Growth & Justice Blog

Less Government? We Tried That. It's Not Working.

The Star Tribune's front-page story today finds that "less government'' is the overwhelming consensus "vision'' for Republican gubernatorial candidates. Peggy Lee and most Minnesotans want to know: Is that all there is?   

Leaving aside that this mantra sounds more like hard-right, activist-energizing radio talk than inclusive vision casting — and has to be extremely disappointing to hundreds of thousands of moderate and progressive Republican voters — we need some context here.   

The Price of Government, an official state Minnesota Management and Budget measure, shows that we DO have less government over the last decade, ever since the no-new-taxes religion, like some southern invasive species, got a hold on the North Star State. (See page 13 of the PowerPoint presented at the capitol last week by State Economist Tom Stinson and State Demographer Tom Gillaspy).

The bar graphs clearly show that our governments are using about two percentage points less (15.5 percent in 2008 compared to about 17.5 percent through the 1990s) of our personal income share than those governments were spending when the economy was actually doing better. Huge income tax cuts in 1999 and 2000 left us with chronic  budget crises, and the promised payoff in sustained, tide-rising economic growth didn't materialize, either.  

Wealth concentration at the top got worse, bridge and road conditions deteriorated, public school course offerings were cut, and thousands of working low-income folks lost their health care. And our economy is slumping and beginning to underperform the national average on some key indicators.  

We surely could use some more judicious restructuring and redesign of how we do our government work. But the basic things government provides are essential for our shared prosperity and quality of life.  

NOTE: The Price of Government measure is one of the most comprehensive of all the measures we have to describe the size and role of government. It counts state and local government revenues as a percentage of total income and therefore accounts for inflation, population growth and economic growth. It was instituted at the behest and with the approval of business groups in the late 1980s.

— Dane Smith

After Labor Day, keep working on economic justice

I had the great privilege of delivering the Labor Day Sunday sermon at my church (Unity Church, Unitarian Universalist, in St. Paul). I offered the best I could find from Abraham Lincoln, the Bible, Catholic and Lutheran teachings on social justice, and recent economic studies to make the case that we have an inequality problem in Minnesota and the nation. And it was a treat to get Donna Summer's great song, "She Works Hard for the Money'' into the liturgy as the postlude.  

Here's one point I made about labor and fairness, and democratic and religious traditions.

As Americans we mark our progress by looking back at forms of liberation from exploitation of labor. In our western hemisphere, we look back in horror at the forced conversion and attempted enslavement of aboriginal people to Christendom and efforts to bring them under the English and Spanish or French yoke. We are proud of the American Revolution and our fight against the illegitimate seizure, without representation, of our labor. We are proud of the great fight led by liberal religious founders of our own Unitarian Universalist denomination against the enslavement of African people. Interestingly, southern defenders of slavery used the Bible’s apparent approval or neutrality on the subject to advance their secessionist cause.

In the last century, we’ve made enormous progress against the much more subtle forms of semi-slavery that come with unbridled capitalism and the slanted bargaining table set up between employers and employees: the simple and basic right to organize, child labor laws, the 40-hour work week and overtime compensation, the minimum wage, the civil rights movement and ongoing efforts to finish the Emancipation Proclamation and end the de facto slavery imposed on people of color, the migrant workers’ reforms, and in more recent years but throughout history, hugely important, the oppression of women in the workforce.

I urged the congregation to consider the mountains of evidence that show economic inequality growing once again, after we reached a high-water level of overall economic equality in the 1970s. And I urged folks to do whatever they possibly could to change policies and laws to bring about more equal outcomes, chiefly through more and better investment in human capital.   

The full text of the sermon is available here [PDF]. 

— Dane Smith

Click on "10000strong.org" for Martin Luther King Day

This is about here and now.   At Growth & Justice, we try to focus relentlessly on the long-term and the strategic, on the thinking and research and advocacy that will expand and improve our public investments for a more shared prosperity.   And we don't focus so much on the immediate, the obligation to take care of more urgent injustices.   Few human needs are as immediate and pressing as hunger, and by all accounts this problem is spreading in Minnesota during a time of deep economic travail.    Here's something I'm doing right now, and I urge you to do so also.   Click on 10000strong.org, watch the powerful and compelling video,  and do what the good people tell you to do, or as much as you can.   It's an effort, led by Second Harvest Heartland, one of Minnesota's premier non-profits, to enlist at least 10,000 people  in the Land of 10,000 Lakes to alleviate hunger now and, eventually to end it in our state.  It's a most appropriate thing to do on Martin Luther King Day and Inauguration Day. 

