| December 6, 2016
Hoosier Daddy? The Man Who Really Delivered the Jobs in Indiana
For much of the past week, President-elect Donald Trump boasted about saving 1,000 jobs at the Carrier air conditioning plant in Indianapolis, Indiana. Representing only about half of the positions candidate Trump promised to protect from relocation to Mexico, the murky Carrier deal appears to be a one-off bargain combining the carrot of state tax breaks with the potential stick of retaliation against the manufacturer's parent company, defense contracting giant United Technologies. For UTX, it was a small price to pay for some favorable PR. For its part, the Obama administration begrudgingly gave credit where credit is due, with press secretary Josh Earnest acknowledging, "This is good news and, obviously, we'd welcome that good news."
As it turns out, the Obama White House has good reason for its lack of enthusiasm. For starters, as economist Justin Wolfers pointed out, "Every savvy CEO will now threaten to ship jobs to Mexico, and demand a payment to stay." And such corporate extortion won't even require a warning to set up shop South of the Border. "You can go to different parts of the United States and then ultimately you'd do full-circle -- you'll come back to Michigan because those guys are going to want their jobs back even if it [their pay] is less," Trump told the Detroit News on August 12, 2015. "We can do the rotation in the United States -- it doesn't have to be in Mexico." But adding insult to injury is the overlooked record of the current occupant of the Oval Office. After all, Barack Obama didn't just preside over the addition of 800,000 new manufacturing jobs since 2010. Thanks to his stimulus program and auto rescue which Donald Trump, Mike Pence and virtually the entire GOP opposed, President Obama deserves much of the credit for the tens of thousands of jobs produced during the economic turnaround of the Hoosier State.
Of course, you'd never know that based on what the good people of Indiana say, or how they vote.
To be sure, Indiana is a traditionally red state. Until Barack Obama narrowly defeated John McCain there in 2008 (see chart at top), Hoosiers voted for Republicans for President in every election since 1964. But eight years ago, Indiana was in desperate need of some hope and change. The great recession that began in late 2007 was hammering the state. By Election Day 2008, the Indiana unemployment rate of 7.6 percent was already well above the national average. On Inauguration Day just two months later, the jobless rate hit 9 percent. The hemorrhaging didn't stop until a year after that, when the unemployment rate peaked at a staggering 10.9 percent.
Then, things started to change for the state that calls itself "the Crossroads of America." Among those "things" was the February 2009 Obama stimulus package, which in addition to tax relief for 95 percent of working Americans brought $8.8 billion in ARRA (American Recovery and Reinvestment Act) funding to Indiana. (Though he opposed the $800 billion program, then Rep. Mike Pence nevertheless requested funds for his district because they would "provide real and long-term economic and livability benefits.") In 2008 and 2009, then Senator and President Barack Obama made four trips to Elkhart, Indiana, to highlight his efforts to reduce an unemployment rate that topped a horrific 20 percent. Then that spring, President Obama followed up on George W. Bush's 2008 loans to Chrysler and GM to launch an $82 billion rescue of the American auto industry. That move, too, was opposed by Donald Trump and his future running mate Mike Pence. As Pence boasted in a 2010 speech in Detroit:
"I even opposed bailing out GM and Chrysler. I welcome the rebound of that company with an open heart, but I still think that most Americans know that it would have still been better for GM and for the country if GM had been allowed to go through normal bankruptcy proceedings."
By 2016, the New York Times reported, the landscape in Indiana had changed dramatically for the better:
Since 2010, the private sector in Indiana has added roughly 300,000 jobs, bringing the unemployment rate from a high of 10.9 percent in January 2010 (nearly a percentage point above the national average) to 4.5 percent now (nearly half a percentage point below the national unemployment rate).
As we'll see below, all of these efforts by the Obama administration in the face of near-total GOP opposition were essential in reversing the fortunes of Hoosier state voters. But in return, by overwhelming margins they delivered Indiana to Republicans Mitt Romney in 2012 and Donald Trump in 2016.
