Sunday, January 18, 2015

Reagan Revolution rollback

Here's how Matt O'Brien, the Washington Post/Wonkblog economics reporter, characterizes Obama's new tax proposals:
The state of the union is pretty good, actually, but President Obama has an idea to make it better: taxing Wall Street and the super-rich to make middle-class work even more worthwhile. It's Piketty with an American accent.

Okay, that's a little bit of an exaggeration, but not a huge one. Obama's State of the Union, you see, will call for $320 billion of new taxes on rentiers, their heirs, and the big banks to pay for $175 billion of tax credits that will reward work. In other words, it's fighting a two-front war against a Piketty-style oligarchy where today's hedge funders become tomorrow's trust funders. First, it's trying to slow the seemingly endless accumulation of wealth among the top 1, and really the top 0.1, no actually the top 0.001, percent by raising capital gains taxes on them while they're living and raising them on their heirs when they're dead. And second, it's trying to help the middle help itself by subsidizing work, child care, and education.
Stepping back, it's amazing the extent to which Thomas Piketty's tome Capital in the 21st Century, published in the U.S. in January 2014, has focused the U.S. policy debate on income inequality. Some economists have been talking about rising inequality since the 1980s, but Piketty and his colleague Emmanuel Saez have more recently put the spotlight on the very top -- the top 1%, .1% and .01% (they first published major findings pointing that way in 2003, but post-crisis updates have been making news in recent years). The book put the trends on the front pages. Now Democrats, after a rather disastrous pause to protect red-state senators in the 2014 election, are putting inequality front and center in their policy proposals.

Piketty has made his mark chiefly by demonstrating the reality and full extent of a surge in inequality since the 1980. To my mind, though, the heart of the book is his take on why the surge occurred. He's shifted the emphasis from global competition and technology to policy decisions -- above all, tax policy:
Of course changes in tax laws are themselves linked to changes in social norms pertaining to inequality, but once set in motion they proceed according to a logic of their own . Specifically, the very large decrease in the top marginal income tax rate in the English-speaking countries after 1980 (despite the fact that Britain and the United States had pioneered nearly confiscatory taxes on incomes deemed to be indecent in earlier decades) seems to have totally transformed the way top executive pay is set, since top executives now had much stronger incentives than in the past to seek large raises. I also analyze the way this amplifying mechanism can give rise to another force for divergence that is more political in nature: the decrease in the top marginal income tax rate led to an explosion of very high incomes, which then increased the political influence of the beneficiaries of the change in the tax laws, who had an interest in keeping top tax rates low or even decreasing them further and who could use their windfall to finance political parties, pressure groups, and think tanks (Capital in the 21st Century, p. 335)
It's that insight, however directly derived from Piketty or not, that's emboldening Democrats now to propose taxing capital and inherited wealth.  It's led House Democrats, led by Chris Van Hollen, to propose a financial transaction tax paired with middle class tax breaks. And now here's Obama proposing a belated assault on inherited wealth, reducing the extent to which inherited capital gains can be excluded from taxes, as well as an increase in the capital gains tax.

To mess up my timeline a bit, Obama delivered a Pikettian narrative on December 4, 2013 in what should have been a landmark speech on inequality  -- and might have been, if he (and Democrats generally) hadn't been persuaded to clam up on the subject and play small ball to try to protect their Senate majority until election day 2014. After a hat tip toward nonpolitical causes of the widening gap, Obama zeroed in on policy choices (my emphasis):
But starting in the late ‘70s, this social compact began to unravel. Technology made it easier for companies to do more with less, eliminating certain job occupations.

A more competitive world led companies ship jobs anyway. And as good manufacturing jobs automated or headed offshore, workers lost their leverage; jobs paid less and offered fewer benefits.

As values of community broke down and competitive pressure increased, businesses lobbied Washington to weaken unions and the value of the minimum wage. As the trickle-down ideology became more prominent, taxes were slashes for the wealthiest while investments in things that make us all richer, like schools and infrastructure, were allowed to wither.
And for a certain period of time we could ignore this weakening economic foundation, in part because more families were relying on two earners, as women entered the workforce. We took on more debt financed by juiced-up housing market. But when the music stopped and the crisis hit, millions of families were stripped of whatever cushion they had left.

