Quick Hits: Wednesday, August 31st

The LA Times describes how public-private partnerships have helped keep California state parks operating in a time of tight budgets.

Richard Epstein of the Hoover Institution argues that price controls have led to shortages of cancer drugs.

Brad Plumer at the Washington Post discusses how a pre-paid, “rainy-day” government fund for disaster relief could benefit us as natural disasters become increasingly expensive.

The Heritage Foundation’s Hans Von Spakovsky examines the controversy over new voter-identification laws in several states.

New Orleans Six Years Later

“Greater New Orleans continues to recover and in some ways is rebuilding ‘better than before’ with emerging signs of a healthier economy, better social outcomes, and improved schools and basic services.” –  From “The New Orleans Index At Six”

This week marks the sixth anniversary of Hurricane Katrina’s devastation in New Orleans and the Gulf Coast region. A new book from the Brookings Institution and a report from their partner, the Greater New Orleans Community Data Center, explore how far New Orleans and the Gulf region have come since the disaster and the challenges these areas still face.

Before the hurricane struck in 2005, New Orleans struggled with high crime and poverty; a sluggish economy; dysfunctional education, healthcare, and criminal justice systems; and racial and economic inequality. Though the city still wrestles with these and other problems, Brookings expert Amy Liu argues that the utter destruction wreaked by Katrina created a blank slate upon which a great deal of systemic change could be enacted.

Since Katrina, New Orleans has made significant gains in the following areas:

  • A strong educational reform and charter school movement has taken hold, test scores have improved, and a greater share of students are now at schools that meet state standards.
  • Violent and property crime have fallen, though violent crime rates are still higher than the national average.
  • Reforms have made the criminal justice and healthcare systems more equitable.
  • Entrepreneurship has boomed and the rate of new business development is much higher.
  • The gap has been narrowing between the median income and average annual wages in New Orleans and the national averages for these figures.
  • Ethics reforms have reduced government corruption.
  • A better disaster-response plan has been developed that addresses many of the evacuation failures that occurred during Katrina.

Three key factors made these developments possible:

  1. Residents used the holes left by the disaster as opportunities, building high levels of citizen engagement and develop an “informed and sophisticated network” of community-based organizations.
  2. Local efforts were backed by government and philanthropic recovery funding, the assistance of national experts, and support from federal agencies such as HHS, DOJ, and HUD.
  3. The ongoing rebuilding efforts buffered the local economy from the worst of the recession. The rate of job loss in New Orleans has been one-fourth that of the nation as a whole.

Although much progress has been made, challenges remain. Some of the most critical:

  • Environmental issues that contributed to the disaster, such as the degradation of local wetlands, have yet to be addressed.
  • Though it has been diversifying, the regional economy still relies heavily on industries that are shrinking – oil and gas, shipping, and tourism.
  • Significant racial disparities in income still exist and while white incomes increased over the past decade, black and Hispanic incomes fell.
  • Housing costs jumped after Katrina and remain high.
  • A great deal of rebuilding remains to be done and some neighborhoods are still damaged and vacant.
  • Much of the progress was built on recovery funds that won’t be around forever, so reformers will have to find new sources of money.

These reports suggest that, though work remains to be done, the people of New Orleans have used the tragedy of Hurricane Katrina as an opportunity to bring much-needed change to their city.

Resilience and Opportunity Lessons from the U.S. Gulf Coast after Katrina and Rita (book)
Brookings Institution Press // Edited by Amy Liu, Roland V. Anglin, Richard M. Mizelle Jr., Allison Plyer // 2011

The New Orleans Index at Six
Greater New Orleans Community Data Center // Allison Plyer, Elaine Ortiz // August 2011

Wealth, Taxes, and Warren Buffett

Guess what share of his income the third richest person in America paid in federal taxes last year? 45%? Maybe 38%? It has to be at least 25%, right? Actually, Warren Buffett paid 17.4%, a lower tax rate than any of the twenty other people working in his office, who paid an average of 36%. Interestingly, Buffett isn’t happy about his low tax bill. Two weeks ago he wrote an attention-grabbing op-ed in the New York Times asking Congress to please tax him and other super-rich folks more.

So, just how does it happen that Warren Buffett pays a lower tax rate than his coworkers? It has a lot to do with how different types of taxes are structured.

  1. The super-rich make most of their income from earnings on investments, rather than wages paid for work (which is where the average, non-retired person makes most of her money). People who “make money with money,” as Buffett puts it, see much of their income taxed at the capital gains rate of 15%, rather than the highest personal income tax rate of 35%.
  2. People who earn more pay a smaller portion of their income in payroll taxes (the taxes designated for Social Security, Medicare, and unemployment), since Social Security taxes are only paid on income up to $107,000.