This past April, the New York Times gave a preview of what was to come--and why--in an article titled, "Obama gets scant credit in Indiana region where recovery was robust." Years after the auto bailout and millions of federal stimulus dollars went towards improving local highways, the municipal airport, police equipment and building weatherization, Elkhart County is booming. "Elkhart's unemployment rate, at 3.8 percent, is among the country's lowest," the Times' Jackie Calmes wrote, "so low that employers here in the self-described R.V. capital of the world are advertising elsewhere for workers, offering sign-up bonuses, even hiring from a local homeless shelter." But when it comes to giving credit for that amazing return to prosperity, there is a bipartisan consensus among local officials:
"Whether he gets the credit or not, people's home equity has gone back up, fuel prices are the best we've had in a long time, there's a lot of things that make this all go," Larry Thompson, a former longtime mayor of nearby Nappanee and a Republican, said as he showed off an expanding cabinetry factory, Kountry Wood Products.
"But I think that maybe it's just some of the other things he's been involved with that people in our area" -- Mr. Thompson stopped, shaking his head in unspoken reference to various social issues...
"He gets very, very little credit, and I think that's too bad because we got quite a bit of help," said Dick Moore, Elkhart's mayor the past eight years, a Democrat who lost election to a third term in November. "I don't know what we would have done without it." [Emphasis mine.]
That's exactly right. While the Economic Development Corporation of Elkhart County touts "head of household" job opportunities that pay up to $75,000 a year, Dan Browning of the Faith Mission homeless shelter is fielding dozens of calls each month from companies seeking employees. He no longer deals with businesses offering only minimum wage work. "Now the employers are desperate," he said. "Before it was the workers who were desperate."
But that desperation did not translate into gratitude to--or votes for--either President Obama or his would-have-been Democratic successor, former Secretary of State Hillary Clinton. In 2008, Senator Obama lost Elkhart County by a 55 to 44 percent margin. Four years later, Obama didn't even contest the state, and got drubbed in Elkhart County by 63 to 36 percent. In 2016, Donald Trump expanded on Mitt Romney's numbers, drubbing Clinton by 64 to 32 percent. While manufacturing employment statewide has not returned to its pre-recession levels, some Hoosier State analysts think something else may be behind the rejection of Obama since 2008:
Brian A. Howey, publisher of the Howey Politics Indiana newsletter and once a reporter in Elkhart, sounded stumped, even allowing for the state's conservatism: "I'm a lifelong Hoosier. I'm just amazed that not only do people not appreciate what happened in '09, but there's a lot of hostility toward Obama. I think part of it is racial and a lot of it is political."
"This state stood to lose 150,000 auto jobs if Chrysler and G.M. had liquidated," Mr. Howey added. "We would have had a bona fide depression here." [Emphasis mine.]
A bona fide depression, not just in Indiana, but across the entire United States if not for the federal interventions including the Obama stimulus. As Lori Montgomery of the Washington Post reported in 2012, the nonpartisan Congressional Budget Office (CBO) certainly thought so. Its director, Douglas Elmendorf, explained to Congress that "CBO's own analysis found that the package added as many as 3.3 million jobs to the economy during the second quarter of 2010, and may have prevented the nation from lapsing back into recession." Economists Alan Blinder and Mark Zandi certainly agreed. As their October 2015 showed, the combined federal efforts to rescue the American economy from its greatest collapse since 1929 "dramatically reduced the severity and length of the meltdown that began in 2008; its effects on jobs, unemployment, and budget deficits; and its lasting impact on today's economy." The impact of the measures taken in 2008 and 2009 by Presidents Bush and Obama, including the Troubled Asset Relief Program (TARP), the $800 billion Obama stimulus program, Obama's auto bailout and the Federal Reserve's "quantitative easing," is simply staggering. Without those policy responses--almost all of which were opposed by Congressional Republicans--Blinder and Zandi estimated:
- The peak-to-trough decline in real gross domestic product (GDP), which was barely over 4%, would have been close to a stunning 14%;
- The economy would have contracted for more than three years, more than twice as long as it did;
- More than 17 million jobs would have been lost, about twice the actual number.
- Unemployment would have peaked at just under 16%, rather than the actual 10%;
- The budget deficit would have grown to more than 20 percent of GDP, about double its actual peak of 10 percent, topping off at $2.8 trillion in fiscal 2011.
The decision to rescue GM and Chrysler, derided by Donald Trump, Mike Pence and Mitt Romney, had an outsized impact for Indiana. Ultimately, the federal government spent almost $80 billion to save the two companies. But after selling off its remaining shares, the price tag was much lower at $9.3 billion. But as the Center for Automotive Research documented in December 2013, that sum may have been the best investment Uncle Sam ever made:
Had GM and Chrysler failed altogether, the result could have been 4.1 million jobs lost across the U.S. economy in 2009 and 2010, with federal transfer payments and $105 billion in lost income and payroll tax revenue for the U.S. Treasury.
