The Hype on Taxes: They Don’t Matter Much

Taxes impede economic growth. This is the belief among the Republican presidential contenders as they offer plans to cut taxes as a panacea to stimulate the economy. Herman Cain’s “9-9-9” assumes lower income tax rates for corporations and individuals will stimulate the economy. Newt Gingrich wants to cap top rates at 15% and Rick Perry has called for a national flat tax of 20%. Mitt Romney has a 59 point plan that includes tax cuts. Ron Paul wants a constitutional amendment to eliminate income and estate taxes. Michele Bachmann wants a return to the Reagan era tax cuts. All want to make the Bush era tax cuts permanent.

Yet do high taxes really hurt the economy as much as they believe, and will lowering them have much of an impact on stimulating it? The economic literature is clear — tax breaks to encourage economic relocation or investment decisions are inefficient and wasteful. Hundreds of studies reach this conclusion. When businesses are surveyed regarding factors important to their investment decisions, taxes often come in behind proximity to markets, suppliers, and the quality of the labor force. These other factors occupy a larger percentage of a business's budget than do taxes, and all of them are far more critical to long-term success than are taxes. Businesses occasionally admit this. Nearly 62 percent of those interviewed in a California study on hiring tax credits indicated that they had never or rarely affected their decision to employ individuals. Speaking at a recent chamber of commerce event, I asked business leaders whether the Obama tax cuts would encourage them to hire. Unanimously the response was no—they were unwilling to hire until such time that consumers were willing to buy their products and services.

Anecdotal stories and illustrations also confirm the tax fallacy. High tax states such as Minnesota have generally fared better in terms of economic growth, unemployment, median family incomes, and location of Fortune 500 companies, than low tax ones such as Mississippi and Alabama. In many situations high taxes, and with that, government expenditures on education, workforce training, and infrastructure, correlate positively with income, low unemployment, and business retention. One needs to look not just a one side of the equation—taxes—but the other side too—what taxes buy—to see what value businesses get out of them in terms of educated workforces and infrastructure investments. Most debates fail to do this.

Bureau of Economic Analysis statistics demonstrate how economic growth is related to tax rates. One can compare annual economic growth as measured by the percent change in the gross domestic product (GDP) percent based on current dollars to the highest federal individual tax rate and the top corporate tax rate since 1930. If taxes are a factor affecting economic growth, one should see an inverse relationship between growth of the U.S. economy and higher tax rates. The GDP should grow more quickly when top individual and corporate tax rates are lower. If taxes are a major factor deterring economic growth, lines on a graph should go in opposite directions: As tax rates go up the GDP should go down.

No such pattern emerges between high taxes and GDP growth over 80 years. During the Depression of the 1930s corporate and individual taxes rates increased, but in 1934 through 1937 the GDP grew by 17%, 11%, and 14% annually. Top corporate tax rates climbed to over 50% through the 1960s, again with no discernable pattern associated with decreased economic growth. The same is true with top tax rates on the richest which were 91% into the 1960s. Conversely, since the 1980s after Kemp-Roth and then after 2001 with the Bush era tax cuts, there is no evidence that the economy grew more rapidly than in eras with significantly higher tax rates on the wealthy and corporations. Looking at time periods when tax rates were at their highest, GDP often grew more robustly than when taxes were cut. Visually, the attached graph simply fails to demonstrate that tax rates negatively impact economic growth. (Click on the graph to get a better view of it).

Pictures are worth a thousand words, but statistics are priceless. Statistically, if a tax hurts economic growth, the correction with it is -1. If they positively facilitate growth the relationship is 1, and if they have no impact the relationship is 0. The correlation between GDP and top individual taxes is 0.29, between GDP and top corporate taxes is 0.32, and among the three it is 0.14. Statistically, there is a slight positive impact on either top individual or corporate taxes or economic growth, but overall almost no connection between tax rates on the wealthy and corporations and economic growth in the United States.

