Innumeracy and Generosity – Don’t be deceived by big numbers

Just a quick note here.  Lots of people today, especially the media, are making a big deal out of Jeff Bezos and his wife’s donation of $33 million for a scholarship fund for DACA Dreamers. For example there’s this CNN article.  Lots of tweets. It’s a nice gesture. It’s definitely a worthy cause – although worthy causes are legion.

My problem is with the intimation that this is somehow a noble sacrifice. The problem here is common in economics data. We get lost in big numbers and get fooled.  $33 million sounds like a lot. To over 99.9% of Americans, it’s a number we can’t really fathom. It sounds like so much money.  Let’s take a closer look. Bezos household net worth – the value of his personally owned assets minus their debt – is estimated at $105 billon (Bloomberg) or $104 billion (Forbes) (source: Google on Jan 13, 2018 ).  That’s billion with a B. Bezos is 54 years old.

The median household net worth for Americans in his age bracket was $100,404 according to the most recent data for 2013/2014 from Census Survey of Income.  The median means there are as many households with more assets as there are with less assets. It’s the middle observation. It’s typical.

So Bezos has pretty close to a million-times larger net worth than the typical household for somebody of his age. He and his wife sacrificed $33 million of their assets to make this donation. On a strict linear scale, that’s the equivalent of the typical household for his age bracket donating $33.  Yep, that’s all. $33.

Bezos’ sacrifice is the equivalent of an ordinary, typical 54-year old giving $33. Actually, it’s less of a sacrifice. Economics teaches us about diminishing marginal utility of income or money. Basically, when you’re rich each additional dollar of income or asset is much less valuable to you than if you’re poor. To a poor person, the $33 means eating or healthcare. When you’re really rich, it’s just another digit you’ll round-off on your financial statement.

I laud the Bezos family for making a donation. It’s a good thing to do. But let’s not make it out to be more noble than it is.  The bottom 20% of households in that age bracket have zero or negative net worth. The single mother with no assets that stuffs a twenty in the Salvation Army bucket at Christmas makes a lot bigger personal sacrifice.

Data and Visualization Resources for Incomes and Inequality

Posting links to two incredibly useful resources for students and people doing research on incomes, income distribution, and income inequality. These resources are useful for both historical data and visualizations as well as cross-country comparisons.

The first is the World Top Incomes Database from the Paris School of Economics. Many thanks to the Paris School and researchers Facundo Alvaredo, Tony Atkinson, Thomas Piketty and Emmanuel Saez. It’s a a tremendous resource.

The second is a tremendous resource also. It’s Our World In Data. It’s a work in progress project by Max Roser,   but it’s already jam packed with great data and visualizations on incomes, health, war and violence, poverty, and food and hunger. And best of all, it’s all CC-BY-SA licensed.  I love it when collaboration and the commons come together to support learning.

Busting the Medicare Myths – Presentation

I gave a presentation today to the Michigan Intergenerational Network at Madonna University on the economic prospects of Medicare (U.S.). Thanks to the Madonna Univ. Gerontology Department for support and assistance.

For a downloadable and viewable copy of the presentation, see:

Understanding The Social Security Trust Fund – It’s More A Checking Account and Less of A Trust Fund

Now that the Republican-Democratic budgetary battle that shut down much of the U.S. government earlier this month has been resolved  delayed for 3 months.  Once again the hope of the politicians from both sides is to achieve some kind of “grand bargain” on the budget that continues to reduce the federal budget deficit.  Now the expectations are only for maybe a two-year deal instead of the ten-year deal the President sought in 2011.  But regardless of the length of the deal, the renewed negotiations have put Social Security, and with it, the economic well-being of seniors at risk.  For example, Senater Dick Durbin, an alleged Democrat, has offered up cuts in Social Security claiming:

“Social Security is gonna run out of money in 20 years,” Durbin said. “The Baby Boom generation is gonna blow away our future. We don’t wanna see that happen.”