As the Center's chief economist Sean McAlinden put it, "This peacetime intervention in the private sector by the U.S. government will be viewed as one of the most successful interventions in U.S. economic history."
Especially in Indiana. As the Northwest Indiana Times documented in August 2013, the Obama administration's actions enabled General Motors to rebound from bankruptcy and invest hundreds of millions of dollars in plants and jobs in Fort Wayne. The north central Indiana city of Kokomo came roaring back, as Delphi and Chrysler respectively pumped $190 million and $1.6 billion into facilities there. As the Times' Joseph Pete summed it up, "Indiana's automotive industry has raced ahead to second place nationally and is not letting off the gas."
When domestic automakers begged for federal bailouts and leniency from bankruptcy judges a few years ago, Indiana pulled ahead of Ohio in the total value of automotive products made each year and also took third place away from Kentucky in terms of jobs at automotive assembly plants, according to the U.S. Bureau of Labor Statistics.
The Hoosier state has since held on to second place, producing $9.9 billion in automotive goods compared with Ohio's $6.9 billion in 2011, the most recent year for which data was available. Indiana trails only Michigan, which churned out $18.8 billion in cars and car parts.
On all of this, the Republican ticket of Donald Trump and Mike Pence was silent during the 2016 campaign in the Midwest. They had to be. "Without government financing -- initiated by President George W. Bush in December 2008, the two companies would not have been able to pursue Chapter 11 reorganization," Obama car czar Steven Rattner wrote in 2012. "Instead they would have been forced to cease production, close their doors and lay off virtually all workers once their coffers ran dry." In February 2012, The Economist blasted Mitt Romney--and itself--over the successful rescue of the American auto industry by President Obama:
Free-marketeers that we are, The Economist agreed with Mr Romney at the time. But we later apologised for that position. "Had the government not stepped in, GM might have restructured under normal bankruptcy procedures, without putting public money at risk", we said. But "given the panic that gripped private purse-strings...it is more likely that GM would have been liquidated, sending a cascade of destruction through the supply chain on which its rivals, too, depended." Even Ford, which avoided bankruptcy, feared the industry would collapse if GM went down. At the time that seemed like a real possibility. The credit markets were bone-dry, making the privately financed bankruptcy that Mr Romney favoured improbable. He conveniently ignores this bit of history in claiming to have been right all along.
Unfortunately, the voters of Indiana, along with those in Ohio, Pennsylvania and Michigan, appear to have ignored this bit of history, too. As that series of New York Times features shows, their distrust of Hillary Clinton, of "people who've been here 12 years who don't even care to learn the language but want to reap all the benefits of this country" and of the "status quo" drown out Obama's record and Clinton's platform. As Jeff Guo detailed in the Washington Post, "Yes, working class whites really did make Trump win. No, it wasn't simply economic anxiety."
Certain economic factors were important. Trump tended to outperform Romney in places where median incomes were a little lower, places where people tended to be out of work and where middle-aged whites were more likely to die.
But these places have been like this for a while. In fact, Trump's victory doesn't seem to be linked to any recent declines in people's economic circumstances. The economy has been getting better over the past four years. Median incomes have risen. The unemployment rate has plummeted including in regions won by Trump.
"Trump, on some level, understood the importance of making members of the white working class feel as though they were being heard," Guo concluded, "He tapped into deeper, slower-moving resentments."
But that long-simmering resentment could pale compared to the outrage when these voters learn what Donald Trump and Mike Pence actually have in store for them. Obamacare, which has reduced the uninsured rate in Indiana to a record low, is almost certainly going to get the axe. President Trump will almost certainly break his promises not to touch Medicare and Social Security, as the Republican majority in Congress seems poised to target both. With a national right to work law, a rollback of President Obama's expansion of overtime pay and legal challenges to both private and public sector unions, workers in states Trump turned red may soon see their living standards slashed. Economic growth as high as six percent from "the greatest jobs president god ever created" will be a pipe dream. The draconian tariff barriers Trump promised on China (45 percent) and Mexico (35 percent) almost certainly won't be forthcoming. (If they did, the trade war which would necessarily ensue would boomerang back into the Rust Belt.) Good news though it is, a thousand jobs saved in a dubious deal in Indianapolis will quickly fade from memory.
