Figure 1 shows the extraordinary reallocation of national resources from the bottom 80 percent of the population to the top 1 percent, while those in between (81^st-99^th) have, as a group, shown no change in their share of total income.

FIGURE 1

Source: CBO Report “Trends in the Distribution of Household Income Between 1979 and 2007”

Not surprisingly, over the last three decades many households in the bottom 80 percent have faced sharp declines in their standard of living as the costs of health care, higher education, food and energy have risen far faster than the wage check. The result has been the accumulation of unprecedented levels of mortgage, credit card, and student debt.

I have argued that the roots of the economic crisis can be found in the shift in economic thinking and public policy toward free market fundamentalism in the 1970-80s, which fueled the rise in debt, financial instability, and extreme inequality. We’ve seen a toxic mix of financial deregulation, evisceration of protective labor market institutions (like collective bargaining and the minimum wage), a political system corrupted by campaign contributions, and an increasingly polarized education system that performs poorly for most of those in the 80 percent and terribly for the most disadvantaged communities.

But this is not at all the conventional wisdom. Rather, it has become widely accepted that the government is the root cause of the economic crisis of 2008-11 and the decline in living standards for the vast majority. The problem in this conservative vision is too much regulation, too much taxation, too much encouragement of home ownership for low-income families, and government workers (who take too much for themselves in wages, benefits and job security). And worst of all is fighting the economic crisis with deficit spending. Incredibly, many leading academic economists have lent support to this free market fantasy, which of course has the causation between unemployment and government spending exactly backwards.

In the free market vision, extreme inequality is not the real problem. It is government spending and regulations, and reducing both would induce employers to generate jobs, workers to get off unemployment benefits, and students to invest in their own education (as public spending for education is cut back). Mainstream economists have long been fixated on supply side solutions to inequality and low pay. It is a natural part of the package of free market orthodoxy: more education makes people more productive and in competitive labor markets workers get paid what they’re worth (otherwise known as their “marginal product”).

A good example of this free market vision can be seen in David Brooks’ recent column in which he argued that the “right” inequality to worry about is not what’s going to the top 1 percent, but instead it is the “chasm between college and high school grads.” And we get much more than just higher incomes from more higher education. As he put it: “Today, college grads are much less likely to smoke than high school grads, they are less likely to be obese, they are more likely to be active in their communities, they have much more social trust, they speak many more words to their children at home.”

Unfortunately, while college grads may, on average, have higher scores on all these good outcomes, it seems unlikely that an increase in college degrees would have any effect on any of them. Let’s say we increase in the 6-year graduation rate for Bachelor’s degrees from about the current abysmal level of 55% (see below). Should we really expect to see less smoking, less obesity, more social trust and more words spoken to children?  Actually, given the costs and benefits of college attendance spelled out below, we might reasonably expect these outcomes to worsen, as recent graduates with modest incomes realize that they are unable to pay off their  mountainous student debt.

So what is the payoff to getting a college degree? We can start with Figure 1. Since 30 percent of the population over age 25 had college degrees in 2010 (Department of Education, Digest of Education Statistics: 2010, table 8), not many college graduates could have been among the top 1 percent of winners.

Figure 2 provides a view of the timing of the growth in inequality at the top. Saez shows that all the action at the top has taken place within the top 1%, whose share of total income rose from about 14% in 1993 to 23% in 2007, and then declined to about 21% in 2008, as the financial system nearly collapsed.

FIGURE 2

Nothing like this sort of take-off in inequality appears in the earnings data organized by educational attainment. Figure 3 shows that real earnings for those with only a college degree rose modestly in the 1990s and not at all since (in 2007 dollars).  At the peak of the last business cycle, in 2000, the average college graduate wage was $25.86 and increased to $26.40 the next year. Six years later the college wage was $26.51. Measured from 2001 to 2007, the Bush “boom” increased the average college wage by a full 11 cents.

It is true, as Figure 3 reports, that average wages have been much higher for college than high school graduates. But while the average college graduate earns about 1.7 times more than the average high school graduate, this ratio has remained unchanged since 1998: the payoff to a college degree stopped increasing over a decade ago.