But what about taxes as job killers? Again running similar statistical tests, there is little connection. Using Bureau of Labor Statistics data on unemployment rates since 1940, the correlation among top individual and corporate taxes and the annual unemployment rate is -0.02—essentially no connection at all.

The simple claim of Perry, Cain, and others that high tax rates on the wealthy and corporations hurt economic growth and job production is false. The evidence is simply not there to support assertions that high taxes alone hurt the economy or that cutting them will have the stimulus effect asserted.

A plea for fact-based policymaking in an era of political myths

Comedian George Carlin quipped that "business ethics" was an oxymoron. The same can now be said about reasonable politics. Politics and the making of policy seems less to rest upon reasoned debate, social-science evidence, and facts than upon hope and belief. Rep. Michele Bachmann panders to ignorance when decrying vaccines as causing retardation. She, along with Herman Cain, Gov. Rick Perry, and most of the other Republican presidential hopefuls deny global warning, evolution, and a host of other well-established facts, preferring to base their candidacies and appeals on propositions lacking rational or empirical support.

Ronald Reagan famously misspoke: "Facts are stupid things." He seems to have gotten it right when it comes to political debate, pointing to how truth takes a backseat to myth or worse — lies. Two of Reagan's myths — welfare queens exploding the federal budget deficit, and supply side economics as trickling down to benefit us all – both failed truth tests. But that did not matter then or now; people bought them as simple answers to complex problems.

Today, untested or worse, crackpot or refuted ideas dominate political debate. Nationally, we hear rants about how illegal aliens are a drain on the economy and that they take jobs from Americans, when in fact the evidence suggests otherwise and that they are net contributors to our country. Taxes are assailed as job killers when evidence suggests that they are a marginal factor behind workforce quality, access to supplies and consumers, and transportation costs as more important factors affecting business location and expansion decisions. Conversely, little evidence supports the idea that tax holidays to repatriate corporate savings back to the United States will yield job production. Herman Cain more or less admits that his "9-9-9" was conceived as a bold political idea that was not based on any real evidence of its impact.

A bevy of other stupid public policies and political myths dominate the American political landscape. Wrongly we believe that welfare migration is a major problem in the country. Some contend that teaching sex education to teenagers encourages promiscuity, that we can pray away homosexuality, or that same-sex marriage hurts traditional matrimony. Never mind what the best research and facts state.

Both parties indulge

Myth-based politics does not seem confined to one party. Gov. Mark Dayton is determined to secure funding for a new Vikings stadium even though the economic evidence is overwhelming that public subsidies for this purpose are one of the worst uses of tax dollars there is as a tool for economic development. Conversely, the Minnesota Majority continues to beat the drum of voter fraud as stealing elections when the absolute best research suggests that in-person election fraud is negligible, that there is no evidence that it has affected the outcome of any recent election, and that voter-identification laws will not prevent this fraud and instead will disenfranchise many individuals.

As a professor who has taught public policy for nearly 25 years and a former government administrator and planner who worked in the world of facts, evidence and research, I find all this frustrating, especially when called upon to testify before the Legislature. Seldom have I seen facts — and not ideology or prejudice — move elected officials.

My students are not given the liberty simply to assert opinions unless they can support them with evidence. We should ask no less of our politicians and government officials. Reporters do not press candidates to substantiate their claims, and the public often gives them a free pass, letting emotion, anger or frustration guide decision-making. What results are bad laws and foolish policies that do not work, waste taxpayer money, and often make the problems worse than before.

Evidence dismissed

Recently I gave a talk to a local Rotary Club about the 2012 elections. When I finished, a minister came up to me and asked where I stood on voter-ID laws. I told him that I had researched and written on the subject extensively and that the evidence of fraud was negligible. He dismissed my statement, declaring: "I am from Milwaukee, I know about voter fraud. They bring busloads of those folks up from Chicago all the time to vote in our elections."