Back in Indiana, 15-year Carrier employee Nicole Hargrove was among those promising to hold President-elect Trump accountable for his pledge to the air conditioning workers. "If he doesn't pass that tariff, I will vote the other way next time."
Over the next four years, we'll find out who keeps their promises to those Indiana Hoosiers. For the next seven weeks, though, we'll still have someone in the White House who did. As he often said half-jokingly on the campaign trail this year, "We avoided a Great Depression. Thanks, Obama."
| November 29, 2016
Donald and the Debt Ceiling Suckers
"Reagan," Vice President Dick Cheney said in 2002, "proved deficits don't matter." Unless, Cheney felt no need to mention, the occupant of the Oval Office is a Democrat. After all, Ronald Reagan had tripled the national debt in 8 short years and George W. Bush had nearly doubled it again by the time he ambled out of office on January 20, 2009.
But when Barack Obama took the oath of office during the worst American economic crisis since the Great Depression, Uncle Sam's annual budget deficits and the cumulative national debt suddenly mattered to Republicans a great deal. After both parties had routinely raised the debt ceiling 40 times between 1980 and 2010, Congressional Republicans demanded draconian spending cuts as a condition of increasing the federal government's ability to borrow more money for expenses it had already incurred. Despite Speaker John Boehner's warning that failure to hike the debt ceiling "would be a financial disaster, not only for our country but for the worldwide economy," his House Republicans nearly did just that. Just the possibility of the previously unimaginable nightmare of a sovereign default by the United States triggered plummeting consumer confidence and job creation numbers. It's no wonder rating agency S&P summed up its Tea Party downgrade with this red alert:
"That a country even has such voices, albeit a minority, is something notable. This kind of rhetoric is not common amongst AAA sovereigns."
But now, that minority will control Congress and the White House, too. And with President-elect Donald Trump, like Reagan and Bush before him, promising to dramatically reduce taxes, increase defense spending and balance the budget, those supposed Republican deficit hawks and default deniers are singing a different tune. Debt ceiling not high enough? No problem.
As Politico reported in "GOP leaders look to dodge spending, debt ceiling clash," during President Obama's lame duck period Congress will pass only a short-term, continuing resolution because "letting President-elect Donald Trump and a Republican Congress handle government funding is easier politically and gives the GOP more control over final budget outcomes:"
Republican leaders are also eager to de-link the need to increase the debt ceiling from funding the government. Privately, House Republicans say that with Trump in control of the Treasury Department next year, they will not have to worry about government funding and debt ceiling deadlines colliding, as Obama repeatedly faced...The Trump administration can use "extraordinary measures," as the Obama administration did, to extend the debt-ceiling deadline for months, possibly until the fall. That would give Trump and GOP congressional leaders time to work out a spending deal without a debt crisis hanging over their heads.
Congress voted in the fall of 2015 to "suspend" the debt ceiling - currently at about $20 trillion - until March 2017.
"It will be Trump's Treasury now, we won't have to worry about that," said a House GOP aide close to the issue. "We can control that."
It will be "Trump's Treasury," all right, and one which despite years of Republican tough talk will have to raise the debt ceiling repeatedly.
On top of the current $20 trillion in debt, the nonpartisan Congressional Budget Office (CBO) forecast an additional $8.5 trillion in accumulated deficits between 2017 and 2016. Whether he sticks to his tax plan or opts for Paul Ryan's "Better Way" blueprint to deliver a massive windfall for the wealthy, President Trump's Treasury will hemorrhage another $6 trillion. Ignoring for the moment his pledges to raise defense spending while protecting Social Security and Medicare from any cuts, Trump is on a path to generate $15 trillion more in new debt for a total of $35 trillion over the next decade. Nevertheless, candidate Trump promised to eliminate the entire national debt "fairly quickly." Just how quickly"?
"Well, I would say over a period of eight years."
It is no exaggeration to say Trump's is a formula for national suicide. Cutting roughly 70 percent of total federal spending (currently forecast at $50.2 trillion through 2026), which necessarily result in a recession dwarfing the financial collapse which started in late 2007. Regardless, the scenario is a hypothetical one. Most of each year's federal spending ($2.6 trillion out of $3.7 trillion) is mandatory' outlays for Medicare, Medicaid, Social Security, interest on the national debt are required by legislation. And non-defense discretionary spending is already at its smallest percentage of the U.S. economy since the 1950's.
