How to achieve shared prosperity even if wages aren’t rising

April 13, 2013

See here. This is a framing essay I prepared for a conference on progressive governance organized by Policy Network and Global Progress. The full set of conference essays is here.


February 8, 2013

Posted here are slides from talks I’ve given in the past few months on …

America’s opportunity gap

America’s struggling lower half

Social democratic America

Social policy

Macrocomparative research

FISS 2013 conference in Stockholm

January 22, 2013

For those interested, the 2013 conference of the Foundation for International Studies on Social Security (FISS) is June 13-15 in Stockholm. Details are here.

Social issues in America

January 9, 2013

Lecture slides for my “Social Issues in America” course this past fall are posted here. The topics:

  1. Should we legalize marijuana?
  2. Do we need a carbon tax to reduce climate change?
  3. Should same-sex marriage be legal?
  4. Is political polarization hurting America?
  5. Why are some of us red and others blue?
  6. Should we reduce taxes?
  7. Should we reduce income inequality?
  8. How can we get our economy back to health?
  9. Is big business ruining America?
  10. Should we promote gender equality?
  11. What should we eat?
  12. Would less regulation make cities better?
  13. Should we limit imports and outsourcing?
  14. Should we reduce illegal immigration?
  15. When should we intervene abroad?

Beyond the ‘fiscal cliff,’ America’s kids need more – not less – government spending

December 11, 2012

Early education would help.

SASE 2013 conference in Milan

November 26, 2012

For those interested, the 2013 conference of the Society for the Advancement of Socio-Economics (SASE) is June 27-29 in Milan. Details are here.

America’s opportunity gap

November 1, 2012

This article appears in the November-December 2012 issue of Foreign Affairs magazine. Reprinted here by permission.

It’s Hard to Make It in America: How the United States Stopped Being the Land of Opportunity

by Lane Kenworthy

For all the differences between Democrats and Republicans that were laid bare during the 2012 U.S. presidential campaign, the parties’ standard-bearers, Barack Obama and Mitt Romney, do seem to have agreed on one thing: the importance of equal opportunity. In remarks in Chicago in August, Obama called for an “America where no matter who you are, no matter what you look like, no matter where you come from, no matter what your last name is, no matter who you love, you can make it here if you try.” The same month, he urged the Supreme Court to uphold affirmative action in public universities, putting his weight behind what has been a mainstay of U.S. equal opportunity legislation since the 1960s. Days later, the Republican vice presidential nominee, Paul Ryan, echoed Obama’s sentiment, saying, “We promise equal opportunity, not equal outcomes.” Romney, too, argued that whereas Obama “wants to turn America into a European-style entitlement society,” his administration would “ensure that we remain a free and prosperous land of opportunity.”

It is no accident that both campaigns chose to emphasize equality of opportunity. It has long been at the center of the American ethos. And one of the United States’ major successes in the last half century has been its progress toward ensuring that its citizens get roughly the same basic chances in life, regardless of gender or race. Today, women are more likely to graduate from college than men and are catching up in employment and earnings, too. The gap between whites and nonwhites has narrowed as well, albeit less dramatically.

Yet this achievement has been double edged. As gender and race have become less significant barriers to advancement, family background, an obstacle considered more relevant in earlier eras, has reemerged. Today, people who were born worse off tend to have fewer opportunities in life.

Of course, there is no perfect way to measure opportunities. The best method devised thus far is to look at outcomes: college completion, gainful employment, and sufficient income. If the average outcome for one group far outpaces that for another, social scientists conclude that the first group had greater opportunities. Comparing outcomes is not foolproof, as differences in outcomes can result from differences in effort. But a person’s effort is itself shaped by the circumstances he or she encounters.