I shook my head in disbelief. "Those people?" He might as well as said blacks, because that is what he meant. I am not sure what disappointed me more — the racism, the dismissal of the facts or that he was a minister. Why he asked my opinion I do not know — except to confirm his prejudices. It was clear his mind was made up and no amount of facts would change it. He embodied all that is wrong with contemporary politics — one not of evidence-based policy making but one dominated by blind ideology, ignorance or willful disregard of the facts

Today's blog appeared in the Friday, October, 28, 2011 Minnpost.

Michele Bachmann's Meltdown

The Iowa presidential caucuses of January 3, 2012 are less than 75 days away and their outcome are more in doubt today than ever. What once looked like a certain victory for Michele Bachmann now looks less and less likely, and talk of her presidential prospects sounds more like a deathwatch especially in light of the resignation of her New Hampshire staff.

August 13, 2011 seems so distant now. Barely nine weeks ago Bachmann surprised many by winning the Ames straw poll. She was on top of the world, leading the GOP pack as the darling of the Tea Party. But then came the collapse. Rick Perry entered the race eating at her conservative base. Bachmann was unable to move to the center given her rhetoric and positions, and she disavowed any intention to do so. Media attention and scrutiny mounted, missteps and statements about HPV and retardation damaged her, and the cycle of decline began.

In the last few weeks numerous problems have mounted. Declining poll numbers followed with dismal debate performances that revealed no more than canned vacuous answers. All this was followed by poor third quarter fund raising and campaign debt and now her New Hampshire staff has stepped out.

Is Bachmann done?

Essentially, yes. As noted in several of my blogs, her campaign rested upon an Iowa strategy that is faltering even now. The belief before was that a victory in Iowa would be the springboard to success in other states such as New Hampshire and South Carolina. But she never did much to campaign there and her presence and infrastructure there was always weak. But now with Nevada and Florida moving up their delegate selection, Bachmann’s campaign was damaged even more because she did not have staff there to help her. The point here is that the Iowa strategy presupposed that she had money and structure in place in other states to take advantage of the Iowa victory. But she did not have this and thus, even if Iowa does still become a victory for her, she will be unable to take advantage of it. (Here are similar comments of mine in a story about Bachmann).

But now she is losing even in Iowa. Evidence is seen in the polls and in other candidates now returning to it to campaign with the belief they can win the state. She is falling back in the pack. She increasingly looks more like Rick Santorium than a leader in Iowa. She gives speeches to a few faithful but continues to slip in the polls. She has little new to say and the buzz she once had is gone. She has been unable to take advantage of Perry’s drop and instead Cain has benefitted. While potentially she can recover to win Iowa, the new January 3 date gives her less time to do that. Thus, an earlier Iowa date gives Bachmann too little time to recover and her dismal fund raising and failure to plan beyond Iowa make it unlikely she can go much further beyond Iowa.

Lessons Learned

What we learn from Bachmann’s collapse in part is that her great congressional campaign machine was unable to transition to a presidential level. You cannot win the presidency with a $40 average campaign contribution and an unwillingness to grow and expand a base, especially when others are also competing for that base. Bachmann took for granted that she owned the Tea Party–never do that.

In addition, her electoral skills were always vastly over-rated. She had a plus-6 GOP district in Minnesota–a district tailored to her. Her victories were over weak opponents or took place in the banner Republican year of 2010. In many ways, she looked stronger than she really was and perhaps she believed she was the star that the media had declared. While I always thought she had a chance to do well as an Iowa candidate and perhaps beyond, what is most striking is how amateurish she turned out to be as a candidate. That is the product of never facing a serious primary for Congress nor a serious contest in the general election.

Bachmann’s Clouded Future

So what next for Bachmann? Does her December book even have value now? Hard to say and it is unlikely it will save her campaign. Do we see her move on to CNN or another network with her own show? Her increasingly collapsing campaign makes that even less of an option.