But in one sense, the Republicans now willing to calmly give Donald Trump what they only delivered to Barack Obama after repeated extortion threats are right. Raising the debt ceiling should be a routine, bipartisan act (or eliminated altogether). Among the many reasons is simply because, as both Paul Ryan and John Boehner quietly admitted in 2013, "we have no immediate debt crisis." As Paul Krugman explained in October, "right now we have a more or less stable ratio of debt to GDP, and no hint of a financing problem." As the Center on Budget and Policy Priorities (CBPP) documented, projections of America's debt-to-GDP ratio have plummeted by more than between 2010 and 2016. Much-lower interest-rates combined with much slower than forecast increases in Medicare spending account for much of the difference.
As did President Obama. Contrary to Republican mythology, after accounting for inflation federal spending has actually declined since Obama first took the oath of office. Annual budget deficits have been halved from the $1.2 trillion a year President Bush bequeathed eight years ago. As a percentage of gross domestic product, federal spending is under 21 percent and tax revenue around 18 percent. Those just happen to be the targets set by the Simpson-Bowles commission that Paul Ryan and his Republican panel members voted against. The reason? The upper income tax increases that played a key role in narrowing the deficits.
Despite all this, conservatives tout polls with findings like "61% of Americans Oppose Debt Limit Hike or Want It Tied to Spending Cuts." As I documented previously, in 2011 and 2013 GOP disinformation convinced majorities of Americans that Congress should not raise the debt ceiling despite warnings from some of the hostage-takers like Lindsey Graham that not doing so would mean "financial collapse and calamity throughout the world." After his brinksmanship helped produce the 2011 Budget Control Act (and with it, budget "sequestration"), Mitch McConnell bragged about his debt ceiling blackmail, "It's a hostage that's worth ransoming." Or in "King of Debt" Donald Trump's case, one not worth worrying about at all. As he put it this spring:
"I would borrow, knowing that if the economy crashed, you could make a deal. And if the economy was good, it was good. So, therefore, you can't lose."
Of course, that's not how the national debt works. "No one on the other side would pick up the phone if the secretary of the U.S. Treasury tried to make that call," said Lou Crandall, chief economist at Wrightson ICAP. "Why should they? They have a contract" requiring payment in full.
Meanwhile, back in Washington, Republicans will continue to play their make-believe game of fiscal discipline. Politico certainly fell for it--hard--by proclaiming "It's never been easy for House Republicans to raise the debt limit." That was just a repackaging of GOP talking points from the likes of Texas Rep. Jeb Hensarling, who declared that hiking the debt ceiling is "contrary to our DNA." Or as former House Majority Leader Eric Cantor put it:
"I don't think the White House understands is how difficult it is for fiscal conservatives to say they're going to vote for a debt ceiling increase."
Unless, of course, a Republican like Ronald Reagan, George W. Bush or Donald Trump is in the White House.
| November 27, 2016
Trump's 'Forgotten Americans' Will Get Lower Taxes on the Rich and Higher Income Inequality
Throughout his unlikely journey to the White House, Donald Trump declared himself to be a "blue-collar billionaire" who as President would be the "voice" of the "forgotten man." Rolling out the first of the three versions of his tax plan last December, the real estate tycoon and reality TV star boasted, "it's going to cost me a fortune -- which is actually true."
Of course, it's not true.
Dodging his traveling press pool, President-elect Trump on November 15 headed off to the tony 21 Club in Manhattan. There, to a standing ovation, he told the well-heeled diners the truth:
"We'll get your taxes down, don't worry."
Theirs, and his. The man who apparently hasn't paid Uncle Sam a penny in 20 years has proposed a tax cut scheme that will enrich him, his businesses and his children for years to come. Whether based on The Donald's own outline or House Speaker Paul Ryan's "Better Way" budget blueprint, the Trump Tax Cuts of 2017 will drain roughly $6 trillion from the United States Treasury over the next 10 years. Unfortunately for those forgotten men and women who supported him, decades of evidence show that Trump's massive supply-side windfall for the wealthy won't make him "the greatest jobs president that God ever created." What the 45th President and his Republican allies will accomplish, however, is the greatest expansion in income inequality since Ronald Reagan ambled into the White House.