And the result is an economy that’s become profoundly unequal and families that are more insecure. Just to give you a few statistics: Since 1979, when I graduated from high school, our productivity is up by more than 90 percent, but the income of the typical family has increased by less than 8 percent. Since 1979 our economy has more than doubled in size, but most of the growth has flowed to a fortunate few. The top 10 percent no longer takes in one-third of our income; it now takes half. Whereas in the past, the average CEO made about 20 to 30 times the income of the average worker, today’s CEO now makes 273 times more. 
Yes, this was prior to the English publication of Capital. But the French version had come out three months earlier, and Piketty had previewed the results in a Nov. 29 lecture. Piketty and Saez's precursor findings, first published in 2003, were percolating to the extent that Wonkblog, on Dec. 31, 2013, spotlighted the two economists' choice of the "graph of the year," a representation of their findings updated through 2012:

Proposing tax hikes on the wealthy is a default move for Democrats, as David Leonhardt noted last November. The harder lift is labor law.  If radical tax cuts blew the lid off executive pay, a steady assault on labor ensured that the vast majority of workers would not share in the strong productivity gains of recent decades. Charts of labor's declining share of national income are now nearly as ubiquitous as charts of income gains going to the top 1%. And yet, as Kevin Drum recently lamented, Democrats seem to be increasingly perceived by white working class voters to be helping the poor at their expense. And in fact, in the post-Reagan era, Democrats' support for labor and measures to boost employees' leverage has often been tepid.

That too may be changing. Obama's Department of Labor and National Labor Relations Board have recently been moving aggressively, as Timothy Noah recently reported in Politico. taking action to speed union elections, hold fast food restaurant corporations like McDonald's co-responsible for the conduct of franchise owners, and collect back pay in wage-and-hour complaints. Most importantly, perhaps, DOL is poised to boost the income threshold below which employers must pay overtime rates to employees who work more than 40 hours in a week (though probably not high enough to satisfy billionaire-turned-labor-advocate Nick Hanaeur, who points out that in 1975, such rules protected 65% of U.S. workers -- and just 11% by 2013). And in his SOTU address next week, Obama will propose mandatory sick pay and extend paid family leave after the birth of a child to federal workers.

[added 1/10]: A just-released report by the Center for American Progress's Commission on Inclusive Prosperity, chaired by Larry Summers and cast by some a likely foundation of Hillary Clinton's economic agenda, recommends a raft of labor-friendly policies, the most far-reaching and far-out being mandatory European-style workers' councils. Other recommendations include expediting union elections, injunctions to end unfair labor practices, automatic arbitration of first contracts negotiated by a new union, and crackdown on misidentification of workers and independent contractors, raising the minimum wage, and raising the salary threshold for immunity from overtime pay.(pp 105-109)

Thanks largely to Piketty  it's become increasingly clear that in the Reagan Revolution, middle class America sold its birthright for a mess of supply-side pottage. Democrats' willingness to credit core conservative tenets -- that raising taxes on high incomes and investment gains always inhibits growth, that deregulation always spurs it -- are melting away. Fresh from their November drubbing, Democrats are beginning to heighten rather than soft-pedal the policy contrasts between the parties. Wounded politically by perceptions that the Affordable Care Act helps the poor at the expense of working people, they are looking for proposals obviously attractive to the middle class.  Emboldened by accelerating growth and employment gains,  they are perhaps shedding inhibitions about leveling the playing field between workers and management.

Of course the Democratic party has a long history of supporting these kinds of measures, with varying degrees of emphasis and intensity -- and again Piketty and Saez are not the only apostles of rising inequality. But I do think it's fair to say that Piketty's impact on economists on the media, the evidence he's brought to bear and theses repeated seemingly every few pages throughout his book have sharpened the way Democrats talk about inequality and reduced their inhibitions about proposing steps to remedy it.

It's the wages, stupid
Piketty: U.S. sold its middle class birthright for a mess of Reaganite pottage
Is the tax code the best route to attacking wage stagnation?

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