Normative Narratives


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“The Beast” Has Been Starved, Long Live The Beast!

Starving the Beast

What is “The Beast”, and How to Starve It

Starve the beast is the long running small government belief of the GOP that if you deprive the government of tax revenue, it will be forced to cut spending. 

This theory has generally been disproven–despite concerns about “socialism”, social programs tend to be popular once enacted. Instead of starving the beast, when taxes are cut the deficit and national debt get larger as “the beast” continues to grow.

So what is a small government ideologue to do? How can one starve the beast in such a world?

Unlike the Federal government (the main “beast”), most state and local governments cannot run deficits. They are designed to have balanced budgets, which can be a problem when projected tax revenues fall short and expenses unexpectedly rise (like, say, during a once in a lifetime pandemic).

Congress must pass some sort of meaningful state and local government aid package. These governments employ about 13% of all payroll workers in the country. Many of the public servants they employ work jobs providing a broad array social services to the least well off, and their budgets fund non-profits that do the same. They pay for first responders, teachers and schooling, not to mention all the extra costs associated with safely getting kids back in the classroom whenever that happens. 

Don’t give me that tired line about “bailing out” mismanaged states. With careful wording Congress can address legitimate needs without bailing out states from any pre-COVID budgetary issues; it is ideology and partisan saber rattling holding back this aid, not any concern for economic justice or moral hazard. The economic recovery will lag, and poverty will be exacerbated, if state and local governments slash their payrolls and services at a time when both are needed more than ever. 

Another way to “starve the beast” is to go after programs that are funded through specific “trust funds”, like Social Security and Medicare. These programs are funded through payroll taxes, so cutting the payroll tax could effectively starve that portion of the beast. Even though it likely wouldn’t lead to cuts to these popular programs, the legislative fight to reallocate money for them would present the GOP with an opportunity to push for cuts to other important programs.   

So where do we find ourselves now? In the middle of a manufactured fiscal crisis on top of a terrible recession and pandemic. The Democrats passed a bill 3 months ago in preparation for this, but the GOP has neither passed a bill nor negotiated from the Democrats starting point.

So what was the GOPs response? First, to wait until the last second to even try to start developing out a solution. Then to balk at providing state and local governments the aid they need, despite decades of empty rhetoric about how state governments are best positioned to meet the needs of their people. From the Trump administration the plan is to suspend the payroll tax that funds Social Security and Medicare (an idea he’s been floating since March that no one in his own party even wants), and further strain state budgets by asking them to foot part of enhanced UI benefits.

Taken together the GOPs plan was to cynically try to blame the Democrats for not having a deal in place, while starving whatever “beasts” they could.  

The COVID Spotlight

The corona virus has brought the structural inequalities of America to the forefront. Poorer people and persons of color were more likely to lose their jobs and be exposed to and die from the disease due to interrelated factors such as occupation, income, wealth, underlying health conditions and access to medical care.

People have rightfully been critical of the Trump administration’s response to the corona virus, but these issues are different in that they all predate the pandemic. In order to address them, two things are needed:

  1. An economic system that does a better job of promoting equality of opportunity by providing or making affordable the bare minimum needed for people to reach their cognitive potential (early childhood development programs, universal pre-K), care for themselves when they are sick, and receive the education and job training needed to live a life of dignity and meaning.

    We also need a plan to address structural racism, as history and current systems have left persons of color at a disadvantage relative to their white counterparts (perhaps most simply visualized by racial wealth inequality, even when controlling for income). Call this the “Thurgood Marshall plan”.

    Despite what Trump says, racism will not fix itself with economic growth. For too long that lie has been told, as people of color have been “last hired, first fired” recession after recession. If only the expansion had lasted just a bit longer, Trump says, we would’ve achieved economic and racial justice. Don’t point to relatively low black unemployment and poverty rates pre-COVID as proof Trump is right, those metrics obscure the inequality of opportunity and often times insurmountable headwinds facing America’s least well off.

    Being employed and not in poverty are bare minimums, not high-water marks to be celebrated when finally achieved for a brief moment at tail end of the longest economic expansion in American history. The idea that we may get back to that point 10 years from now should not excite anyone–structural changes are needed.

  2. A stronger social safety net, for those who need temporary support when they are down on their luck (or when something completely outside their control, like a global pandemic, uproots their life).

    On a macro level such programs temper economic downturns and prevent poverty from spiking during them. The recent expiration of enhanced UI benefits without any plan in place with have a negative impact on both these fronts. 

As the past few months have laid bare, a lot of work remains to be done. As comedian John Oliver put it:

“There is no better argument for a permanent welfare state then watching the government desperately trying to build one when it’s already too late. Because make no mistake, the real test here isn’t whether or not our country will get through this, it will. The question is how we get through this, and what kind of country we want to be on the other side…”

Trying to build an adequate safety net from scratch has led to some truly remarkable inefficiencies in our response, from unemployment claim backlogs to small business and hospital aid flowing to undeserving wealthy interests, to outright fraud. In other words, America paid a premium for slapping things together at the last second.

Creating a more just economic system is a more difficult undertaking, but ultimately even more important. In addition to creating a fairer society, getting that right would lead to more long term economic growth as a larger pool of innovators and entrepreneurs reach their potential. It would also lead to savings in our criminal justice system, poverty reduction efforts, mental healthcare, and other “safety net” programs, as fewer people would be reliant on them. To quote Fredrick Douglass, “it is easier to build strong children than to repair broken men”.

In other words America has long been paying the price for our structural inequalities. These costs have just been unfairly ascribed to the very people weighed down by the systems that have failed them, in the largest scale example of victim blaming you will ever see.

Feeding The Beast

Both of these undertakings–building a more just society and a stronger safety net–require not only political will but also large sums of money. America was already heavily indebted before it devoted almost $3 trillion to “managing” the COVID outbreak (if you want to call what the Trump administration has done “managing”). Then there is the stalled stimulus bill that will ultimately need to be passed in some form or another, which will probably settle around $2 trillion

Believe it or not, none of this spending is actually an economic recovery plan (think jobs programs, infrastructure spending), which itself will also likely be in the trillions. All this spending needed to address a bungled COVID-19 response, combined with the GOPs tax reform bill that is projected to reduce tax revenue by over $1 trillion over the next decade and unresolved long-term structural issues funding Social Security and Medicaid, and America’s fiscal outlook is bleak. 

But there is hope. We can pay for the many demands Americans have on their governments. After all our governments are not beasts to be starved, but rather the most important institutions we have in promoting the twin goals of justice and economic dynamism. 