To better understand why, it's worth looking back at recent history.
During the depth of the great recession, President Obama as promised delivered tax relief to 95 percent of working Americans. A major component of his $800 billion stimulus program of 2009, Obama's was the largest two-year tax cut in modern American history. (Nevertheless, as a 2010 CBS/New York Times poll of Tea Party supporters found, "only 2 percent think taxes have been decreased, 46 percent say taxes are the same, and a whopping 44 percent say they believe taxes have gone up.") In 2011 and 2012, working Americans benefitted from a payroll tax holiday that trimmed two percent from their payments to Medicare and Social Security. But with the economic recovery under way, a just-reelected President Obama in late 2012 pushed for an end to the Bush tax cuts for the wealthiest Americans.
As the so-called "fiscal cliff" (that is, the triple-whammy of the expiration of all of the Bush tax cuts, the end of the payroll tax holiday and the beginning of budget "sequestration) approached on January 1, 2013, the nonpartisan Congressional Budget Office (CBO) warned the overall impact could be devastating to the economy. But as I noted at the time, CBO was confident that higher taxes on the rich would have virtually no impact at all:
Letting upper-income tax rates return to their slightly higher Clinton-era rates (as President Obama has proposed) will play no part in that instant austerity. While extending the Bush rates for all Americans carries a $330 billion overall price tag for Uncle Sam next year, the CBO calculated that $42 billion goes to the top taxpayers. But as the chart above shows, eliminating that Treasury-draining windfall for the wealthy (by raising rates for the top-two tax brackets, indexing the AMT and raising capital gains, dividend and estate taxes), would slice only 0.1% from economic growth next year.
For their parts, then-Senate Minority Leader Mitch McConnell (R-KY) and House Speaker John Boehner (R-OH) clung to their party's tall tales on upper-class tax rates. While McConnell warned Democrats are "seeking is the Europeanization of the U.S. economy," Boehner sounded the alarm that ""Going over part of the fiscal cliff and raising taxes on job creators is no solution at all." Previously, Boehner peddled the GOP's job creators myth this way:
"The top one percent of wage earners in the United States...pay forty percent of the income taxes...The people he's [President Obama] is talking about taxing are the very people that we expect to reinvest in our economy."
Ultimately. the fiscal cliff deal did raise tax rates from 35 to 39.6 percent for individuals earning over $400,000 a year (and families earning $450,000) starting in 2013. Including the 3.8 percent Obamacare surcharge, the top capital gains rate moved to 23.8 percent. But as it has turned out, Boehner and his conservative amen corner were completely wrong.
In the most recent employment report for October 2016, the White House reported that 15.5 million private sector jobs had been added to the economy since early 2010, lowering the unemployment to 4.9 percent. (In 2012, candidate Mitt Romney promised to lower it to 6 percent by the end of his first term.) "Most importantly," Jason Furman of the Council of Economic Advisers explained, "average hourly earnings for private employees increased 2.8 percent over the last twelve months."
But that's not all we've learned since President Obama boosted rates for the wealthiest taxpayers. While the historical tables of the Office of Management Budget (OMB) show that tax revenue surged, there has been progress on both sides of the income gap. A new analysis from UC Berkeley Professor Emmanuel Saez, Michael Hiltzik reported in the Los Angeles Times, found that "hiking taxes on the rich really does raise more money and help the economy."
The share of pre-tax income going to the top 1 percent had jumped from 8.9 percent in 1975 to 22.0 percent in 2015. While moving up and down with fluctuations in the economy (and especially the stock market), the share reached 22.8 percent in 2012 before plummeting to 20 percent in 2013. The cause was the Obama tax cuts, which led the rich to take their capital gains in 2012 in order to avoid those higher rates coming the next year. By 2015, the upward climb had resumed.
But that's not all Saez discovered:
What happened to top incomes in the medium-term? Figure 1 shows that the share of national income going to the top 1 percent income resumed its upward trend after 2013. By 2015, that share is back up to 22 percent. This means the 2013 tax increase depressed pre-tax top incomes only temporarily in 2013. This finding presents two important consequences. First, it means that raising taxes on the rich is an efficient way to raise additional revenue, as the rich do not respond much to the higher tax rates in the medium term. I estimate that only about 20 percent of the projected revenue increase from the 2013 tax hike is lost due to the behavioral responses over the medium term. Second, by itself, the 2013 tax increase will not be sufficient to curb the extraordinarily high level of pre-tax income concentration in the United States.
