How Poverty Helps the Rest of Us

Ezra Klein of The New York Times writes about poverty and the American economy:

I’m not going to pretend that I know how to interpret the jobs and inflation data of the past few months. My view is that this is still an economy warped by the pandemic, and that the dynamics are so strange and so unstable that it will be some time before we know its true state. But the reaction to the early numbers and anecdotes has revealed something deeper and more constant in our politics.

The American economy runs on poverty, or at least the constant threat of it. Americans like their goods cheap and their services plentiful and the two of them, together, require a sprawling labor force willing to work tough jobs at crummy wages. On the right, the barest glimmer of worker power is treated as a policy emergency, and the whip of poverty, not the lure of higher wages, is the appropriate response.

Reports that low-wage employers were having trouble filling open jobs sent Republican policymakers into a tizzy and led at least 25 Republican governors — and one Democratic governor [the one in Louisiana] — to announce plans to cut off expanded unemployment benefits early. Chipotle said that it would increase prices by about 4 percent to cover the cost of higher wages, prompting the National Republican Congressional Committee to issue a blistering response: “Democrats’ socialist stimulus bill caused a labor shortage, and now burrito lovers everywhere are footing the bill.” The [right-wing] outlet The Federalist  complained, “Restaurants have had to bribe current and prospective workers with fatter paychecks to lure them off their backsides and back to work.”

But it’s not just the right. The financial press, the cable news squawkers and even many on the center-left greet news of labor shortages and price increases with an alarm they rarely bring to the ongoing agonies of poverty or low-wage toil.

As it happened, just as I was watching Republican governors try to immiserate low-wage workers who weren’t yet jumping at the chance to return to poorly ventilated kitchens for $9 an hour, I was sent “A Guaranteed Income for the 21st Century,” a plan that seeks to make poverty a thing of the past. The proposal, developed . . .  for the New School’s Institute on Race and Political Economy, would guarantee a $12,500 annual income for every adult and a $4,500 allowance for every child. It’s what wonks call a “negative income tax” plan — unlike a universal basic income, it phases out as households rise into the middle class.

“With poverty, to address it, you just eliminate it,” [one of the authors, Darrick Hamilton] told me. “You give people enough resources so they’re not poor.” Simple, but not cheap. The team estimates that its proposal would cost $876 billion annually. To give a sense of scale, total federal spending in 2019 was about $4.4 trillion, with $1 trillion of that financing Social Security payments and another $1.1 trillion support Medicaid, Medicare, the Affordable Care Act and the Children’s Health Insurance Program.

Beyond writing that the plan “would require new sources of revenue, additional borrowing or trade-offs with other government funding priorities,” [the authors] don’t say how they’d pay for it, [but] it’s clearly possible. Even if the entire thing was funded by taxes, it would only bring America’s tax burden to roughly the average of our peer nations.

I suspect the real political problem for a guaranteed income isn’t the costs, but the benefits. A policy like this would give workers the power to make real choices. They could say no to a job they didn’t want, or quit one that exploited them. They could, and would, demand better wages, or take time off to attend school or simply to rest. When we spoke, Hamilton tried to sell it to me as a truer form of capitalism. “People can’t reap the returns of their effort without some baseline level of resources,” he said. “If you lack basic necessities with regards to economic well-being, you have no agency. You’re dictated to by others or live in a miserable state.”

But those in the economy with the power to do the dictating profit from the desperation of low-wage workers. One man’s misery is another man’s quick and affordable at-home lunch delivery. “It is a fact that when we pay workers less and don’t have social insurance programs that, say, cover Uber and Lyft drivers, we are able to consume goods and services at lower prices,” Hilary Hoynes, an economist at the University of California at Berkeley . . . 

This is the conversation about poverty that we don’t like to have: We discuss the poor as a pity or a blight, but we rarely admit that America’s high rate of poverty is a policy choice, and there are reasons we choose it over and over again. We typically frame those reasons as questions of fairness (“Why should I have to pay for someone else’s laziness?”) or tough-minded paternalism (“Work is good for people, and if they can live on the dole, they would”). But there’s more to it than that.