Does Bachmann return to run for her congressional seat again? Maybe, she has until June to decide. But redistricting uncertainty and the prospects of a less friendly set of lines for the sixth district pose challenges. Moreover, the worse her presidential campaign looks the more it makes her potentially vulnerable to a primary challenge. Bachmann has never attracted big donors and if she were to run for Congress again her small donors may be tapped out or unwilling to give. She is in a bad situation right now and her options are ticking away along with the clock to Iowa.

Class divides America -- and conflicts reflect a broader battle

This blog originally in Minnpost on October 17, 2011.

A line in the sand of American politics is being drawn. It is a line that cut through Madison, Wis., last spring in the debate over unions. It is a line being cut through Wall Street over the role of banks and hedge-fund managers in destroying the American economy in 2008. And it is a line cutting though Washington, D.C., in Congress over how to produce jobs, regulate banks, reduce the deficit and debt, and provide health care to those who need it. That line is about class in America.

There is a basic belief in America that we are all in it together. We are one big happy middle class where the interests of the rich and poor are not in conflict. Rising tides lift all boats, as Ronald Reagan used to say. There are no class conflicts in this world. That what is good for GM is good for America, and that we live in a society where all of us can be winners with no losers in the economic marketplace. The promise of America is of a non-zero-sum game — some do not have to lose for others to win. The truth is far uglier.

America is a nation characterized by increasing class divides. In 2010 the Census reports the richest 5 percent of the population accounted for 21 percent of the income, with the top 20 percent receiving over 50 percent of the total income in the country. This compares to the bottom quintile accounting for about 3 percent of the total income.

Congressional Budget Office research found that the income gap between the top 1 percent of the population and everyone else more than tripled since 1973. After-tax income for the top 1 percent increased by 281 percent between 1973 and 2007, while for middle class or middle quintile it increased by 25 percent, and for the bottom quintile it was merely 16 percent.

Looking beyond income to wealth, the maldistribution has not been this bad since the 1920s. According to the Institute for Policy Studies, in 2007 the top 1 percent controlled almost 34 percent of the wealth in the country, with half of the population possessing less than 3 percent. The racial disparities for wealth mirror those of income. Studies such as the Survey of Consumer Finances by the Federal Reserve Board have similarly concluded that the wealth gap has increased since the 1980s.

Record numbers in poverty

Social mobility in America has ground to a halt. A 2010 Organization for Economic Cooperation and Development study found that social mobility in the United States ranked far below that of many other developed countries. Other studies, including those in 2005 and 2010 in the Economist, similarly point to declining social mobility in the United States that makes it difficult for individuals to rise from one social economic status to a better one. In fact, there is better than a 95 percent chance that children will not improve their social economic status in comparison to their parents. Finally, the latest Census figures point to a poverty rate in 2010 of 15.1 percent, representing a record 46 million people in poverty. The numbers are equally grim when one looks at women, children, and people of color in poverty — all record or near-record numbers. Few really can move on up to live the American dream.

The reality is that America is a zero sum game. There are winners and losers. What is good for corporate America is not benefitting most Americans, and it is increasingly clear that in simple terms the rich are getting richer, the poor poorer. The reality is, we are not all in it together and class divides America. We see the divide in where individuals live, what they eat, and the entertainment they consume. It is seen in who votes, runs for office, and in political contributions. It is reflected in our tax code, criminal-justice system, and educational opportunities.

Class exists. The problem is, few want to acknowledge it. And when someone talks of economic redistribution, bailing out homeowners and not banks, taxing millionaires, or blaming Wall Street and not the government for the economic problems that ail America, cries of class warfare are raised. Or worse — Herman Cain "McCarthyited" the Wall Street protesters as "Anti-American," invoking the ugliest of all political epithets to assail opponents.