These findings echo the findings of earlier work analyzing the 1993 Clinton era tax increase, which also generated short-term retiming of top incomes into 1992 but did not prevent top income shares from surging in the mid-to-late 1990s. It is also striking that the best growth experience for the bottom 99 percent of income earners over the past 25 years took place in the mid-to-late 1990s and between 2013 and 2015--after tax increases on the rich. This suggests that taxing the rich more does not have detrimental effects on the broader economy; quite the contrary. [Emphasis mine.]
As I have previously documented, higher marginal income tax rates have only a negligible impact on income inequality. Capital gains rates are another matter altogether: the record shows that lower tax rates on capital gains and dividends don't increase investment in the economy, but fuel greater income inequality. Now, a new paper by the White House Council of Economic Advisers (CEA) has shown that the Obama administration's policy troika of economic stimulus, upper income tax increases and the dramatic expansion of health insurance coverage under the Affordable Care Act has made a significant dent in America's record-high income inequality. As Ben Casselman of FiveThirtyEight summed up Jason Furman's argument:
The CEA report argues that Obama has fought inequality in three main ways. First, the administration's actions during the recession -- extending unemployment benefits, temporarily cutting payroll taxes to stimulate growth and bailing out the auto industry, among others -- kept unemployment lower than it would otherwise have been. Since recessions tend to hit the lowest-earning workers hardest, policies that mitigate their impact will tend to reduce inequality. Second, the CEA argues that the Affordable Care Act, by making health insurance more affordable for and accessible to low-income workers, has greatly reduced disparities in health care. And third, the CEA argues that the administration's tax policies -- which raised taxes on the rich, cut them for the middle class and expanded programs such as the Earned Income Tax Credit that help poor families -- made the tax code more progressive. All told, the CEA estimates that the poorest fifth of American households will earn 18 percent more in 2017 than they would have without the administration's policies.
As Casselman noted, "There is room to argue with all of these claims." But what is very hard to dispute is this. Any agenda that rolls back virtually the entirety of the Obama presidency--and more--is going to have major negative consequences for the still-yawning income gap. And that is precisely what President-elect Trump and House Speaker Paul Ryan are promising to do.
The forgetting of Trump's forgotten Americans starts with his tax plan. Like Paul Ryan, Trump would condense the current 7 tax brackets into just 3 of 12, 25 and 33 percent. Like Ryan, Trump would repeal Obamacare, and with it, the 3.8 percent capitals gains tax surcharge on the wealthy. (Ryan seeks to further lower the top capitals gains rate to 16.8 percent.) Also, like Ryan, President Trump wants to eliminate the estate tax, a change that would blow a $250 billion hole in the budget. (With its $10.7 million threshold per family, only about 0.1 percent of estates even have to pay it. If The Donald is really worth $10 billion as he brags, this would redirect $7 billion from Uncle Sam to Trump's heirs.) In addition, Trump is seeking to lower corporate taxes and change the treatment of so-called C corporations and "pass through" businesses and partnerships. Instead of a top rate of 35 percent, these entities (of which the Trump Organization consists of hundreds), would pay only 15 percent. And their changes to personal and standard deductions could actually raise taxes for many lower income and middle class families, especially those headed by a single head of household. (Targeting the deduction for state and local taxes would be especially painful for blue-state residents who live in high-tax/high-service states.)
Now, there are certainly real differences between Ryan's "Better Way" and Trump's tax plan, especially regarding their treatment of multinational corporations. But as the New York Times explained:
There is certainly a significant overlap. Both would cut income tax rates across the board and keep rates low on income from investments, an approach intended to spur savings that effectively guarantees the juiciest cuts for the wealthy.
An analysis of Mr. Trump's latest plan by the Tax Policy Center calculated that the top 0.1 percent of the population, those with incomes over $3.7 million in 2016, would receive an average 14 percent reduction, or about $1.1 million. Households in the middle of the scale -- those earning between about $48,000 and $83,000 today -- would get a 1.8 percent tax cut worth on average $1,010, while the poorest fifth of Americans will gain about $110, or 1 percent of their income.
