Baldwin Wallace University Economics Blog ... thinking out loud ...: October 2011

Monday, October 31, 2011

Trick or Treat

By Lewis Sage

I couldn’t decide on a costume for tonight, so I went to a scary place, the Congressional Budget Office for inspiration.

The CBO’s report, Trends in the Distribution of Household Income Between 1979 and 2007, came out a little early for Halloween, but it is just as full of tricks – for most of us – and treats – for a select few - as earlier reports (see especially Piketty and Saez, Income Inequality in the United States, 1913-1998, Quarterly Journal of Economics, 2003). The news, in case you’ve been off the planet for the last generation, is that between the pre-recession peaks of 1979 and 2007, the inflation-adjusted after-tax-after-transfer income of the average American household rose an average of 1.8% per year, a total of 62% since the waning days of the Carter administration. Pretty good, if you live in the average household, but there’s no such thing as an average household.

If we sort households by income from highest to lowest, the rising economic tide turns out to have been a flood for the top 1%, but no more than a heavy dew for those in the bottom 20%. After-tax income for the top 1% has risen at an average rate of 5% per year, a pace at which it doubles twice a generation; for the bottom 20%, the rate is 0.6%, doubling their standard of living every four generations. In between, income growth has been, well, in between. But the facts are clear: only those households in the top 20% have seen above-average increases, and those have been heavily concentrated in the top 1%, so that by 2007, the aggregate income of the top 1% equaled that of the bottom 40%.

There are three main reasons for this skewed growth pattern: disproportionate growth at the top of the wage distribution; a shift toward highly concentrated income sources; reduction in the progressivity of the federal tax structure. Concentrated growth was not limited to wages, however:
“In 1979, the bottom 80 percent of the population in the income spectrum received nearly 60 percent of total labor income, about 33 percent of income from capital and business, and about 8 percent from capital gains In 1979, the bottom 80 percent of the population in the income spectrum received nearly 60 percent of total labor income, about 33 percent of income from capital and business, and about 8 percent from capital gains… By 2007, the share of labor income going to the bottom 80 percent had dropped to less than 50 percent, their percentage of business income and income from capital had decreased to 20 percent, and their share of capital gains was about 5 percent.” (p. 10) Increasing demand for highly skilled labor, exploding compensation for upper management, the growth of the superstar model, all have been proposed to explain the concentration of labor income.

Inequality has also increased because the top 1% shifted sources from capital income to business income (perhaps in response to changing tax rules) and business income was at the same time the fastest growing income source. And finally, the tax and transfer structure of the federal government has contributed to the concentration of income at the top, becoming less progressive, with tax rate reductions at the upper end, and increased reliance on payroll taxes.

One percent wins; 19% break even; 80% slip backward. Maybe I’ll go as an occupier.

Dr. Lewis C. Sage (AB Kenyon, PhD U. Maryland) likes intersections. Since 1991, he has taught Law and Economics, Mathematical Economics, and the Economics of Healthcare. A former Fulbright Fellow (Bulgaria 1995-6), he teaches an interdisciplinary Honors seminar, Enduring Questions, and is studying strategy in the NFL draft with faculty and students in Sport Management and Psychology. E-mail: lsage@bw.edu

Saturday, October 29, 2011

…tagged an Internet hoax but promising

By kay.e.strong

The other day I received in my email box an Internet chain letter described as the "Congressional Reform Act of 2011." Billionaire Warren Buffett is quoted early in such a way as to suggest his support.

Initially, I read it and dismissed it. But upon further reflection, I find some provisions promising, perhaps, even complementing ideas emerging from the 99% movement. I have modified the text slightly in some places, added Fact Checks and commentary.

1. TERM limit of twelve years congressional service in total

The practice of “homesteading” and “perpetuity in office” in Congress creates an environment which American Statesman Richard Henry Lee described as "most highly and dangerously oligarchic."

George Mason, the Father of the Bill of Rights, argued that "nothing is so essential to the preservation of a Republican government as a periodic rotation."

Known as the Conscience of the American Revolution, Mercy Otis Warren chided the founding fathers for the lack of term limits stating that "there is no provision for a rotation, nor anything to prevent the perpetuity of office in the same hands for life; which by a little well timed bribery, will probably be done...."