It is most unfortunate that Senator Durbin, along with many of his colleagues, continue to repeat what is utter nonsense.  They endanger not only the well-being of seniors in the U.S. but all of us. For many years enemies of Social Security and the Wall Street banks that lust to have siphon fees from the hundreds of billions of dollars that currently flow efficiently through the Social Security Administration have propagated the idea that Social Security is going bankrupt – that it won’t be here in 20 years.

Much of the problem comes from people only having a superficial understanding of how Social Security (or any other intergenerational transfer program) works.  Combine a superficial understanding with misunderstood and ill-defined terms and scary but shallow projections of demographics and you get fear and hysteria – exactly what the enemies of Social Security want.  There are many aspects that I could talk about, but the most misunderstood aspect of Social Security is the Trust Fund, so I’ll focus this post on explaining the Trust Fund.

The Social Security Trust Fund is, in fact, actually two separate trust funds, each with its own share of the payroll tax and its own purpose. One fund is involved in the old age and survivors benefits and the other for disability insurance.  Nonetheless, I will lump them together since that’s what most commentators do.  The root of confusion and deception lies in the names of the funds.  They’re called “trust funds”.  And since the largest fund is used in the payment of old age insurance payments, which most folks liken to pensions, they tend to assume that the SS funds work like a private, personal trust fund.  After all, we know about people called “trust fund babies”  – they’re people who live off the interest and dividends of some big pile of money that somebody (usually parents) left them.  We also know that private savings for retirement works in a similar fashion except that we put the money away ourselves during working age and then deplete the account when we’re older – and often retirement accounts are established in some sort of “trust” account.

The people who argue we need to cut Social Security benefits usually claim it is because we are going to deplete the Social Security Trust Fund at some date a couple decades into the future.  They claim that Social Security itself will be bankrupt when that happens.  This is absolutely not true and it plays on a misunderstanding of what the SS Trust Fund is, what it does, and why it exists.

The Social Security Trust Funds are not what enables benefits to be paid.  Current payroll taxes are what enable benefits to be paid, not Trust Fund balances.  Social Security is an intergenerational transfer system.  Each month workers, people who are most likely aged 18-65, and their employers pay a payroll tax.  Then that same month, the money collected is paid out to Social Security beneficiaries.  .  Under current conditions, the payroll tax amounts to a 6.2% tax on worker earnings up to $113,700.  The employer pays a matching amount.  Earnings over $113,700 are payroll tax-free. As long as people are working and getting paid, there are payroll taxes being collected and money available to pay benefits – even if the Trust Fund were zero.  The Trust Fund isn’t really necessary to the basic functioning of Social Security.  This is why Social Security can never go bankrupt and unable to pay benefits.  For Social Security to be unable to pay any benefits, the U.S. would have to have nobody working – zero employment.  If we ever get to the point where there is nobody working in the economy, we have much greater problems on our hands than Social Security – problems like no food to eat.

Social Security Receipts and Benefit Payments by MONTH.So if the Trust Fund isn’t what is funding benefit payments – what is it?  The way to think about the SS Trust Fund is to think of it as a checking account.  This graph which shows the the income (payroll taxes collected) and the outgo (benefit payments) by month illustrates the problem and why the Trust Fund exists.  See how erratic and variable the income is.  This is because it’s a payroll tax and payrolls (employment) varies enormously from month-to-month.  In November and December we employ a lot of people and pay them something extra – it’s called Christmas and bonus season.  In January and February employment drops.  So the income received by the SS Administration varies greatly too.  But this income is used to pay benefits.  But we want benefits to be relatively constant.  Grandma and grandpa should expect the payment each month.  We don’t want to have tell all our senior citizens in January  “hey sorry, but the check’s a little short this month, we’ll make it up next December”.  So what to do when the income is both variable and a bit uncertain but the payments need to be relatively constant and fixed?  The answer is to do the same thing any private individual facing an uncertain and variable income but constant outgo:  keep a nice buffer balance in the checking account.  That’s what the Trust Fund was created for – to keep a buffer balance so that monthly payments can be held constant against variable and unpredictable income.