The good news is that the GOPs unpopular tax reforms can be undone, and “tax justice”–raising enough revenue to pay for the programs society needs–can be achieved. But it will take an administration that believes in both the ability of government programs to improve people’s lives and in international coordination on tax dodging (because of how easily money can be moved around the world these days). These are two things the Trump Administration is diametrically opposed to.

Because this is a global pandemic, governments around the world find themselves in the same boat–with the demands of their people far outstripping their current abilities to bring in tax revenue. Debt levels have exploded as spending increases and tax revenues shrink. This presents a unique opportunity to engage in truly meaningful action against “base erosion and tax avoidance” (BEDS), one that must not be wasted. Outliers must be treated like pariahs; the global community needs to sanction them until it is proven that white collar crime doesn’t pay.

It may be odd to hear me say it, but generally speaking now is not the time to be raising taxes. At any given moment appropriate fiscal policy is context sensitive and “counter-cyclical“. This is exactly what all this stimulus spending now is for (to prop up the economy during a deep recession), and another reason why the GOPs tax bill was not only regressive but unnecessary (stimulus mostly for the rich during an economic boom). 

But if we try to raise taxes now, when we are beginning what is likely to be a prolonged global recession, it could choke off any recovery we might otherwise realize. This is less true of tax reforms that target the wealthy, or just funding the IRS enough to effectively audit wealthy dodgers, but generally speaking this is not the time to be raising taxes, particularly on small and medium sized businesses. 

This absolutely does not mean there aren’t meaningful steps to take on taxation. Now is when America must do the heavy lifting of leading the global effort to setup a tax framework that works for the 21st Century by plugging up all the holes. If we can accomplish this difficult task it will be relatively easy to raise not just the statutory tax rate (what the tax code says), but more importantly the effective tax rate (what is actually paid), when the time is right.

 


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When “Race Blind” Policies are Progressive, and When They Aren’t

A demonstrator holds a No Justice No Peace sign at the ral… | Flickr

In this blog I will paint with broad strokes. In reality each of the issues I will touch on–income and wealth inequality, our criminal justice system, racism and globalization–are interrelated and have complex historical underpinnings. I hope it will inspire you to research further and get involved in advocating for the change you want to see in the world.

Addressing Income Inequality–It’s Not So Black or White (or Latinx)

I don’t like to be put in a box politically or labeled in general, but I consider myself a “progressive”. I believe in the importance of empowering all people to realize their full potential and live a life of dignity, freedom and self-determination. I consider these not only our moral imperatives, but also to be in our economic and security interests.

In my policy advocacy, I tend to promote “race blind” economic policies. I do so for a few reasons:

  • Poverty and lack of economic opportunity affect people of all races
  • Broad, structural reforms are the most meaningful in promoting equality of opportunity
    • These reforms include early childhood development programs, educational reform, higher education reform, job [re]training, and mental and physical healthcare reform
  • I think there is more broad-based support for these policies, particularly in “electorally important” areas

History has led us to a point where significant racial disparities in wealth and income exist, which I will address in a moment. I by no means want to belittle the fact that, on average, minorities still earn less than white people, or that people with ethnically identifiable names still face discrimination in the hiring process.

But nowadays and going forward, people of all races will have to contend with the labor market effects of globalization. With many blue collar jobs displaced or changing, the increasing importance (and therefore cost) of education and job [re]training has led to increasing inequality and decreasing social mobility across racial lines.

So if poor people of all races have similar root causes for lack of opportunity today, if “race blind” policies can meaningfully address these issues, and if they are more politically viable, my thinking is why not advocate for those policies? This platform is similar to Bernie Sanders’ vision of economic populism. It also, I believe, promotes the structural changes many are calling for in the wake of the murder of George Floyd. These are the same structural inequalities that have led the corona virus to be more harmful for persons of color both economically and health-wise.

These are the kind of changes that will never “trickle down”; powerful interests never willingly give up their positions of power. Rather they are the kind of changes that must be claimed by the righteous hand of a unified American people. While these policies may be “race blind” on the surface, to the extent that minorities are disproportionately impacted by poverty, they will disproportionately benefit from them.

Is this approach 100% just, no–more on that in a moment. Might it be criticized as “political expedient”? Yes, and I don’t necessarily think that’s a bad thing. We should not let perfection be the enemy of progress. Progress can be built upon. It can also be used to change the minds of people who need government support the most, but have paradoxically let themselves be led to believe that the government is their enemy (for example, the effect of Medicaid expansion under the ACA in red states).

You can feel free to disagree with me, but I think there is a strong argument that “race blind” economic policies are a big piece of the economic justice puzzle. But by themselves they are insufficient, particularly when we change our focus from income to wealth.

Wealth Inequality–A Legacy of Discrimination

figure 3

Income and wealth are related, but are not the same. Wealth is accumulated over time from savings and investments that are only possible once a certain income level is reached. Wealth is passed down from generation to generation, providing the resources to help keep one’s children at the top of the income ladder (nepotism aside).

Our nations legacy of slavery and racial discrimination clearly drives racial wealth inequality and therefore social immobility. While the primary structural cause of widening income inequality today–an incomplete globalization strategy–may be mostly “race blind”, the same simply cannot be said of wealth inequality.

These wealth disparities mean that even though poorer white and black people’s livelihoods were disrupted similarly by globalization, poorer white people were better positioned to adjust to that shock (and many probably did). This is what I meant earlier when I said race blind economic policies might not be “100% just”. Did previous generations of white people have more opportunities to escape poverty than minorities? Of course. But if they didn’t, is it really fair to tell the current generations they do not have legitimate grievances?

Here is what the Brookings Institute has to say on wealth:

“…wealth confers benefits that go beyond those that come with family income. Wealth is a safety net that keeps a life from being derailed by temporary setbacks and the loss of income. This safety net allows people to take career risks knowing that they have a buffer when success is not immediately achieved. Family wealth allows people (especially young adults who have recently entered the labor force) to access housing in safe neighborhoods with good schools, thereby enhancing the prospects of their own children. Wealth affords people opportunities to be entrepreneurs and inventors. And the income from wealth is taxed at much lower rates than income from work, which means that wealth begets more wealth.

Well-designed taxes on inheritancesreforms to capital income taxation, and even taxes on wealth could be part of the solution. Inheritance or estate taxes in particular could enhance equality of opportunity, especially if revenues were invested in programs that give low-income children a better chance at economic success.”

Not only is a home in a good neighborhood an important factor in a child’s economic outcome, but houses also represent the largest source of wealth of any single type of asset in this country (p. 34). It is unsurprising, then, that minorities have far lower home ownership rates than white people.