It is true, of course, that some might use a guaranteed income to play video games or melt into Netflix. But why are they the center of this conversation? We know full well that America is full of hardworking people who are kept poor by very low wages and harsh circumstance. We know many who want a job can’t find one, and many of the jobs people can find are cruel in ways that would appall anyone sitting comfortably behind a desk. We know the absence of child care and affordable housing and decent public transit makes work, to say nothing of advancement, impossible for many. We know people lose jobs they value because of mental illness or physical disability or other factors beyond their control. We are not so naïve as to believe near-poverty and joblessness to be a comfortable condition or an attractive choice.

Most Americans don’t think of themselves as benefiting from the poverty of others, and I don’t think objections to a guaranteed income would manifest as arguments in favor of impoverishment. Instead, we would see much of what we’re seeing now, only magnified: Fears of inflation, lectures about how the government is subsidizing indolence, paeans to the character-building qualities of low-wage labor, worries that the economy will be strangled by taxes or deficits, anger that Uber and Lyft rides have gotten more expensive, sympathy for the struggling employers who can’t fill open roles rather than for the workers who had good reason not to take those jobs. These would reflect not America’s love of poverty but opposition to the inconveniences that would accompany its elimination.

Nor would these costs be merely imagined. Inflation would be a real risk, as prices often rise when wages rise, and some small businesses would shutter if they had to pay their workers more. There are services many of us enjoy now that would become rarer or costlier if workers had more bargaining power. We’d see more investments in automation and possibly in outsourcing. The truth of our politics lies in the risks we refuse to accept, and it is rising worker power, not continued poverty, that we treat as intolerable. You can see it happening right now, driven by policies far smaller and with effects far more modest than a guaranteed income.

Hamilton, to his credit, was honest about these trade-offs. “Progressives don’t like to talk about this,” he told me. “They want this kumbaya moment. They want to say equity is great for everyone when it’s not. We need to shift our values. The capitalist class stands to lose from this policy, that’s unambiguous. They will have better resourced workers they can’t exploit through wages. Their consumer products and services would be more expensive.”

For the most part, America finds the money to pay for the things it values. In recent decades, and despite deep gridlock in Washington, we have spent trillions of dollars on wars in the Middle East and tax cuts for the wealthy. We have also spent trillions of dollars on health insurance subsidies and coronavirus relief. It is in our power to wipe out poverty. It simply isn’t among our priorities.

“Ultimately, it’s about us as a society saying these privileges and luxuries and comforts that folks in the middle class — or however we describe these economic classes — have, how much are they worth to us?” Jamila Michener, co-director of the Cornell Center for Health Equity, told me. “And are they worth certain levels of deprivation or suffering or even just inequality among people who are living often very different lives from us? That’s a question we often don’t even ask ourselves” . . . 

What the Hell Is Private Equity?

What is private equity? According to Investopedia, “private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies”. This means that a private equity firm puts its money directly into target companies, either companies that are themselves privately owned (like Koch Industries) or ones that sell publicly traded stock (like General Motors and I.B.M.).

The people who run a private equity firm are able to do this because they have vast sums of money, either their own or their partners’ or money they’ve collected from their customers (i.e., investors who pay the private equity firm to manage their money, the same way investors in a mutual fund company pay management fees to the mutual fund company). 

Sometimes a private equity firm invests so much in a target company that they control its finances. This allows them to sell the most profitable parts of the target company or saddle it with enormous amounts of debt (I don’t know how, but private equity firms somehow suck profits out of companies they control without ever having to pay back the debt they’ve taken on).

This brings us to an article in The New York Times about how private equity firms avoid taxes, not always legally:

Private equity has conquered the American tax system.

The industry has perfected sleight-of-hand tax-avoidance strategies so aggressive that at least three private equity officials have alerted the Internal Revenue Service to potentially illegal tactics, according to people with direct knowledge of the claims and documents reviewed by The New York Times. The previously unreported whistle-blower claims involved tax dodges at dozens of private equity firms.

But the I.R.S., its staff hollowed out after years of budget cuts, has thrown up its hands when it comes to policing the politically powerful industry.