Fact Check: As they pertain to Congress, these laws are no longer enforceable, however, as in 1995, the U.S. Supreme Court overturned congressional term limits, ruling that state governments cannot limit the terms of members of the national government.

A provision for term limits exists in 15 states. Some states have bans on consecutive limits, others on lifetime bans. <Source: http://www.ncsl.org/default.aspx?tabid=14844>

Churning the membership rolls of Congress is an obvious way to assure that the cupboard gets restocked with a mixture more diverse and authentically representative of the American demographic landscape than its current stock of white, aged cans. Churning holds open the possibility of a deeper, more inclusive examination of complex issues which typically involve niche communities. Churning is probably the only way to breathe new life into the marketplace of ideas and stamp-out self-interested cronyism.

2. A congressman/ woman collects a salary while in office and receives no pay when they're out of office.

Fact Check: The current salary (2011) for rank-and-file members of the
         House and Senate is $174,000 per year which clearly, is more than
         sufficient to meet basic needs. Current compensation:
         <http://www.thecapitol.net/FAQ/payandperqs.htm>

Serving in Congress is an honor, not a career. As such Congressional pay should be set at the national average of salaries in other honorable career services such as public school teaching ($47,100 to $51,180), police ($51,410) and fire ($44,260) protection. (Occupational Outlook Handbook-BLS)

The Founding Fathers envisioned citizen legislators, so ours should serve their terms, then go home and back to work.

3. CONGRESS (past, present & future) participates in Social Security.

        Fact Check: Members elected since 1984 are covered by the
        Federal Employees' Retirement System (FERS). Those elected prior
        to 1984 were covered by the Civil Service Retirement System
        (CSRS). In 1984 all members were given the option of remaining
        with CSRS or switching to FERS.

As it is for all other federal employees, congressional retirement is funded through taxes and the participants' contributions. Members of Congress under FERS contribute 1.3 percent of their salary into the FERS retirement plan and pay 6.2 percent of their salary in Social Security taxes.

The average annual pension of retired members of Congress ranged between $35,952 and $60,972 as of 2006, according to the CRS. Members of Congress are eligible for full retirement after twenty years of service, a provision marked similar to that of military.

4. CONGRESSIONAL pay rises in tandem with Social Security cost of living adjustments.

         Fact Check: In December 2010, 43.8 million people received Old Age
         Survivors Insurance benefits. A 3.6% increase becomes effective
         January 2012.

5. CONGRESS participates in the same health care system as the American people.

          Fact Check: Members of Congress are allowed to purchase private
          health insurance offered through the Federal Employees Health
          Benefits Program, which covers more than 8 million other federal
          employees, retires and their families.

6. CONGRESS must equally abide by all laws they impose on the American people.

7. ALL contracts with past and present Congressmen/women are void effective 1/1/12. The American people did not make this contract with Congressmen/women. Congressmen made all these contracts for themselves.

The first provision concerning term limits holds promise as an effective tool at unleveraging the positive feedback loop between power and money influence.

The original email encouraged each recipient to pass the letter along to at least twenty other recipients as a means to “fix Congress.”

So, what do you think?

[In case you are interested in an unadulterated version, viewed it at http://urbanlegends.about.com/od/government/a/Congressional-Reform-Act-Of-2011.htm]

Kay Strong, Ph.D., Southern Illinois University, M.T., University of Houston, M.A., Ohio University; Associate Professor at Baldwin-Wallace College; Areas of expertise: international economics, contemporary social-economic issues, complexity and futures-based perspectives in economics. E-mail: kstrong@bw.edu

Sunday, October 23, 2011

PS to the Message (see below)

By Lewis Sage

Alexander Stille’s op-ed piece, “The Paradox of the New Elite,” in the Sunday Review section of the NYT (10.23.11), points – once again – to two salient points that explain exactly how frustratingly stacked the deck is. In our increasingly stratified and calcified society, income and status buy access to income and status for a demographically diverse, but highly exclusive meritocracy. We have heard, both here and elsewhere that the growth of American productivity has been captured by the top few percentiles of the income distribution and that the position of the median household has been eroding over the last couple of decades, so that the portion of gross income going to top 1% now approaches the 23% they controlled in 1929. But Professor Stille’s second point is that upward socio-economic mobility – the carrot that used to make a winner-take-all society palatable to the not-yet-haves – has also been eroded.