As such, housing is one fiscal policy area that should not be race blind; more resources must go towards desegregating neighborhoods and promoting minority home ownership. The same is true of programs that assist minority entrepreneurs and small business owners. These policy areas should not be race blind because they specifically address racial wealth inequality, which is a direct result of our racist past. These are the types of “reparations”, if you want to call them that, that would make the most impact.

Justice is Not [Race] Blind

While poor people’s economic experiences in recent history may have been similar across racial lines, their experiences with the criminal justice system certainly have not been. In other words, “white privilege”, in many ways, plays out most strikingly in the criminal justice system. Poor minorities and poor white people were similarly displaced by our nation’s incomplete globalization strategy, but only members of one of those groups has to fear for their freedom or life every time they go out for a walk.

I think acknowledging this would go a long way towards healing racial divides. Words matter–if we frame “white privilege” this way, and acknowledge that poor people of all races today face an unfair economic system, I think that would go a long way in making the concept more broadly accepted. Perhaps it could even help to build the cross-race working class coalition that would enable this country to finally address many of its structural unfairnesses.

Minorities are disproportionately hurt by virtually every facet of the criminal justice system–from school to the juvenile justice system, and continuing through adult life. Poverty and living in a “bad” neighborhood are root causes of crime, and having a criminal record hurts one’s labor force prospects. Clearly our criminal justice system, with it’s reliance on racial profiling and mass incarceration, has perpetuated a racial poverty trap (on top of the globalization poverty trap).

Because make no mistake, there is certainly a poverty trap resulting from the failures of our criminal justice system. Growing up in a full, happy home is probably even more important in a child’s development than growing up with a lot of money. But due largely to our country’s failed “war on drugs”, an African American child is six times as likely as a white child to have or have had an incarcerated parent.

Mass incarceration is not only socially regressive, it drains a huge amount of public resources. Since this practice has disproportionately impacted people of color, it is only fair that savings resulting from a realignment of our priorities be earmarked for programs that specifically benefit people of color, like the housing and entrepreneurial programs I mentioned earlier. More resources should also go to community development centers, which empower strong voices that can make a difference young people’s lives and run after-school programs that get them off the street and building social and practical skills.

Police reform is an important component of criminal justice reform, and one that is at the forefront of our national discourse right now. 8 Can’t Wait prescribes some promising reform ideas, and I’m sure there are many others pertaining to police accountability. We also have to reconsider who should be hired as a police officer in the first place (conducting more extensive psych evals and background checks, and making them more representative of the communities they serve), and ensure that the criminal justice system works in prosecuting officers when they do commit crimes.

Ultimately the “race blind” economic reforms many advocate for also rely on targeted race conscious programs and wholesale criminal justice reform in order to fully deliver on their promise for those who have heard so many broken promises from policymakers before.


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Economic Outlook: For-Profit Failures Further Support Free Community College Plan

Your Student Government '13 to '14

New Research:

On Thursday (9/10), two researchers — Adam Looney of the Treasury Department and Constantine Yannelis of Stanford University — released an analysis of a new database that offers much more detail. It matches records on federal student borrowing with the borrowers’ earnings from tax records (with identifying details removed, to preserve privacy). The data contains information about who borrows and how much; what college borrowers attended; their repayment and default; and their earnings both before and after college.

the data suggests that many popular perceptions of student debt are incorrect. The huge run-up in loans and the subsequent spike in defaults have not been driven by $100,000 debts incurred by students at expensive private colleges like N.Y.U.

They are driven by $8,000 loans at for-profit colleges and, to a lesser extent, community colleges. Borrowing for both of these has become far more common in recent years. Mr. Looney and Mr. Yannelis estimate that 75 percent of the increase in default between 2004 and 2011 can be explained by the surge in the number of borrowers at those institutions.

It’s not hard to see why. The traditional borrowers from four-year colleges tend to earn good salaries out of college and pay back their loans, even during the recent years of economic weakness. The typical borrower who left a less selective four-year college in 2010 earned $35,000. For those leaving more selective colleges, the figure was $49,000. Those salaries obviously aren’t lavish, but they’re high enough to let most people meet their initial loan payments — and they tend to lead to bigger salaries in later years.

Borrowers at for-profit and community colleges, by contrast, earn low salaries — a median of about $22,000 for those exiting school in 2010 — and have had difficulty paying their loans.

The new findings are consistent with earlier data — such as statistics showing that default rates are actually lower among borrowers with large loans than among borrowers with small loans.

But the new data, which goes back two decades, shows how much the landscape of borrowing has changed. Today, most borrowers are older and have attended a for-profit or community college. A decade ago, the typical borrower was a traditional student at a four-year college.

Why did the face of borrowing change so rapidly in just a few years? During the recession, millions of students poured out of a weak labor market and into college to improve their skills. Historically, these students would have gone to community colleges. But with state tax revenues taking a nose-dive, community colleges were starved for funds and unable to expand capacity to absorb all of the new students. Students took their Pell Grants and loans to for-profit colleges. Enrollments at these schools spiked, and so did borrowing.

Behind the increase in for-profit college loan defaults is an underlying problem. How did these for-profit schools become so prominent so quickly? During the Great Recession, there was a spike in demand for schools where people could acquire marketable skills cheaply. This is exactly what economic theory told us would happen:

  1. With a larger pool of people looking for work (higher unemployment), employers could be more selective, requiring greater credentials for a given job than they otherwise would have been able to.
  2. As the labor market worsened, the “opportunity cost” of obtaining required skills (foregone wages) decreased.
  3. As people’s income decreased (both as a result of the recession, but also part of a long-term trend of stagnant median incomes versus increasing tuition costs), demand for the “inferior good” (in this case, for-profit and community colleges) increased.

Compounding the issue, many War on Terror veterans we’re returning home, with GI Bill tuition-assistance in hand but little idea of what to do with it.

At the same time, the recession resulted in lower tax receipts, and municipal and state budgetary restraints became more acute. Instead of increasing funding to deal with the predictable influx of students, community colleges faced budget cuts. The resulting surplus of students was readily snapped up by for-profit colleges.

For-profit colleges are, on average, four times more expensive than community colleges, and return poorer graduation rates and career outlooks. In other words, for every one student the federal government paid for to go to a for-profit school, it could have sent four students to community college. Furthermore, those four students would be more likely to graduate and have better career prospects.

People have different reasons for wanting to attend community college. Some people want to learn a specific marketable skill, with no intention of pursuing a bachelors degree (or beyond). Therefore, in order for community colleges to be eligible for new proposed federal subsidies, they should have to offer specialized vocational training programs.

