Economic Policy Institute Head Steps Down

Working with Jared Bernstein, Larry Mishel is the originator of the famous graph that shows the split between productivity and wages. Mishel is also notable for helping some important and good economists early in their careers. He’s therefore one of the people I am willing to give a tribute to on this site.

WHEN LAWRENCE MISHEL came to Washington during the height of the Reagan revolution, the options for a young leftist economist looking to make a difference were nearly non-existent.

“The liberal position was represented by the Brookings Institution,” Mishel told The Intercept, “which at the time was very free trade uber alles, hostile to industrial policy, not interested in workers and unions. The debate was between Brookings on the left, and [the American Enterprise Institute] and the Heritage Foundation on the right.”

And then there was the Economic Policy Institute, a new think tank designed to fill the ideological gap and shift America’s economic debate to the left. In 1987, Mishel joined EPI as a research director, later becoming vice president and eventually president in 2002. As his thirtieth year at EPI winds down, Mishel gets to see the Democratic Party finally move closer to the positions the think tank has always had. Now, he is stepping aside.

“The hallmark has been to center that an economy is only working if it’s working for the benefit of the vast majority,” Mishel said. “We hammered that every day.”


From the beginning, EPI elevated the daily struggle of those on the economy’s margins. Starting in 1988, Mishel and colleagues produced a biennial report, The State of Working America, with comprehensive data on wages, incomes, jobs, and wealth. The reports found a discordant trend in the economy: wage stagnation amid increasing productivity. Prior to the late 1970s, these two measures followed one another: as workers produced more goods, they made more money. When that changed, others made excuses for this bifurcation while EPI insisted that conscious policy choices shortchanged workers and funneled the gains to the very top, as evidenced by rising CEO compensation and the erosion of living wages. In other words, EPI argued, natural forces didn’t lead workers to their plight — those in power pushed them there.

If these themes of rising income inequality sound familiar today, they were practically a foreign concept at the outset. In 1994, Mishel and Jared Bernstein created a now-famous chart showing the split between productivity and the median hourly wage.



Much of EPI’s work under Mishel served to reject pernicious myths about the economy, hardened into perceived wisdom by self-interested forces. EPI’s research found that social and economic disadvantage, not failing teachers or schools, depressed student achievement. It refuted that high school graduation rates were collapsing, an alternative fact used to push vouchers or charter schools. It proved that automation played little role in inequality. It laughed off the idea that CEOs were paid nearly 300 times more than the average worker based on a competitive race for talent.


As Mishel steps aside, he believes America needs a broad set of policies to rebuild worker power, things like raising the minimum wage to $15 an hour, empowering union organizing, ending worker misclassification in the “gig economy” to deny benefits and overtime pay, preventing arbitration agreements that limit worker options in a dispute, and banning non-compete clauses that stop workers from moving to similarly situated employers. These moves to strengthen worker bargaining power, collectively and individually, cut a path to robust wage growth for the 99 percent. “It will take bold proposals,” Mishel said. “If not, we won’t have a vibrant middle class, or a democracy.”

Mishel’s mission in 30 years at EPI was not only to identify the economy’s problems, but to demonstrate how to fix it. And he consistently brought complex insights down to a level of popular understanding, striving to reach the ordinary worker rather than the academy. The way he talked about the economy mirrored who he fought for. A garrulous man with a shock of white hair, Mishel cherishes that EPI has become a fixture in Washington, and that the poles of the economic debate have finally trended in his direction.


Propaganda Attempt to Divert Attention from Class Warfare

Arguably the main problem with American Social Security is that the payroll tax is capped at about $128,000. This means that someone who makes millions of dollars per year pays the same amount into Social Security as someone who makes about $128,000. That means that the maximum cap is a regressive part of the tax code, similar to how the carried interest loophole allows hedge fund managers to treat income as capital gains rather than regular income, which reduces their tax contributions. But significantly raising the cap on the payroll tax would solve the problem of Social Security lacking adequate funds, and then outlets such as The Atlantic would hopefully focus on more important issues.

With the Republicans having just passed a $1.5 trillion tax cut, the bulk of which goes to the richest one percent, it was inevitable that the generational warriors would come out of the woodwork and resume the attack on Social Security and Medicare. Generational warriors try to divert attention away from how our economy has redistributed income upwards over the last four decades, and convince a large portion of today’s workers that their real problems stem from their parents’ and grandparents’ overly generous retirement benefits.