The share of young people (25-29) with a college degree rose in the 1990s, but this measure of rising educational attainment has been flat in the 2000s: 29.1% in 2000, 29.6% in 2007 and 31.7% in 2010 (Department of Education: Digest of Education Statistics: 2010, Table 8).

But while many more students have sought post-secondary degrees, the reality of low wages for recent graduates and high costs of schooling have produced dismal graduation rates. Students entering a four-year college in 2003 had a graduation rate of just 55.5% six years later. Even worse, community colleges offering a two-year Associate’s degree report a three year graduation rate of just 29.2% for the 2006 entering class (NCHEMS Information Center, from Department of Education data).

The fact is that many students do not complete college, perhaps partly because they are pretty good at weighing the benefits and costs. Figure 3 graphically illustrates the tiny payoff to going to college and not finishing a four-year college degree. On average, the wage increase from “some college” over a high school degree was $1.85 per hour in 1998, $2.03 in 2000, and $1.92 in 2007.

FIGURE 3

Real Hourly Earnings by Educational Attainment, 1979-2007 (2007 dollars)

Source: Economic Policy Institute

If we succeed in getting more students out of college with diplomas, nearly all will get paid far less than the average college graduate (since they are younger and will come from the lower part of the high school performance distribution). Figure 4 compares the median annual earnings for high school graduates in 2010 with the average annual earnings of those in the 1^st quartile of the college graduate earnings distribution (those with earnings in the bottom 25% of earnings for all college grads). The increase for undertaking an additional four years of schooling is $5,600 for women and $4,850 for men.

Ignoring the complications of discounting, let’s say it cost $10,000 per year in tuition and related costs, and opportunity costs of $25,000 (foregone earnings, at slightly below the median high school graduate rate). Let’s further assume she won’t need to bear any costs of student loans (an entirely unlikely scenario – generally only possible for those whose parents are in that top 1%…).

Under this scenario, she’s got $140,000 invested in her college degree ($35,000 x 4). If her payoff is the average one ($5,600), it will take her about 25 years to break even.

This simple example illustrates the reality that the payoff to getting a college degree isn’t so obvious, given a labor market paying low wages to almost one-third of all workers and costs of education that are rising far faster than the overall inflation rate. This helps explain not just the dismal graduation rates mentioned above, but also why the percentage of 25-29 year olds with a college degree or more has hardly budged over the last decade (29.1% in 2000, 29.6% in 2007, and 31.7% in 2010; Department of Education, (Digest of Education Statistics: 2010, table 8).

It will take some radical institutional changes before we get to a more egalitarian and productive economy, as Brooks would have us do. We would need substantial reductions in the incidence of low pay and the burden of post-secondary education costs on less well-off families. Progressive change requires reversing the inequality revealed in figure 1: let’s start by giving back those 10 percentage points of national income to the bottom 80 percent of the American people. One critical step is to reduce the incidence of low pay without reducing job opportunities. Some say this is not possible, but France has shown that it can be done. I’ll make that case in the next post.

FIGURE 4

Median Annual Earnings in 2010 for High School Graduates and Average Earnings for College Graduate in the 1^st Earnings Quartile (Usual weekly pay X 50)

Source: Bureau of Labor Statistics

]]> http://www.deliberatelyconsidered.com/2011/11/college-degrees-not-the-answer-to-extreme-inequality/feed/ 4 http://www.deliberatelyconsidered.com/2011/10/the-metrics-of-protest-%e2%80%9c99-percent%e2%80%9d/ http://www.deliberatelyconsidered.com/2011/10/the-metrics-of-protest-%e2%80%9c99-percent%e2%80%9d/#comments Mon, 31 Oct 2011 14:06:21 +0000 http://www.deliberatelyconsidered.com/?p=9271

Occupy Wall Street protests have spread across the country behind the rallying cry that the “99 percent” have been left behind. There is a sense of outrage that the “system” is not just rigged in favor of the elite – something like the top 1% – but has spun out of control, leading to an accelerating concentration of wealth and power in the hands of the very few.

Wage stagnation, the explosion of health and education costs as the American welfare state shrinks, and above all the financial manipulation of debt has generated extraordinary profits on Wall Street and massive indebtedness and housing foreclosures on Main Street. Losses from outrageous risk-taking by too-big-to-fail financial institutions are made good by the taxpayer, who is told there is no alternative.