While intensive examinations of large multinational companies are common, the I.R.S. rarely conducts detailed audits of private equity firms, according to current and former agency officials.

Such audits are “almost nonexistent,” said Michael Desmond, who stepped down this year as the I.R.S.’s chief counsel. The agency “just doesn’t have the resources and expertise.”

One reason they rarely face audits is that private equity firms have deployed vast webs of partnerships to collect their profits. Partnerships do not owe income taxes. Instead, they pass those obligations on to their partners, who can number in the thousands at a large private equity firm. That makes the structures notoriously complicated for auditors to untangle.

Increasingly, the agency doesn’t bother. People earning less than $25,000 are at least three times more likely to be audited than partnerships, whose income flows overwhelmingly to the richest 1 percent of Americans.

The consequences of that imbalance are enormous.

By one recent estimate, the United States loses $75 billion a year from investors in partnerships failing to report their income accurately — at least some of which would probably be recovered if the I.R.S. conducted more audits. That’s enough to roughly double annual federal spending on education.

It is also a dramatic understatement of the true cost. It doesn’t include the ever-changing array of maneuvers — often skating the edge of the law — that private equity firms have devised to help their managers avoid income taxes on the roughly $120 billion the industry pays its executives each year.

Private equity’s ability to vanquish the I.R.S., Treasury and Congress goes a long way toward explaining the deep inequities in the U.S. tax system. When it comes to bankrolling the federal government, the richest of America’s rich — many of them hailing from the private equity industry — play by an entirely different set of rules than everyone else.

The result is that men like Blackstone Group’s chief executive, Stephen A. Schwarzman, who earned more than $610 million last year, can pay federal taxes at rates similar to the average American.

Lawmakers have periodically tried to force private equity to pay more, and the Biden administration has proposed a series of reforms, including enlarging the I.R.S.’s enforcement budget and closing loopholes. . . . 

The private equity industry, which has a fleet of almost 200 lobbyists and has doled out nearly $600 million in campaign contributions over the last decade, has repeatedly derailed past efforts to increase its tax burden.

“If you’re a wealthy cheat in a partnership, your odds of getting audited are slightly higher than your odds of getting hit by a meteorite,” Senator Ron Wyden, the committee’s chairman, told Mr. Rettig at the hearing. “For the sake of fairness and for the sake of the budget, it makes a lot more sense to go after cheating by the big guys than focus on working people.”

Yet that is not what the I.R.S. has done.

Private equity firms typically borrow money to buy companies that they see as ripe for turnarounds. Then they cut costs and resell what’s left, often laden with debt. The industry has owned brand-name companies across nearly every industry. Today its prime assets include Staples, Petco, WebMD and Taylor Swift’s back music catalog.

The industry makes money in two main ways. Firms typically charge their investors a management fee of 2 percent of their assets. And they keep 20 percent of future profits that their investments generate.

That slice of future profits is known as “carried interest.” The term dates at least to the Renaissance. Italian ship captains were compensated in part with an interest in whatever profits were realized on the cargo they carried.

The I.R.S. has long allowed the industry to treat the money it makes from carried interest as capital gains, rather than as ordinary income.

For private equity, it is a lucrative distinction. The federal long-term capital gains tax rate is currently 20 percent. The top federal income tax rate is 37 percent.

The loophole is expensive. Victor Fleischer, a University of California, Irvine, law professor, expects it will cost the federal government $130 billion over the next decade.

Back in 2006, Mr. Fleischer published an influential article highlighting the inequity of the tax treatment. It prompted lawmakers from both parties to try to close the so-called carried interest loophole. The on-again, off-again campaign has continued ever since.

Whenever legislation gathers momentum, the private equity industry — joined by real estate, venture capital and other sectors that rely on partnerships — has pumped up campaign contributions and dispatched top executives to Capitol Hill. One bill after another has died, generally without a vote.

Unquote.

There’s much more in the article, including how these guys pretend they aren’t collecting management fees (which are taxable as regular income) by disguising them as capital gains (which are taxed less). But you get the idea.