According to the Urban-Brookings Tax Policy Center, Buffett’s point about the discrepancy between the tax rates on investment income and wage income is a valid and important one. However, most high-earners pay a higher tax rate than Buffett’s 17% and most low- and middle-earners pay a lower rate than the 36% Buffett’s colleagues pay. For Buffett to imply that all, or even most, wealthy people pay a lower tax rate than low- and middle-income people is inaccurate.

The thing is, Buffett’s argument doesn’t really apply to your run-of-the-mill millionaires making $1 or $2 million a year. A lot of those people still earn most of their income from wages so they end up paying higher tax rates than someone making, say, $50,000. It’s the super-rich investors like Buffett who get the low tax rates. The average federal tax rate for the top 400 taxpayers is around 18%, which is significantly lower than the rate for someone making, for example, $180,000 or $1 million. The graph at left, from the excellent blog Visualizing Economics, shows just how far the average tax rate for the top 400 taxpayers has dropped  in the past two decades.

Another thing Buffett has been criticized for is not mentioning the corporate income tax in his article. Corporations pay taxes too, at a rate of about 35%, but since corporations aren’t people the burden of these taxes gets passed on to actual humans – to investors in the form of lower returns on their investments or to workers in the form of lower wages. Buffett’s true net tax rate, some argue, is 17.4% plus whatever share of corporate taxes fall on investors. The problem is, economists can’t agree on who, investors or workers, bears what share of the corporate tax burden. Given this disagreement, perhaps Buffett was right to leave it out of his argument.

Beneath all this is the question of fairness and how much every group should ideally contribute. For more on this, see one of my older posts here.

Stop Coddling The Super-Rich
Warren E. Buffett // NY Times // August 14, 2011

Was Buffett Right? Do Workers Pay More Tax than Their Bosses?
Tax Policy Center // Roberton Williams // August 23, 2011

Quick Hits: Monday, August 30th

Chris Edwards of the Cato Foundation discusses some of the negative consequences of government infrastructure projects.

Michael Mussa of the Peterson Institute dissects what kind of growth rate we can realistically expect for the U.S. economy in the near future.

The American Enterprise Institute explains how competitive bidding could save Medicare money.

At the Urban Institute’s Metrotrends blog, Margery Turner outlines on how we can reduce neighborhood segregation along racial and ethnic lines

Infographics of the Week: An Increasingly Diverse America and What It Means for the GOP

Almost half of all births in the U.S. are of children from racial and ethnic minority groups, according to a Brookings Institution analysis of 2010 Census data. This milestone is part of a demographic shift that has been happening for decades, as each successive generation of Americans becomes increasingly diverse (see the graph below). The trend results from variations in immigration patterns, fertility rates, and age distributions across different racial and ethnic groups.

Source: Brookings Institution, 2011

What I find most interesting about this analysis is a map Brookings created that shows which counties have the highest percentage of non-white births. You can see a band of high concentrations running along the bottom of the mainland U.S., particularly in the Southwest.

Source: Brookings Institution, 2011

This cool video, which illustrates how the population of people of color will grow between 1990 and 2040, shows the same geographic trend: the epicenter of America’s increasing diversity is the South and, particularly, the Southwest.

So what does this mean for national politics? Take a look at the Brookings map above and focus on the South, traditionally a key GOP stronghold. See the blue (which indicates high levels of diversity) along the western edge of Texas and winding through Mississippi, Alabama, Georgia, and South Carolina? Now look at the map below, which shows the 2008 presidential election results by county. You see the same blue areas (indicating votes for Obama) on the western border of Texas and winding through those four Deep South states.

Source: Los Angeles Times, 2008

As long as the GOP continues to be the party of, by, and for white people, it is fighting a losing demographic battle, because many of the states it has traditionally relied on winning are quickly becoming less white. North Carolina and Virginia went Democratic in the last presidential election for the first time in 32 and 44 years, respectively. Could someplace like Georgia be next?

America Reaches Its Demographic Tipping Point
Brookings Institution // William H. Frey // August 26, 2011

Holes In The Safety Net: Welfare During The Recession

Yesterday I wrote about the landmark 1996 welfare reform and its impact over the past 15 years. The reform instituted work requirements and time limits on welfare receipt and changed the way the program was administered. While the new model (TANF) led to some early successes, these have been wiped away by the economic downturn and, perhaps more troubling, the program has proven ill-equipped to buffer families from the harsh impact of the recession.