This new gilded age political-economic system can be thought of as the interlocking trifecta of a mostly degraded and increasingly dual educational system, a financial system that became mostly unregulated by either law or social norms, and a political system increasingly corrupted by money.

The educational system has promoted a meritocracy of cumulative advantage. The vast majority of American students experience primary and secondary schools during which they fall far behind their peers in much of the rest of the developed (and even less-developed) world, and then face costs of post-secondary education that produce a level of debt that cannot possibly be repaid out of earnings. But the elite reproduces itself with an ability to pay for college and graduate school educations whose superiority has steadily grown, while at the same time feeling entitled since the educational process has also become extraordinarily competitive.

The financial sector was systematically deregulated as free market orthodoxy took off in the 1980s. This deregulation served to extract resources from the “real” economy and concentrated it in the bank accounts of a tiny elite, who are increasingly those same victors of the Darwinian educational competition. As the concentration of income at the very top of the distribution proceeded in the 1990s-2000s, . . .

Read more: The Metrics of Protest: “99 Percent”

Occupy Wall Street protests have spread across the country behind the rallying cry that the “99 percent” have been left behind. There is a sense of outrage that the “system” is not just rigged in favor of the elite – something like the top 1% – but has spun out of control, leading to an accelerating concentration of wealth and power in the hands of the very few.

Wage stagnation, the explosion of health and education costs as the American welfare state shrinks, and above all the financial manipulation of debt has generated extraordinary profits on Wall Street and massive indebtedness and housing foreclosures on Main Street. Losses from outrageous risk-taking by too-big-to-fail financial institutions are made good by the taxpayer, who is told there is no alternative.

This new gilded age political-economic system can be thought of as the interlocking trifecta of a mostly degraded and increasingly dual educational system, a financial system that became mostly unregulated by either law or social norms, and a political system increasingly corrupted by money.

The educational system has promoted a meritocracy of cumulative advantage. The vast majority of American students experience primary and secondary schools during which they fall far behind their peers in much of the rest of the developed (and even less-developed) world, and then face costs of post-secondary education that produce a level of debt that cannot possibly be repaid out of earnings. But the elite reproduces itself with an ability to pay for college and graduate school educations whose superiority has steadily grown, while at the same time feeling entitled since the educational process has also become extraordinarily competitive.

The financial sector was systematically deregulated as free market orthodoxy took off in the 1980s. This deregulation served to extract resources from the “real” economy and concentrated it in the bank accounts of a tiny elite, who are increasingly those same victors of the Darwinian educational competition. As the concentration of income at the very top of the distribution proceeded in the 1990s-2000s, spectacular displays of conspicuous consumption became commonplace. At the same time, a political system corrupted by the absence of meaningful limits to special interest campaign spending could not rein in the financial sector with limits to risk-taking, even after both the magnitude of the crisis and its causes were plain to see.

And in the face of all this, what in the end has been the rallying cry of protest at Occupy Wall Street and beyond? A simple statistic originally generated in a technical article in a leading economics journal by Thomas Piketty and Emmanuel Saez – the after-tax income share of the top 1 percent. Their work told the story of a staggering increase in the share of after-tax income received by those with top incomes since the 1970s. And so: the “99 percent”.

The Congressional Budget Office has just released an update of these figures. The after-tax, after-benefit share of total household income taken by the top 1 percent grew from 8 percent in 1979 to 17 percent in 2007. The shares of each of the bottom four quintiles (together the bottom 80 percent) all fell by 2-3 percentage points. Households in the top quintile but not in the top 1 percent (the 81^st-99^th percentiles) showed no change, while those in the bottom 20 percent fell from 7 percent to 5 percent. In sum, only the top 1% gained, and the top .01 percent gained even more magnificently.

It is not just that wages and salaries have grown vastly more unequal. Policy decisions have greatly reduced the equalizing effect of taxes and transfers. As the CBO puts it, “In 1979, households in the bottom quintile received more than 50 percent of transfer payments. In 2007, similar households received about 35 percent of transfers.”

Our political-economy trifecta (education-finance-politics) has not just rigged the system to syphon the productivity of the economy into the hands of the top 1 percent. It has also systematically attacked the standard of living of workers in the bottom half (or more) of the workforce.

