Robert Samuelson Won’t Change the Light Bulb

Robert Samuelson, the Washington Post opinion columnist, is frequently taken to the woodshed by progressive pundits for hiding his conservative ideology behind a facade of ostensibly neutral, green-eyeshade economic analysis. (Though Samuelson did tip his hand further than usual in a recent column, the unsubtly titled “The Folly of Obamacare,” dedicated to strafing of Obama’s health care reform on factually flimsy yet uncharacteristically venom-filled grounds.) One of his most persistent critics is Dean Baker of the Center for Economic and Policy Research; on his Beat the Press blog, Baker has made something of a cottage industry out of “debunking” Samuelson’s talking points for a liberal audience. In labeling Samuelson a partisan hack, Baker mostly preaches to the choir, though he does land some clean hits — and I suspect Samuelson’s latest column, about the supposedly outmoded economic models of America, China and Europe, will be a soft target.

However, what struck me most about Monday’s “The Source of Economic Stalemate” was not any deep-seated animosity toward government but what seem to be the author’s genuine ideological blinders. Samuelson describes a valid dilemma: The U.S. economic model of “consumer-led growth” has been laid low by a recession in which stagnating median income and a reluctance to spend leads to the uncomfortable conclusion that, “[t]o grow faster, the U.S. economy can’t rely on large gains in consumer purchases.” So far, so good. High unemployment, declining home prices and an inability to access credit have indeed hobbled the recovery, with liberal economists virtually unanimous in attributing our prolonged recession to what Paul Krugman calls“a simple lack of demand.” Robert Reich, the former U.S. Secretary of Labor, writes that the cause of the recession is “in front of our faces . . . . American consumers, whose spending is 70 percent of economic activity, don’t have the dough to buy enough to boost the economy – and they can no longer borrow like they could before the crash of 2008.”

Samuelson would disagree with neither of these points. Yet his prescription for an economy crippled by a lack of demand curiously does nothing at all to boost demand. Instead, he writes off consumer spending altogether, reaching far into his economist’s magic black hat to come up with three unrelated “solutions.” Asking what will replace consumer demand, he concludes:

There are three possibilities: higher exports, more business investment and higher government spending. Weak economies elsewhere hinder exports. Businesses won’t invest unless there’s stronger demand. And more reliance on government means bigger budget deficits, a policy that inspires powerful political resistance.

Why doesn’t Samuelson simply attack the root of the problem rather than searching for solutions at least one degree removed from the problem’s source? Just two short paragraphs earlier, his own column provides an explanation for the robust spending that sustained the American economy for so long:

From the early 1980s until the mid-2000s, what propelled the economy was rising wealth — stocks, bonds, real estate — that encouraged households to spend and borrow more. Feeling richer, people traded up for better cars, homes and vacations. Everyone could afford or aspire to “luxury.” Businesses responded by investing in more malls, restaurants, hotels, factories and start-ups.

I would argue that increased growth has driven economic growth for far longer than 30 years; in fact, Samuelson seems to have his facts backward. Robert Reich observes that the 1980s were actually a time of declining wealth, in which “globalization and automation began exerting downward pressure on median wages.” Union-busting and deregulated financial markets contributed to the slow bleed of wealth from the average household. Reich would likely concur with Samuelson’s description of an economy based on rising wealth, but would quibble with his timeline: “The earnings of the great American middle class fueled the great American expansion for three decades after World War II. Their relative lack of earnings in more recent years set us up for the great American bust.”

The hollowing out of the middle class, exacerbated by the 2008 financial crisis that wiped out housing values and retirement accounts, prevents ordinary Americans from driving the consumer demand that Samuelson finds lacking. Somewhat controversially, Reich attributes stagnating middle-class income to the sharp rise in inequality that has occurred since the 1980s. Conservatives would dispute this connection, accusing liberals of seeing causation where only correlation exists, and indeed the most outrage-provoking statistics, which purport to show that nearly all of the income gains of the past few years accrued to the rich, have been challenged for failing to fully account for non-wage income (health benefits, unemployment insurance, anti-poverty tax credits like the EITC). Still, even if the numbers are not nearly as stark as they appear at first glance, the gap between the so-called “one percent” and the rest of us is jaw-dropping. Reuters blogger David Cay Johnson cites an analysis of IRS data by economists Emmanuel Saez and Thomas Piketty that reveals the average gross adjusted income for the bottom 90 percent of taxpayers was $29,840 in 2010 — “down $127 from 2009 and down $4,842 from 2000.” The analysis also bolsters Reich’s argument that the degree of inequality in income gains is a major divergence from historical precedence:

The average income of the vast majority of taxpayers in 2010 was just a smidgen more than the $29,448 average way back in 1966.