For other people, community college is a stepping stone towards a more advanced degree. For these students, a free community college option would allow them to find out if “college is for them”, without taking out loans (I would argue that the absence of debt itself would lead to better academic outcomes). Another requirement for receiving expanded federal assistance should be making it easier to transfer community college credits to four-year college.

Of course, it is not solely up to community colleges whether four year institutions accept their credits. The Federal Government could, however, use the power of the purse and scale grant eligibility based on a four year school’s willingness to accept credits from community colleges. I bet community college credits would become more transferable if this were the case…

Perhaps some of these reforms are already baked into the Obama plan–if so, good. Either way the government, with the assistance of academic and private sector partners, should develop guidelines to help community colleges meet technical program and transfer-ease requirements.

With these requirements are met, community colleges could better serve their two target groups–returning adult-students looking for technical skills, and out-of-high-school prospective college students who think they want to pursue a bachelors degree, but do not have the conviction and/or financial resources to jump right into a four year college.

If properly tailored, a tuition-free community college plan would not greatly increase government spending. Rather it would be, in large part, a transfer of funding from for-profit (which rely almost exclusively–86% of revenue–on federal grant money to operate) to community colleges, in exchange for reforms that allow community colleges to better serve their students.

Some figures here might help put this “transfer” into context. Obama’s community college plan calls for $1.4 billion in funding in 2016 and $60 billion over the next decade. Compare this to the $32 billion the Department of Education spent on for-profit grants and loans from 2009-2010 alone

Isn’t better educating more people, for far less money (per person), exactly what student aid programs should strive for? Now, to be sure, pushing more people towards community college would increase the cost of the tuition-free plan. As many people have pointed out, to make the plan less costly tuition assistance could be reserved for less wealthy applicants with good academic records (high school grades and/or standardized test performance).


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Economic Outlook: Inelastic Demand, Imperfect Competition, and Price Regulation

Talk is cheap, which is why makes sense for business owners to claim prices will increase and / or mass layoffs will result if regulations are put in place. What this really means is that profits will fall, so it is worth it to talk (which, remember, is cheap), and hire lobbyists (which are relatively cheap for big business compared to the benefits they deliver) to support these claims.

In most cases, markets decide pricing. Increase prices, and people can substitute your good for a competitors. Lay people off to make a political statement, and you forego market-share that will be readily snapped up by competitors. In competitive markets, these problems tend to regulate themselves. While true Perfect Competition doesn’t exist in reality, some markets are closer to this ideal than others.

Under perfect competition, there are many buyers and sellers, and prices reflect supply and demand. Also, consumers have many substitutes if the good or service they wish to buy becomes too expensive or its quality begins to fall short.

When a good is necessary for living (healthcare) or for social mobility (college), imperfect markets can price lower income people out.

bls data

Base Year 1978 (Prices = 100)

Healthcare:

ACA–companies justify price increases:

Rate Review helps protect you from unreasonable rate increases. Insurance companies must now publicly justify any rate increase of 10% or more before raising your premium.

Price controls imposed as part of the ACA are at least partially responsible for the dramatic slowdown in healthcare cost increases over the past few years (the Great Recession was another major factor).

But since health insurance is a composite of a number of inputs, including cost of being seen by a doctor and cost of prescription drugs, each of these inputs would need to be regulated to keep health insurance costs down.

The current approach used to try to keep prescription drug prices down–naming and shaming price gauging companies–does not work.

College:

While a college education is not a silver bullet, it is an important element of the social mobility puzzle. As the graph above shows, college costs have skyrocketed in recent decades, leading poorer students to take on increasing levels of debt to afford a degree.

Those who complete their degree still tend to realize a strong return on investment, but the high (and increasing) debt burden is a huge stressor, which likely contributes to poor graduation rates (especially among lower class students). The combination of non-completion (and related low earnings) and high debt can result in an inescapable debt cycle.

A good proxy for the “necessity” of a good or service is it’s elasticity of demand:

Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases.

The availability of substitutes…is probably the most important factor influencing the elasticity of a good or service. In general, the more substitutes, the more elastic the demand will be.

Imperfect markets result in a lack of substitutes, as barriers to entry result in little competition. Policymakers can start with a matrix of competitiveness and necessity (elasticity of demand); goods and services that are both necessities and exist in highly imperfect markets are primary candidates for price regulation. Two obvious tools for regulating these markets are:

  1. Price controls (making companies justify price increases over a certain threshold)
  2. Tying federal funding to price oversight

 

Price controls may seem like a blunt tool, but they can actually be quite nuanced. Take the ACA’s “Rate Review”. A company can has an opportunity to make its case that a price increase is justified; if it justified is, the government will allow it. It is in no ones interest to see businesses fail in the name of price control regulation. Such failures hurt the economy, and undermine support for the regulatory policies that lead to their failure.

What is the American dream? Is it meritocracy and social mobility, or is it the freedom to charge whatever the market will bear regardless of the social cost?

Admitting their are limits to what perfect competition market models can achieve in the real world does not make you a socialist. It makes you a good economist and policy analyst. There is room for these industries to remain private and profitable. That does not mean we cannot regulate them in ways that make them work for society as a whole (considering the social benefits when they are widely available, and the social costs when they are not).

It is the job of politicians to identify these markets and call owners on their bluffs. Failure to do so reinforces power asymmetries that stifle social mobility. The Commerce Department’s mandate should be expanded to help balance the power asymmetry that exists between consumers and producers of necessities in the most imperfect markets.


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Economic Outlook: Fiscal Policy, Equality of Opportunity, and Social Mobility

georgraphyofupwardmobility_chetty_Page_06

“Your chances of achieving the American Dream are almost two times higher … if you are growing up in Canada than in the United States,” said Harvard’s Raj Chetty at a Center on Children and Families (CCF) event held on Monday. Chetty, the Bloomberg Professor of Economics and a leading scholar on opportunity and intergenerational mobility, presented his latest research on how where one grows up has a huge impact on success later in life.

Chetty and colleagues calculated upward mobility for every metro and rural area in the United States. 

The heat map below shows the chances that a child born in the bottom fifth of the income distribution in that particular place will reach the top fifth later in life.

My more perceptive readers may be thinking, “Ben, you usually advocate for equality of opportunity, not outcomes, what gives?”

This is a fair observation. Generally speaking, I do believe more in equality of opportunity than equality in outcomes. But these two concepts cannot be fully separated. In fact, they intersect at what has become an important issue for politicians, academics, and social scientists alike–social mobility.

Observing social mobility outcomes at the macro level provides insight into opportunity (or lack thereof) at the micro level. At more macro levels (neighborhood, city, county, etc), the differences in individuals’ development experiences (wealth, culture, parental values, personal ability, luck, etc.) are naturally smoothed out. Taking into consideration every possible permutation of personal development, these forces offset one another. What we are left with is the “average” (for lack of a better word) personal development experience.  