One source of this attack has been to reduce the legal minimum wage to a level so low it has become largely irrelevant as a wage floor. In another post, I will show that different approaches to the use of a statutory minimum wage can go a long way towards explaining why, for over three decades, about 30 percent of all American workers are paid very low wages (less than 2/3 of the median wage). This compares to a 2009 low wage incidence of less than 10 percent of French workers (whose unemployment rate is almost identical!). “30 percent” should become another Metric of Protest.

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“The early George W. Bush years saw spending bounce up to a plateau of roughly 20% of GDP, but no more than 20.7% as recently as 2008. Then came the Obama blowout, in league with Nancy Pelosi’s Congress. With the recession as a rationale, Democrats consciously blew up the national balance sheet, lifting federal outlays to 25% in 2009, the highest level since 1945.”

The editorial is accompanied by a chart to illustrate the basic claim–witness the remarkable uptick of the curve between 2008 and 2009:

At first sight, the chart appears to sustain the WSJ charge and to indicate that federal spending under Obama is of a different order of magnitude from the past. For a moment, it shook my own antipathy to the Republican position; maybe, in all fairness, the blame deserves to be more evenly divided between the two sides of the political aisle. My curiosity aroused, I probed more deeply into the numbers (which come from the OMB website). I’d like to share what I discovered. I make no claims about any special knowledge of the intricacies of the federal budget, just an affinity with numbers.

If you have followed me this far, you may have guessed what is coming—the discovery of a deceptive use of data. It begins with a disturbing piece of disingenuousness, if not dishonesty, in the WSJ editorial, which places the responsibility for remarkably high level of fiscal year (FY) 2009 expenditures entirely at Obama’s door.  But a federal fiscal year begins on October 1 of the prior year, and the Bush White House was therefore the source of the FY 2009 budget passed by Congress and responsible for spending some of the money. The budget as proposed authorized $3.1 trillion in expenditures (and didn’t include the full costs of the Afghanistan and Iraq wars); actual expenditures rose to $3.5 trillion, an increase that does not appear so remarkable in light of the enormous economic turmoil of late 2008 and the first half of 2009. Unsurprisingly, a large part of the increase from the prior fiscal year, $260 billion, can be found in the human-resources category, as unemployment and Social-Security payments rose.

Then, there is the editorial’s insistence on viewing federal spending in relation to GDP. The problem is that the expenditures-to-GDP ratio has two sources of variation, not one. Indeed, the ratio is so high in FY 2009 in part because the GDP declined between 2008 and 2009 as a consequence of the recession. And it hasn’t risen much since. As a consequence, the ratio tends to inflate the apparent spending levels since Obama became President. It is useful, then, to look directly at the nominal levels of federal expenditure from year to year.

Looked at this way, the expenditures of the Bush years reveal a momentum of steady increase that averages $160 billion per year. In the first budget year that the Bush White House fully “owned,” FY 2002, expenditures amounted to $2.01 trillion (in nominal, not inflation-adjusted dollars); in the last, FY 2008, they rose to $2.98 trillion—in other words, an increase of just under $1 trillion. The drivers of increasing expenditures were mainly twofold: defense spending (two wars, of course); and human resources, with Social Security and Medicare sharing lead roles.

The same drivers have been at work so far during the Obama years, so the same momentum should be present. In fact, the expenditures in FY 2010 are almost exactly in line with the year-to-year increases of the Bush years: that is, the $3.46 trillion actually spent is not much above the $3.30 trillion one would anticipate by straightforward extrapolation from FY 2008 (see chart below). Given the slow recovery and high unemployment rate, the bump up seems reasonable.

OMB projects the FY 2011 expenditures to come in at around $3.82 trillion, admittedly a sizable increase from the prior year, but expenditures are then expected to level off. These projections may turn out to be off the mark. But the main point is that during the Obama years so far, with the exception of FY 2009, a year that the Bush administration at least partly owns, the year-to-year changes in federal spending are not much above those of the Bush years, and any differences seem easy to explain in terms of the needs of more economically difficult times.  There is no sign here of a runaway federal budget.