At the top, the super-rich saw their 2010 average income grow by $4.2 million over 2009 to $23.8 million. Compared to 1966 their income was up on average by $18.7 million per taxpayer.

Such data points are expressed graphically (and dramatically) by two charts from the liberal magazine Mother Jones:

Both Reich and Johnson contrast the recovery from the Great Depression of the 1930s to the far weaker recovery from the “Great Recession” of 2007-09. Reich exhorts us to “learn something from history” — namely that “the answer is to make sure the middle class gets far more of the gains from economic growth.” Some of Reich’s history might be instructive for Robert Samuelson to consider: “During the 1920s, income concentrated at the top. By 1928, the top 1 percent was raking in an astounding 23.94 percent of the total (close to the 23.5 percent the top 1 percent got in 2007).” Enter Roosevelt’s redistributive New Deal policies, the full employment of the war years, and the post-war GI Bill and major infrastructure investments. The result? “By 1957, the top 1 percent of Americans raked in only 10.1 percent of total income. Most of the rest went to a growing middle class – whose members fueled the greatest economic boom in the history of the world.”

But Samuelson is seemingly uninterested in replicating this strengthening of the middle class. Instead, he turns to his three possibilities, which even he admits are unlikely to materialize. Turning to increased exports to solve the problem of a stagnating middle class is a bit like lighting a match or switching on a flashlight to solve the problem of a burnt-out light bulb. Both a flame and flashlight will illuminate the room for awhile, but neither is a long-term or comprehensive solution. You’re better off investing the five minutes necessary to pull out a step-stool and screw in a new bulb.

(This may or may not be a good time to insert a semi-relevant joke I came across in a recent Businessweek article. Q: How many Chicago School economists does it take to change a light bulb? A: None. If the light bulb needed changing, the market would have done it by now.)

President Obama’s modest proposals for reducing inequality would hardly soak the rich; it’s hard to argue that that returning to the top marginal tax rate of the Clinton boom years (39% versus the current 36%) would lead to fiscal disaster when the highest rate for much of hte 20th century was above 70%. But if Samuelson is wary of attributing the hobbled purchasing power of the middle class to the outsize gains made by the rich, he could also look to the surge in corporate profits that, in the words of Fiscal Times columnist Merrill Goozner, has left “average employees scrapping over a smaller slice of a smaller pie.” As Goozner explains, “the share of all income going out in wages, salaries, dividends, interest and capital gains, which includes everyone’s pay from the chief executive officer to the lowly janitor, is declining as a share of national income and has been for over 30 years.” While employee compensation “has fallen to 61.6 percent of total national income, down from 66.3 percent when Ronald Reagan took office,” the private sector has done much better.”Corporate profits . . . . have surged to 14.6 percent from 10.4 percent over the same time period.”

Goozner quotes an economist from Moody’s Analytics who believes that “what is clear going forward is that in the absence of debt and government support, we’re going to need the labor share to stop declining if consumers are to regain their prowess as drivers of the U.S. economy.” But the Fiscal Times piece looks backward as well as forward, echoing Reich’s pleas for a return to post-war levels of inequality. It recounts an anecdote about Henry Ford in which the industrialist, hoping to create customers for the automobiles rolling off his assembly lines, paid his employees “the then unprecedented salary of $5 a day.” The company’s official history describes Ford’s logic:

[S]ince it was now possible to build inexpensive cars in volume, more of them could be sold if employees could afford to buy them. The $5 day helped better the lot of all American workers and contributed to the emergence of the American middle class.

Despite what Republicans would have us believe about Obama’s “job-killing” regulation and tax hikes, and despite the widespread criticism of the president’s remark about the private sector doing just fine, “just fine” may in fact not be such an off-base description of the corporate world. An article in Mother Jones titled “All Work and No Pay” offers a succinct explanation for Samuelson’s “jobless recovery”: “US productivity increased twice as fast in 2009 as it had in 2008, and twice as fast again in 2010: workforce down, output up, and voilá! No wonder corporate profits are up 22 percent since 2007, according to a new report by the Economic Policy Institute. To repeat: Up. Twenty-two. Percent.”