By law, the law creating the system, Social Security cannot use general funds of the government.  It can only use the payroll taxes it collects for Social Security.  And vice versa.  Social Security payroll taxes cannot be used for other government purposes (although George W. Bush once proposed doing that).  Also by the same law, the buffer balance- the trust fund balance – is supposed to always be at a minimum of 100% of projected one year’s benefit payments.   Today, the SS Trust Fund balance is approximately 350% of each year’s benefits and it’s growing.

Why is the Trust Fund so much bigger than it is (was) supposed to be originally?  Because in the early 1980’s it wasn’t so big.  In the 1970’s Congress increased Social Security benefits by indexing them to inflation (a good move), but they didn’t increase the payroll tax enough to pay for it.  The moment of truth came in the early 1980’s when the Social Security had to dip into the Trust Fund to help pay some of the current benefits.  The Trust Fund then stood at less than the legally-mandated 100% of projected benefits.  A commission was appointed by President Reagan and Congress to develop a solution.  The resulting deal increased the payroll tax from the then 5.4% gradually until in 1990 it stood at the present 6.3%.  By the early-mid 1990’s, the Social Security Trust Funds were well-replenished and beginning to significantly exceed the 100% of benefits level.  Yet the payroll tax was kept at the 6.2% level ever since even though it has generated a significant surplus every year.  Every year since, the Trust Fund has grown as payroll taxes collected have significantly exceeded benefits paid.

Since the mid-1990’s Social Security has, in effect, been over-taxing workers compared to what was needed to pay current benefits. One option in the 1990’s would have been to cut the payroll tax slightly – perhaps not back to the 5.4% level but maybe to 5.9%.  But the decision was made to keep “over-taxing” so as to deliberately build up the Trust Funds to extremely high levels in anticipation of an eventual wave of baby boom retirements.  That has happened. As mentioned above, today’s Trust Fund includes both the 100% of benefits buffer balance and another 2.5 years worth of benefits.  The additional money will be drawn down to help pay for baby boomer retirements.  Instead of bankrupting the Social Security system, the baby boomers are effectively the first and only generation to not only pay for their elders’ benefits but to also pre-pay a portion of their own benefits.  The baby boom generation may be faulted for man things but bankrupting Social Security is not one of them!

So what about all these scary projections of the Trust Fund depleting at some time in the future?  At the present, the Trust Fund continues to grow.  All projections about the future of Social Security are subject to some uncertainty and the farther out you project the more uncertain they become.  To project the precise future balances of Social Security funds, benefits, and taxes, we need to project and know with a high degree of certainty changes in the  following:  birth rates, death rates, changes in productivity and wages, labor force participation, retirement age preferences, and even immigration.  Nonetheless, the Trustees of the Social Security Administration take a stab at updating their projection of the future for the next 75 years. In fact, they make at least 3 projections: an optimistic, pessimistic, and most expected case.  In looking at recent expected case projections, the Trust Fund will continue to grow until somewhere around 2019.  Then the “wave” of baby boomer retirements combined with expected lower labor force participation will result in monthly benefits that exceed monthly taxes collected.  Withdrawals from the Trust Fund will make up the difference to pay the promised level of benefits.  Then, somewhere a decade or so later, the Trust Fund will be back down to it’s legally mandated minimum. Of course this is only once scenario.  If the optimistic scenario happens (slightly faster economic growth between now and then, more labor force participation, and more folks delaying retirement), then there is never a problem in the entire 75 year horizon.

But let’s suppose the expected case happens, at that point a choice must be made: Reduce the benefits paid below the promised level? Or increase the payroll tax?  Or, remove the earnings cap on the payroll tax so that high-income earners pay taxes on amounts above the $113,700 cap.  How much of a tax increase would be needed?  Approximately a 1% increase in the payroll tax would make the system totally solvent and ensure minimum balances in the Trust Fund for the entire 75 year horizon.  That’s not much really.  It’s easily doable and more important, we can delay the time to raise the tax until the mid-2020’s when we have a much clearer picture.