To assess equality of opportunity among people from different family backgrounds, the measure of outcome that social scientists look at is relative intergenerational mobility — a person’s position on the income ladder relative to his or her parents’ position. Social scientists don’t have as much information as they would like about the extent of relative intergenerational mobility, its movement over time, and its causes. The data requirements are stiff; analysts need a survey that collects information about citizens’ incomes and other aspects of their life circumstances, then does the same for their children, and for their children’s children, and so on. The best assessment of this type in the United States, the Panel Study of Income Dynamics, has been around only since the late 1960s.

Even so, there is general consensus among social scientists on a few basic points. Continue reading

Gaining from growth

October 31, 2012

A key challenge for America and other affluent countries going forward is to figure out how to ensure that more of the benefits of economic growth reach households in the middle and below. In the U.K., the Resolution Foundation, a London think tank, set up a Commission on Living Standards a year and a half ago to look into this. The Commission has produced a number of helpful studies and reports. Today it released its final summary report: Gaining from Growth. Well worth a read.

Will everyone be worse off if the United States turns social democratic?

September 29, 2012

Daron Acemoglu, James Robinson, and Thierry Verdier have a new paper that asks “Can’t We All Be More Like Scandinavians?” Their answer is no. The answer follows from a model they develop in which

  1. Countries choose between two types of capitalism. “Cutthroat” capitalism provides large financial rewards to successful entrepreneurship. This yields high income inequality, but it stimulates lots of entrepreneurial effort and hence is conducive to innovation. “Cuddly” capitalism features less financial payoff to entrepreneurs and more generous cushions against risk. This yields modest income inequality but less innovation.
  2. Because of the difference in innovation, economic growth initially is faster in cutthroat-capitalism nations. But technological advance spills over from cutthroat nations to cuddly ones, so growth rates then equalize. Over the long run, GDP per capita is higher in cutthroat-capitalism nations (due to the initial burst) while economic growth rates are similar across the two types.
  3. Average well-being may be higher in cuddly countries because the more egalitarian distribution of economic output more than compensates for the lower level of output.
  4. Nevertheless, it would be bad for all countries if cutthroat-capitalism nations switched to cuddly capitalism. That would reduce innovation in the (formerly) cutthroat nations, which would reduce economic growth in all nations.

Acemoglu, Robinson, and Verdier say the model might help us understand patterns of economic growth and well-being in the United States and the Nordic countries — Denmark, Finland, Norway, and Sweden. The United States chose cutthroat capitalism, while the Nordics chose cuddly capitalism. The U.S. grew faster for a short time, but since then all five countries have grown at the roughly same pace. America’s high inequality encourages innovation. The Nordics can be cuddly and still grow rapidly because of technological spillover. If the U.S. were to decide to go cuddly, innovation would slow. Both sets of nations would grow less rapidly.

Incentives, innovation, and economic growth in the U.S. and Sweden

I won’t provide the “detailed empirical study of these issues” that Acemoglu and colleagues say they hope their paper will inspire, but I can offer a little data. To keep things simple, I’ll compare the United States with just one of the Nordic countries: Sweden.

An indicator of financial incentives for entrepreneurs is the top 1%’s share of household income. An indicator of the extent of cushions against risk is government expenditures’ share of GDP. What we see in the data is a lot of similarity between the U.S. and Sweden until the second half of the twentieth century. Government spending begins to diverge in the 1960s, income inequality in the 1970s.

Though Sweden’s top 1% get a smaller share of the total income than their American counterparts, are incentives for entrepreneurs really much weaker in Sweden? Swedish CEOs and financial players don’t pull in American-style paychecks and bonuses in the tens of millions, but there is little to prevent an entrepreneur from accumulating large sums. In the 1990s Sweden undertook a significant tax reform, reducing marginal rates and eliminating loopholes and deductions. Corporate income and capital gains tax rates were lowered to 30%, and the personal income tax rate to 50%. Later the wealth tax was done away with. In the early 2000s a writer for Forbes magazine mused that Sweden had transformed itself from a “bloated welfare state” into a “people’s republic of entrepreneurs.”