This “average” experience leaves a common factor–public goods and services–as the variable explaining why certain areas recognize greater social mobility than others (as shown on Mr. Chetty’s map). The fact that the administration of many important public services is carried out at these same levels reinforces the idea that social mobility outcomes are the result of policy choice(s).

Once we get past the question of “if” government programs can impact people’s opportunities, we can focus on which programs are most effective in promoting social mobility. Data mapping serves an important role here, highlighting areas that may have a working policy mix (although since economic development is context sensitive, even the seemingly best policy mix must be adapted to local realities to be effective).

The question then becomes how to pay for the programs which enable equality of opportunity. Fiscal debates are always implicitly an often explicitly shaped by underlying budgetary positions. The unwillingness of governments around the world to engage in stimulus spending despite low interest rates and high un(der)employment (a liquidity trap) is case-in-point.

In order to pay for the services needed to enhance social mobility in poorer neighborhoods, significant investments are needed. This necessitates higher effective tax rates on the ultra-wealthy (which in turn requires a multi-faceted approach, closing loopholes in capital gains, income, and inheritance/gift taxes to name a few); people whose wealth is often unrelated to productivity.

The economic outcomes of the wealthiest ultimately must be impacted in order to finance programs that promote equality of opportunity. This fact, however, does not necessitate class warfare between the lower, middle, and upper-middle classes–the vast majority of the America’s citizenry.

The American economy must work for everybody who is willing to work hard to succeed, regardless of their socioeconomic background. Once this condition is met, inequality is not only defensible, it actually spurs hard work and innovation. Unfortunately, contemporary America is nowhere near this “good inequality”; our inequality is not the result of meritocracy, but primarily the result a political process / tax code beholden to wealthy interests and an outdated criminal justice system.


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Transparency Report: The Decline of American Populism Has Been Self-Inflicted

turnout chart

Original Article:

People who feel financially secure vote, people who aren’t secure don’t, according to a Pew Research Center report released this morning. And because financially insecure Americans disproportionately identify with the Democratic Party, Democrats face a structural disadvantage, especially in mid-term elections. In 2014, fully 94% of the most financially secure Americans were registered to vote, compared to only 54% of the least secure; 63% of the most secure were likely voters, versus only 20% of the least secure.

Not surprisingly, financial security is correlated with political knowledge and activism. The most secure Americans are more than twice as likely to know basic facts about the political system, and three times as likely to have contacted an elected official during the past two years.

40% of all Americans think that government does a better job than people give it credit for compared to 56% who believe that it is almost always wasteful and inefficient. Among the least financially secure Americans who would seem to have the most to gain from effective public programs, only 48% adopt the more affirmative stance, while 49% focus on waste and inefficiency. Government’s poor reputation is one of the many obstacles impeding political mobilization along economic lines.

One can only hope that elected officials will focus on this disparity more than they have in recent years. But as the report shows, the people who most need a hand up are those least likely to vote and to make their views known to elected officials. Unless average Americans feel secure enough to afford generosity, leaders who focus on the problems of those at the bottom are likely to reap meager electoral rewards.

People have many excuses for not participating in the political process. The rise of “Super-PACs” / money in politics makes many people feel they have no voice compared to wealthy interests. Gerrymandering can take the “punch” out of an individual’s vote. Whatever the reason, too many people in this country simply feel their vote does not matter, that the “costs” of voting outweigh the benefits (notably this feeling seems to coalesce at the bottom of the economic ladder).

Just 36.4% of eligible voters turned out for the 2014 midterm elections, the lowest level since WWII.  But passive-aggressive resistance (abstaining from voting) is a counter-productive form of protest. Not voting will not make the political system go away, nor will it lead to meaningful changes in the political process. To paraphrase Thomas Picketty’s “Capital in the 21st Century“, everyone should be active participants in the democratic process; the wealthy never fail to promote their interests.

Reducing inequalities requires an active, informed citizenry. To this end, I have identified a few reforms which could have a meaningful impact on voter turnout among the financially insecure (aside from campaign finance reform measures):

1) Make National Election Day a national holiday:

Senator Bernie Sanders (I, VT.) wants to make national election days national holidays. While this is a sentiment I support, and one that should increase overall voter turnout rates, it may not directly address the issue of increasing turnout among the financially insecure.

Most of the poorest people in America are hourly wage earners. Therefore, making election day a federal holiday would not necessarily lead to higher turnout amongst the poor. In fact, since wage earners typically earn “time and a half” for working holidays, making election day a federal holiday could actually create an perverse incentive, keeping hourly wage earners away from the polls.

Perhaps in addition to making election day a national holiday, the government should consider providing businesses with tax credits in exchange for offering hourly wage employees paid leave on election day?

2) Include a political science / economics class as a required part of the high school curriculum:

I understand the federal government generally tries to stay out of educational curriculum issues, which are developed at the state level. But to me, this area seems like it should be an exception to that rule.

A primary goal of schooling is to help children develop into well rounded, successful adults. But regardless of what someone ends up doing for a living, every American citizen has a civic responsibility to be an active, informed voter. We cannot demand every American be a political buff, but we can and should empower every American citizen to make an informed decision at the polls.

Educating young adults about the functions of the different levels (municipal, state, federal) and branches (executive, legislative, judicial) of government, and the basics of economics, economic policy, personal finance, and taxation would go a long way towards producing informed voters.

A bipartisan committee could draft the curriculum, to ensure it is even-handed.

3) Remote Voting via the internet:

Assuming we can ensure security (and I see no reason why we would not be able to), it seems obvious to me that advances in ICTs should translate into greater ease of voting. Voters should be able to register and vote online, ensuring those who are strapped for time–a limited resource regardless of ones level of income / wealth–can vote.

Online voting would require registration based on SSN, allowing one vote per registered voter. Registration would have to take place ahead of time, to provide ample time to verify age, residency, and any other eligibility requirements.

Update: According to PolitifactAt least 20 states currently offer online voter registration for new applicants and a few more are in the works…Experts who study online registration say there have been no reports of actual security breaches or fraud. If designed in a way to account for security, online registration reduces opportunities for fraud and errors.

While this is a promising start, I am advocating for online registration and voting in all 50 states.

Voting is a voluntary activity. In order to increase voter turnout, we have to consider why people do things voluntarily.

Reducing the perceived “opportunity costs” of voting, both foregone wages and the time it takes to vote, is one side of the equation. Convincing people voting is in their best interests by teaching them the basics of political economy (and consequently explaining why the political system may have failed to promote their interest in the past), would increase the perceived benefits of voting.