It’s very important to realize that Social Security is not going bankrupt.  Even if we refuse to raise the payroll tax in 2030 and even if the expected case happens and we have to cut benefits in early-mid 2030’s, we won’t have to eliminate the program.  Benefit payments will still happen.  They will simply have to scaled back.  How much?  We will still be able to pay 75-80% of what we are currently projecting the benefit payments to be at that time.  And our currently projected benefits for that time period are greater in real dollars than today’s benefits because people will be earning more money entitling them to larger benefits.

Social Security is not going bankrupt. It can’t.  It will be there for my current students when they age and retire, and it will be there for my students’ kids.  The only reason Social Security might not be here is because politicians surrender to an anti-Social Security ideology and the desires of Wall Street banks to get their hands on billions more.

For those interested, here are some good references for continued explanation on this topic:

No Social Security Is Not Going Bankrupt from Center on Policy and Budget Priorities

Five Huge Myths About Social Security from Daily Finance

Why Social Security Can’t Go Bankrupt from Forbes

Social Security Trustees Report 2013




Social Security Receipts and Benefit Payments by MONTH.

Taxes, Incentives, and Being Poor

Now Updated with proofreading!

Political debates about taxes and tax rates in the U.S. often focus on the rich and claims about the incentive effects of different tax rates. Rarely mentioned these days are the poor.  Indeed, the Republican demands in the last few years that tax rates should be cut  for the high-income rich are primarily about claims of incentive effects. And, no, high-income rich isn’t redundant; it’s precise.  There are at least two types of “rich”: High-income rich, which pay income taxes, and the high-asset, low income rich which pay much less. (I suppose there’s another type, the spiritually-rich, but that’s the domain of some other blog.) The claim is made that if tax rates are raised or raised too high, then that provides a disincentive to work and the rich will not work as much. It is often asserted that this is simple micro-economics–that people respond to incentives–and should be obvious.

There’s a problem with the claim, though.  Actually there are two problems. First, there’s very little empirical evidence of higher tax rates on the highest end, the rich, actually reducing their efforts to earn income.  Indeed, numerous studies (I don’t have time at the moment to look for citations) have found in “natural experiments” that the rich really don’t respond to higher tax rates by working less and earning less. Several studies have found that in situations where a large metropolis straddles two or more states, such as NYC, and different neighboring states changed their tax rates on the rich, the rich did not in fact do what they threatened or what would appear “rational”: move to the lower tax state in the same metro area.  There’s also substantial longitudinal evidence in the U.S. and other countries that shows when tax rates on the rich were a lot higher, such as in the 60’s and 70’s, effort and incomes were no less than in more recent times.

The other problem is the whole idea that the “rational” response to higher tax rates is to reduce one’s effort and income actually doesn’t hold microeconomic water.  It’s actually irrational to respond that way unless the marginal tax rate is truly so high that it approaches or exceeds 100%. The average tax rate, the percents you normally hear on TV, isn’t what affects incentives. Instead, it’s the marginal rate, or how much an extra dollar earned is taxed, that changes how we behave. Even then, a raising a marginal tax rate might reduce the incentive or attractiveness of additional effort and gross income, but won’t become a true dis-incentive until it becomes very, very high. An example:  Let’s suppose someone makes $1,000,000 a year and is taxed $400,000. Such a person is said to pay a 40% average tax rate or effective tax rate. But averages and effective rates tell us nothing about incentives.  Incentives deal with changes in behavior at the margins – the incremental changes.  If micro is clear about one thing and has been since the 1870’s, it’s that decisions and changes in behavior depend on changes in marginal costs and marginal benefits.  What matters is the taxes on the marginal, the incremental, change in income.  What matters is the marginal tax rate.  The only reliable way to figure the marginal tax rate is to compare two different amounts of income, preferably with only a small difference between them, the taxes paid and the after-tax-income that results.  What people work for is to get after-tax, spendable income.