For extensive background reading on the distribution of income and wealth in the US, Dr. G. William Domhoff’s page, Who Rules America? (http://sociology.ucsc.edu/whorulesamerica/about.html) is an interesting starting place. For those who may find UC Santa Cruz a little to the left of their own political persuasion, I’d suggest a quick stop at Kiplinger’s website to read Kevin McCormally’s “Where Do You Rank As a Taxpayer?” (October 13, 2011) (http://www.kiplinger.com/features/archives/how-your-income-stacks-up.html), where you can check out what it takes to make the top 1% according to the IRS. At Kiplinger’s invitation, I entered a variety of hypothetical adjusted gross income (AGI) figures (none of them my own) and learned that an AGI of $66,200 puts one in the top 25%; $112,200 gets you to the top 10%; $154,650 is the cut-off for the top 5%; $343,930 is the threshold for the top 1%, with nearly 17% of the nation’s reported AGI.

Left or right, both sites end at the same place – and I quote Kiplinger – “For historical perspective, back in 1986, the top 1% of earners reported [only] 11% of all income and paid 26% of the income taxes; the lower-earning 50% made 17% of the income and paid 6% of the nation’s individual income tax bill.” Today, the bottom 50% has 13% of the income and pays 2.25% of the income tax bill. Makes you think.

…folks, the medium is the message

By kay.e.strong

In the silence of the Occupy Wall Street movement is a poignant message about the status of 99% of Americans. But how many get it?

The movement is an emergent property arising endogenously out of the frustrations and anxieties and general dissatisfaction of the 99% in a system flagrantly stacked against them—a system that has silence them.

OWS is not politics-as-usual! All attempts to benchmark it against the status quo framework owned by the 1% are ill-contrived.

The 99% movement is a first draft in the evolutionary process of differentiation-selection-amplification. This process, if nurtured, will provide us with novelty, a pool of alternative design options from which to draw a more sustainable system. Any reasonable person would concur that the status quo of politics or economics can not continue as is.

The 99% movement operates as a consensus-building mechanism, the expressway to rebuilding trust. For those not in the know, high economic performance demands both high-levels of cooperation and high-levels of trust. Both of which have been wrung from a system so fragmented by self-interested, big-monied politics that gridlock is the tactic-de-jour! We willingly pay 1.1 billion dollars to secure a head on a plate, but feign no funds available for food in the bellies of our children. We bail out Big Men institutions, but ignore the cries of main street homeowners in distress. Cuts to the social safety net take precedent over cuts to defensive spending.

Despite being characterized as leaderless and lacking an agenda, the protest that began at the heart of the American financial district has grown to become an undisputed national movement with sympathetic rallies in 60 cities world-wide. Intuitively, people get it. Even members of the 1% have been seen among the ranks of the 99%.

Last week City Council Speaker Christine Quinn, a potential 2013 New York City mayoral candidate, stated that “…by focusing on the protests’ anti-Wall Street theme and not the larger issue of people feeling hopeless about the economy, ‘you lose the bigger point.’” (NYT, 18 Oct 2011)

Cornel West, an activist of the sixties, defended the lack of agenda asserting that "[i]t’s impossible to translate the issue of the greed of Wall Street into one demand, or two demands. We’re talking about a democratic awakening." (29 Sep 11 in Democracy Now!)

Chiding the Occupy Wall Street protesters for failing to look like your grandmother’s politics is to truly miss the message. Here’s a hint from Marshall McLuhan, “The medium is the message.”

Wednesday, October 19, 2011

Imported from Detroit

By Lewis Sage

A couple of weeks ago, one of our regular readers sent us an email that would have blown out the limits of any known comment box. It ran about three pages and raised eight or ten excellent comment-questions about the current economic scene – enough fodder for a whole series of blogs – and when I asked permission to use them that way, he was kind enough to agree. The entries ranged from suggestions as to the foundations of recovery, to musings on the nature of modern political reality. So here goes.

Our correspondent’s first suggested foundation for economic growth calls for the expansion of foreign markets for US goods and services, what trade economists refer to as export-led growth. Simply, the idea is that US output and employment must increase when foreigners start buying more of our stuff.