Perhaps the financially insecure are not as “rational” as I am making them out to be. There is a strong argument that people who live in poverty do not act “rationally” (in the economic sense of long-run “utility” maximization). It may not be enough for voting to be in a financially insecure person’s “best interest”; to increase voter turnout amongst the poor, voting must be made a “no-brainer”.

Politicians come in all shapes, sizes, and ideologies. Some are progressive, some are conservative. Some serve “the people”, while other are beholden to special interests.

One thing that is consistent among all politicians is their desire to be (re)elected. It is the responsibility of voters to make a populist agenda (by whatever name it goes by), a (re)electable platform.


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Economic Outlook: Relaxed Regulations, Lax Regulation, and “Too-Big-To-Regulate”

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A Short History of Financial Deregulation in the United States; CEPR

Data from the National Income and Product Accounts (1947-2009) and the National Economic Accounts (1929-47) are used to compute added value as a percentage of gross domestic product in the United States.

As an economist living in the Post-Great Recession world, I often consider the effects of greater financial sector regulation on overall economic performance.

Given my populist leanings, it may surprise you to hear that I have been conflicted about the merits of greater regulation (or more accurately, the merits of pursuing such reforms now). The argument (in my head) usually goes something like this:

During a period of weak economic growth, which we are now just starting to emerge from, a growth sector such as finance should not be held back. Listening to (part) of the hearing between the Senate Subcommittee and Goldman Execs, who invoked the concepts of economic efficiency and job growth with bravado, this is exactly what financial sector advocates want people to think.

But is there any merit to these claims? Inflating a bubble and calling it growth does not make it so, and certainly does not necessarily benefit the vast majority of people. This conclusion (which may be obvious to some, but given my determination to consider arguments and counter-arguments, consequences and unintended consequences, has to this point eluded me) led me to a much broader question:

If GDP growth doesn’t necessarily help people, perhaps a slight slowdown in growth would not necessarily hurt people?

It has long been accepted by development economists that GDP growth alone is not a reliable measure of increases in well-being / standard of living. Is it time to consider that paring back GDP growth, in order to set our financial system on more sustainable ground, might be in best interests of the vast majority of Americans?

Before considering these points, we should explore (1) how the financial sector got “too big to regulate”, and (2) why efforts to regulate big banks have proven so lackluster.

In my opinion, the root causes (and therefore solutions) are straightforward:

(1) Intentional deregulation of financial markets to spur economic growth, and;

(2) Lax enforcement of those regulations that are still on the books, due to the “revolving door” between the financial sector and government regulators

(For my readers who want a more in depth look at these issues, I would highly recommend Matt Taibbi’s best-selling book “Griftopia”)

Relaxed Regulations:

A two-year Senate-led investigation is throwing back the curtain on the outsize and sometimes hidden sway that Wall Street banks have gained over the markets for essential commodities like oil, aluminum and coal.

The Senate’s Permanent Subcommittee on Investigations found that Goldman Sachs and JPMorgan Chase assumed a role of such significance in the commodities markets that it became possible for the banks to influence the prices that consumers pay while also securing inside information about the markets that could be used by their own traders.

Until about 20 years ago, regulated banks faced tight constraints that barred them from owning physical commodities and limited them to trading in financial contracts that were linked to the prices of commodities. But a substantial relaxation of the rules allowed the banks to own actual commodities themselves, known as “physical assets” on Wall Street.

During the second panel of the day, two executives from the aluminum industry said that Goldman’s practices were unusual and were costing aluminum users.

“The warehouse issue is having a profoundly negative impact on our customers’ businesses,” said Nick Madden, the chief supply chain officer at Novelis, a producer of rolled aluminum.

Mr. Madden said that when he first saw The Times article on Goldman’s practices, he didn’t understand why the warehouse company was encouraging long lines for customers wanting to remove their metal.

“Now I see it in black and white and I understand it,” he said, in reference to the subcommittee’s report.

One warehousing source, who is familiar with these transactions, said what he read in the report was “immoral, but not illegal”.

Far from increasing efficiency, it appears that financial intermediation may actually harm related “real” elements of the economy in certain situations.

Lax Regulation:

So deregulation has led to expansion by financial institutions into “physical assets”. But what about regulations that are still on the books? Surely, in the wake of The Great Recession, accountability and transparency have been force-fed down the financial sector’s throat?

Unfortunately, this is not the case. In an attempt to erect a meaningful barrier between the financial institutions and those who regulate them, new legislation has been proposed by Rhode Island Senator Jack Reed:

A senior Democratic senator (Jack Reed) has introduced legislation that would make the head of the New York Federal Reserve Bank a presidential appointee subject to Senate confirmation.

The New York Fed also oversees some of the nation’s largest financial institutions, and has been questioned in recent years for failing to look with enough rigor at the operations of companies like JPMorgan. The hearing on Friday will address the question of whether Fed regulators may be too soft on the banks they oversee.

“Someone at this institution needs to be directly accountable to Congress,” Reed said in a statement. “This legislation is about holding the New York Fed accountable … It’s just too powerful to be left unchecked.”

The idea of making the job a presidential appointment is not a new one: with Reed’s support it was included in the Senate’s version of Wall Street reform legislation in 2010, although it was not included in the final Dodd-Frank law.

“The perception today, and the perception for years, is there are no fences between the New York Fed and the banks they’re regulating,” said Reed.

After the subcommittee finished questioning Dudley, it turned to the matter of solutions. Columbia University professor David Beim, the author of a harsh internal investigation into the New York Federal Reserve, told the subcommittee that more needs to be done to eliminate the revolving door between the finance industry and the Fed.

“The problem is regulators and bankers form a community,” he said.

Given the dysfunction of our Federal government, making the NY Fed President a presidential appointee subject to congressional approval is by no means a sure fix. But there have been bipartisan efforts to reign in the financial sector; such a move could certainly be part of a more comprehensive financial sector reform agenda.

Too-Big-To-Regulate:

..Six years after the onset of the financial crisis, four years after Dodd Frank and two years after the biggest banks submitted the first drafts of their living wills — the Federal Deposit Insurance Corporation and the Federal Reserve rejected the plans from 11 large banks as “unrealistic or inadequately supported.” The regulators said further that the banks had failed “to make, or even identify” structural and operational changes that would be needed to attempt an orderly resolution.

