Income gap widened in 2005

In case you wonder why the American public isn't all that excited about their economic outlook despite an economy that's doing well on the macro level, here's the reason.

While total reported income in the United States increased almost 9 percent in 2005, the most recent year for which such data is available, average incomes for those in the bottom 90 percent dipped slightly compared with the year before, dropping $172, or 0.6 percent.

So despite what looks like healthy wage gains, very little of it was actually wages. All of the income increase and more went to the top 10 percent. Actually most of it went to the top 1 percent, whose income grew 14 percent.

That explains the following statistics from the article:

1. Both the top 10 percent and top 1 percent have hit income shares not seen since 1928 -- shortly before the 1929 stock market crash and the Great Depression.

2. The top 300,000 Americans -- one tenth of one percent of the population -- earned almost as much as the bottom 50 percent -- 150 million people. On average, each of those 300,000 people earned 440 times as much as one of those 150 million.

And the numbers probably understate the situation:

The Internal Revenue Service estimates that it is able to accurately tax 99 percent of wage income but that it captures only about 70 percent of business and investment income, most of which flows to upper-income individuals, because not everybody accurately reports such figures.

Defenders of the current tax system argue that the problem isn't tax levels -- even though federal income taxes, measured as a share of income, has stayed largely flat for middle-income workers over the past 40 years while dropping by half for the affluent.

They make two main claims:

1. The numbers simply reflect the demands of the global economy, where skilled workers command ever more of a premium and unskilled workers fall behind.

2. The numbers don't count benefits, such as health insurance, that make up a much larger share of total income for poorer Americans than they do for the wealthy.

There is probably some truth to #1, but it's a stretch to argue it accounts for the entire difference. And even if it did, it's not an argument for complacency or acceptance. Extreme income inequality is a hallmark of unstable societies. Too much wealth concentrated in too few hands sparks unrest.

#2 is mostly bogus. The reason health insurance makes up a larger share of worker income is because health costs have gone up sharply. My employer paying 20 percent more for health insurance doesn't leave me better off if my health costs go up that much; it's a wash as far as disposable income is concerned. Never mind that I'm probably worse off because health-care costs also are eating into my take-home pay, in the form of higher premiums, co-pays, deductibles and all the other ways hard-pressed employers are devising to push more such costs on to workers.

While there can be plenty of principled disagreement about what causes the situation and what should be done about, two things seem obvious:

1. The tax system that conservatives often criticize as "punitive" toward the wealthy or successful has turned out to be nothing of the sort. Despite such "confiscatory" measures, the wealthy have increased their share of income -- to the point of hoovering money out of the pockets of the less affluent.

2. Given #1, as well as the gigantic federal deficit and the consequences of extreme income inequality, it makes zero sense to prolong or enhance tax cuts for the wealthy. The estate tax should be retained, and the AMT fixed instead. The cap on Social Security taxes should be removed, and income caps on benefits should be added. Marginal rates should be re-examined. Tax enforcement should be beefed up to capture more of that non-wage income.

Perhaps you think this is somehow a socialist redistribution of wealth downward, ignoring the fact that the current situation is a socialist redistribution of wealth upward, which simply makes no sense.

Dealing with the national debt will require work on both the spending and revenue side of the federal ledger. But as far as the revenue goes, it is only logical to take the most money from those most able to pay. Everyone's second $100,000 should be taxed more heavily than everyone's first $100,000. Doing so will not only restore our federal finances to health; they will head off a building social convulsion that benefits nobody -- especially the rich.

deficit, AMT, class, income, taxes, politics, midtopia

Now in session

The Minnesota Legislature opened its session today, with a situation mirroring the national one: both chambers controlled by Democrats (or the DFL, as they're known here) and the governor's seat occupied by a Republican.

One major difference, though, is in that Republican: Tim Pawlenty has already acknowledged the need to change course on several things, and he was always more clueful and willing to compromise than Bush is. So there's actually some hope that this legislature will be able to get some good things done.