The studied incredulousness of Mother Jones notwithstanding, it is indeed surprising that certain sectors of the economy — corporations, the wealthy — can be doing so well when the vast majority of Americans are doing so poorly. When conservatives attempt to assert that inequality is not actually a problem, they fall back on dubious analyses that favor measuring “consumption inequality” over income inequality. “Looking just at income ignores how individuals are generally able to smooth consumption by borrowing in the low-income years,” notes one American Enterprise Institute study. I find this argument unconvincing, to say the least. The run-up to the financial crisis was characterized by severe overleveraging, as families drained equity from their homes to sustain day-to-day spending and borrowed against everything from houses to retirement accounts. Why on earth should we be advocating a return to the very practices that got us into this mess in the first place?

Yet failed policies are exactly what Robert Samuelson champions when he asks readers to ignore the root causes of depressed consumer demand. America spent the last three decades diminishing the economic might of the middle class. The last thing we need is another three decades — or even another three years — of the same.

Death and Taxes (But Mostly Taxes)

The fog of war is alive and well in Washington, D.C., as Republicans and Democrats battle endlessly over budget deficits, taxes and the economy. Below, some pieces of information worth remembering when conservatives whine that taxes are too high, that government is too big, and that the best remedy for the recession would be to ask even less of the wealthiest two percent of Americans.

The New York Times’ revamped “Week in Review” section ran a great piece on May 14, “Rich and Sort of Rich,” which debates the usefulness of lumping people who make $250,000 per year together with millionaires and billionaires. While I can’t manage much sympathy for those who feel they just can’t live on $250k, no matter what high-tax state they live in, Times writer Andrew Ross Sorkin does make two important points:

• “The truly rich — the ‘millionaires and billionaires’ — often pay much less in taxes. The wealthiest 400 Americans in the country paid, on average, a rate of only 16.6 percent, according to the latest report from the I.R.S. that examined returns from 2007. That is because much of the income of the country’s wealthiest people comes from investments, which is taxed at the long-term capital gains rate of just 15 percent.”

• A “study on economic equality showed that the rich have gotten richer — income for the top 1 percent rose by $261,930, or 30 percent, from 2002 to 2008 — while the bottom 90 percent saw their incomes drop by $1,170, or 4 percent, on an inflation adjusted basis.”

• The highest tax bracket today is 35% and starts at $379,150. The key thing to remember — something that I didn’t understand until recently — is that these are marginal tax rates. A billionaire’s entire income is not taxed at 35%, only the portion of his or her income that exceeds $379,150. Every dollar below that is taxed in the (lower) bracket it falls into. Bill Gates pays the same taxes on his first $20,000 as I do. Sorkin writes that “for most of the 1950s, ’60s and ’70s the highest rate was about 70 percent. Even under President Ronald Reagan in 1986, the highest rate was 50 percent.”

A blog post on The Atlantic Monthly by Derek Thompson also offers a reality-check on the statement, frequently quoted by Grover Norquist-type conservatives, that “half of American tax payers owe no federal income tax.” Thompson concedes that this is indeed true — about 15 million low-income Americans either pay no net taxes or receive more in tax credits than they pay — but lists some crucial caveats:

• It’s not all income taxes: “The majority of households who pay no income tax still pay net taxes to the IRS. Federal income taxes account for about 40 percent of total government receipts. Most of the rest comes from payroll taxes, which workers of all income levels do pay. Since every dollar up to $106,800 is subject to taxes, a typical middle class family pays payroll taxes on all its income while a millionaire employee pays payroll taxes on only a tenth of his income.” Not to mention the state and local taxes that aren’t included in the “no federal income tax” statement.

• The richest 20 percent of the country pays more than half of income taxes for two simple reasons: America’s wealthiest 20 percent earns half the nation’s income and their income is taxed at a higher rate.

• The wealthiest quintile’s share of federal taxes has grown more rapidly than their share of income. This suggests that the rich are facing steeper taxes. Not so. Effective tax rates at the top have fallen in every decade since 1970. But since effective tax rates also fell for every other quintile, the share of taxes paid by the rich has increased.