So let’s continue the example.  Suppose the existing tax code, with all of its exemptions, deductions, rates, credits, etc, says that $1,000,000 income pays $400,000, but that $1,010,000 income pays $405,000 in taxes, then we have an increase in income of $10,000 of which $5,000 is used to pay the additional taxes. After-tax income rises from $600,000 to $605,000, leaving a net increase in after-tax income of $5,000. This means we have a marginal tax rate of 50%.  There be a disincentive effect only if opportunity cost (usually leisure) of the additional time/effort needed to generate the higher income is judged to be greater than the $5,000 increase in after-tax income.  Empirical evidence indicates that is not likely.  On the other hand, if the marginal tax rate were 100%, it would mean that $1,010,000 in income requires $410,000 in taxes. At a 100% marginal tax rate none of the additional effort results in more after-tax spendable income, so obviously it doesn’t make sense to exert the extra effort.

So what are the marginal tax rates for the highest brackets in the U.S.?  Even if all income comes from wages, the highest marginal rate is now around 38%.  Even if you include state or city income taxes, the marginal rates faced by the rich aren’t greater than 50% even in the most onerous tax-happy states. For the really rich, most income comes from capital gains and not wages.  Capital gains have a much lower marginal tax rate of close to 23-24% (including the 2013 Medicare tax on capital gains).  Evidence is pretty clear that such marginal rates do not provide a disincentive to additional work.

But, now I want to return to the poor.  We often assume that the poor don’t pay much in taxes.  That’s true in total  since they’re poor–there’s not much there to tax. But, marginal tax rates still exist. And they affect incentives.  In fact, it’s the working poor that face the most serious disincentives to work and earn income.  Our tax code is actually set up to make it rational for the poor to not try to earn more income!  As University of Southern Cal Professor Edward McCaffery notes on,

…some of the working poor face marginal tax rates “approaching 90% as they lose benefits attempting to better themselves.”

Readers were incredulous, asking how it could be that in a nation with a top federal income tax rate of 39.6% on individuals making more than $400,000 a year, anyone could face a 90% rate.

It is true. Marginal tax rates, especially for those below the top rate brackets, are chaotic, confusing, and all over the map.

As a result, some of the working poor face extremely high rates on their next dollar earned. Tax scholars and economists have long known this. Dan Shaviro of NYU published a study in 1999 showing marginal tax rates above 100% on the working poor; specifically, he illustrated that a single parent earning $10,000 would lose over $2,500, after taxes, by earning another $15,000, pushing her income to $25,000.

Obviously, this is a policy failure.  We want to support the working poor, but we want them to be able to increase their incomes, join the middle class, and leave dependency behind.  Yet the way most welfare and aid to working poor programs are structured, a working poor person can find themselves in a situation where working additional hours or getting a modest raise in wage will actually result in less after-tax spendable money.

The problem is even worse, as Professor McCaffery points out.  The tax code exerts a genuine disincentive to getting married or to staying married if you are among the working poor.  Yet, we know that stable marriages and two-income households are often the key to escaping poverty for both the present and next generations .

It’s appropriate to talk about the incentive effects of tax rates.  Incentive effects should be part of the thinking when writing the tax code, just as reasons for government revenue should be a part.  But when we talk about incentive effects of tax rates, we must focus on the marginal rates and we really should be talking about the poor.  Not the rich.

Student Debt + Stagnant Real Wages = Colleges Need to Focus On Student Success

Today’s post is an excerpt of something I wrote for another site.  This year, in addition to my teaching duties at the college, I’m leading a project to update our college strategic plan.  As part of that project I’m writing and editing a series of “briefing papers” (long blog posts, actually) about issues of strategic importance to the college’s future.  When those papers cover a topic that I think might be of interest to econproph readers I’ll cross-post them. Last week I wrote the following about the student debt explosion in the U.S., the stagnation in hourly wages for those for with less than college degrees/credentials, and the implications for those of us who work in higher education.  The full original post is here.

America has a student debt problem.