Protests are symptoms

Yes, class conflict exists in America. Protests in Wisconsin over attacks on unions or on Wall Street to challenge the power of banks reflect this. But they are merely symptoms of the broader battle over a simple question: "Why government?" It is a debate over whether free-market fundamentalism prevails as a means to provide order and declare winners and losers in America versus letting the government correct the imperfections and errors that capitalism has produced. It is between saying that the direction of the country is decided by "one dollar one vote" or by "one person one vote." It a battle over whether the government serves the interests of corporations and the rich or the rest of us.

Class exists in America, as it does in all other nations of the world. Like it or not, there are diametrically opposed interests in this country and the real questions are whether the government and politicians should do anything about it and whose interests they should serve.

Presidential Politics: It’s about the money

The third quarter presidential financial reports are in and this is a good time to string together some thoughts about the candidates.

“Money is the mother’s milk of politics,” said former California Assembly Speaker Jesse Unruh.

Money is what it is all about in campaigns, especially presidential politics, as they have evolved into hundreds-of-million dollar businesses, replete with fundraisers, media consultants, travel consultants, pollsters, and a host of other specialists. The days of candidate door-knocking and Lincoln-Douglas debates are part of a quaint Norman Rockwell past. Modern presidential campaigns are won or lost with money.

Third quarter reports are in and we can learn a lot about candidate prospects by examining their fund-raising balance sheets. Of most interest, Michelle Bachmann’s along with those of Obama, Romney, and Cain.

Bachmann

Bachmann is dead financially and it confirms her descent in the polls. In the third quarter she raised $4.2 million, suggesting that her congressional money machine was not equipped to make the presidential leap. Yet her second quarter produced barely $4 million, and she spent nearly $6 M. This is embarrassing and bad news for her.

Embarrassing–She rails against government deficits and need to live within our means yet she cannot do that with her own campaign. She has proved to be a bad steward of her own money–how can we trust her with the public treasury? Her credibility on the budget is gone.

Bad News–Bachmann’s financial woes confirm her poll problems and fall from grace. Think about it–the 3Q should have been a slot machine for her. In August she was at the top of the polls and had won the Iowa straw poll. She had a massive donor list and money should have poured in. Yet it did not. Perry clearly hurt her as did her bad debate performances and gaffes. She failed to capitalize on her opportunities.

But that is not the end of it. Bachmann has not been to New Hampshire since June. She has little or no organization outside of Iowa where she continues to camp out. Her poll numbers are bad and hurt fund-raising, and now this news about the 3Q only makes it harder to generate cash.

Even if Bachmann wins Iowa in January it will not be enough to save her. Everyone expects her to do well there so she will not get much of a bounce even my winning. But assume she wins, what then? With no organization in other states she will not be able to capitalize on the win there to help her move forward. Her financial number reveal a candidate who will meet her Waterloo one way or the other in Iowa. She lacks an infrastructure in other battle ground states and thus she may be a one-state candidate.

How long will Bachmann last? I think she makes it through Iowa at most. At the least she stays in the campaign through December because she has a book coming out then. Is she counting on the book bolstering her campaign? No–Bachmann is now in it for herself. She is using her presidential campaign and her supporters for the personal benefit if herself. An active campaign makes for books sales and for money in her own pocket.

Call me cynical but it is now clear Bachmann does not care about the presidency or her supporters. She is in it for the money. Watch her make a few million on her book, leave her creditors on the hook, and she walks away from politics rich and her supporters used.

Obama and Romney

Obama raised a ton of 3Q money, dwarfing all of the GOP. Good for him–he will need it if he wants to win reelection. Money, the power of incumbency, an unpopular Congress, and the penchant of the Republicans to want to nominate a candidate so conservative that no swing voter will support them (Think Goldwater and 1964) may overshadow the 9% unemployment rate. Obama still lacks a narrative for reelection and GOP will run on the mantra of “change” against him.