Here are some of the things I've asked my elected representatives to do. A lot of the big issues (like civil liberties, health care, education or Iraq) are missing, and that's deliberate: I consider these items that need addressing, but are at risk of being lost in the shuffle.

To my local representatives:

1. Fund transit projects like the Central Corridor and Northstar, and start looking at ways to expand it into the western suburbs.

2. Legalize instant-runoff voting, both as an option for local elections and as a requirement for statewide contests.

3. Allow grocery stores to sell wine. It's a small thing, but I strongly dislike it when an industry (liquor stores, in this case) uses the law to insulate itself from competition.

4. Stop balancing the state budget on the backs of property taxpayers.

Nationally, I've asked my representatives to:

1. Sign on to tighter ethics rules and more transparent government.

2. Adopt "pay as you go" rules and aggressively reduce the deficit.

3. Reform Social Security by eliminating the earnings cap (thus replenishing the "trust fund" by recouping money from the taxpayers who most benefited from raiding it) and indexing benefit increases to inflation.

The list is hardly exhaustive. Feel free to list your political priorities in the comments.

Minnesota, politics, midtopia

How much does the government owe?

Would you believe $53 trillion?

And the 2006 deficit alone? $4.6 trillion.

That's based on a GAO analysis (pdf) that looks at the present value of future liabilities the government has racked up over the next 75 years.

Are the numbers real? Yes. Are they meaningful? Sort of.

The figures come in answer to the following question: "If the current budget situation continues, what will be the cumulative difference between federal revenue and federal outlays in the next 75 years?"

Note all the important qualifiers: "If the current situation continues" and "75 years." The estimate ignores things like economic growth and population growth and then projects current conditions out over a very long time frame.

That time frame is important, because the longer the time period, the less accurate the projection becomes. It is extremely unlikely that current conditions will prevail for the next three quarters of a century, and even small changes can have big effects on such long-term guesses. Do the same projection in five years and you'll get a much different answer.

Further, the time frame makes the numbers look more scary than they really are. The $4.6 trillion deficit for 2006, for example, works out to about $61 billion a year -- big, but manageable.

Finally, this is not money actually spent; it's money we've implicitly promised to spend, assuming federal policy doesn't change in the next seven decades. Most of it represents Social Security and Medicare payments that won't come due for years -- but for which we've made no preparation, in part because we're using the Social Security "surplus" to pay for current government operations. So far the government has borrowed nearly $2 trillion from Social Security; if that money were instead held in trust, the multiplier effect of 75 years would go a long way toward reducing that $53 trillion.

So we're not really $53 trillion in the hole. What the figure mostly shows is the difference between our promises and our willingness to pay for them.

But they do serve as a wakeup call. The longer we run deficits and refuse to start saving for our long-term obligations, the greater the pain will be in the end -- either through higher taxes or greatly reduced government services. We need to end deficit spending sooner rather than later, start paying money back into the Social Security reserves and make some decisions about the intent and breadth of entitlement programs.

President Bush's tax cuts, mind-bogglingly expensive invasion of Iraq (with a final price tag estimated to be in the trillions) and ill-considered Medicare drug benefit have certainly worsened the problem, but he's not the only one to blame. We all share the blame to one extent or another, for wanting more government than we're willing to pay for.

I've commented before on how unethical it is to live large now and leave the bill for our grandchildren. What the GAO report demonstrates is how large that bill actually is. It's time to act like grownups and pay our own way. Anything else is simply unconscionable.

Social Security, GAO, deficit, budget, politics, midtopia

A truly radical federal budget

The Republican Study Committee, a group of conservative GOP lawmakers, today released their version of the 2007 federal budget, titled "Contract with America: Renewed."

Their budget would cut the deficit by $358 billion over five years, compared with $60 billion in Bush's budget. But as you might imagine, the devil is in the details. Their proposal is a mixture of solid ideas and conservative fantasies.