To expand markets, it seems that American firms need to close our trade deficit, selling more both here and abroad. But wait a minute. All that says is that American firms need to sell more stuff, which is exactly the problem we’re trying to address. So let’s back up. The trade deficit isn’t the cause of the problem for US firms – it’s the effect of deficient demand for US goods in foreign markets. We need to focus on foreign market demand.

The good news for this strategy is that approximately 6.6 billion people don’t live here – all of them potential importers of our exports, if only they wanted and could afford the things we have to sell. And, based on recent data (Economic Report of the President, 2011), we already export more than $1 trillion worth of such stuff in a typical year. Trouble is, there’s a lot more stuff that we prefer to buy from overseas, about 1.8 times as much, as of 2007, which suggests that, on balance, their goods are more attractive to us than ours are to them. But our trading partners aren’t monolithic: maybe we can learn something by looking at bilateral trade flows.

The question then becomes, “With whom we are running trade deficits?” Broadly speaking, the answer is, “Everybody.” (Except Brazil and Singapore.) Surely some of the imbalance is attributable to trade barriers of one kind and another and certainly a big chunk is the consequence of the over-valued yuan, but even if we could perfectly balance our trade with China, we would still have been about $550 billion short of current accounts parity in the last year before the recession. Which is not to say that increasing exports by $250 billion would be useless: holding everything else constant, it would lop about one percentage point off our unemployment rate.

So, maybe if we look at what it is that we export, we can get a handle on which American goods are relatively attractive. If we have enough unused capacity, opening new markets to a potentially attractive export would make a lot of sense. Examining the 2007 data by broad categories of imports / exports, however, we find that

· We exported about as much food and as much non-automotive capital as we imported.

· We imported about twice as much in the way of industrial supplies and material as we exported ($320+ billion deficit).

· We ran a $120+ billion deficit in automobiles and engines.

· We ran a $320+ billion deficit in other consumer goods.

· We ran a $120+ billion deficit in petroleum products.

Put another way, we could double our automotive exports without coming close to closing the balance of payments gap. Goodness knows, we have the plant capacity to expand auto production dramatically and cut manufacturing unemployment in the process, but the real question (emblematic of the problem underlying the strategy of export-led growth) is, “We Americans may love them, but who else wants to buy a Chrysler ‘imported from Detroit’?”

Sunday, October 16, 2011

…talking hunger in America’s living room

By kay.e.strong

While the public outcry about exaggerated inequities of a system long skewed in favor of “the moneyed” play out in public squares around the globe, preschoolers across the nation talk food insecurity on the living room floor. Lily, the newest resident of 123 Sesame Street, reaches out to raise awareness about the realities of growing hunger in America. An injustice visited upon the most helpless of all humanity---our progeny.

And in the halls of Congress recommendations to cut the funding to the Supplemental Nutrition Assistance Program (SNAP) and National School Lunch Program are being readied for the Committee on Deficit Reduction.

More that 44.5 million Americans receive SNAP benefits, nearly a 61% increase over four years. In fiscal year 2009, 48 percent of all SNAP participants were children. This recommendation would cut one million recipients and leave some 200,000 children without school lunches.

Proponents of balancing the budget on the backs of the nation’s children claim that “increasingly lax requirements” explain the growth in the number of American households now relying on federal government’s food assistance. A claim at odds with the realities of life on 123 Main Street America.

In September the U.S. Bureau of Census released its annual publication Income, Poverty and Health Insurance Coverage. A decline in real median household income, an increased poverty rate and an increase in the number of individuals without insurance between 2009 and 2010 were the major findings. Not surprisingly, changes in the shares of aggregate household income indicated an increase in income inequality between 2009 and 2010 favoring the higher income household.

Last week Gallup released its monthly U.S. Well-Being Index. According to Gallup, “Americans' access to healthcare, food, and shelter worsened the most in September compared with when the Basic Access Index was at its high point in September 2008. Fewer Americans now have a personal doctor and health insurance. And more Americans are having trouble paying for food and shelter.”

<http://www.gallup.com/poll/150122/Americans-Access-Basic-Necessities-Recession Level.aspx?utm_source=tagrss&utm_medium=rss utm_campaign =syndication>

Perhaps, no organization knows the stark realities of Hunger in America more fully than Feeding America, the nation’s leading domestic hunger-relief charity.