Dane Smith

Budget crisis should bring out the best thinking

This has been Think Tank Week on the Star Tribune's op/ed page. 

We could find something to agree with in the Center of the American Experiment's thoughts on Green JOBZ, which tracks pretty closely with what we wrote last month. And we're in accord with Mitch Pearlstein when he says the state budget crisis calls for smart solutions — and even being open to the possibility of a tax increase.

With Phil Krinkie and the Taxpayers League of Minnesota, though, we must vigorously disagree. His response to Dane Smith's recent opinion piece on the coming budget challenges reiterated the Taxpayers League's tried and not-so-true talking points.

Dane made three points. 

1. Our local and state governments already have been significantly downsized — as a share of the economy, as a percentage of our income, and relative to other states.
2. Top-earning Minnesotans pay a smaller percentage of income in state and local taxes than other income brackets, even as their share of wealth and income  has grown larger than ever.
3. Minnesota, in its new status as an average-tax state, is chronically underperforming the national economy for the first time in decades.

These points were backed up by comprehensive tax-and-spending measurements that Krinkie called "deceptive percentages."  He prefers to use what he calls "real dollars." In fact, Krinkie's tally of real dollars spent in Minnesota in fiscal 1998 does not appear to be real at all in the economic sense. Economists use "real dollars" to refer to inflation-adjusted amounts. He presents "nominal'' dollars, unadjusted for inflation or population growth, as a way to track the size of government.

Why do he and other anti-tax advocates reject percentages? Because then their argument about bloated government doesn't play very well. Using nominal dollars lets them inflate the bloat. Adjusting for population growth, size of the economy, individual incomes and the cost of the things government buys gives a much more realistic picture. And it's the kind of measurement most economists use when comparing nations and states, and then vs. now.

Here's an example. You might not like having a larger mortgage payment on your second house than on your first one, but if the payment takes the same or a smaller proportion of your growing income and the house is larger, it's pretty hard to argue you are paying more and are worse off.  

Never mind, says Krinkie:

The fact is, the price of government as a percentage of income is economically irrelevant. Validity of a POG index assumes that government is entitled to some arbitrary percentage of private production. You work hard, earn more, and government is entitled to more of your income.

The League's dissing of the POG might be taken as an insult to the state's business establishment, which was instrumental in installing the POG as a bottom-line defining measurement of government's size some two decades ago. If the business view is "economically irrelevant," then we're really in trouble!

Actually, a POG index simply shows us what we spent at different times in our history for a certain level of government services. It's a measure that allows taxpayers to compare now with then. If we don't like what's happening now, and we're funding public services at a lower level than at a time we liked better, we might consider raising taxes. And if we're spending less now and liking it more, we should re-elect the people who got us there. 

Of course, "liberals in the Legislature" are to blame for point #2, says former legislator Krinkie, because the government has imposed some regressive taxes. No mention of how regressive property taxes actually grew so much in recent years in response to cuts in income taxes and less state revenue for local governments.   

And no acknowledgment of the Taxpayers League's role in helping to make progressive income tax policy politically toxic in Minnesota.

In fact, Growth & Justice has been among the state's strongest voices for limiting regressive taxes and for finding ways to offset their impact on lower-income families. Conservatives have made income tax increases their Alamo, while more easily giving ground on regressive fees, sales and property taxes.

On point #3, the best our righty friends can do on the state's lagging growth is to agree and then haul out the discredited talking point about how state and federal government employment growth has displaced private job creation. We laid out the facts on that one back when Rep. Marty Seifert tried it in January.

Sparring with each other can be fun, but Minnesota's policy groups from across the political spectrum ought to be bringing workable ideas, straightforward information and good will to the table in the coming months. We'll need it.

— Charlie Quimby

Minnesota Poverty: Still better than Mississippi's!

This decade has not been kind to low-income Minnesotans.

According to new U.S. Census data analyzed by Lutheran Social Service and the Minnesota Budget Project [PDF], Minnesota lost ground in poverty, health care coverage and household incomes during the six-year economic recovery that lasted from late 2001 through 2007.