NEUTRAL IDEAS

Increase defense spending to match Bush's request for 2007. Defense spending shouldn't be sacrosanct, but adequate funding is a must. Reserve judgement on this pending a detailed look at where the money goes.

Eliminate the Mars initiative and the space shuttle program. The Mars program is great, but not the way it's being funded: by gutting everything else NASA does. If the Mars mission doesn't come with extra money, it should die. The space shuttle needs to be retired, but we should have its replacement in hand before that happens.


BAD IDEAS

Gut foreign aid. This is a huge mistake. The war on terror demands *more* foreign aid spending, not less.

Dept. of Energy. Eliminate federal funding for energy conservation research, and arbitrarily cut the department's size by 35 percent. In an era of high oil prices and searches for alternatives, this makes little sense.

Interior and Agriculture. Arbitrarily cut the size of the Depts. of Interior and Agriculture by 10 percent and impose a wide variety of cuts in environment and natural resource programs, including eliminating the Energy Star program (that logo that lets you know if you're buying an energy-efficient appliance).

Transportation. Eliminate Amtrak and mass transit subsidies and transfer a whole bunch of responsibilities to the states, including railroad safety and regulation and (the biggie) highway construction spending. Eliminate the subsidies that maintain the U.S. merchant marine. Privatize the FAA.... Dumping funding on the states merely shifts responsibilities. Maintaining the merchant marine is a security issue. Privatizing the FAA would harm its regulatory function.

Deep cuts in education spending. Eliminate the Reading Is Fundamental program and programs to encourage learning a second language -- this at a time when a shortage of foreign-language speakers is hampering our security efforts. Freeze spending for Head Start. Eliminate the Corporation for Public Broadcasting, National Endowment for the Arts and National Endowment for the Humanities and cut the Dept. of Education by 30 percent.

Health. Cut National Institute of Health budget by 10 percent, eliminate family planning programs and turn Medicaid and SCHIP into a block-grant program -- cutting $36 billion a year from it in the process, largely by capping spending increases without regard to actual need.

Aid to the poor. Save $13 billion a year by arbitrarly restricting eligibility for Section 8 housing (cutting the number of vouchers in half) and eliminating heating-bill assistance for low-income households. Again, arbitrary cuts that evince no concern for the impact of those cuts.

Social Security. Doesn't touch Social Security at all. This may be politically expedient, but even minor tweaks -- raising the eligibility age and lowering the income limits for benefits, for example -- would save huge amounts of money.

GOOD IDEAS

Agriculture. Cut lots of subsidies and programs at the Dept. of Agriculture. The whole agricultural subsidy structure could be thrown overboard and the country would be better off for it.

Medicare. Cut $63 billion a year from Medicare, by raising premiums and means-testing benefits. This is a reasonable approach and politically courageous. But they also propose limiting cost increases to a percentage point below medical inflation. Hospitals and doctors are already reluctant to take Medicare because it pays so little; this will just make that worse.

Legislative reforms. They advocate a line-item veto, earmark reform, strict sunset provisions on most federal programs, a discretionary spending cap and restoring pay-as-you-go provisions. All of those are excellent ideas. Which raises the question: "why aren't they already in effect?"

Bad programs. One of the strengths of the document is specifically identifying a lot of wasteful or useless programs that could be eliminated. Doing so usually doesn't free up a great deal of money, but it should be done on principle. Of course, people will disagree on what's wasteful or useless. I would recommend establishing a bipartisan committee whose sole job was to eliminate bad programs. Objective criteria would be used whenever possible; a committee vote could settle more contentious cases, with a tie meaning the program lives.

Once you read the budget, you can see why they didn't trumpet the specifics. Budget cutting, of course, will require pain, and they do have some good ideas; but by ignoring defense and Social Security and heaping the cuts on social programs and other conservative pet peeves, they undermine their credibility. It's a start, but it's only a start.

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deficit, budget, politics, midtopia