(This is cross-posted from ProgressiveFix.com, the new online face of the Progressive Policy Institute, where I will be posting regularly.  Give 'em a look.)

A CNN poll out this week must have been a disappointment to some progressives. According to the poll, a majority of the public – 56 percent – supports the use of the filibuster in the Senate, versus 39 percent who oppose it. I wouldn’t bet the farm that this majority would hold up against any number of equivalent questions worded differently, but the results should at least prompt us to stop and think about the growing end-the-filibuster strain on the left.

Ezra Klein and Matt Yglesias, among other progressives, have grown increasingly frustrated with the Senate as the imperative of winning 60 senators’ votes for a health care reform bill has driven the debate on the Hill this year. But hold up! Are progressives really willing to take their chances with a future GOP-controlled Senate empowered to pass whatever they have 51 votes for? With the Supreme Court nominees who could be seated (to say nothing of other judgeships)? With the restrictions on abortion and LGBQT rights? With welfare reforms?

These culture-war issues call to mind one of the benefits of the filibuster — it protects unpopular groups and rights from the tyranny of the majority. Indeed, as Klein and Yglesias have also argued, the Senate’s structure already gives outsized influence to small states with relatively conservative electorates. “Majority rule” isn’t quite as enlightened a principle when the majority is a majority of senators rather than a majority of the national electorate.

Of course, the filibuster also prevents the will of the majority of voters from being implemented in some instances. But there is something to be said for requiring that the most consequential policies have more support than a simple 50.1 percent majority. Large tax changes, changes to major programs, and the creation of new ones are often hard to undo. In some ways it makes sense to subject such legislation to a higher bar.

Klein has argued that the filibuster makes entitlement reform and governing itself practically impossible, but I think this is a misreading of the problem. The reason that prospects for major reforms are so dim is not that such reforms require 60 votes — it is that the Senate has become so polarized that there are too few swing votes available to get to 60.

One can imagine a Senate in which legislators could be arranged in a continuum from most liberal to most conservative such that there were as many moderates as liberals as conservatives. Or there might be a lot of moderates bunched up in the middle with few Senators at the extremes. In such a Senate, it would not be particularly difficult to get to 60 votes — there would often be compromises to be found to get over the bar.

However, the Senate that we have looks like this:
Those are Poole-Rosenthal scores for the 110th Senate (the previous one), with liberals to the left and conservatives to the right. You probably can name most of those “centrist” dots that bridge the clumps to the left and right (from left to right, the six closest to the center are Ben Nelson, Olympia Snowe, Susan Collins, Arlen Specter, Gordon Smith, and Norm Coleman).

If the “Senate problem” is really about polarization, then the most obvious practical solution that presents itself is one that many progressives may not be too excited about – reform of primary elections so that senators are not chosen from the most ideological parts of their constituencies. But ironically, it’s possible that that would be the best way to achieve more progressive victories while at the same time avoiding tyrannical majorities.

The views expressed in this piece do not necessarily reflect those of the Progressive Policy Institute.*

*Note: The original version of this post omitted the disclaimer.
(This is cross-posted from ProgressiveFix.com, the new online face of the Progressive Policy Institute, where I will be posting regularly.  Give 'em a look.)

In my last post, I noted that progressives need to turn their attention toward the medium- and long-term fiscal crisis the country faces. How massive is the challenge we face? The following chart, from Keith Hennessey, an ex-Bush policy advisor, says it all:

Obviously the first thing to jump out is the escalating divergence between federal spending and revenues in the decades ahead. And the spending projection in the chart is from 2007, so it doesn’t include the stimulus or spending on the financial crisis (or the projected cost of health care reform). That’s scary enough. But the scariest part may not be evident at first glance.

The red line shows federal taxes as a percent of GDP going back to 1945 and projected outward to 2080 by Hennessey based on its historic growth. The yellow line shows federal spending as a percent of GDP. The chart makes clear that the level of federal taxation has actually varied little since World War II (which says nothing about how marginal tax rates faced by different groups have changed). You can see the last build-up of deficits that occurred from the 1970s through the mid-1990s. You can also see the build-up of the Bush years.

