Bernstein on Income Inequality

February 9, 2012 at 2:21 pm

Testifying at a Senate Budget Committee hearing today on “Assessing Inequality, Mobility, and Opportunity,” CBPP Senior Fellow Jared Bernstein explained that, “even with recent improvements in the job market, the American economy still faces significant challenges, particularly the historically high levels of income and wealth inequality, the squeeze on middle-class incomes, and elevated rates of poverty.”  Below are the main findings of his testimony:

  • It is important to examine trends in income inequality through the lenses of various different data sources, as each has its own strengths and limitations. The fact that all of these series show similar trends toward increased dispersion of incomes is itself good evidence of the validity of their findings.
  • A key factor driving the ups and downs in the inequality trend in recent decades is capital incomes, particularly capital gains; the fact that such income is given preferential treatment in our tax code relative to ordinary income from wages is thus a relevant issue for both inequality and tax reform.
  • Some analysts and policy makers cite income mobility — movements by persons and families up and down the income scale over the course of their lifetimes, or from one generation to the next — as a reason why policy makers should be less concerned about historically high levels of inequality. However, a key finding here is that the rate of income mobility has not accelerated in recent decades; if anything, it may have slowed. Therefore, it is incorrect to argue that income mobility has offset the greater distance between income classes over time — i.e., higher inequality. It is also notable that there is considerably less mobility in the US than in most other advanced economies, including those with far lower levels of income inequality.
  • These findings suggest a negative feedback loop wherein higher inequality is blocking key opportunities, such as educational attainment, that would in turn reduce inequality and enhance mobility.
  • The potential interactions between our major economic and fiscal challenges remain a challenge for policy makers. Along with inequality, there is the related squeeze on low- and middle-class incomes, high rates of poverty, and the high, though declining, rate of unemployment. And, of course, a central concern of this committee is our bleak fiscal outlook. Addressing one of these problems could potentially exacerbate another.

Income Gains at the Top Dwarf Those of Low- and Middle Income Households

For example, recent Congressional Budget Office analysis predicts that full and sudden expiration of the 2001 and 2003 tax cuts in 2013 would push unemployment higher.  Similarly, cuts to programs that are supporting low and moderate income families, like nutritional assistance, the Earned Income Tax Credit, or the Child Tax Credit, could worsen poverty and inequality.  This worsening would further exacerbate inequality if we were to then turn around and use some of these savings to lower taxes on the wealthiest households.

While this may sound fanciful, it is not. In fact, the 2011 budget proposed by House Republicans does precisely this. As analysis from the Center on Budget and Policy Priorities shows, almost two-thirds of that budget’s spending cuts over ten years — $2.9 trillion —come from programs targeted at households with low and moderate incomes. And those budget savings are used to support tax cuts for the wealthiest households.

With this in mind, a central question of this testimony is how policymakers can address these three problems — inequality, economic slack, and the fiscal path — without solving one problem at the expense of exacerbating another problem. Most pointedly, revenue and spending policies designed to put the nation on a sustainable budget path must not exacerbate inequality, poverty, or the ongoing middle-class squeeze.

Click here for the full testimony.

Safety Net Spending Is Supposed to Rise in a Weak Economy

February 9, 2012 at 2:08 pm

In my blog post this week for US News & World Report, I highlight CBPP’s recent analyses of safety net programs and explain why the rise in spending on most of these programs during the Great Recession and subsequent slow recovery is an important feature of them, not a sign of something amiss:

[B]ecause these social safety net programs expand to meet the greater needs in a weak economy, they cushion the loss of purchasing power, keep the economy from weakening further, and prevent still more job loss. But because those increases are temporary, they do not add much if anything to the long-term budget deficit.

An important safety net program that doesn’t fulfill this role is Temporary Assistance for Needy Families (TANF).  Because TANF is a block grant with fixed federal funding, it does not respond to increased need — a major reason why proposals to convert other programs to block grants are seriously misguided.

Dos and Don’ts to Improve State Economies

February 8, 2012 at 4:36 pm

Our new guide to state fiscal policies that can create jobs now and prepare states for long-term prosperity has four main recommendations:

  1. Boost revenues and target investments to strengthen the economy. The deep cuts in education, health, human services, and other areas that states have imposed to close their recession-driven budget shortfalls are job killers.  They directly eliminate jobs in both the private and public sectors, and they indirectly cost other jobs by reducing consumer buying power.  Moreover, research shows, spending on education, transportation, and public safety is among the most important keys to economic growth and job quality in the long run.

