

“I don’t see how Greece can eventually avoid some kind of default,” said Martin N. Bailey, a senior fellow at the Brookings Institution and the former chairman of the U.S. president’s Council of Economic Advisers.

“It’s hard to see how you can avoid the need to finance this over the next 5 to 10 years,” he said over the weekend at a conference held in Venice by the Council for the United States and Italy.

His sentiment was echoed widely among economists, politicians and analysts gathered here.

“We were too optimistic about the first bailout for Greece,” said Fabrizio Saccomanni, the director general of the Italian central bank.

Slow economic growth has cut a bigger hole in the Greek budget, leading to a new scramble to find more money as the country remains shut out of financial markets and grapples with one of the largest debt burdens in the world. The government is trying to cut its deficit by €6.4 billion with more spending cuts and tax increases, and raise €50 billion by selling major national assets.

Without those pledges, the International Monetary Fund was wary of releasing a new portion of aid promised in its first loan a year ago, and European leaders were loath to come up with new financing for Greece.

Experts at the conference expected a number of potential international investors — many of whom stockpiled cash after the financial crisis — to look at what Greece is putting up for sale. But the country’s ability to restore economic stability over time would be a major consideration for any deal.

That confidence may be hard to come by. The Greek fiscal crisis worsened after Moody’s Investors Service warned last week that there was a 50 percent chance that the country would default or have to restructure its debts within the next five years.

European leaders want to avoid such an event at all costs. The European Central Bank has warned that a default or restructuring may lead to problems on the order of the collapse of Lehman Brothers, by sparking a panic about the ability of Ireland and Portugal — which have also received European bailouts — to repay their debts. The result, some say, could be a new contagion that engulfs other weak euro zone countries, a number of large European banks and even the E.C.B., which holds large amounts of Greek debt.

Some officials say such warnings are too dire.

“I don’t see a crisis in the euro zone,” Mr. Saccomanni said. “If anything, Europe’s financial conditions are sounder than other economies, although there is a crisis in some euro zone countries.”

But most economists say they see any further trouble in Greece as both a political and economic flash point for the rest of the euro zone. As it is, the inability of heavily indebted countries to stoke their economies will probably broaden an economic divide between those nations and Germany.

The German economy has expanded so quickly that the E.C.B. raised interest rates in April to ward off the specter of inflation in the country, a move that analysts say will further dampen growth in Ireland, Portugal, Spain and other weakened economies.

Article source: http://www.nytimes.com/2011/06/06/business/global/06euro.html?partner=rss&emc=rss

Economix: The Case for Higher Taxes

Today's Economist

Uwe E. Reinhardt is an economics professor at Princeton.

Alan Greenspan, the former chairman of the Federal Reserve, opined on “Meet the Press” last month that to cope with the growing federal deficit the United States should go back to the federal income tax rates of the Clinton years. Such a step would raise tax rates for all American taxpayers.

I was reminded of that remark earlier this week at this year’s Princeton Conference on Health Policy, organized by the Council on Health Care Economics and Policy, housed at Brandeis University’s Heller School for Social Policy and Management.

In a session on “Future Health Care Spending: Political Preferences and Fiscal Realities,” Henry J. Aaron of the Brookings Institution presented this fascinating chart:

Center on Budget and Policy Priorities, based on estimates from Congressional Budget Office


Dr. Aaron was quick to add that he took the chart directly from an analysis by the Center on Budget and Policy Priorities. The chart illustrates how prominent a role the tax cuts of 2001 and 2003 have played in the buildup of deficits and public debt in the United States.

An additional factor, of course, has been the economic downturn (dark blue), along with two wars. Evidently, the stimulus package (the bulk of the “recovery measures”) played a role as well, although probably not nearly as prominent a role as seems to have been widely assumed.

This next chart, taken from a report by the Congressional Budget Office, illustrates more clearly the shock that the deep recession brought on by the financial crisis dealt to American fiscal policy, on top of dubious decisions in that policies.

Congressional Budget Office, Feb. 15, 2011

It can be seen that the “politics of joy” – granting tax cuts without commensurate cuts in government spending – began in earnest in the 1980s. That strategy was briefly interrupted by President Clinton who, as legend has it, was converted by his Treasury secretary, Robert Rubin, to worship the bond market and therefore sought to keep interest rates low by sharply lowering the federal deficit.

In that lapse into fiscal responsibility the Clinton-Rubin duo found support, after 1994, with a Republican Congress and a House of Representatives firmly led by Newt Gingrich.

Sadly for fiscal policy, the politics of joy was revived with the tax cuts of 2001 and 2003. To my mind, the pièce de resistance of that era was the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which bestowed on the nation’s elderly, known to be active voters, a large and generous entitlement that was entirely financed by the deficit. It is projected to add close to $1 trillion to the federal deficit during the current decade alone, and much more in decades beyond.

Starting in 2008, the deep recession saw federal tax revenues plummet as federal outlays soared, driven in part by economic stabilizers such as unemployment insurance. Large deficits are a natural byproduct of deep recessions.

As early as January 2009, two weeks before President Obama took office, the Congressional Budget Office projected in its “Budget and Economic Outlook” a federal deficit of close to $1.2 trillion. As the chart above shows, the federal government now budgets with red ink as far as the eye can see.

The chart demonstrates a chronic affliction of American politics aptly diagnosed by Douglas W. Elmendorf, director of the Congressional Budget Office:

The United States faces a fundamental disconnect between the services that people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services.

Note that Mr. Elmendorf does not accept the usual folklore — that Americans are inherently mature and fiscally responsible and are victimized by a sinister, alien force called government. Rather, he asserts that we, the people, have time and time again favored at the ballot box politicians who promise tax cuts, even though a mature people would have noticed long ago that government spending will never be cut commensurately – mainly because, as voters, we do not countenance major spending cuts, either.