Pandemic Cash Made a Difference

Millions needed help and got it. From The New York Times:

In offering most Americans two more rounds of stimulus [or relief] checks in the past six months, totaling $2,000 a person, the federal government effectively conducted a huge experiment in safety net policy. Supporters said a quick, broad outpouring of cash would ease the economic hardships caused by the coronavirus pandemic. Skeptics called the policy wasteful and expensive.

The aid followed an earlier round of stimulus checks, sent a year ago, and the results are being scrutinized for lessons on how to help the needy in less extraordinary times.

A new analysis of Census Bureau surveys argues that the two latest rounds of aid significantly improved Americans’ ability to buy food and pay household bills and reduced anxiety and depression, with the largest benefits going to the poorest households and those with children. The analysis offers the fullest look at hardship reduction under the stimulus aid.

Among households with children, reports of food shortages fell 42 percent from January through April. A broader gauge of financial instability fell 43 percent. Among all households, frequent anxiety and depression fell by more than 20 percent.

While the economic rebound and other forms of aid no doubt also helped, the largest declines in measures of hardship coincided with the $600 checks that reached most people in January and the $1,400 checks mostly distributed in April.

“We see an immediate decline among multiple lines of hardship concentrated among the most disadvantaged families,” said H. Luke Shaefer, a professor at the University of Michigan who co-authored the study . . .

Given the scale of the stimulus aid — a total of $585 billion — a reduction in hardship may seem like a given, and there is no clear way to measure whether the benefits were worth the costs. . . . Still, the aggressive use of stimulus checks coincides with growing interest in broad cash payments as a tool in social policy, and the evidence that they can have an immediate effect on the economic strains afflicting many households could influence that debate.

Starting in July, the government will mail up to $300 a month per child to all but the most affluent families in a yearlong expansion of the child tax credit that Democrats want to make permanent. . . .

“Cash aid offers families great flexibility to address their most pressing problems, and getting it out quickly is something the government knows how to do,” Mr. Shaefer said. Extrapolating from the survey data, he concluded that 5.2 million children had escaped food insufficiency since the start of the year, a figure he called dramatic.

The experience of [Chenetta Ray], a warehouse worker at a recycling company in Houston, captures the hardships that the pandemic imposed and the varied ways that struggling families have used stimulus checks to address them. Earning $13 an hour, Ms. Ray had an unforgiving budget even before business closures reduced trash collection and cut her hours by a third.

Her car insurance lapsed. Her lights were shut off. She skipped meals, even with food pantry aid, and re-wore dirty work clothes to save on laundromat costs. When her daughter discovered that they owed thousands in rent, she offered to quit high school and work, which Ms. Ray forbid. A stimulus payment in January — $1,200 for the two of them — let her pay small parts of multiple bills and restock the freezer.

“It bridged a gap,” Ms. Ray said, while she waited for slower forms of assistance, like rental aid.

Then she got cancer. To confirm the diagnosis and guide her treatment, she had to contribute $600 to the cost of a CT scan, which she did with the help of a payment in April totaling $2,800.

In addition to providing for the test, Ms. Ray said, the checks brought hope. “I really got down and depressed,” she said. “Part of the benefit of the stimulus to me was God saying, ‘I got you.’ Spiritual and emotional reassurance. It took a lot of stress off me.”

“Purity” and “Quality”: A Crisis in the Making

More than 100 experts on democracy, from John Aldrich to Daniel Ziblatt, have issued a “statement of concern” regarding the imminent crisis in American politics:

We, the undersigned, are scholars of democracy who have watched the recent deterioration of U.S. elections and liberal democracy with growing alarm. Specifically, we have watched with deep concern as Republican-led state legislatures across the country have in recent months proposed or implemented what we consider radical changes to core electoral procedures in response to unproven and intentionally destructive allegations of a stolen election. Collectively, these initiatives are transforming several states into political systems that no longer meet the minimum conditions for free and fair elections. Hence, our entire democracy is now at risk.

When democracy breaks down, it typically takes many years, often decades, to reverse the downward spiral. In the process, violence and corruption typically flourish, and talent and wealth flee to more stable countries, undermining national prosperity. It is not just our venerated institutions and norms that are at risk—it is our future national standing, strength, and ability to compete globally.