But set this aside for the moment. Suppose the incentives for entrepreneurs did begin to differ in the two countries around 1960 or 1970. The model predicts innovation will subsequently diverge. Acemoglu, Robinson, and Verdier refer to one measure of patent applications per capita that has the U.S. leading Sweden beginning in the late 1990s. That timing perhaps is consistent with the model’s prediction if we allow a substantial lag. But they cite another measure that is available starting in 1980 and has the U.S. well ahead of Sweden already by then. This suggests America’s innovation advantage might have preceded rather than followed the two countries’ type-of-capitalism choice.

The final outcome is GDP per capita. Here the model stumbles. The gap between the two countries isn’t recent; it dates back to more than a century ago. Apart from a few hiccups, each country has stayed on its long-run growth path throughout the past 100 years, with Sweden slowly catching up to the United States.

So the U.S. and Sweden have chosen different styles of capitalism, at least as measured by income inequality and public spending. That choice looks to have occurred around 1960 at the earliest. The U.S. may be the more innovative of the two nations, and that advantage may have come after the type-of-capitalism choice. But the model doesn’t seem to help in explaining the gap between the two countries in per capita GDP.

Will American innovation slow if we go “cuddly”?

The really interesting question posed by Acemoglu, Robinson, and Verdier is whether innovation would slow in the United States if we strengthened our safety net and/or reduced the relative financial payoff to entrepreneurial success. I’m skeptical, for three reasons.

The first flows from America’s past experience. According to Acemoglu et al’s logic, incentives for innovation in the U.S. were weakest in the 1960s and 1970s. In 1960 the top 1%’s share of pretax income had been falling steadily for several decades and had nearly reached its low point. Government spending, meanwhile, had been rising steadily and was close to its peak level. Yet there was plenty of innovation in the 1960s and 1970s, including notable advances in computers, medical technology, and other fields.

Second, the Nordic countries, with their low income inequality and generous safety nets, currently are among the world’s most innovative countries. The World Economic Forum’s Global Competitiveness Index has consistently ranked them close to the United States in innovation. The most recent report, for 2012-13, rates Sweden as the world’s most innovative nation, followed by Finland. The U.S. ranks sixth. The 2012 WIPO-Insead Global Innovation Index ranks Sweden second and the United States tenth. Whether or not this lasts, it suggests reason to doubt that modest inequality and generous cushions are significant obstacles to innovation.

Third, if Acemoglu and colleagues are correct about the value of financial incentives in spurring innovation, we should see this reflected not only in the United States but also in other nations with relatively high income inequality and low-to-moderate government spending, such as Australia, Canada, Ireland, New Zealand, and the United Kingdom. But we don’t.

There’s one additional possibility worth considering. If financial incentives truly are critical for spurring innovation, it could be the opportunity for large gains that matters, rather than the absence of cushions. Suppose we were to increase government revenues in the United States via higher taxes on everyone — steeper income taxes on the top 1% or 5% plus a new national consumption tax. And imagine we used those revenues to expand public insurance and services — fully universal health insurance, universal early education, a beefed-up Earned Income Tax Credit, a new wage insurance program, more individualized assistance with training and job placement. These changes wouldn’t alter income inequality much, but they would enhance economic security and opportunity. Would innovation decline? I doubt it.

We may get a test of this moderate-to-high inequality with generous cushions scenario at some point. I suspect this is where America is heading, albeit slowly. Interestingly, the Nordic countries, where the top 1%’s income share has been trending upward (see figure 10 here), might end up there first.

Mitt Romney vs. the 47%

September 18, 2012

Who pays taxes: Klein, Center on Budget and Policy Priorities

Who receives government benefits: Plumer, Mettler and Sides, Kenworthy

Commentary: Be sure to read Reihan Salam, David Brooks, and Claude Fischer. I especially like this, from Ryan Avent:

The belief that there is an irreconcilable conflict between government benefits and the freedom to pursue dreams can only arise among those who have never had to worry about the reality of equality of opportunity in America. For most Americans, public schools are a critical piece of the machinery of economic mobility. Things like unemployment insurance and social security, meagre though they are, sometimes mean the difference between destitution and the possibility of a second chance or a non-wretched standard of living. For many Americans, the ability to even contemplate dreams for a better life is down to the small cushion and basic investments provided by governments, provided for precisely that reason, because an economy in which only those born with a comfortable financial position can invest in human capital and take entrepreneurial risks is doomed to class-based calcification.