And yet the regulators are not taking steps to downsize the banks. For that to occur, the F.D.I.C. and the Fed have to agree that living wills are unworkable and that more forcible downsizing is needed. The F.D.I.C. seems to have reached that conclusion; it said flatly that the plans don’t work. But not the Fed, which has told the banks to submit new plans by July 1, 2015. The banks have had four years already. Now they have nearly another year to toy with a process that has utterly failed to produce credible results.

Will anything change between now and next July? Using the history of the last several years as a guide, the biggest banks will be even bigger, more complex and more interrelated by then. They will be undercapitalized and overleveraged. They will be reliant on unstable sources of short-term financing and will be more steeped than ever in speculative derivatives transactions.

In short, they will still be too big to fail, too big to manage and, judging from the Fed’s latest indulgence, too big to regulate.

While business cycles are largely natural occurrences, the severity of downturns are largely determined by the regulatory policies in place. This is why, following the Great Depression, rules limiting questionable financial activities were put in place.

But as time went on, and the pain of The Great Depression faded in memory, these rules were repealed in the name of economic efficiency / growth. Instead what we got was increasing inequality and the regulatory groundwork which enabled The Great Recession.

We must stop relying on “self-regulation” of the financial sector; the fact that the Fed has given financial institutions so much leeway and time in writing their own “living wills” is indeed disconcerting. Since the collapse and bailout of the financial sector, “Too-Big-To-Fail” financial institutions have only gotten larger, potentially setting the stage for an even more painful recession down the road.

When growth is the result of over-leveraging, opaque bundling, insider trading, and imaginative accounting, it benefits a select few at the expense of everyone else.

It is past time to question the assertion that tighter regulation of financial markets will lead to a meaningful increase in unemployment / deterioration of standard of living. All evidence points to the contrary; financial regulation would benefit the vast majority, at the expense of a select few who have made their fortunes exploiting loopholes and shady relationships.

The further we get from the financial crisis, the less necessary tighter financial regulation will seem. The “benefits” of having an under-regulated financial market will look that much greater than the “costs” of regulation–until it all comes crashing down.

The time for meaningful action is passing us by.


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Economic Outlook: Of Minimum Wages and Employment (Revisited)

Another hot button topic during the 2014 midterm election season are candidates stances on increasing the federal minimum wage.

This past February, the CBO released its analysis of the effects of a federal minimum wage increase on economic growth, employment, and poverty. Those on the political right seized on the reports projection that raising the minimum wage could result in 1 million fewer jobs in America.

I found Jared Bernstein’s Economix blog on the subject pretty even-handed (click here to see my previous blog on the topic):

It is important to recognize that there is a very wide range of estimates from which the budget agency can choose, as shown in the chart below, which plots results of the employment effect from dozens of studies (from a recent set of slides from the White House Council of Economic Advisers).  This wide range does not imply that the budget office made a mistake, though it looks to me as if it applied a higher job-loss estimate than is the current consensus among economists who’ve closely studied the issue.

Note:

As the chart shows, the employment impact from this “meta-analysis” clumps around zero, which is why the report finds that the policy is a significant net plus from the perspective of low-wage workers: Many more workers get a raise from the policy than are displaced from their jobs.” (Jared Bernstein, Economix blog)

There is no policy I can think of that generates only benefits without any costs, and policy makers always have to weigh the two sides. In the case of the minimum wage, on the benefits side of ledger, the budget office shows that 16.5 million low-wage workers would directly get a much-needed pay increase at no cost to the federal budget.

16.5 million workers will benefit from a $10.10 minimum wage by 2016, 900,000 will be raised out of poverty, with negligible effects on the federal budget.

The CBO report was a projection. What have minimum wage “experiments”, carried out in America’s “laboratories of democracy” (states and municipalities), revealed?

The White House told us they were referring to the seasonally adjusted growth of non-farm jobs since December 2013. So we crunched the numbers for state-level employment data, which is collected by the Bureau of Labor Statistics.

The comparison involved nine states that increased their minimum wage automatically early in the year to keep pace with inflation (Arizona, Colorado, Florida, Missouri, Montana, Ohio, Oregon, Vermont and Washington) plus four more states that passed new laws to hike the wage (Connecticut, New Jersey, New York and Rhode Island). The other side consisted of 37 states that didn’t boost their minimum wage at all.

Using the second method — the one that gives greater weight to high-population states — we found that job growth over that eight-month period averaged 1.092 percent in the wage-raising states, compared to 1.090 percent in the non-wage-raising states. That’s a higher rate of job growth in the minimum-wage-raising states — but by the almost comically narrow margin of 2/1,000ths of one percent.

From this 8-month comparative analysis, we can see that minimum wage changes have had essentially no impact on employment levels. The meta-analysis seems to have been vindicated–I guess economists are good for something after-all.

What does this mean? Which stance on minimum wage increases has been vindicated? I would say it has to be the pro-minimum-wage-increase side of the debate.

Increasing the federal minimum wage is not meant to be a “job-creating” policy; its primary purpose is to redistribute income from the top of the economic pyramid (wage payers) to the bottom (wage earners). It is a “market” solution that does not require taxation and welfare spending, so money would not go to those “lazy welfare recipients” (this is not my view, however a significant proportion of Americans do view welfare recipients this way, and it is necessary to consider alternative perspectives when trying to pass legislation in a democracy).

One may think such an inequality / poverty reducing solution would be agreeable to proponents of “small government”, and one would be wrong. Since opponents of increasing the minimum wage cannot assail deficit spending going to undeserving recipients, they have relied on the “jobs lost” argument. Fortunately, this argument becomes less and less viable the more it is challenged and disproven.

Raising the minimum wage does not just address the “symptoms” of inequality / poverty–there are important long term / inter-generational implications of minimum wage increases. Having more money enables people to build their skills, take more entrepreneurial risks, and provide better upbringings for their children (which obviously affects their earning capacity later in life).

“Meta-analysis” of the effects of minimum wage increases on employment clustered around zero, and these findings have been backed up by the non-partisan statistics produced by the Bureau of Labor Statistics (in the interest of full disclosure, I should mention that I work for the BLS, although my job has nothing to do with employment statistics).

The mechanism by which minimum wage increases raises poorer peoples income is straightforward. How people would choose to use their new-found income is less straightforward–some will predominately invest in into their and their families futures, while others will use the majority for instant gratification. While not as targeted as a welfare program, raising the minimum wage is the most politically viable solution to America’s inequality problems.

Contemporary American political discourse is dominated by the related themes of “equality of opportunity” and “social mobility”. Raising the federal minimum wage would bring immediate relief to America’s poorest workers, while moving closer to the utopian goal of “equality of opportunity”. Furthermore, it would accomplish these goals without any meaningful impact on employment rates or the federal budget.