Statutory changes in large key electoral battleground states are dangerously politicizing the process of electoral administration, with Republican-controlled legislatures giving themselves the power to override electoral outcomes on unproven allegations should Democrats win more votes. They are seeking to restrict access to the ballot, the most basic principle underlying the right of all adult American citizens to participate in our democracy. They are also putting in place criminal sentences and fines meant to intimidate and scare away poll workers and nonpartisan administrators. State legislatures have advanced initiatives that curtail voting methods now preferred by Democratic-leaning constituencies, such as early voting and mail voting. Republican lawmakers have openly talked about ensuring the “purity” and “quality” of the vote, echoing arguments widely used across the Jim Crow South as reasons for restricting the Black vote.

State legislators supporting these changes have cited the urgency of “electoral integrity” and the need to ensure that elections are secure and free of fraud. But by multiple expert judgments, the 2020 election was extremely secure and free of fraud. The reason that Republican voters have concerns is because many Republican officials, led by former President Donald Trump, have manufactured false claims of fraud, claims that have been repeatedly rejected by courts of law, and which Trump’s own lawyers have acknowledged were mere speculation when they testified about them before judges.

In future elections, these laws politicizing the administration and certification of elections could enable some state legislatures or partisan election officials to do what they failed to do in 2020: reverse the outcome of a free and fair election. Further, these laws could entrench extended minority rule, violating the basic and longstanding democratic principle that parties that get the most votes should win elections.

Democracy rests on certain elemental institutional and normative conditions. Elections must be neutrally and fairly administered. They must be free of manipulation. Every citizen who is qualified must have an equal right to vote, unhindered by obstruction. And when they lose elections, political parties and their candidates and supporters must be willing to accept defeat and acknowledge the legitimacy of the outcome. The refusal of prominent Republicans to accept the outcome of the 2020 election, and the anti-democratic laws adopted (or approaching adoption) in Arizona, Arkansas, Florida, Georgia, Iowa, Montana and Texas—and under serious consideration in other Republican-controlled states—violate these principles. More profoundly, these actions call into question whether the United States will remain a democracy. As scholars of democracy, we condemn these actions in the strongest possible terms as a betrayal of our precious democratic heritage.

The most effective remedy for these anti-democratic laws at the state level is federal action to protect equal access of all citizens to the ballot and to guarantee free and fair elections. Just as it ultimately took federal voting rights law to put an end to state-led voter suppression laws throughout the South, so federal law must once again ensure that American citizens’ voting rights do not depend on which party or faction happens to be dominant in their state legislature, and that votes are cast and counted equally, regardless of the state or jurisdiction in which a citizen happens to live. This is widely recognized as a fundamental principle of electoral integrity in democracies around the world.

A new voting rights law (such as that proposed in the John Lewis Voting Rights Act) is essential but alone is not enough. True electoral integrity demands a comprehensive set of national standards that ensure the sanctity and independence of election administration, guarantee that all voters can freely exercise their right to vote, prevent partisan gerrymandering from giving dominant parties in the states an unfair advantage in the process of drawing congressional districts, and regulate ethics and money in politics.

It is always far better for major democracy reforms to be bipartisan, to give change the broadest possible legitimacy. However, in the current hyper-polarized political context such broad bipartisan support is sadly lacking. Elected Republican leaders have had numerous opportunities to repudiate Trump and his “Stop the Steal” crusade, which led to the violent attack on the U.S. Capitol on January 6. Each time, they have sidestepped the truth and enabled the lie to spread.

We urge members of Congress to do whatever is necessary—including suspending the filibuster—in order to pass national voting and election administration standards that both guarantee the vote to all Americans equally, and prevent state legislatures from manipulating the rules in order to manufacture the result they want. Our democracy is fundamentally at stake. History will judge what we do at this moment.

Unquote.

The two Democratic senators who seem most reluctant to suspend the filibuster in order to protect democracy should read this statement.