Intent on its narrative, the WSJ editorial omits any analysis of federal income, which, as is widely known, has reached its lowest level as a percent of GDP since the 1950s—14.9%. In nominal dollars, income fell during the early years of the oughts decade as a result of the Bush tax cuts and was just starting to recover when it dropped precipitously, by $400 billion, in FY 2009, because of the recession. Unlike federal spending, federal revenue is, in 2010, barely above (in nominal dollars!) what it was a decade before (see chart):

The big story, in other words, is not the rise of federal spending but the stagnation of federal receipts. Taking inflation into account, they have suffered a significant decline since 2000, of about 16 percent. There would seem to be no way to rectify the budget situation without doing something to correct this slide downward.

The WSJ editorial gets it exactly wrong!

The headlines this week were devoted to the high-stakes drama in D.C. that led to (literally) an 11th hour deal to avert a federal government shutdown and an $38 billion spending cut for 2011-2012. But the real news was that the 2012 Presidential election was effectively thrown to the Democratic incumbent (who also announced the launch of his campaign this week) when the leading fiscal policy visionary on the Republican side issued his long-term plan for the role of government over the next ten years. Congressman Ryan’s plan is so extreme in its proposed cutbacks on health insurance coverage and so regressive in its proposed reform of income and corporate taxes that it leaves most of the American political spectrum open to President Obama for the taking. He will no doubt begin the journey to this vast expanse of political turf with his speech on Wednesday.

Ryan’s plan has been much discussed in the press. It calls for a privatization of Medicare, with drastic reductions in funding. The key will be in how this funding reduction is distributed, and there is no indication that it would be done in a progressive way. This the major fault line of the plan, that it would put an even greater burden on the poor and middle class in accessing health care than is the case today. The plan calls for reducing the income tax on the richest individuals and corporations to the extremely low level of 25%. Finally, the projected effect of the plan on budget deficits hinges on wildly unrealistic assumptions that have already been questioned by the Congressional Budget Office.

We are in such a moment of political frenzy over the fiscal deficits that we often forget two basic economic fundamentals about deficits. The first is that deficits are not a function simply of spending levels but mainly of economic growth rates, since it is these that largely determine revenues. The second is that shrinking deficits generally reduce the economic growth rate and slow the creation of jobs.

There is no reasonable economic case for cutting the budget deficit in the short run because while the hemorrhaging of the labor market seems to be over, there are only small signs of an upturn in employment. The $38 billion cuts in this weeks budget deal will only hurt, although the cuts are not large enough to make a big difference (0.25% of GDP). Over the recent period of GDP growth the unemployment rate remains just below 9%. More important is that the decline in the unemployment rate is swamped by the increase in discouraged workers who are not counted among the unemployed.

What is the economic case for deficit cutting in this environment? There are two lines of argument, both related to the stress that public borrowing puts on capital markets. The first is that fiscal deficits raise interest rates. There is no evidence to support this case. Both short-term and long-term rates remain at historic lows. The bond market is simply not showing signs of a lack of confidence in the U.S. Treasury as the budget cutters would lead us to believe. The second argument is that public spending “crowds out” private investment. Given the weakness of corporate spending over the last few years, this one at least is plausible. The problem is that the most significant determinant of investment spending by the private sector is expected future profitability usually tied to expected future rates of economic growth. Most studies by economists, thus, find that public spending serves to “crowd in” private spending because it spurs economic growth. There remains a case for improving the corporate sector’s access to credit, but this should be addressed through financial regulation, not fiscal restraint.

The Ryan plan would exacerbate the economic problems of our day–slow growth and high inequality. The good news is that the plan is a political disaster for the right. Either the Republicans will have to back away from the Ryan plan — which, given their aversion to tax increases, will translate into larger budget deficits – or, the Republicans will make the plan a centerpiece of their platform, in which case they are ceding most of the political spectrum to President Obama. Like all incumbents before him, Obama is not concerned with his base or those on the left of the political spectrum. He will govern not even from the center, but from right of center (see, for example the Simpson-Bowles deficit commission recommendations), since this allows him to capture a big part of the centrist vote and everything to its left.

While those on the left may not be able to count on President Obama to support a standard left-wing fiscal agenda of expanding entitlements and a progressive tax reform, they can expect that the administration will trumpet the results of the CBO analysis of the Ryan plan. Once the implications of the plan are clear to the American public, the extreme nature of this vision will be apparent.