And it’s growing. According to the statistics assembled by the New York Federal Reserve Bank, theU.S. Dept. of Education, and other sources, total student loan debt outstanding is nearing $1 trillion, easily exceeding the $791 billion in total credit card debt.  As disturbing as the total might seem, the growth rate of student debt is even more distressing.  This graph, first published by The Atlantic last summer from NY Federal Reserve Bank statistics shows the relative growth  (not amounts) of outstanding student debt since 1999 compared to total household debt including mortgages. FromThe Atlantic:

The red line shows the cumulative growth in student loans since 1999. The blue line shows the growth of all other household debt except for student loans over the same period.

crazy student loans 2011-q2.png

This chart looks like a mistake, but it’s correct. Student loan debt has grown by 511% over this period. In the first quarter of 1999, just $90 billion in student loans were outstanding. As of the second quarter of 2011, that balance had ballooned to $550 billion.

The chart  is striking for another reason. See that blue line for all other debt but student loans? This wasn’t just any average period in history for household debt. This period included the inflation of a housing bubble so gigantic that it caused the financial sector to collapse and led to the worst recession since the Great Depression. But that other debt growth? It’s dwarfed by student loan growth.

Roots of the Problem

The student loan debt problem has many roots, most of which [colleges] cannot change or directly affect.  Causes of the explosion in student debt include:

  • A long-term shift in U.S. political opinion away from thinking of higher education as a public good with direct funding support from government toward thinking that students should pay for their own educations with loans guaranteed by the government.
  • Tuition and fee increases in higher education (particularly at 4 year schools and especially at private schools) have outpaced inflation for at least 3 decades, driven by cost increases, stagnant productivity, and reduced government direct funding.
  • Middle class real incomes have been largely stagnant or only modestly increasing for those same 3 decades, limiting the ability of families to pay dependent students’ tuitions.
  • The collapse of the housing price and mortgage bubble in 2006-07 which limited the ability of many middle- and working-class families to finance college education through home equity loans.
  • High unemployment rates since 2008 have limited the ability of students to work while in college and have also sent increased numbers of unemployed back to college.

 most community colleges can be a partial solution to the nation’s growing student loan burden.  After all, [community colleges are] one of the most cost-effective providers of the first 2 years of a college education.  Indeed, students can graduate with a bachelors’ degree with less total indebtedness if they take their first two years at community college and then transfer.

But the growing student loan problem when combined with another trend has even more significant implications the community college mission.

The Long Term Trend on Real Incomes – A Closing Middle Class

Long term trends in incomes in the U.S. including increasing income inequality have become a news headline topic in recent months.  …  Cumulative Growth in Hourly Wages, 1979-2009, by Level of EducationAs this graph from  the Congressional Budget Office (via Paul Krugman) shows, over the past 30 years the clear trend in hourly wages for workers with less than high school or only high school education has been negative. A high school graduate now earns 10% less per hour in inflation-adjusted dollars than they did 30 years ago.  Even workers who only have some college but haven’t completed a formal degree or credential are either negative or at best, even with 30 years ago.  The data in the graph is from 2009 and labor market conditions have not improved since then.  Indeed, most labor market economists, myself included, expect little to no improvement in wages or employment rates for many years to come.

So what does this mean?  It’s clear that for young and middle-aged people, the route to a rising income and participation in the middle class requires either a college credential or advanced degree.  Yes, anecdotal exceptions are always possible such as the stellar young person who becomes a big success in sports or entertainment. But the numbers are clear – for virtually all, membership in the middle class in the future requires succeeding at college not just attempting college.

Implications for LCC and It’s Mission

The mission of LCC and community colleges in general since they were created has been to provide access.  The great post-World War II expansion of community colleges in the U.S., of which LCC was a part, was based on the idea that broad, democratic access to higher education was important.  Community colleges provided access to college for millions who otherwise couldn’t attend, either because of costs, lack of family support, family/work obligations, location, lack of preparation, grades, or other circumstances.  Over time community colleges have expanded programs to help  increase access to even more individuals.  Indeed, this open-door, democratic access mission is a large part of the motivation for many who work at LCC.  Providing access is something we could feel good about.