Romney hangs tough with $14 million, but GOP polls continue to place him at about 25%–a spot that has not changed for months. He seems stuck, unable to gain more support as the different flavors of the month–Trump, Bachmann, Perry, and now Cain–seem to come and go. Romney may have the best shot of all to beat Obama but he generates little excitement. His problem is that he is like the guy who reminds a woman of her first husband. He has the same problem with the Republicans. He generates little excitement and affection. His boringness is why other candidates look good to the Republicans–they are searching for something more exciting and for someone who will fulfill their fantasies. Romney is out of place with the current version of the Republican Party. If he does get the nomination he will generate little excitement among the Tea Party folks. Remember, Rod Stewart is right–it is about passion–especially in politics–and Romney lacks it.

Wall Street, Obama, and Romney

If you want loyalty and a friend, get a dog. This is what Obama must be thinking about Wall Street. They were his friends in 08 when they needed him and they gave to his campaign. Now Romney is out-pacing him when it comes to Wall Street money. Why?

Wall street got what it wanted from Obama–the bailouts–and they do not need him anymore. Obama was played like a violin–he bailed them out before getting anything from them and now that they are fat with cash again they cast him aside for someone else. No surprise.

Cain and Final Thoughts

Cain might be the flavor of the month but it is good to be the flavor when it is close to the real start of the primary season, which is just a few weeks from now. His poll numbers are great but his fund-raising is lackluster at less than $3 million (which includes a ton of his own money). In the last few days the media has poured scrutiny on him–look to see more of that in the coming weeks.

His 9-9-9 will come under huge analysis. Cain admits that 9-9-9 was conceived of as a bold idea. Bold it is, smart it is not. It is not based on any real economics but instead it captures the attention of those who want quick simple solutions.

Wait to people begin to think about the 9% federal sales tax. I am sure consumers and businesses will love it. Plus 9-9-9 will force massive budget cuts and fail to generate the revenue needed to address the debt. Look to see 9-9-9 lampooned soon.

Bad Ideas Never Die: How to Stop the Vikings Arden Hills Stadium Proposal

Bad ideas never seem to die. Proof of that is the continued folly of Ramsey County, Tony Bennett, Governor Dayton, and some in legislature to continue to press for public funding for a new Vikings stadium. Two events this week pushed this folly into the news again. The first was refusal by the Ramsey County Charter Commission (RCCC) to place a proposal on the ballot in 2012 that would require voter ascent on any public funding for the Vikings. The second is a Met Council feasibility study on construction of the stadium in Arden Hills. While opponents were wrongheaded in putting their faith in the RCCC option to halt the stadium, the feasibility study really offers the best arguments and tactics for them to stop the project in Ramsey County.

The Folly of Public Subsidies for Sports

Public subsidies for professional sports teams are economic follies. Back in a February 10, 2011 MinnPost piece; I outlined the economic argument against them. Simply put, such economic subsidies are economically inefficient, are horrible economic development tools, and they fail to produce the returns on investment to the public that they tout. Overall, studies are conclusive in terms of their bad economic value compared to other investments that governments can make.

Yet these bad ideas do not seem to die. Politicians get sports fever, they chum up with team owners, take their political contributions, or get captured by the “a major sports teams makes us a first class city” syndrome and therefore want to build a new stadium in their community. They get gripped by the “if you build it they will come” mentality,” and they also get Pharaoh envy–they see a stadium as their form of a pyramid that they can point to as a final legacy of their time in office. Overall, even in the best of times public subsidies are economic sinkholes for communities but in bad economic times the argument is about priorities. Money for greedy billionaires ahead of highways, schools, and heath care? Money for the Vikings and not to help tornado victims in Minneapolis (yet I know this is another country)? What statement are we making when we say money for sports is more important than K-12 education?

Finally, remember, professional sports is a business and this is supposed to be America, the land of capitalism. Since we are we supposed to subsidize businesses, especially ones that are profitable? What part of this do politicians not understand?

How not to stop the stadium?