The opening shot in this new round of generational warfare showed up earlier this month in The Atlantic Magazine. It told the classic story about how seniors are getting too much money back from Social Security and Medicare, the same thing we’ve been seeing for decades. (There is little expectation of originality if you’re in the business of promoting generational warfare.)

In fact, middle-income seniors will get somewhat less back from Social Security than they paid into the system. The cost of Medicare benefits does exceed their taxes, but this is because Americans pay twice as much for our doctors, drugs, medical equipment and other health care items than people in other wealthy countries.

The real problem is high-income people in the health care sector making too much money, not the country being too generous to its seniors. But, the folks promoting generational warfare aren’t interested in clamping down on the rich doctors and drug companies; they want us to go after retired school teachers and retail clerks.

Even if Social Security and Medicare were more generous, it would still say almost nothing about generational equity. While the generational warriors would like to have everyone focus on the cost of programs that primarily serve the elderly, paying for these programs has a trivial impact on the well-being of the working population. Policies that affect the distribution of income within generations are vastly more important.

To make this point as simple as possible, suppose that we had a huge increase in payroll taxes to cover projected shortfalls in Social Security and Medicare. Imagine a combined increase of 4.0 percentage points, which would be more than sufficient to leave both programs fully funded throughout their 75-year planning horizon.

This would undoubtedly be a big hit to working people who have to pay this tax. But, let’s compare this to the upward redistribution of income over the last four decades. This has primarily been an upward redistribution within the wage distribution, from ordinary workers to CEOs, Wall Street trader-types, and highly paid professionals like doctors and dentists. In the last decade there has also been a substantial redistribution from wages to profits.

The result of this upward redistribution has carved a large gap between productivity growth and wage growth. The hourly pay of a typical worker has risen by roughly 6.0 percent from 1979 to 2017. Even if we take a broader measure of compensation that includes health care and other benefits, the increase would be less than 20 percent.

By comparison, productivity has risen by more than 60 percent, even after making adjustments for technical factors like differences in deflators and net versus gross measures of output. This means that the upward redistribution over this period has reduced wage growth by more than 40 percentage points. In short, our children are 40 percent poorer than they would otherwise be because of the money going to people like Bill Gates and Mark Zuckerberg rather than ordinary workers.

So by very conservative estimates, a typical person in their twenties or thirties has seen their income reduced by more than 40 percent because of all the money redistributed to those at the top. However, the generational warriors want young people to be upset about the possibility that a bit more than one-tenth of this amount could be used to pay for their parents’ and their own Social Security and Medicare. (This upward redistribution is also responsible for about half of the projected shortfall in Social Security, as more income going to profits and high-income workers escapes the Social Security tax.)


We spent over $450 billion on prescription drugs in 2017. Without government-granted patent monopolies we would probably have spent less than $80 billion. The difference of $370 billion is equal to an increase of a 5.0 percentage point increase in the Social Security payroll tax. But the generational warriors don’t want anyone talking about how much money our children to pay drug companies with government-granted patent monopolies.

In fact, the generational warriors have directly cost our children more than 10 percent of their paychecks with their harebrained fiscal policies. They insisted on a smaller stimulus and austerity following the collapse of the housing bubble in 2007 to 2009. This slowed the recovery, reducing both employment and investment, leaving the economy permanently poorer.

Dean Baker on Tax Cuts

This segment on The Real News Network covers the Trump regime’s absurd tax proposals that would benefit the richest people in the country at the expense of most of the population.

httpswww.cbpp.orgblogdespite-presidents-promise-emerging-details-point-to-large-tax-cut-for-wealthiest (2)

What is your response to these two things, two reductions, the corporate tax rate and the pass through business tax?

Dean Baker: These are likely to be big tax breaks for high-end individuals. The corporate tax rate, they have justified lowering the tax rate by saying that we have among the highest in the world, which is true, the statutory rate. In terms of what we actually collected, it was somewhere around 22% of corporate profits, which put us right around the middle of the pack.

Now, if we make the statutory rate 20%, presumably they’ll get rid of some deductions but surely the statutory rate will fall two, three, four percentage points below that, which means we’ll be collecting substantially less money in corporate income tax.

Now, one of the important deductions is for interest. Here is one of the bizarre things. They say, “Oh, we’re going to limit the corporate interest deduction,” but it doesn’t say how. That, in principle, would be a very good thing if they sharply limited it, but they didn’t care enough to put in a rate.