Feeding America reports:

In 2010, 16.4 million or approximately 22 percent of children in the U.S. lived in poverty.
Nearly 14 million children are estimated to be served by Feeding America, over 3 million of which are ages 5 and under.
According to the USDA, over 16 million children lived in food insecure (low food security and very low food security) households in 2010.

The implications of childhood hunger are dire with their consequences accumulating over the lifetime of the individual. Poor pre-natal nutrition causes mothers to bear low birth weight babies---infants likely to experience hearing, vision and learning problems, often, requiring more expensive special education services. A hungry child is more likely to experiences chronic illnesses requiring more frequent medical care—care that is often subsidized by those with health insurance. Children who are malnourished perform poorly academically, become ill more often, potentially infecting classmates, miss school and fall further behind. Emotional and behavior problems surface in the classroom disrupting the learning process for classmates. As young adults the academically unsuccessful drop out of school. Gainful employment becomes problematic. The incident of unemployment among those without a high school diploma is often double the national average. Without access to education beyond high school or a good paying job, a stable productive life becomes all the more elusive. As aging adults, the accumulated effects of poor nutrition and health show up as a financial stressor on the nation’s health care system in the form of chronic diseases. It is estimated that over 75% of our national expenditures result from treatment of chronic diseases.

Hunger for our children is tied inexplicable to unemployment of parents in a vicious feedback loop represented by the system archetype known as “success to the successful.”

Any politician sanctimoniously justifying cuts in food assistance programs to hungry American families should be sent to reeducation camp at 123 Sesame Street!

“The true measure of a nation’s standing is how well it attends to its children – their health and safety, their material security, their education and socialization, and their sense of being loved, valued, and included in the families and societies into which they are born.”—UNICEF Child poverty in perspective: An overview of child well-being in rich countries, Innocenti Report Card 7, 2007

Sunday, October 9, 2011

...dig in for the duration

By kay.e.strong

Occupy Wall Street is a grassroots movement fueled by dissatisfaction about financial and social inequities being borne by growing numbers of ordinary Americans—the 99%, to be more precise.

The 99% movement has evoked varied responses from blatantly dismissive---Republican presidential candidate Herman Cain: “Don’t blame Wall Street, don’t blame the big banks, if you don’t have a job and you’re not rich, blame yourself!”, to in your face:“We are the 1 percent” sign posted on an eighth floor window of the Chicago Board of Tradeand soft sympathy from Federal Reserve chair Ben Bernanke: “They blame, with some justification, the problems in the financial sector for getting us into this mess, and they’re dissatisfied with the policy response here in Washington. And at some level, I can’t blame them.”

The motives of the 99% are clarified in the article Protesters Against Wall Street (NYT 8 Oct 11)

“… protest is the message: income inequality is grinding down that middle class, increasing the ranks of the poor, and threatening to create a permanent underclass of able, willing but jobless people.

…the protesters are giving voice to a generation of lost opportunity.”

The good news is that the emergence of the 99% movement is evidence of a healthy dynamic system in action, at least, in my humble opinion. It is not a threat to be quashed but rather a source of vital information to be processed through the system. Though difficult for many to accept, there is nothing sacrosanct about the current economic design.

In his voluminous tome, The Origin of Wealth (2006), Erin Beinhocker tells a provocative tale of the wealth of nations. This tale fleshes out the role of evolution and complexity and disequilibrium as a normative state of the economy.

Evolution is seen as a general purpose algorithm for grinding through the design space of possibilities—variations on the mix of physical technologies + social technologies + business plans. According to Beinhocker, wealth creation follows a simple but profoundly powerful three step evolutionary process: differentiate-select-amply. As in the story of biological evolution, designs are discovered by trial and error with the successful retained, replicated and built upon; the unsuccessful discarded. Beinhocker asserts that “if conditions are right, competition between designs for finite resources drives emergence of greater structure and complexity over time (P14).”

Economic evolution oscillates between two patterns for selecting the operational design of an economy: Big Men versus Markets.