Minnesota is one of 24 states that saw its overall poverty rate worsen since 2001. Nearly one in ten Minnesotans, or 9.5%, lived in poverty in 2007. This is significantly higher than the 2001 poverty rate of 7.8%. Nationally, the poverty rate was 13.0% in 2007, which is also significantly above the 12.1% rate measured in 2001. Remarkably, the poverty rate was higher after six years of economic recovery than during the 2001 recession.

Still, could be worse. Minnesota ranked only 44th among the states on poverty, compared to number 1 Mississippi at 20.6%.

Last year when these figures were released, the Bush Administration heralded a down-tick in the national poverty rate from the previous year, from 12.6% to 12.3%. At the time, The Christian Science Monitor noted that the reported number might not provide a true picture of economic turmoil in America [emphasis mine]:

The bureau's poverty rate measures a snapshot in time. Some experts say that focus masks a significant increase in economic instability for Americans that makes more people in the middle class vulnerable to poverty. That's because while the percentage of people in poverty at a given time may be declining (it's fluctuated between 10 and 15 percent for the past 20 years), more Americans overall are experiencing poverty at some time during their lives than at any time during the past 30 years, according to a study done at Washington University in St. Louis.

The study found that in the 1970s, about 24 percent of people between the ages of 20 and 29 experienced poverty for a year or more. In the 1980s, that went up to 30 percent. And in the 1990s, it increased to 38 percent. The reasons, according to Mark Rank, one author of the study, are the increase in lower-paying jobs, employment insecurity, and significant decreases in health-insurance coverage.

In Minnesota, we're seeing the consequences of this instability — not just in poverty rates, but in rising unemployment, foreclosure rates and perhaps even in school test results and dropout rates. Whatever growth occurred during the last weak business cycle did not reach many Minnesota families.

According to the Minnesota Budget Project:

Minnesota households had a median income of $55,802 in 2007. This is significantly less than 2001’s figure of $58,363 (measured in 2007 dollars).

Minnesota is still better than average on all three measures noted in the analysis, but the trends are heading in the wrong direction, and the costs are falling largely on state and local governments already feeling budget pinches.

Cutting taxes won't do much to help feed families with marginal incomes, and putting more in the pockets of high earners doesn't directly address the employment problem — helping people develop the skills to find and hold jobs. But unless concerned Minnesotans speak up, cutting programs that aid the poor will be one reflexive response, and tax cuts will be the other. 

— Charlie Quimby

The anti-government theme and the (alleged) "fall of conservatism''

There’s a temptation in the punditry business to attach too much meaning to the present, to excitedly say "never before,'' and to declare the  "fall of'' and "death of''  this or that.   And in my time I've seen too many premature pronouncements  _ of the death of God, of the decline and fall of liberalism, and even the end of history _ to get too excited.   But George Packer in the latest New Yorker has written an eminently readable treatise  about “The Fall of Conservatism.’’   It was referenced in a Star Tribune editorial Saturday about the Minnesota Republican Party’s state convention, and the Packer piece promises to be prime grist for the mill this summer. 

Packer quotes conservatives themselves who fear that the movement is out of ideas and intellectually fatigued and he draws some amazing admissions  out of Patrick Buchanan about how Republicans consciously and aggressively exploited southern white fury over the civil rights movements to build their counter-attack in the late 1960s.   Packer also does a good job sketching out broader and more defensible non-economic motivations for the rise of conservatism:  concerns about “the chaos of the cities, the moral heedlessness of the young and the insults to national pride.’’ I've always maintained that "liberalism'' got to be a dirty word because of "free love'' and drugs and flag-burning and goofy dalliances with Marxism, not because of its efforts to alleviate poverty and social problems and gross inequalities in wealth and income.

And Packer gets closest to explaining the conservatives' strategic mistake when he cites David Brooks’ analysis about how conservatives overreached with their hostility to government.  “An anti-government philosophy turned out to be politically unpopular and fundamentally un-American…People want something melioristic, they want government to do things.’’  And in the end, because of a very contradictory conservative view of government as limitless when it comes to security and national defense, conservatives after almost 30 years of dominance  “hadn’t made much of a dent in the bureaucracy, and they had done nothing to provide universal health-care coverage or arrest growing economic inequality.’’   Packer goes on to quote conservative David Frum as saying that “smaller government is no longer a basis for conservative dominance.’’   And he points to young conservatives like Ross Douthat and Reihan Salam who are pushing progressive ideas like wage subsidies for low-income workers and tax credits for children with families.    