Some redistribution of income in necessary; inequality is a drag on economic growth, and poverty is a root cause of many other societal ills. History has proven over and over again that “trickle-down” economics does not work. Minimum wages should also be linked to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), periodically (once per year?) increasing to reflect changes in cost of living.

If our federal government continues to fail in this regard, leaders at the state and municipal level must step-up–this is a matter of both present and future socioeconomic justice.

 


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Economic Outlook: A Living Minimum Wage in Seattle

https://normativenarratives.files.wordpress.com/2014/06/91ea7-minimumwagecartoon.jpg

The Seattle City Council has unanimously approved an ordinance Monday to phase in a $15 hourly minimum wage — the highest in the nation.

Drafted by an advisory group of labor, business and nonprofit representatives convened by Mayor Ed Murray, the ordinance phases in wage increases over three to seven years, depending on the size of the business and employee benefits.

The issue has dominated politics in the liberal municipality for months. Murray, who was elected last year, had promised in his campaign to raise the minimum wage to $15 an hour. A newly elected socialist City Council member, Kshama Sawant, had pushed the idea as well.

“This legislation sends a message heard around the world: Seattle wants to stop the race to the bottom in wages and that we deplore the growth in income inequality and the widening gap between the rich and the poor,” Councilmember Tom Rasmussen said.

The increase in minimum wage comes amid a national movement from low-wage workers for higher pay, and a more livable minimum wage.

An individual working full time–$40 hours a week for 52 weeks at $15/hr–would earn a pretax income over $31,000 (or $62,000, for a two minimum wage income family) enough to put most U.S. families over the official poverty line. Furthermore, such an income level would lead to substantial savings on welfare programs, pushing many households into positive net tax brackets (taxes owed minus transfer payments) while unlocking public resources for other deserving causes (investments in human capital, infrastructure, R & D, etc). One would also expect a drop in crime rates (and perhaps the ability to save money throughout the law enforcement and criminal justice systems), as it becomes easier for people to earn a comfortable living legitimately.

A $15 minimum wage is an ambitious plan, as a proponent of economic populism I hope it is a resounding success. People from both sides of the political divide will be paying close attention to Seattle’s socioeconomic indicators–specifically, poverty rates, unemployment rates, crime rates and economic growth rates–in order to support their position on minimum wage laws. It is notable that businesses will have a period of between 3-7 years to phase in higher wages, which should temper any potential adverse economic shocks resulting from this policy.

When it comes to socioeconomic outcomes, there are too many variables to come to definitive conclusions by running experiments; even sophisticated randomized control trials and cohort studies have their limitations. Economics is always context sensitive, and while it may not be fair to extrapolate lessons learned from Seattle across the country, this will inevitably occur. And in these extrapolater’s defense, the only way to see how a living minimum wage works is to test it out on a sufficiently large scale. Seattle has become this testing grounds, and based councilman Rasmussen’s comments, the city welcomes this distinction.

Proponents of this minimum wage hike will likely frame it as the harbinger of a golden age of shared prosperity, while its critics will foretell of rampant unemployment and economic decline; the truth invariably lies somewhere in the middle. For what it’s worth, in the context of the modern American economy, I believe the results will be much closer to the former rather than the latter.


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Economic Outlook: Funding The Social Security Trust Funds

Social Security reform always receives a lot of attention from politicians on both sides of the political spectrum. On one hand, we cannot continue to finance future social security obligations with our current system. On the other hand, privatized retirement plans are susceptible to market fluctuations, and therefore make poor backstops for retirement. Perhaps we can shore up Social Security Funds by lifting the social security “cap”, and limiting benefits to those who truly need them:

Under Social Security’s “Old-Age, Survivors and Disability Insurance” program, an annual limit based on changes to the national average wage index determines the maximum amount of taxes that can be taken out of an individual’s salary for Social Security.

For 2014, the cap is 6.2 percent of $117,000, or a little over $7200. Once that amount has been reached, an individual has satisfied the annual requirement and will no longer pay into the country’s Social Security trust fund.

There are 9.63 million U.S. households with a net worth of $1 millon or more, according to a recent study by financial firm Spectrum Group. Many will reach the tax cap before the majority of working-class Americans.

“Most workers have Social Security contributions withheld from their paychecks every week for 52 weeks of the year,” said Nancy Altman, co-director of Social Security Works. “If you’re a millionaire, you stop paying right around now. For someone like Warren Buffett, you’re done paying Social Security taxes in January.”

When the cap was established in 1937, 90 percent of annual salaries were subject to paying Social Security tax year round.

But in recent years, pay has risen faster for wealthy Americans than it has for the working class. In some instances, workers have seen their salaries decrease. Today, only about 70 to 75 percent of annual salaries are subject to paying the tax year round.

Marilyn Moon, senior vice president of the American Insitutes for Research, said that the Social Security tax cap will eventually need to be lifted in order to keep the system afloat.

It’s not unprecedented, she said. In 1993, the federal government lifted the cap for Medicare.

“Social Security and Medicare are two of the most successful federal programs and I don’t think that we will let it lapse,” she said. “Most of us are not wealthy enough to make it through the rest of our lives without some form of help from either program,” so eventually the cap will have to be lifted or modified she said.

Altman agrees, arguing that requiring wealthy Americans to pay year round is an issue of fairness.

“Social Security works extremely well, but its benefits should be increased and expanded. A fair way to pay for benefit improvements is to require millionaires and billionaires to pay Social Security contributions on every dollar of their salaries, just as typical Americans do.”

Lifting the social security cap and restricting benefits to those who need them is sure to be a divisive idea; it stops those who have contributed the most into the Fund (the wealthiest) from receiving any benefits. The threshold for not receiving benefits would have to be a very high level of wealth, to ensure people who have worked hard and are fiscally prudent (yet still need social security benefits to enjoy their retirements) are not penalized for such laudable lifestyles.

However, if the goal is to ensure that social security funds exist for those who need them, to the benefit of individuals and the economy as a whole, then lifting the cap and restricting benefits to the richest people is an idea worth exploring.

I have not attempted to put any exact numbers to this proposal, as it is more of an ideological question at this point. Is the purpose of Social Security to get out (part) of what you pay in, or is it to ensure people can survive their latter years in dignity and comfort? Is Social Security an investment (a retirement account), or is it a safety-net?

This question touches on a larger point about “contributing” and “taking” in America’s social welfare model. In the context of widening inequality and a disconnect between wages and productivity, in a country where money = free speech = political influence = exorbitant wealth, is it so unfair to ask those who milk this system to fund a dignified life for those who make it run with their hard work (at least until a more radical re-democratization of America’s political economy takes root)?