TANF has responded weakly to the increased need brought on by the recession. From the start of the recession in 2007 through 2010, the national unemployment rate increased by 88% but TANF caseloads grew only 14%. Food stamps (SNAP) caseloads, in comparison, increased 60% over roughly the same time period. Of course, not all unemployed people need the cash assistance TANF offers – they may have their own savings to draw on and/or be receiving unemployment benefits. But in one in four states, TANF caseloads have actually decreased since the recession began, a counterintuitive and harmful trend.

Why hasn’t TANF played a greater role in helping people weather the recession? The authors of a new report from the Urban Institute suggest that the ’96 reform may have a lot to do with it. Here’s how:

  1. Welfare reform made it much harder to get benefits. Meeting work requirements is difficult when there are no jobs to be had, and some families may have already exhausted their lifetime benefits eligibility of five years.
  2. Welfare reform changed the funding structure of the program to a fixed block grant whose real value (adjusted for inflation) has declined 28% in the past fifteen years. Because federal TANF funding does not change from year to year in response to need or economic conditions,** benefit levels are low and caseloads must be limited.
  3. Welfare reform gave states significant freedom in determining how to administer the program and set eligibility requirements, and individual states have exercised this discretion very differently. For example, the share of families living below the poverty line who receive TANF ranges from 8% in Texas to 80% in California. During the recession, some states have significantly increased TANF coverage while others have cut their caseloads.
  4. Welfare reform gave states greater flexibility to spend TANF money on items other than cash assistance, such as job development, childcare, and other poverty-reduction measures. While these measures can help create and support jobs, they do not offer immediate assistance to families in crisis. Currently only 39% of TANF funding is spent on direct cash assistance, compared to 73% in 1997.

While the intent of the ’96 welfare reform – to encourage employment and reduce dependence on government assistance – may have worked well during the strong economy of the late 90s, it reduced the ability of the program to provide a robust response in times of economic crisis. How might Congress make welfare a better tool for helping people weather future recessions?

  • Allow welfare recipients the flexibility to participate in job training and education instead of work when jobs aren’t available.
  • Expand TANF funding in times of need and increase funding each year to keep pace with inflation.
  • Provide increased oversight of state welfare policies to ensure states aren’t making harsh cuts when individuals need welfare the most.

What Role is Welfare Playing in this Period of High Unemployment?
Urban Institute // Sheila R. Zedlewski, Pamela J. Loprest, Erika Huber // August 17, 2011

“A safety net built around work – when there is no work”, The Hill
MDRC // Gordon Berlin // August 22, 2011

**While the stimulus created a $5 billion TANF emergency fund, it was exhausted within a year and has not been renewed.

A State’s Guide To Surviving The Recession

Why have some states, like Texas and North Dakota, weathered the recession much better than others, like Arizona and Florida? According to new report from Goldman Sachs (not available online but summarized here and here), three key factors protected certain states from the worst of the recession:

  • energy resources or industries, particularly oil and natural gas
  • technology and high-end professional industries
  • fewer subprime mortgages during the housing bubble

These three factors explain nearly three-fourths of the difference in job performance among states since the recession began.

What didn’t matter? States’ tax and spending policies. Goldman’s research found that the  size of a state’s spending and its income and property tax rates had no relationship with that state’s job picture. Whether other government activities, like regulatory structures or investment in job development programs matter wasn’t covered in any descriptions of the report I read.

These findings should give pause to those who argue that tax and spending policies, in and of themselves, are responsible for recent job trends at the state level. Two recent examples of this line of thinking: (1) the Rick Perry campaign’s claim that miracle job growth in Texas is due in part to tax cuts and spending reductions (2) the Heritage Foundation’s suggestion that poor job growth Illinois is due to its plan to increase tax rates. The Goldman report suggests that focusing on strengthening the housing and mortgage markets and cultivating key industries may be more valuable for states than tinkering with taxes and spending.

Quick Hits: Thursday, August 25th

The Council on Foreign Relations has an interview with Noble Prize winning economist and Hoover Institution fellow A. Michael Spence about the debt crisis and the impact of the recent U.S. credit downgrade.

George L. Kelling of the Manhattan Institute outlines what the British could learn from American policing.

The Economic Policy Institute discusses the problems with the J-1 visa system, which opens foreign students and other guestworkers up to abuse at the hands of employers.

The Heritage Foundation catalogs the benefits of marriage to health and well-being.

The American Enterprise Institute argues that privately operated buses are more efficient and cheaper than publicly funded high speed rail.