Now, the pass through corporation, this is potentially a huge bonanza for very wealthy people, I should point out, including Donald Trump who has most of his businesses as pass-through corporations. What a pass-through corporation means, it pays zero tax. The corporation itself pays zero tax. It goes back to the individual and where that individual is a very wealthy person, like Donald trump, they’d be paying tax at the high individual income tax rate or higher, which in his case, say this goes through, that’s 35%. Instead, he’ll just pay 25%, and what that means is you give people a very big incentive to become corporations to have their doctors, lawyers, other professionals will have most, or all their income as corporate pass through and they’ll just pay a 25% tax rate.

Here, too, we get a magic asterisk. They say they’re going to have the IRS police this to make sure it’s not abused. Well, the republicans have spent two decades weakening the IRS’s enforcement power. This would be extremely difficult thing to enforce, even if you had a very effective IRS, which they’ve done a lot to make sure we do not have.

Gregory Wilpert: Then, another related aspect is the whole thing about the repatriation of corporate taxes. It’s estimated that something around $700 to $800 billion are being held offshore by U.S. companies because their corporate tax is made abroad. They’re keeping them there, so they don’t have to pay the corporate taxes. Trump wants to provide a tax incentive, basically a lower tax rate for temporarily, so they repatriate their profits. What do you think of that plan?

Dean Baker: Let me clarify that. He’s talking about actually making that permanent. We would switch to a territorial tax system, so that they would never have to pay taxes on foreign profits. This is a big bonanza. You have a lot of companies, maybe the most successful companies in the country that declare a lot of profits overseas precisely so that they don’t have to pay taxes here, and at least as an accounting convention they keep the profits over there in many cases, The Wall Street Journal did a piece on this a few years back. The money is literally here in the United States. It’s kept in banks in the Unites States, but at least as an accounting matter, it’s still with their Irish subsidiary, or Cayman Island, or wherever they’re booking it, so they don’t have to pay taxes on it.


Dean Baker: The alternative minimum tax was a catch-all. Basically it says no matter how many games you played that at the end of the day, you still had to pay, I think it was set at 20%. It only applied to a relatively small number of people. Donald Trump, actually ended up the one tax return that was released, or leaked out 2005, he paid the alternative minimum tax because he had enough deductions of different sorts, he would have paid less, so he still had to pay the 20% alternative minimum tax.

I don’t see a good reason for eliminating that. It applies to a very small number of people. Basically by definition, they’re wealthy because there’s a very big floor to it. Unless you’re earning a lot of money, you don’t have to worry about it. Again, unless you’re playing a lot of games, it’s moot. I don’t really see a downside to it. I don’t see anything whatsoever gained by eliminating the alternative minimum tax.

The estate tax, this too, applies only to very wealthy people. People are allowed to exempt 4 million per a person, so a married couple could pass on $8 million totally tax free. It applies to, I think it was two-tenths of 1% of estates. A very tiny number and I just don’t see a good argument as to why we shouldn’t be taxing these people. We’re going to get the money from lower income people instead? I really don’t see a downside to the estate tax, and it’s just unfortunate if we give up that revenue.

Gregory Wilpert: As I mentioned, one of the main Republican arguments, of course, in favor of lowering taxes more generally and it’s an argument that’s been around since President Reagan, is that lower taxes for both corporations and households would mean more money for spending and for reinvestment and therefore more economic growth and, of course, that this would pay for itself. What’s your response to that relatively old argument?

Dean Baker: This is one of the rare cases where we actually had the opportunity to test it. Economists, we can come up with all sorts of theories and we try to find a way to, what looks like that. In this case, we actually did it. They did it under Reagan, they did it under George W. Bush. There’s basically, zero evidence that led to any increase in growth. The growth was okay in the 80s, was not particularly strong, growth was very weak after the tax cuts that Bush put in place in 2001 and 2002. I wouldn’t necessarily blame the tax cuts for the weak growth but you’re pretty hard pressed to argue the opposite that somehow we had very strong growth but something happened and that prevented us from having good growth.

The one thing I will say for reducing complications in the systems, loopholes, basically, that is a way. That’s why I have, actually been sympathetic to the idea of lowering the corporate tax rate coupled with reducing the deductions, because the tax avoidance system is a major source of inequality. You have a lot of people on Wall Street who come up with clever tax avoidance schemes and they get very rich that way. I can’t see any reason we want people to get rich designing tax avoidance schemes. We could argue how much money we should make from designing a good product or whatever, but I can’t see any rationale for saying, “Oh, we want people to get real rich ’cause they’re clever at avoiding income taxes.” I think there’s something to be said for that, but it’s not clear how much we’re doing to combat tax avoidance with this reform plan.