Ramsey County Charter Commission

Asking the RCCC to place on the 2012 ballot a proposal to require voter ascent for public funding for a Vikings stadium would have been closing the barn door after the cows ran out. The Vikings and Ramsey County could have done the deal before that vote. The vote, even if successful, might have come too late and the damage would have already been done. Opponents confused the RCCC with the Ramsey County Commissioners (RCC). The RCCC is not a policy body–it defines the structure of government for how policy is made. The pressure needs to be directed on the RCC to stop the project but that seems unsuccessful. Thus, option two.

How to stop the stadium?

Met Council “Stadium Proposal Risk Analysis”

The best read of the week was the Met Council’s “Stadium Proposal Risk Analysis” documenting the costs and problems associated with the Arden Hills site. In summary, the report correctly states that the potential pollution, site remediation, and infrastructure costs associated with the project may be far greater than anticipated. Moreover, because an environmental impact statement (EIS) and state and federal permits may be required for the site, completion of the project within the time frame anticipated is also doubted. What does all this mean?

The proposed Vikings site is polluted and perhaps more so than anticipated. The real costs cold balloon and one may never know the full bill until the project is begun. At that point one is faced with a sinkhole problem. By that, hundreds of millions are already committed and to finish the project more will be required.

First, the project could have significant cost overruns.

Second, the pollution and remediation efforts expose the public to potential lawsuits from the cleanup and it is unclear what insurance is available to cover the county.

Third, the infrastructure repairs are extensive and may again be far more extensive than stadium supporters are describing.

Fourth, all of the above will require government environmental permits to begin the work, but only at the EIS is completed. The EIS an permitting process could take years, delaying the project well beyond the Vikings deadline and what are now given as estimates for project completion.

In short–the Arden Hills project is potentially more expensive and complicated than its advocates claim. Here is where opponent have leverage. Over the years I have seen more projects delayed or killed than I can count because of shoddy EIS. In a rush to complete a project an EIS is rushed and done poorly, risks are ignored, and estimates of remediation downplayed. What happens then is either permits are not issued or lawsuits are filed in federal court holding up projects for years because of a rush to sneak projects through. Think of the replacement for the Stillwater Lift Bridge and I have said enough.

Thus, if opponents really want to kill the Arden Hills project the RCC and Dayton may be their best friend. In their rush to get the project done they will do a bad EIS and risk assessment, setting up the real ability of opponents to challenge the EIS in court, thereby delaying the project for years and driving up the costs of doing the project beyond the underestimated price tag that is already being touted for this folly.

Class Warfare and the American Dream

Note: This piece appeared in Politics in Minnesota, Capitol Report, September 29, 2011.

America is the land of dreams. The United States is lauded as the land of opportunity, the place where anyone can go from humble beginnings and become a millionaire. It is the tale of rags to riches, of the Horatio Alger story, of a nation where we can rise as far as our talent takes us. Yet dreams die hard. The reality is that America is a nation of increasing poverty, economic inequality, and decreased social mobility; at least according to a series of recent studies and reports documenting the economic woes of the United States.

The first study is from the United States Census Bureau in 2010 describing poverty and income in America. In 2010 the richest five percent of the population accounted for 21% of the income, with the top 20% receiving over 50% of the total income in the country. This compares to the bottom quintile accounting for about 3% of the total income.

A second study by the Center on Budget and Policy Priorities in 2010, drawing upon Congressional Budget Office research, found that income gap between the top one-percent of the population and everyone else more than tripled since 1973. After-tax income for the top one-percent increased by 281% between 1973 and 2007, while for middle class or middle quintile it increased by 25%, for the bottom quintile it was merely 16%. Looking beyond income to wealth, the maldistribution has not been this bad since the 1920s. According to the Institute for Policy Studies, in 2007 the top one-percent controls almost 34% of the wealth in the country, with half of the population possessing less than 3%. The racial disparities for wealth mirror those of income. Since 2007 the wealth gap has increased as the value of American homes–the single largest source of wealth for most Americans– has eroded. Studies such as the Survey of Consumer Finances by the Federal Reserve Board have similarly concluded that the wealth gap has increased since the 1980s.