Welfare Reform At 15

Monday marked the fifteenth anniversary of the landmark 1996 welfare reform, passed with support from both the Republican “Contract with America” Congress and President Bill Clinton. Experts and journalists have been weighing in this week on the reform’s successes and failures, particularly during the current recession.

The basic political belief driving the ’96 reform was that giving low-income people money is counterproductive because it encourages dependence on the government and reduces recipients’ incentives to work. The solution? Require welfare recipients to work (or participate in job training/job development) and place limits on how long they can collect benefits. Just as important as the reform’s stricter requirements for welfare receipt were its changes to the structure of the program. While the previous program, AFDC, was an open-ended entitlement with no funding cap, its replacement, TANF, receives an annual block grant of $16.6 billion in federal funding, an amount that hasn’t changed in 15 years. The ’96 reform also gave states more flexibility in how they administer the program.

Impact of the Reform

TANF has indisputably succeeded at one of its goals: cutting the welfare rolls. Welfare caseloads have declined 60% since 1996, even though the number of families in poverty has been increasing since 2000. While conservatives may laud the reduction in welfare cases, it doesn’t mean that fewer people are poor, just that fewer of them are accessing benefits. In 1996, 68% of families living in poverty were receiving welfare, while in 2009, the figure was just 27%.

Expert opinion on the success of welfare reform in actually reducing poverty is mixed: most agree there was a significant impact in the first few years but many argue that these early gains were almost entirely undone in the past decade.

Ron Haskins, an architect of the legislation now at the Brookings Institution claims it has “been quite successful.” He points to increased employment among women with low-education levels and reductions in child poverty in the first five years after the reform. But many claim these early gains were a product of the booming economy of the late ‘90s more than welfare reform. As LaDonna Pavetti at the Center for Budget and Policy Priorities shows in the graph below, the employment gains among women have steadily disappeared since 2000.

On the poverty front, the percentages of children (20.7%) and families (12.5%) living in poverty in 2009 were almost exactly the same as in 1996 (20.5% and 12.2% respectively). The rates were, however, lower before the current recession began. In 2007 they were 18.0% for children and 10.8% for families, better than in 1996 but not as good as 2000.

The Heritage Foundation, who played a significant ideological role in shaping the ’96 legislation, offers an interesting take on the reform’s success. They claim the spirit of the reform – discouraging dependency and encouraging work – is no longer being implemented and that’s why it hasn’t worked, though they don’t offer much concrete proof of this perspective.

To me, the evidence suggests that during the strong economy of the late 1990s, stricter eligibility requirements and more flexibility in program administration helped encourage some poor people to work and lifted some families out of poverty. But a good part of these gains were undone when the economy slowed and jobs became scarcer in the 2000s. And when the economy collapsed in late 2007, not only were previous gains lost, but the new welfare model was ill-equipped to help families who were struggling in the recession.

I’ll have a post tomorrow on this last point, exploring how welfare has (or hasn’t) worked during the current recession.

TANF at 15: A Weak Safety Net Getting Weaker
TANF at 15, Part I: How Well Does It Provide Income Support for Poor Families?
TANF at 15, Part II:  How Have States Spent Their TANF Dollars?
Center on Budget and Policy Priorities // LaDonna Pavetti // August 19 – 24, 2011

The 15-Year Anniversary of Welfare Reform (video)
Brookings Institution // Ron Haskins // August 22, 2011

The Economic Misery Continues in 2011

Economic think tank the Peterson Institute tracks a measure they call the “augmented misery index” that combines inflation, unemployment, and housing prices to provide a sense of just how awful our economy is doing. A higher score on the index indicates high inflation, high unemployment, and low housing prices.

Source: Peterson Institute, 2011.

Last week they released a revised score for the first six months of this year and it wasn’t pretty. The economy in the first half of 2011 wasn’t quite as bad as during the worst of the recession in 2008 and 2009, but it was worse than it’s been since the mid-2009. And things have only declined since the end of June – the debt downgrade, stock market turmoil, and little good news on jobs.

The authors offer predictions for the rest of 2011: lower inflation, but continued slow economic growth and thus little reduction in the unemployment rate. The augmented misery index will drop but nowhere near pre-Recession levels. All of this does not, they conclude, look good for President Obama’s reelection prospects. No president since FDR has been reelected when unemployment was over 7.2% (it averaged 9.0% in the first half of 2011).

What Does the Augmented Misery Index Say about President Obama’s Election Prospects?
Peterson Institute // Gary Clyde Hufbauer & Julia Muir // August 16th, 2011