America’s welfare state is far from perfect. But it is necessary; indeed, it’s hard to imagine a just and sustainable system of free enterprise without a robust social safety net. Republicans need to recognise this and acknowledge that the past three decades have meant rising income inequality and falling economic mobility alongside top marginal tax rates that are among the lowest of the postwar period. A party that can’t come up with a better answer to this dynamic than to conclude that half of America simply isn’t trying hard enough probably isn’t a party destined or deserving of electoral success.

The State of Working America, 2012 edition

September 11, 2012

From the Economic Policy Institute. Accessible online and fully downloadable.

We’re all dependent on government, and it has long been thus

September 2, 2012

Nicholas Eberstadt’s “A Nation of Takers” argues that too many Americans have become dependent on government benefits. Over the past half-century, he notes, the share who receive a government cash transfer and/or public health insurance — Social Security, Medicare, Medicaid, unemployment compensation, and so on — has grown steadily. The United States, according to Eberstadt, is now “on the verge of a symbolic threshold: the point at which more than half of all American households receive, and accept, transfer benefits from the government.”

Eberstadt doesn’t contend that this has weakened our economy. His concern is moral. He believes reliance on government for help is undermining Americans’ “fierce and principled independence,” our “proud self-reliance.”

In Eberstadt’s way of seeing things, we are either givers or takers — taxpayers or benefit recipients. This is mistaken. Every American who doesn’t live entirely off the grid pays some taxes. Anyone who is an employee pays payroll taxes, and anyone who purchases things at a store pays sales taxes. Likewise, every American receives benefits from government. If you or your kids attended a public school, if you’ve driven on a road, if you’ve had a drink of tap water or taken a shower in your dwelling, if you’ve deducted mortgage interest payments or a business expense from your federal income taxes, if you haven’t been stricken by polio, if you’ve never had a band of thugs remove you from your home at gunpoint, if you’ve visited a park or lounged on a beach or hiked a mountain trail, if you’ve used the internet….

Eberstadt seems to think receipt of a government cash transfer or health insurance somehow renders people less self-reliant than does receipt of the myriad public goods, services, and tax breaks that government provides. But he doesn’t say why.

Once upon a time public safety was ensured by individuals and privately-organized militias. Then we shifted to government police forces and armies. At one point humans got water and disposed of waste individually. Then we created public water and sewage systems. Education of children was once a family responsibility. Then it shifted to schools. There’s a good reason for this: government provision offers economies of scale and scope, which enables the good or service to be provided to many people who either couldn’t or wouldn’t do it on their own. Did Americans’ character or spirit diminish when these changes occurred? Is there something qualitatively different about the more recent shift from individual to government responsibility in how we deal with retirement saving, health care, unemployment, and other risks? Here too Eberstadt is silent.

It’s true that some government policies encourage people to work less than they otherwise would. If we create a public pension program (Social Security) and allow receipt of benefits beginning at age 62, some who could work longer will elect to retire at that age. If we ease eligibility criteria for receipt of disability benefits, some people who could be employed will instead choose to live off that benefit. But this behavior isn’t the product of an “entitlement culture” that has weakened our moral fiber; it’s the result of incentives created by specific programs. The solution is not to “roll back the entitlement state”; it’s to alter the rules and/or generosity of the particular program that is causing the problem (or to increase the financial reward from staying in employment).