The Wall Street Journal’s “High-Earning Households Pay Growing Share of Taxes” (5/3/11) was on the site’s Most Popular list for over a week. However, though the WSJ readers e-mailing the piece to their friends may have focused more on the supposed unfairness of taxing the rich, I came away with some different conclusions. Even a conservative paper can’t hide the facts, most of which echo the findings of the more liberal publications mentioned above.

• “For their part, Democrats note that the incomes of higher earners have been growing far more rapidly, so it’s only natural that they would pay a higher share of tax. As for those Americans who pay no federal income tax, most of them still pay Social Security and Medicare payroll taxes that can take a significant share of their income, Democrats said.”

• “The growth in higher earners’ tax share has been due to several factors, experts say. Their incomes have been growing more rapidly than others, resulting in generally higher tax collections, even as rates dropped for virtually all earners during the administration of President George W. Bush.”

• “In the U.S., the average tax rate for higher earners has fluctuated, but generally has declined for the top 10% from 29.6% in 1979, to 26.7% in 2007, according to the CBO, even as incomes for that group were rising. Average rates for the very wealthy are often lower than that because of low tax rates on investment income.“

The lower taxation of investment income is something that numerous columnists have brought up. When Republicans complain that the highest tax bracket is a “confiscatory” 35%, they decline to mention that effective tax rate for the wealthy is lowered by the 15% rate on capital gains. Newsweek’s Gary Rivlin points out that “It’s easy for Mark Zuckerberg to say he’s ‘cool’ with raising income-tax rates. Because it won’t affect him.” Zuckerberg, like many billionaires, doesn’t care about that 35%. “Most of his wealth is tied up in stock,” Rivlin writes, and no one is seriously talking about raising the capital gains tax.

“When Warren Buffett talks about paying a lower tax rate than his secretary, that’s because she sees most of her pay through a paycheck, while the bulk of his compensation comes in the form of capital gains and dividends. In 2006, for instance, Buffett paid 17.7 percent in taxes on the $46 million he booked that year, while his secretary lost 30 percent of her $60,000 salary to the government.”

Rivlin quotes author and tax columnist David Cay Johnston as saying, “America has two tax systems. Separate and unequal.”

A longer but certainly worthwhile piece in the New York Review of Books looks at the partisan fight over deficits and taxes. Michael Tomasky lays out the problem as well as some simple but politically untenable solutions. He notes that, in 2008, the left-leaning Center on Budget and Policy Priorities “released a report finding that keeping George W. Bush’s tax cuts intact through 2018 would cost $4.4 trillion.” In April, the CBPP estimated that the Republican budget as designed by Paul Ryan would cut not the promised $5.8 trillion but actually around $4.3 billion, given that some of its savings came from accounting tricks and already-planned cuts in defense spending for Iraq and Afghanistan. Tomasky offers some perspective:

Put the numbers side by side. The Bush tax cuts, if maintained, will cost $4.4 trillion. Ryan proposes to reduce spending by $4.3 trillion over a similar period. “In a way, all of this debate, all of this ‘bravery,’ is largely about paying for the Bush tax cuts,” says the economist Lawrence Mishel of the liberal Economic Policy Institute.

The New York Times columnist David Leonhardt wrote in April that if the President and Congress were somehow to let the Bush tax cuts expire for all taxpayers at the end of 2012 (which would happen if they simply did nothing), 75 percent of the deficit problem would be addressed over the next five years.

Like others, Tomasky has little good to say about the low tax rate on capital gains and the reduction in the estate tax. “Just before this year’s tax deadline,” he writes, “The Washington Post reported that the richest four hundred Americans went from paying an effective rate of 26 percent in 1992 to 17 in 2007.”

Seventeen percent? And the GOP has the audacity to whine that these people are overtaxed, that the government is stifling investment and job creation? The claim is absurd. It is laughable. There is an overwhelming amount of (mis)information on taxes being spouted by conservative talking heads and Republican stalking horses; sometimes even when I know their views are wrong, I’m not sure how to articulate what I feel is right. That’s why it’s so important to me to uncover arguments like Tomasky’s, which are based in reality instead of in some Laffer-curve Wonderland. It’s pretty clear I’m a liberal, but unless I know why, I will be just as bad as the Republicans I disdain.