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Sealed in the House of Privilege

by LAWRENCE MISHEL

David Brooks recently wrote a misguided column criticizing the Congressional Progressive Caucus’ Back to Work fiscal 2014 budget, which the House voted on yesterday. I am proud that EPI budget analysts and I worked closely with the CPC on the proposal’s development and analysis, so I want to clarify where Brooks went wrong.

Brooks and I disagree in two major areas: differing evaluations of the state of economic recovery and prospects for growth, and the role of rich people and the government in generating growth.

Brooks sees an economy that “is finally beginning to take off” and no longer has “a large and growing gap between the economy’s current output and what it is capable of producing.” In contrast, I see an economy with 7.7 percent unemployment, and unemployment projected by the Congressional Budget Office to be roughly 7 percent by the end of 2015. Current unemployment is comparable to that of the worst month of the early 1990s recession and substantially higher than that of the worst month of the early 2000s recession.

Furthermore, the U.S. economy in late 2012 was running $985 billion (5.9 percent) below potential output for the year—which is equivalent to each person losing $3,100 (annually). I will grant Brooks that this “output gap” is not currently growing larger. Nevertheless, the gap has not changed much in two years (it was 6.1 percent in the second half of 2010) and is now much higher than the worst quarters of the recessions in the 1970s, 1990s, and early 2000s (5.0, 3.6, and 2.1 percent respectively). In short, the gap is no longer “large and growing”; it is just “large and not shrinking” and looks relatively stable. The depressed economy is suppressing wage growth (there have been no improvements in wages and benefits for the large majority of American workers for more than ten years!) and we are scarring a generation of young people—both those in school as well as those searching for the bottom rungs of a career ladder. This state of affairs is unacceptable and, therefore, government policy should not accept it.

Brooks snidely describes those who wrote the Back to Work budget as “people hermetically sealed in the house of government.” I think the stronger case is that people who see today’s economy as not needing any additional support are hermetically sealed in the house of privilege.

Brooks also worries that higher tax rates on the rich will “suppress economic activity” and influence “how much people invest in education, how likely they are to create businesses and which professions they go into.” It strikes me as odd that Brooks is so complacent about the current state of the economy but is so worried that taxing the rich will lower economic growth. It is also odd to think that higher taxation will blunt the incentives for education as well as the pursuit of high-paid professions: after all, the top one percent of wage earners now earn 19.3 times that of those in the bottom 90 percent, more than double the distance it was (9.4 times) in 1979. There will remain plenty of incentives for top earners to study, work hard and be entrepreneurial. In any case, if these are his concerns, then the Back to Work budget is the one for him since it invests more in education and spurs far more growth than the House Republican, House Democratic or Senate Democratic budgets.

Brooks also invokes the research indicating that higher tax rates will simply cause rich people to shift the form of their incomes to avoid taxation. However, the main vehicle for doing so is reconfiguring salary income as tax-preferred capital income, and the Back to Work budget broadens the tax base to prevent such tax avoidance: it equalizes tax rates on salary income and capital gains, dividend and other “unearned” incomes for upper-income households.

Last, Brooks worries that higher taxation means “reducing the incentives to work and increasing the incentives to relax”, meaning that Brooks is afraid that rich people will work fewer hours. But how does Jamie Dimon working fewer hours per week affect me, or you, or the vast majority of American workers who have not seen a raise in years?

And the Back to Work budget actually greatly boosts the incentives and payoffs to working for lower-wage workers. It reinstates an expanded Making Work Pay tax credit for three years and permanently extends the recent expansion of the earned income tax credit and other tax credits benefiting low-income households. Policies such as these would increase incentives for low-income workers to work. So it boosts the payoffs to low-wage workers from adding hours to the labor force, but may provide some slight disincentives to those at the very top of the distribution. I can live with that tradeoff—why can’t Brooks?

Lawrence Mishel is president of the Economic Policy Institute, where this column originally appeared.

 
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