At the end of his essay, Eberstadt shifts his concern from the moral cost of government to the financial cost. Rising government expenditures on transfers and health care will require, he says, that we cut military spending, sell off public assets (land, buildings, art), or dump the burden onto future generations by running up government debt. None of these options is attractive. But there is, of course, another option: increases taxes. As we’ve transferred various functions from individuals to government over the course of our nation’s history, we’ve (usually) paid for it by asking Americans to contribute more. In many other rich nations governments provide more services and transfers than ours does, and they (usually) fund this by collecting more in taxes than we do. Perhaps Eberstadt ignores this option because at the moment one of our two political parties opposes any tax increase and the leader of the other favors a tax increase for only 5% of the population. But if history is any guide, this stalemate eventually will pass. Higher taxes, coupled with modest tweaks to Social Security and more significant reforms of our (public and private) health care system, can generate enough revenue to pay for our public goods, services, and transfers.

Growth of government spending is not, for the most part, a consequence of rent-seeking special interests or narrow-minded bureaucrats looking to expand their turf. It’s a product of affluence. As people and nations get richer, they tend to be willing to allocate more money for insurance (protection against risks) and for fairness (extension of opportunity and security to those who are less fortunate). Rather than lamenting an imagined shift from self-reliance to dependence, or claiming that we can’t afford more security and fairness, the American right would do better to focus its energy and creativity on devising alternative ways of pursuing these goals. Government doesn’t always do things best; and even when it does, there almost always is room for improvement. Nicholas Eberstadt’s essay is emblematic of the backward-looking orientation that has dominated America’s right for the past three decades. It’s an orientation that in my view has long since outlived its usefulness. The country will benefit when more smart minds on that side of the spectrum turn their gaze forward.

Disability is the human condition

September 2, 2012

See here, here, and here.

Mitt Romney’s peculiar approach to tax fairness

August 18, 2012

Mitt Romney in a recent Fortune magazine interview: “I indicated as I announced my tax plan that the key principles included the following. First, that high-income people would continue to pay the same share of the tax burden that they do today.”

That’s odd. Sensible debates about tax fairness and tax policy focus on what rate each group should pay, not on what each group’s share of total tax payments (the “tax burden”) should be.

High-income people’s share of tax payments is determined by their average tax rate, their share of total pretax income, and the average tax rate among all taxpayers.

Policy makers have a lot of control over tax rates. They have some, but far less, influence on the share of pretax income that goes to each group. Hence they have limited ability to control the share of total tax payments paid by a particular group.

In the past several decades federal tax rates on the top 1% of Americans have been lowered (Reagan), raised (Bush I and Clinton), then lowered again (Bush II). If all else stayed the same, that would have reduced the top 1%’s share of total tax payments. But this effect has been dwarfed by the large rise in the top 1%’s share of pretax income, which causes their share of total tax payments to increase. Here’s what the numbers looked like in 1979 and 2007, two years at comparable points in the business cycle (data are from the CBO).

The top 1%’s share of pretax income doubled, from 8.9% to 18.7%. Although the average tax rate they paid fell, their share of total tax payments increased, from 14.2% to 26.2%, because their income share jumped so much.

Consider what the Romney approach would have implied for tax rates paid by the top 1% during the 1979-2007 period. In 1979 their average federal tax rate was 35%; in 2007 it was 28%. Suppose policy makers had promised to keep the top 1%’s share of total tax payments at its 1979 level of 14%. Given the sharp rise in the top 1%’s income share, the average federal tax rate paid by the top 1% would have needed to fall to just 15%.

What does this mean going forward? In pledging to maintain the tax share of the richest Americans at its current level, Mitt Romney is in effect promising that if that group’s pretax income share continues to rise as it has in the past three decades, he will slash their tax rates.

Mark Thoma adds: “He is also promising that if the income share falls, he’ll raise tax rates for upper income households. Anyone think he’d really do that?”

Globalization and taxes

August 9, 2012

Eduardo Porter, writing in the New York Times, says we need policies to help adjust to, not fight against, economic globalization.

In the Financial Times, Jared Bernstein argues that our chief tax problem is lack of revenues, not lack of progressivity.

I agree (here, here).


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