But Americans dream and believe they can rise to the top–get lucky, be the Horatio Alger rags to riches story; thus our fascination with buying lottery tickets. Yet social mobility in America has ground to a halt. A 2010 Organization for Economic Cooperation and Development study found that social mobility in the United States ranked far below that of many other developed countries. Nearly half of the economic advantage parents have in the United States is transmitted to their children; a number nearly two-and-one-half times that of Australia and Canada. The biggest cause of social immobility according to the report is declining educational opportunities for many students. Other studies, including those in 2005 and 2010 in the Economist similarly point to declining social mobility in the United States that makes it difficult for individuals to rise from one social economic status to a better one. In fact, there is better than a 95% chance that children will not improve their social economic status in comparison to their parents. Few really can move on up.

Conversely poverty in America has increased. In FDR’s second inaugural speech in 1936 he spoke of a nation that was one-third ill-clothed, ill-housed, ill-fed. In the 1950s due in part to the New Deal anti-poverty programs, the poverty rate fell to 22%, with over 39 million poor persons living at or below poverty level. By 1969 Great Society programs reduced the poverty rate to 12.1%, with a further decline to in 1973 where the poverty rate was 11.1%, representing 23 million.

Yet after that, and especially beginning with the Reagan era’s retrenchment on social welfare programs, the poverty rate has continued to climb. In 1983, the poverty rate was 15.2%, in 1992, the rate was 14.5%, representing 36.8 million, and in 2003, 12.5%, representing 35.9 million. Moreover, in 1992, the poverty rate for female-headed families with children was 48.3%, and 21.9% under the age of 18 were in poverty (14.6 million children). In 2009, 14.3%, or nearly 40 million in poverty, and now the latest Census figures point to a poverty rate in 2010 of 15.1%, representing a record 46 million in poverty. The numbers are equally grim when one looks at women, children, and people of color in poverty–all record or near record numbers.

One could recount in even more detail the picture of an America with growing class differences that are fixed. We live in a world where there are clear rich and poor, with the income and wealth differences played out in terms of racial and gender disparities. We live in a nation where the privileged few go to better schools, live in safer neighborhoods, have better access to medical care, and therefore are healthier and live longer. As F. Scott Fitzgerald once stated in his play The Rich Boy: "Let me tell you about the very rich. They are different from you and me.” Yes they are–they are privileged.

Many reasons explain the growing gap between the rich and poor and America. But at the core one can point to the emasculation of the New Deal and Great Society programs that once provided income transfers to the poor. There is the dramatic cuts on effective tax rates in America that prior to the 1980s were 70% but now are less than half that such that the poor and middle class, as Warren Buffet pointed out, pay a greater percentage of their income in taxes than he does. Similar tax cuts have been gifted to corporations. As a result, the rich are asked o contribute less to society and economic inequalities that exist are not offset by tax policies and income transfers.

Moreover the war on organized labor has had its toll. Unions from the 1930s until the 1980s had a significant impact on increasing wages, benefits, and the quality of life for America. But first beginning with Reagan’s firing of the PATCO air controllers in 1981 and continuing to Wisconsin governor Scott Walker’s assault on public employees this year, unions have come to be depicted as the new welfare queens in America, blamed for declining American competitiveness and budget deficits. Never mind that successful nations such as Germany pay higher wages and benefits, many believe that the only way to future prosperity in this country lies with immiserizating the American worker.

A couple of weeks ago Republicans lambasted President Obama’s call for tax increases on the wealthy as class warfare. The Republicans deserve credit–at least they recognize that there are class differences in America and that a war exists. However, only one class is fighting–the corporate rich–while the rest society sits idly by immobilized.