I don’t want conservatism to fall or die, anymore than I want yin to wipe out yang or night to eclipse day.      And it doesn’t matter what I think because conservatism and the great ideas it stands for _ individual and market freedoms, personal responsibility,  family values, respect for the past, and religious convictions _ will and should always be with us as we try to build a better world.   I just think conservatism needs to return to the healthy accommodation its adherents used to have for other principles _ equality of opportunity, social justice, and a respectful faith that community and the “we” are at least as important as the individual and the “I”. 

Dane Smith

Income gap: It could be worse

A new report on economic inequality contains some old news. The gap between top earners and the rest of the population continues to grow. For Minnesota, the only good news is, it could be worse.

The study by the Center on Budget Policy and Priorities compared income growth rates in each state for three comparable periods in the business cycle over the last two decades. CNN/Money reports it found:

The income gap between the rich and the rest of the population is widening. In 22 states, the top fifth of families made more than seven times what the poorest fifth took home, according to the report. In the late 1980s, only one state — Louisiana — had such a spread. Meanwhile, in more than two-thirds of the country, the wealthiest saw their income grow more than twice as fast as the middle-class over the past two decades.

In Minnesota, the gap was greatest between the top and middle fifths, with top earners seeing average income gains of 50.7 percent over the past two decades, compared to 28.1 percent for the middle. Compared to other states, our rate of growth in inequality was about average (27th) and the size of the gap between the top and the middle ranked 36th. [Download MN summary pdf]

It's worth noting here that the study looked at average incomes and did not track individual households, which would give a more complete picture of changing prosperity for families. (I've written more about that here.) But the trend — driven by wage stagnation at the bottom and growth in forms of income such as rent, interest, dividends and capital gains at the top — is still unmistakable.

The benefits of economic growth were broadly shared for a few years in the late 1990s — the only period in the past two decades for which this was true — but this broad-based growth ended with the 2001 downturn. Once the effects of the recession were left behind, the trend toward greater inequality quickened, as the incomes of the richest families climbed while those of low- and moderate-income families stagnated or declined.

The report also points out that some government policies contributed to the expanding wage and income disparity, including deregulation, trade liberalization, ineffective labor laws and tax changes.

Many states made their tax systems more regressive during the 1990s. Early in the decade, when a recession created budget problems, states were more likely to raise sales and excise taxes than income taxes. Later in the decade, when many states cut taxes in response to the strong economy, nearly all chose to make the majority of the cuts in their income taxes rather than sales and excise taxes.

With the current recession, states are again likely to shift costs to regressive taxes and fees, while resisting investment in education, infrastructure and social programs that can help increase participation in the economy. If recent post-recession patterns hold, the wealthiest families will see their incomes resume healthy growth; the other 80 percent will emerge farther behind than before.

— Charlie Quimby

Birth has a bearing on economic mobility.

Last month, the Economic Mobility Project, an initiative of The Pew Charitable Trusts, released “Getting Ahead or Losing Ground: Economic Mobility in America.” Written by three Brookings Institution scholars, the report [Download .pdf] contains some striking findings about economic opportunity in America — particularly about intergenerational income mobility.

The researchers found that children born to parents with income in the bottom 20 percent are highly likely to remain at the bottom in adulthood, while those born to parents in the top 20 percent are almost as likely to stay there.

About the same time Pew was reporting some of its findings, conservative economist Thomas Sowell was busy putting forward his view that we should not be concerned about the growing income gap between rich and poor. Sowell says we should look at income mobility of individuals, and he used data from ten consecutive years of individual tax returns to support his point that there was greater actual mobility occurring than was apparent from aggregate numbers.

While tracking a large number of individuals is better than divining from averages, there are a number of problems with Sowell's sample and his assessment of what's happening. I addressed a few of these in my personal blog, and started a detailed critique, which I decided was too complicated to interest most laymen (my audience) and not technical enough for experts.

Let's just say I have concerns about using movement across quintiles of the population as a measure of economic mobility, because for every movement up, someone else gets moved down, even if their actual earnings did not decline. This is a potential issue with interpreting both the Sowell and the Pew studies.

Of course, establishing that the poor are already upwardly mobile buttresses the conservative argument against government spending — "income redistribution" — to increase the chances that a person from a poor family might achieve a better life. Why invest more in early childhood, child health and public education, if low income people already do it on their own? (A least, the "good" low income people.)