Beinhocker narrates that “[i]n the early days of the economy, the selection process was fairly straight-forward—survival (P287).” A fit design allowed society to survive and struggle yet another day. Wealth arose as the difference between caloric intake and caloric expenditure. However, as society and the economy grew more complicated the feedback loop on design selection becomes more detached. Social factors began interfering with the natural selection process and the Big Man system emerged. “In a Big Man economy, resources are directed toward the ventures that best lines the pockets of the Big Men. …In a Big Man system, the fitness function maximized is the wealth and power of the Big Man (and his [attendant] cronies) rather than the overall economic wealth of the society (P288).” Wealth creation favors the Big Men. For as long as the distortions of the Big Man system are not life-threatening, the design plan remains unchallenged. Evolution’s clock-speed is slowed down. “In extreme cases, …Big Men can actually stop economic evolution in its tracks …(P288)”.

By way of contrast, in a market economy resources are directed to ventures that make the best economic use of them; …the fitness function attempts to satisfy the overall welfare of the people participating in them (P288).

The emergence of the 99% movement is a first challenge to the economic design plan centered on Big Men. The social inequities identified by the 99% are supportive evidence against wealth distribution in a Big Man system. Beinhocker, however, reminds us that “[i]n extreme cases, …Big Men can actually stop economic evolution in its tracks, and as long as people are merely close to starving, as opposed to actually starving, such evolutionary dead ends can last for a very long period (P288)”.

It appears the 99% have a long night ahead. To go the distance, the 99% are going to need reinforcements to release the economic evolutionary process from the grip of the Big Men.

Saturday, October 8, 2011

Ballot Issue 3 and "Free" Health Insurance

By Lewis Sage

Early voting in Ohio has already begun for this November’s elections with three statewide ballot issues to be decided. Issue 1 proposes a constitutional amendment to raise the age at which a judge may be elected and a YES vote on Issue 2 would approve Senate Bill 5, which either reforms unfair union practices, or unfairly burdens public employees, depending on which side of the argument you prefer. But what I want to talk about is Issue 3, a proposed amendment to the Ohio State constitution “TO PRESERVE THE FREEDOM OF OHIOANS TO CHOOSE THEIR HEALTH CARE AND HEALTH CARE COVERAGE”. Let’s not be coy: the real purpose here is to gut the Affordable Care Act (ACA) by removing the universal coverage mandate.

The language for November ballot Issue 3, available on the Secretary of State’s website (http://www.sos.state.oh.us/sos/upload/ballotboard/2011/3-language.pdf) cloaks the real point of Issue 3 with two unnecessary clauses that a) conflate insurance coverage and health care services and b) defend our rights to buy coverage and care:

“The proposed amendment would provide that:

1. In Ohio, no law or rule shall compel, directly or indirectly, any person, employer, or health care provider to participate in a health care system. 
2. In Ohio, no law or rule shall prohibit the purchase or sale of health care or health insurance. 
3. In Ohio, no law or rule shall impose a penalty or fine for the sale or purchase of health care or health insurance.”

The official arguments supporting and opposing Issue 3 are also available on the Secretary’s website. Support hinges on the principle of preserving individual freedoms; opposition focuses on the preservation of access to insurance. Both ignore three salient points.

First and foremost is the unspoken logic that eliminating mandated coverage would cripple the ACA (known to its detractors as “Obamacare”). Second, the language of the amendment presents health care – an essentially private good – as somehow logically comparable to health insurance – a good with a substantial public component. Third, the title presents the amendment as preserving choice among health care providers – a choice which is not under attack by the ACA – and choice among health care insurance options, which choice implicitly includes the opportunity for a free ride.

Let me explain what I mean.

Everyone in America already has health insurance. Some have privately financed plans, purchased individually or in cooperation with their employers; others’ plans are publicly funded through Medicare or Medicaid, which entail a combination of explicit current taxation and implicit future taxes. But even if you aren’t old enough, poor enough, or lucky enough to be covered under one of those, you're still insured in America because emergency room care is available, whether you can afford its huge cost or not. In effect, society has provided everyone with the option of catastrophic coverage… for free.

Because we are not so hard hearted as to deny care to those in immediate need, we shift part of the risk of being “uninsured,” in the conventional sense, from the individual to society at large. The cost of providing this implicit, high-deductible health insurance is hidden in higher prices – of health care services and of health insurance.

Passage of Issue 3, then, would encourage Ohioans to continue to take a free ride paid for by their more responsible neighbors. Freedom indeed.