We are now seeing this adolescent posture on fiscal policy playing out once again, as voters angrily react to the recently passed House of Representatives budget plan. And it explains why my friend and fellow economist Eugene Steuerle of the Urban Institute, who served at the Treasury under President Reagan, has aptly and with exasperation named his periodic column on United States fiscal policy: The Government We Deserve.”

Looking at the Congressional Budget Office’s chart, I came away convinced that Mr. Greenspan had it right: given what we, the people, expect the federal government to deliver – including, once again these days, a social insurance program called “federal disaster relief” — the only way to avoid a looming fiscal disaster would be to return to the higher taxes across the board that prevailed during the Clinton administration. (An alternative would be to bite the bullet and adopt a value-added tax, as other nations have done.)

Would this make America a relatively overtaxed nation? Not by international standards, as can be inferred from data regularly published by the Organization for Economic Cooperation and Development.

Organization for Economic Cooperation and Development tax database

There is little evidence of a strong, negative correlation between total taxes as a percentage of G.D.P. and economic growth, as is suggested by the chart below (for a similar perspective, see this).

Organization for Economic Cooperation and Development

This is not to say, of course, that a nation’s rate of economic growth is impervious to the composition of its total tax burden – what fraction of taxation comes from levies on business income compared with that on individual incomes, the level of marginal income-tax rates and so on.

One should think, for example, that judiciously targeted investment tax credits would encourage economic growth, or tax preferences for start-ups.

On the other hand, it has never been clear to me in what way granting tax preferences to gains from trades in already existing assets — like those on long-term gains on already issued stock certificates or gains on speculating on the value of already built real estate — fuels economic growth.

Article source: http://feeds.nytimes.com/click.phdo?i=98c5fa3de6d14662cd52396698e0e06c

Long-Ago Affair Might Damage Turkish Candidate’s Chances to Lead I.M.F.

Currently a vice president at the Brookings Institution, he was Turkey’s economy minister from 2001 to 2002 and was widely credited with bringing Turkey out of a severe financial crisis by privatizing state assets and slashing budget deficits amid fierce political opposition.

He speaks fluent French, German and English and is a veteran of I.M.F.-style bureaucracies like the World Bank and the United Nations.

But, Mr. Dervis, it turns out, has a secret that could disqualify him from being considered for the job. Years ago, while a senior executive at the World Bank, he had an affair with a female subordinate who now works at the I.M.F., according to a person with direct knowledge of the affair.

This person’s account was confirmed by Stanislas Balcerac, a former World Bank staff economist who worked on the same floor with Mr. Dervis and the woman.

In a brief interview Thursday, Mr. Dervis declined to discuss the details of his personal life. But after Mr. Strauss-Kahn’s departure over allegations of a sexual assault, questions of past impropriety could be enough to hurt a candidate’s chance.

Mr. Dervis, 62, was not married at the time of the affair, but the woman was, according Mr. Balcerac, who says he bears no ill will toward either person. In fact, he praises Mr. Dervis as one of the brightest, most adept and bureaucracy-beating executives at the World Bank at the time.

“He was not your standard bureaucrat,” he said. He made “decisions quickly and was extremely dynamic.”

Indeed, the professional talents of Mr. Dervis are a reason he has been widely mentioned this week as a possible candidate for the top job at the I.M.F. He would represent a potential bridge between the European establishment from which the I.M.F. chief has traditionally been chosen, and the emerging-economy countries that are now demanding to play a bigger role in global financial institutions. Turkey, with its 9 percent growth rate last year and its ambition to become a major regional actor in the Middle East, would certainly fit that bill.

Most intriguingly, perhaps, Mr. Dervis is a close friend of George Papandreou, the prime minister of Greece, whom he has been informally advising over the last two years.

The two men became acquainted in 2001 when Mr. Dervis was in charge of the Turkish economy and Mr. Papandreou was foreign minister for his government. Since then, Mr. Dervis has provided counsel in a variety of ways.

He has been an active participant in Mr. Papandreou’s annual summer ideas conference held on different Greek islands each year. He has huddled with him at the Brookings Institution in Washington. And he has, insiders say, shared many late-night phone calls with the Greek prime minister.

Book makers in London have been giving Mr. Dervis the second-best chance to get the I.M.F. job after Christine Lagarde, the finance minister of France. And Mr. Dervis has many professional admirers.

“He is the man for the job,” said Dani Rodrik, an expert on globalization and development at the John F. Kennedy School of Government at Harvard. “He would be a truly meritocratic appointment.”

But Mr. Dervis said Thursday that he was in no way prepared for this sudden burst of publicity.

“Look, I have not put my name forward, nor has anyone called me about the job,” Mr. Dervis said. “I am flattered, of course, but that is all I can say at the moment.”

No doubt, the affair in question is very old news. Mr. Balcerac points out that years ago the culture at the World Bank was looser and it was not uncommon for senior executives to have affairs with those working for them.

All of this changed in 2007, when the World Bank had its own, more minor scandal: Its president at the time, Paul D. Wolfowitz, promoted a woman he was involved with.

The I.M.F. has not said publicly who it is considering to succeed Mr. Strauss-Kahn.

John Lipsky, an American, has taken control as acting managing director and while there had been an expectation that Mr. Strauss-Kahn would leave before his term ended in October 2012 to run for the French presidency, it is not clear what type of short list, if any, the fund board has drawn up. 

Article source: http://www.nytimes.com/2011/05/20/business/20dervis.html?partner=rss&emc=rss