The Pew study followed family fortunes from one generation to the next, matching parents with their children's economic attainment 30 years later (see Chapter One of the report).

Americans’ optimistic views about mobility and opportunity in America may stem from the fact that two out of three children have higher levels of absolute income than their parents. That family incomes rise over a 30-year period is not surprising. In fact, more children might have advanced beyond their parents’ income if economic growth had been higher and more equally distributed over the past 30 years.

But as economic growth slowed,

[A]n individual family's fortunes have become more dependent on the opportunity to compete with other families for the economy's rewards. The hope that increased opportunity (or relative intergenerational mobility) would offset the effects of slower growth or more unequal incomes is not supported by most evidence. Research, though mixed, suggests that the rate of relative mobility has not changed much since 1970 and, if anything, it may have declined.

Of particular interest were findings on mobility at the top and bottom of the population. The figure shows "children born to parents with income on the bottom rung of the ladder are highly likely (42 percent) to also be in the bottom rung in adulthood, while those born to parents on the top rung are very likely to stay at the top (39 percent)."

When wealth was considered, the likelihood of sticking in the same quintile was was similar, with 36 percent born at the bottom remaining there, and 36 percent born at the top staying at the top.

The report also includes chapters on the role of education, and on mobility differences between blacks and whites and men and women.

— Charlie Quimby

[Click to enlarge]

Income gap widens and so does the tax gap

The Federal Reserve Bank of Minneapolis has released its 2008 outlook for the regional economy, and for Minnesota the short version is: not so hot.

Monthly job growth numbers, which don't necessarily indicate trends, are nevertheless concerning:

State job growth remains tepid when compared with the nation. The state is growing jobs at a rate of 0.1 percent to the nation's pace of 1 percent.

The state's jobless rate dropped to 4.4 percent in November, down from 4.7 percent in October and under the national rate of 4.7 percent. The report cited a drop in labor participation rate as a driving factor in the drop in jobless rate, which means a drop in people looking for work.

Meanwhile, a new report [Download pdf] on effective federal tax rates says the income gap between the very wealthy and the rest of America continues to widen:

The increase in incomes of the top 1 percent of Americans from 2003 to 2005 exceeded the total income of the poorest 20 percent of Americans, data in a new report by the  Congressional Budget Office shows.

The poorest fifth of households had total income of $383.4 billion in 2005, while just the increase in income for the top 1 percent came to $524.8 billion, a figure 37 percent higher.

The report also shows that the top 1 percent pays the highest effective tax rate of all income groups, but between 2004 and 2005, its effective rate dropped while for the rest of households, the overall rate held steady or increased.

Calculating the gap in Minnesota

In Minnesota, the top 1 percent pay the lowest effective state and local tax rate, as calculated by the state tax incidence study [Download pdf]. The tables below, taken from the two studies, show the federal and Minnesota rates, respectively.

The Minnesota study also calculates tax incidence by income decile — that is, dividing the state's $13.9 billion income into tenths and then seeing how many households it takes to account for 10 percent of the total:

Because of their relatively low incomes, it takes 888,000 households in the first income decile to account for 10 percent of total income; in contrast, there are only 7,339 high-income households in the tenth decile, who also received 10 percent of total income.

Again using the year 2004 for illustration, the first decile includes 37.6 percent of all
households. Their share of total taxes (10.0 percent) was almost equal to their share of
household income (10 percent).  First income decile households (with 10 percent of total
income) paid less than 1 percent of the individual income tax, but paid 16.5 percent of the
consumer sales tax, 22.4 percent of excise taxes, and 19.1 percent of all business taxes
borne by Minnesota residents.

The tenth income decile includes only 0.3 percent of all households.  Their share of total taxes (7.9 percent) was lower than their share of household income (10 percent).  They paid 16.1 percent of the individual income tax, 3.7 percent of the consumer sales tax, 2.0 percent of excise taxes, and 4.1 percent of business taxes borne by Minnesota residents.

As the evidence mounts that this economy has been disproportionately generous to a few — who also pay proportionately less of their incomes in taxes — Minnesota lawmakers should look again at fairness as they consider how to pay for state services.

— Charlie Quimby

Tough sledding for hopeful homeowners

A winter storm is descending on the city, but we're going shopping anyway. Unlike most bargain hunters this holiday season, we're looking for a house.

— Charlie Quimby, "Tough sledding for the newest generation of homeowners," Star Tribune.