But let’s consider how access has traditionally worked.  LCC, like most community colleges, has focused on providing the same basic instruction and learning that was available at 4 year institutions.  The difference was we had an open-door. We provided access.  We provided a chance at college and greater income and success in life. But it was always considered up to the student to succeed. The historical model is the college provides the student a chance at success. If they didn’t succeed that was their problem.  We measured our success by our enrolments as an indicator of the number of people to whom we had provided access.  Thirty years ago, if a student attempted college and didn’t succeed it didn’t carry the consequences it does today.  Thirty and forty years ago, a student who failed at college or simply didn’t complete could always get a job in a factory or a trade. They could still make a middle-class life despite not succeeding at college.

Now the trends tell a different outcome.  If a student doesn’t attempt college at all, they are likely not going to stay in the middle class at all and will likely experience declining real incomes.  The big change is if the student does attempt college but simply doesn’t succeed or complete, today their prospects for staying in the middle class are slim.  Successful completion of a college degree or credential has become a requirement now for a middle class future. It’s necessary for young people in particular to attempt and succeed at college now.

But now let’s add the student loan issue.  Suppose a person attempts college today but doesn’t succeed. Not only are they faced with the prospect of flat to declining real income, they have a significant burden – their student debt. Under current law there are really only two ways to discharge student debt – either pay it or die. Student loans cannot be discharged in bankruptcy. There’s no asset to sell or foreclose. So today’s student is facing a higher risk environment than their predecessors did in previous generations.  Instead of access to college being a chance at a better life, it’s now a high-risk necessity.  So it’s not just access; it’s success that matters.

The governments, both state and federal, are paying increasing attention to success rates.  As mentioned in the first briefing paper, state governments, including Michigan, are increasingly looking at funding for higher education in terms of how many successful credentials or degrees does it produce, not just how many seats in classes were offered.

Beyond what the government is requiring, the success issues pose a challenge to our understanding of our core mission and how we measure our institutional success. In today’s environment, providing access to large numbers of students without regard for their success is playing a cruel joke on them.  It’s teasing them with dreams of a future many of them won’t achieve and then punishing them with a burden of debt.  For those of us in the institution, that’s not the motivator that the original access mission was. We need to adjust our sense of the mission.  Yes, access is important, but it needs to be successful access.  Successful access as a mission changes many things.

It changes our most basic metric of institutional success. Instead of simply enrollment growth showing institutional success at providing access, we now need to consider whether that access was successful. …But measuring success and access are one thing. Improving them is another. The shift to successful access calls for many changes in the organization, it’s processes, systems, the curriculum, teaching methods, support services, and attitudes. It is not easy or simple. It is very challenging.

The Top 0.1% Vs. Rest of Us Throughout the 20th Century

Following up on yesterday’s post about the Global Top Incomes Database, I thought I’d give an example.  Here’s what I created:

So what are we looking at?  The blue line shows almost a century of the average income of the bottom 90% of American earners (in constant, real 2008 dollars – scale on right side).  This represents the typical American worker and the fate of the working/middle classes.  Basically it shows nine different trends or periods.