Senator Joseph Manchin
306 Hart Senate Office Building
Washington D.C. 20510

Senator Kyrsten Sinema
317 Hart Senate Office Building
Washington D.C. 20510

Biden’s Budget Would Make a Difference

Presidents present a proposed federal budget every year, but it’s Congress that decides what the budget will be. Nevertheless, President Biden’s budget is a welcome change. From Paul Krugman of The New York Times:

Many reports about the Biden administration’s budget proposal, released Friday, convey the sense that it’s huge. President Biden, scream some of the headlines, wants to spend SIX TRILLION DOLLARS next year. . . . It takes some digging to learn that the baseline — the amount the administration estimates we’d spend next fiscal year without [Biden’s] new policies — is $5.7 trillion.

In fact, one of the most striking things about Biden’s budget initiative — arguably about his whole administration — is its relative modesty in terms of both money spent and claims about what that spending would accomplish. He is neither proposing nor promising a revolution, just policies that would make Americans’ lives significantly better.

And I, for one, find this hugely refreshing after Former Guy’s achievement-free bombast.

Now, the Biden plan is by no means trivial. The budget proposes spending 24.5 percent of G.D.P. over the next decade, up from a baseline of 22.7 percent. That increase, mainly driven by increased expenditures for infrastructure and families, is bigger than it looks because so much of the baseline is devoted to the military, Medicare and Social Security. But it’s not socialism, either. It would still leave the United States with a smaller government than most other wealthy countries’.

Still, the extra spending would make a huge difference to some economic sectors, notably renewable energy, and vastly improve some American lives, especially those of lower-income families with children.

Notably, however, the administration is not claiming that these policies would dramatically accelerate economic growth. Former Guy’s economists predicted that their policies would produce sustained G.D.P. growth of 3 percent a year, which would have been extraordinary in an economy whose working-age population is barely growing. Biden’s economists are projecting growth of less than 2 percent after the economy has bounced back from the pandemic.

Why this modesty? Part of it may be political strategy: Biden likes to underpromise and overdeliver, the way he did with vaccinations. The administration’s economists are actually quite optimistic, for example, about the possibility that child care and other family policies would expand labor force participation and that investing in children would yield big economic returns in the long run.

But they also know history. Governments can do a lot to fight short-term recessions (or make them worse), but the fact is that it’s very hard for policy to make a big difference to the economy’s long-term growth rate.

This is something the right has never understood. (It’s difficult to get people to understand something when their salaries depend on their not understanding it.)

Conservatives are constantly pushing the claim that tax cuts, in particular, will supercharge growth; they love to cite the supposed economic triumph of Ronald Reagan. But Reagan presided over only a couple of years of very rapid growth, as the economy recovered from a severe recession. Over the course of the 1980s, the economy grew only 0.015 percentage points faster — basically a rounding error — than it did in the troubled 1970s.

And looking more broadly across history at both the national and the state levels shows predictions that tax cuts will produce economic miracles have never panned out — not once. Neither, by the way, have predictions that tax hikes, like the increased levies on corporations and the wealthy that Biden is proposing, will lead to disaster.

So it makes sense for the Biden administration to avoid making big claims about economic growth. But does this mean that its plans are no big deal? Not at all.

. . . While government policies rarely have major effects on the economy’s overall growth rate, they can have huge effects on the quality of people’s lives. Governments can, for example, ensure that their citizens have access to affordable health care; they can drastically reduce the number of children whose lives are scarred by poverty. The Biden plan would take big steps on these and other fronts.

And this is the sense in which the Biden plan, despite its relatively moderate price tag, represents a radical departure from past economic policy.

For the past four decades, U.S. economic debate has been dominated by an ideology fundamentally opposed to spending money to help ordinary citizens: We can’t borrow more, lest we provoke a debt crisis. We can’t raise taxes on those able to pay, lest we destroy their incentive to create wealth.

The Biden budget, however, reveals an administration free from these fears. The budget doesn’t propose huge deficit spending, but it does point out that the burden of federal debt, properly measured, is minimal. And administration officials have made it clear that they don’t buy into low-tax propaganda.

You could say that the most important thing about this budget isn’t so much the dollars it would deliver as the dogma it dismisses. And if Biden’s presidency is seen as a success, this ideological liberation will have huge consequences.