To help offset the torrent of red ink their plans would necessarily produce, both Trump and Ryan turn to the alchemy of "dynamic scoring," which claims that the increased economic activity incentivized by tax cuts ultimately produce more tax revenue. For his part, Trump has promised to increase defense spending while protecting Medicare and Social Security, which he comically boasts can be paid for simply by cutting "waste, fraud, and abuse." But both Trump and Ryan would slash Medicaid spending and turn what remains over to the states as block grants. As he has in his annual budgets routinely supported by 95 percent of Congressional Republicans, Speaker Ryan would privatize Medicare and go much further in shredding the safety net. As the Center on Budget and Policy Priorities recently warned:
By 2025, nearly all of the tax cuts would go to households with incomes over $1 million; low- and middle-income households would gain only slightly. Over the next decade, millionaires would receive an estimated $2.6 trillion in tax cuts.
The increase in inequality also reflects the magnitude and composition of the $6 trillion in program cuts over the next ten years envisioned in the House GOP's budget plan, which aims to balance the budget over this period. The plan's spending cuts would hit programs for low- and moderate-income people much harder than other programs, denying health insurance to tens of millions of people and reducing food assistance and other basic aid to millions more. Over the next decade, the plan would cut programs assisting low- and moderate-income households by approximately $3.7 trillion, dwarfing the very small gains these households would receive from the House GOP tax cuts. Middle-class households likewise would lose far more from the House GOP's planned budget cuts than they would gain from the modest tax cuts they would receive from the tax plan.
All told, CBPP calculated in March, the last House GOP budget got 62 percent of its non-defense cuts from programs for those with low or modest incomes.
Now, none of this is rocket science. We've been here before. As the Center for American Progress demonstrated, the U.S. economy has grown faster and produced more jobs when marginal tax rates were higher--even much higher--than today:
In a dress rehearsal for today's debate, David Leonhardt of the New York Times in 2010 raised many of the same points about the GOP's demand to extend the Bush tax cuts. "Why should we believe that extending the Bush tax cuts will provide a big lift to growth?" His answer was unambiguous:
Those tax cuts passed in 2001 amid big promises about what they would do for the economy. What followed? The decade with the slowest average annual growth since World War II. Amazingly, that statement is true even if you forget about the Great Recession and simply look at 2001-7...
Is there good evidence the tax cuts persuaded more people to join the work force (because they would be able to keep more of their income)? Not really. The labor-force participation rate fell in the years after 2001 and has never again approached its record in the year 2000.
Is there evidence that the tax cuts led to a lot of entrepreneurship and innovation? Again, no. The rate at which start-up businesses created jobs fell during the past decade.
As we sadly look forward to replay of this debate in January 2017, one thing is for certain about the next president from the Party of Lincoln. You can fool some of the people all of the time, and that's Donald Trump's target market. Which means that Trump's voters aren't "forgotten men and women of America" at all. They're his marks.
| November 22, 2016
Neo-Confederate John Ashcroft Defends Trump AG Pick Jeff Sessions
With his choice for Attorney General facing a growing backlash on Capitol Hill, President-elect Donald Trump is circling the wagons in defense of Alabama Senator Jeff Sessions. On Sunday, Team Trump issued a press release declaring, "Civil rights and law enforcement groups are strongly supporting Sen. Jeff Sessions for Attorney General." Near the top of the list of those seeking to deflect charges of racism and anti-gay and anti-immigrant bias is former Bush Attorney General John Ashcroft. The one-time Missouri Governor and Senator denounced the criticism of Sessions this way:
"The political 'drive-by-assassins' who have trotted out the 30-year-old fabrication of racism are utterly devoid of the truth. When attackers resort to 30-year-old falsehoods it is clear evidence of their lack of substantive objection.
"Jeff is devoted to the proposition that equity before the law and in our society is at the heart and soul of what it means to be American. Nothing so completely rivals the injustice of racism more profoundly than the reckless labelling of persons who are not.
"Jeff Sessions has earned the trust of America with over three decades of fair and equitable service to the entirety of our culture. He deserves our commendation and support, not conjured, baseless attacks."
Now, it's no surprise that Trump would turn to a past Republican Attorney General to testify on behalf of the man who would be the next one. But with John Ashcroft, President-elect Trump has also turned to yet another unreconstructed Neo-Confederate to make the case.
You read that right. As Josh Marshall explained in "John Ashcroft's Rebel Yell" for Slate in December 2000:
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