  • From 1917 until 1929, there was no improvement at all (actually a dip in the 1920-21 depression).  Despite all the talk about “roaring twenties”, it wasn’t for the average American worker.
  • 1929-1933, incomes really drop precipitously as the nation falls into the Great Depression.
  • 1933-1937, incomes begin to recover based on the government spending programs of the New Deal and correction of the banking/financial crises of 1932-33.  But the progress stumbles in 1938 as Roosevelt and Congress switch course and try to balance the budget before we’re back to full employment (are you listening Obama?).
  • 1938-1943 incomes really grow dramatically as the nation regains full employment and unions gain power.  The driver of the recovery is the near unlimited willingness to spend to arm for World War II and the demand for food and other items by warring allies.
  • 1944-1949, incomes stagnate again, partly as a result of demobilization of the war effort.
  • 1949-1973 brings the Golden Age. Real economic growth in the U.S. is the strongest it’s ever been and thanks to Keynesian government policies, a productivity-sharing social contract between managements and unions, and strong world demand, the workers get their share of it.  This is the period of fastest U.S. growth.
  • 1973-1993 brings twenty years of declining real incomes for most workers.  Part of it is driven by slower growth brought on by two oil price supply shocks.  Part is inflation (although only until the mid-80’s). Part is driven by a major political shift towards conservative free market policies (“Reaganomics”).  And part is driven by a weakening of unions and union membership.  The economy, while it grows, doesn’t grow near as fast as it did in the Golden Age.
  • 1994-2000 shows a slight recovery in incomes during the Clinton administration.
  • 2001 starts another decline and it’s been pretty much downhill ever since.  Note that the graph ends in 2008 (last available data), but other more recent data indicates the time series has continued to decline significantly.

So what can we conclude from the typical worker incomes, the blue line of average incomes for the bottom 90%,?  Well, yes, as some conservatives and libertarians have been pointing out, today’s incomes are historically high – around $32,000 per worker.  And consumption by household is even higher.  But consumption has risen despite incomes stagnating recently. It’s because many, many more households now depend on two workers for incomes.  Yes today’s incomes are dramatically higher compared to 76 years ago – roughly 6 times higher. But all of the increase happened in the first 38 years after 1932.  Today’s incomes per worker are actually lower than they were in 1973 – 38 years ago.

Now let’s consider the red line.  This shows the percentage share of the national income earned received by the top 0.1%, the top one tenth of one percent.  These are the really, really rich.  There are really only three periods here.  The period before the Great Depression.  Observe that it really was a roaring twenties for the really rich.  In the decade of 1920-1929 their share of national income rose from around 3.5% to over 6.5% – all while the average American worker stagnated. The game was rigged.  As the U.S. economy grew in total GDP terms in the 20’s and as productivity soared, the benefits of that improved productivity went to the rich, not to workers.  The rich lost ground in the Great Depression because the stock market crashed and the banking system imploded.

From 1936 until 1979, the share of income taken by the top 0.1% declines rather steadily and significantly.  Why?  A dominant factor is that income tax rates were rather progressive with high rates on the very high top end.  Now this simply means that the share declined – they took a slightly smaller slice of the pie each year.  But the pie was growing very, very fast, so in dollar terms their incomes were still rising too.  Do not take away the idea that the rich suffered income declines during this period.  On contrary, they did well in absolute terms.  They just didn’t do well at the expense of others.

But in 1979 the rich strike back.  Their share of income starts rising steadily until it reaches the same very high levels today that are reminiscent of the late 1920’s.  What happened?  Well the same forces that hurt the working/middle classes during the last 30+ years worked to the rich’s advantage.  But another important shift was changes in income tax policies.  Initially Carter, but then Reagan and Bush all cut tax rates for the top end.  Reagan did even more.  He eliminated several top end brackets.  This resulted in people in the top 0.1% (multi-millionaires) now paying the same rates as people making $250,000 per year.  That didn’t happen in the Golden Age.  Back then there were special brackets for the very, very rich top end.

So what can we conclude overall?  Well, for one thing, we should definitely bury any idea of “trickle-down” tax cuts helping average workers.  When the economy grew the fastest and typical workers did best was when tax rates on the rich were high.  When tax rates on the rich are lower, the economy grows more slowly and average worker incomes stagnate.  We might also conclude that the OccupyWallStreet movement (#OWS) has a point.  The system isn’t fair and it isn’t working for average workers.  This isn’t a call for socialism, it’s a call for the vibrant capitalism we had in the mid-20th century. That Golden Age of the middle of the 20th century is the only time when we really didn’t have “class warfare”.  We had a social contract that called for sharing the gains from improved productivity. But a little over 30 years ago the really rich declared war on the rest.  It’s class warfare and the middle class has been losing.