Dr. Lewis C. Sage likes intersections. Since 1991, he has taught Law and Economics, Mathematical Economics, and the Economics of Healthcare. A former Fulbright Fellow (Bulgaria 1995-6), he teaches an interdisciplinary Honors seminar, Enduring Questions, and is studying strategy in the NFL draft with faculty and students in Sports Management and Psychology. E-mail: lsage@bw.edu

Sunday, October 2, 2011

…when did “tax” become a four letter word?

By kay.e.strong

Romney statement (19 Sep): “President Obama’s plan to raise taxes [the wealthiest 0.3% of taxpaying Americans] will have a crushing impact on economic growth.”

“Higher taxes mean fewer jobs – it’s that simple. This is yet another indication that President Obama has no clue how to bring our economy back.”

Perry statement (19 Sep): “We need lower taxes.”

Bachman statement (19 Sep): “The president’s plan to raise taxes on the American people is the wrong policy to create economic growth and jobs and shows he doesn’t understand how to turn our economy around.”

Seriously, does every politician believe the entire American public is high on hallucinogenic mushrooms?

Let’s begin with a simple analogy: tax revenue is to government what a paycheck is to a worker--a source of income to keep the lights on, water hot and food on the table. We all know that when bills start piling up, we have a couple options—neither of which entails voluntarily reducing our work hours so that our revenue stream shrinks.

If we are fiscally responsible, we try to cut the fat out of our budget…a couple less cappuccinos and fewer trips to the mall. If that does not work, we hunker down and look to (legally) supplement our paycheck. Gotta a job…maybe time for two? In the short run the best we hope for is just making ends meet.

There is honor in being able to pay your bills. There is honor in caring for your responsibilities. If it takes a larger revenue stream to meet our obligations to one another, then raise taxes. Raise them across the board!

We’ve tried to make tax cuts cover our bills for a decade now. It should be glaringly obvious to all that more of the same will produce more of the same—ballooning deficits, a debt load sufficient to crush the life out of unborn generations, and a destabilized national sense of well-being.

The next time a politician drones on about the evils of ‘raising taxes’ I hope someone will toss him/her a reality checking hallucinogenic mushroom!

Poverty and Ohio Minimum Wage Policy

By Lewis Sage

“Minimum Wage Policy and Poverty in the United States,” by Lonnie Stevans and David Sessions, appeared ten years ago in the International Review of Applied Economics (v. 15, n. 1) and some of their empirical findings about the correlates – and presumed causes – of poverty should be of great interest to us today.

Among the statistics most closely linked with a state’s poverty rate are a slew of variables over which we have little or no control, at least in the short run: the growth of statewide employment, the fraction of households headed by single women, the ratio of college graduates to those with high school only, and, finally, geographic location. Predictably, education and employment growth correlated with reduced poverty; the prevalence of single-female-headed households appeared to increase the rate. And (no surprise here, either), compared to the rest of the country, East Coast poverty rates were lower.

There are two important policy variables, however – the minimum wage and the extent of its coverage – which are within states’ control. According to the Stevans and Sessions study, the level of the minimum wage matters, but the proportion of the workforce covered by the minimum wage matters even more. Applying their estimates to Ohio, for example, an increase in the minimum wage from $7.40 to $8.15 would be 90% certain to reduce the poverty rate in the state from 13.6% to 12.1%. On the other hand, an increase in the fraction of covered workers from 95% to 100% would have a 99% chance of cutting the rate to about 11.5%.

The same model suggests that a five percentage-point reduction in the fraction of covered workers could increase the poverty rate to about 15.5%. And yet, this past summer, opponents of minimum wage coverage had to be persuaded to remove provisions in House Bill 153 that would have narrowed coverage in the State’s biennial budget. But avoiding a bad move, though laudable, is not enough. Instead of reducing minimum wage coverage in Ohio, we should be expanding it to afford every fulltime worker a living wage. (The federal poverty line for an individual is $1174/mo., 159 hours at $7.40 per hour.)

I know: most of the uncovered workers in Ohio are in agriculture (calculated from August 2011 data available at http://ohiolmi.com/); and I know, Governor Kasich loves Ohio’s agriculture industry (Susan Crowell, in Farm and Dairy, 9/27/11). But couldn’t we address poverty rates in Ohio by extending minimum wage protection to all those who work on Ohio farms?