    By limiting additional spending cuts and beginning to reverse past cuts, states can boost the  recovery and restore their investments in the future.  To help do so, states should boost their revenues through steps like raising taxes on high-income households and profitable corporations and expanding the sales tax base to include more services.  And they can free up funds for investment by scrutinizing all forms of spending — including spending in the form of tax breaks — to determine if they are cost-effective.

  2. Avoid ineffective strategies and gimmicks that weaken the economy. A number of states have cut taxes for corporations or high-income people based on the misconception that these cuts would spur economic growth.  Other states are considering doing so.  These proposals not only would fail to produce the positive economic results that supporters promise, but also would make it increasingly difficult to pursue the policy options that do create jobs over the short and long run by draining revenues from state budgets.

    Similarly, arbitrary limits on revenue and spending (like Colorado’s Taxpayer Bill of Rights, or TABOR) and supermajority requirements for tax increases make it difficult for states to protect priority investments, especially during recessions.

  3. Improve fiscal management. Strong fiscal management can help states to better gauge what they will need to sustain their most critical investments. That means creating mechanisms that will help policymakers make prudent and forward-looking spending decisions.

    For example, states should create effective “rainy day funds” — reserve funds designed to help states meet people’s needs during recessions — or improve the ones they already have to make them effective.  Also, states can help avert unaffordable tax cuts or program increases by adopting a “pay-as-you-go” (PAYGO) system that requires policymakers to fully offset the cost of proposed tax cuts or spending increases.

  4. Protect the purchasing power of struggling families and children. The loss of purchasing power — particularly among poor and middle-class families, who are most likely to spend money locally — is one reason why state economies have been slow to rebound from the recession.  Poverty is costly in the long run, too, especially among children; poor children tend to do less well in school and earn less as adults.

    Thus, policymakers should redouble their efforts to keep struggling families from falling into poverty and avoid cutting supports that ease hardship.  For example, they should protect and expand state Earned Income Tax Credits, properly fund state unemployment insurance systems, and protect supports for the neediest families through the Temporary Assistance for Needy Families program.

Repairing the Safety Net

February 7, 2012 at 4:46 pm

Mitt Romney said last week that if the safety net “needs a repair, I’ll fix it.”  It does need some repair, as our recent blog series explained.  That is, the safety net works but still has some serious gaps.

The positive news is that the safety net, bolstered by temporary expansions enacted during the recession, has helped hold the line against poverty and hardship in the past few years.  Without safety-net programs, the poverty rate would have been 28.6 percent in 2010, nearly twice its actual 15.5 percent rate (using a measure of poverty that includes the impact of tax credits and safety-net programs like food stamps that provide non-cash benefits).

Moreover, under broader measures of poverty, the poverty rate rose only modestly between 2007 and 2010 despite the tremendous increase in unemployment.  This outcome reflects the strength of the safety net, as bolstered by temporary measures enacted in the Recovery Act that Census data show kept 7 million Americans out of poverty in 2010.

But the safety net also has significant holes.  For example:

  • Medicaid coverage for poor parents has large gaps. Most low-income children are eligible for either Medicaid or the Children’s Health Insurance Program.  But for adults, the story is very different.

    In the typical (or median) state, working parents are not eligible for Medicaid if their incomes exceed just 63 percent of the poverty line ($12,027 for a family of three), as a new Kaiser Foundation report shows.  Non-working parents, such as those who have been laid off, are ineligible for Medicaid if their incomes exceed 37 percent of the poverty line (or $7,063 for a family of three).  And, in most states, non-disabled adults under age 65 who are not raising minor children are not eligible for Medicaid at all.

    As a result, very large numbers of poor individuals — including many of the working poor — are uninsured.

    The Affordable Care Act will fill this coverage hole by expanding Medicaid to cover non-elderly adults with incomes up to 133 percent of the poverty line.  A number of presidential candidates and other political figures, including Governor Romney, have pledged to repeal the law, however, which would leave this hole in place unless a repeal measure is accompanied with strong alternative ways to expand coverage for these low-income individuals.

  • Temporary Assistance for Needy Families (TANF) has weakened at the very time that the need for it has increased. Congress created TANF in the 1996 welfare reform law both to help parents find and maintain employment and to provide a safety net for families when they cannot work.  Unfortunately, flaws in TANF’s design have significantly limited its success on both fronts.

    TANF policies that emphasize employment — combined with other policy changes, such as expansions of the Earned Income Tax Credit — moved more people into the labor market, particularly during the booming economy of the late 1990s.  But the current downturn has exposed serious shortcomings in TANF.

    TANF benefits have eroded over time and now are below 50 percent of the poverty line in all states — and below 30 percent of the poverty line in most states.  In addition, the share of needy families who receive any benefits has fallen sharply.  In 1996, TANF cash assistance reached 68 families with children for every 100 such families in poverty; in 2009, it helped just 27 families for every 100 in poverty.

    Largely because of these trends, Census data show that the safety net now does much less than it used to to lift children out of deep poverty — that is, to lift them above half of the poverty line.

    A big reason for TANF’s sharp decline is that it is a block grant, so federal funding stays flat even when need rises during recessions.   This is noteworthy because both the Ryan budget that the House adopted last year and proposals put forth by various presidential candidates (including Romney, Newt Gingrich, and Rick Santorum) would use TANF as a model for sweeping changes to programs such as Medicaid and SNAP and convert both programs to block grants.

  • Supplemental Security Income (SSI) provides vital cash assistance to the nation’s poorest elderly and disabled people but leaves many of them well below the poverty line. SSI provides monthly cash assistance to people who are disabled, blind, or elderly and have little or no income and few assets, but its benefit levels are very low.  SSI benefits bring a single elderly or disabled individual to $8,376 a year — 75 percent of the poverty line.  (It brings couples to 83 percent of the poverty line.)  As a result, many SSI recipients have difficulty meeting basic needs.
  • Federal rental assistance enables millions of low-income households to rent modest housing at an affordable cost, but the need far outstrips available funding. Only one in four low-income households that qualify for housing assistance receives it, due to limited funding.  The number of families receiving federally funded rental assistance has remained static in recent years in the face of growing need.

These shortcomings deserve policymakers’ attention.  We need a strong safety net both because not everyone can work (due to age, illness, and other factors) and because there often are not enough jobs for all who want them — such as now, when there are four job-seekers for every available job.

A well-functioning safety net also helps the economy by making recessions less severe than they otherwise would be.  It expands to cover more people when unemployment climbs and poverty increases, thereby cushioning the loss of purchasing power and keeping the economy from weakening further and preventing still more job loss.

Note: The Center on Budget and Policy Priorities is a non-partisan organization and takes no position on political candidates.

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No Spending Cuts in 2013, But Bigger Cuts Later, Under Senate Proposal

February 7, 2012 at 4:09 pm

Senate Republican Whip John Kyl (R-AZ) and six other senators last week proposed to cancel the automatic $109.3 billion “sequestration” (spending cut) scheduled for January 2013 because of what they call its “draconian” defense cuts.  (Their bill is nearly identical to a House bill [HR 3662] that House Armed Services Committee Chairman Howard P. “Buck” McKeon [R-CA] introduced on December 14.)  But, the bill (S. 2065) would offset the cost of cancelling the 2013 cut by expanding the cuts for 2014 through 2021 from $109.3 billion each year to about $125 billion — making those cuts even larger than the 2013 cut that they view as unacceptable.

The 2013 cuts represent the first stage in the Budget Control Act (BCA)’s sequestration process to cut deficits by $1.2 trillion in 2013 through 2021.  Half of the cuts each year will occur in defense and half in certain nondefense programs, both discretionary and mandatory.

The 2013 cuts will reduce that fiscal year’s funding for defense and nondefense programs each by $54.7 billion.  (The nondefense cuts consist of $38.6 billion in cuts to discretionary programs and $16.1 billion in cuts to mandatory programs, about two-thirds of the latter in cuts to Medicare provider payments.)  For subsequent years, the cuts will come from lowering the funding caps that the BCA set for defense and nondefense discretionary funding and from further cuts in mandatory spending.

While eliminating the scheduled cuts for 2013, the legislation would expand the required cuts for 2014 through 2021 by $127 billion: $46 billion in new defense discretionary cuts and $81 billion in new nondefense discretionary cuts.  (The BCA’s nondefense mandatory cuts for 2014 through 2021 would remain unchanged.)  Thus, the cuts in defense discretionary funding in 2014 would grow from $54.7 billion to $59.7 billion and in nondefense discretionary funding from $38 billion to $48 billion.  The impact in subsequent years would be similar.

The legislation would also extend a 2012 pay freeze for federal employees for two more years and cut the federal workforce by 5 percent.  Not only are these policies ill-advised, given the need for an effective federal workforce, but — contrary to claims by the bill’s sponsors — they do not offset the cost of cancelling the January 2013 cuts.  That’s because the savings in the legislation come from reducing the discretionary caps by an additional $127 billion over eight years (and Congress will likely need to limit federal personnel costs simply to comply with the caps already in effect for 2014 through 2021).

This legislation would simply lead to further cuts in discretionary programs in 2014 through 2021 — and a further weakening of those programs’ ability to meet national needs.