Historic Shortfalls The kind of budget shortfalls we are looking at in the future dwarfs anything we’ve ever seen. There are two ways to close the fiscal gap – cut spending or increase revenues. What Hennessey’s chart makes clear is that the level of taxation it would require to meet projected spending needs is far higher than anything the country has ever seen-slash-tolerated. Indeed, even closing half the gap through higher taxes would necessitate historically unprecedented taxation levels.

Progressives, in short, are going to be caught between a rock and a hard place: we will either have to find a way to convince the electorate to go along with massive tax hikes, with all of the electoral risk that entails, or we will have to come up with a plan to make equally massive cuts to entitlements that are likely to also be unpopular and that may do significant harm if not thought through carefully.

It’s true that the right will also be caught in this dilemma, but its situation is not quite as severe for two reasons. First, as the chart implies, their preferred path to fiscal sanity (spending cuts) starts off a much easier sell than tax hikes, given historical patterns. And second, the right has little programmatic interest in permanent spending hikes. The Reagan and Bush years showed that there is a constituency on the right for greater defense spending, but unless we really end up permanently at war with radical Islam, it can be expected that the Pentagon’s budget will rise and fall as global circumstances dictate. Progressive goals, on the other hand, such as greater federal education spending, expansion of child care assistance, more generous safety nets, and broader social insurance constitute costly and (ideally) permanent spending increases that will exacerbate the fiscal gap in the above chart.

The Upshot for Progressives What does this mean for the progressive agenda? First, it is vital that we prioritize our goals, a process that is going to require us to drop many of them, as difficult as that may be. Second, we need to come to terms with what “higher taxes” is going to mean in practice. U.S. taxation is actually as progressive as in Europe because we have taken so many families off of the income tax rolls. The added boost to raising taxes on “the rich” is much smaller than the revenue that could be raised by broadening the tax base so that we were not so reliant on upper-income families to pay for the benefits of government that everyone enjoys.

Third, we need to look for ways to achieve progressive aims that do not cost the federal government so much. That could include certain types of regulation, but it could also include a shift toward progressive cost-sharing in social insurance programs. Rather than trying to raise taxes to give people the benefits they say they want, we could move toward a paradigm where people gradually incur increasing costs of these benefits privately, forcing them to directly confront the trade-offs and efficiency concerns that social insurance tends to hide. Those with limited incomes could receive federal assistance but would still be incentivized to use benefits efficiently. (I will suggest what such programs might look like in future pieces here.)

Some progressives may object to the idea of progressive cost-sharing because it shifts costs and risk onto individuals. But they are going to incur the costs one way or another, whether through higher taxes or greater out-of-pocket spending. And given the impracticality of paying for future benefits solely out of taxes, risk is also likely to be privatized either way — whether by a thoughtful policy framework or through massive cuts in existing programs.

But let there be no doubt — the long-term prospects for significantly expanded progressive government are dim, and in fact, a retrenchment in coming decades is inevitable. President Clinton was wrong — the Era of Big Government is not over. But it will be soon. As progressives we must lead the process of winding it down in a responsible and fair way.
(This is cross-posted from ProgressiveFix.com, the new online face of the Progressive Policy Institute, where I will be posting regularly.  Give 'em a look.)

Regardless of whether health care reform is ultimately signed into law — and momentum makes it increasingly likely, if far from certain — the historic passage of the House bill constitutes a remarkable legislative accomplishment. More than that, however, the bill would give millions of Americans health security. Under the status quo, the Congressional Budget Office estimates that 19 percent of Americans will be uninsured in 2019. The House bill would reduce that figure to six percent (see Table 3). It’s an achievement progressives should cheer.

That said, I’ve heard and read a number of critiques of the House and Senate bills that give reason for concern as well. Tellinglythese critiques have almost all come from outside the progressive community. The intra-progressive health care reform debate — make that the absence of a debate — has revealed a depressing with-us-or-against-us mindset that we like to think is only a conservative malady. But if health care reform is enacted in the coming months, progressives will need to focus sincerely on a problem to which they have paid only lip service over the last few months, one that reform is sure to exacerbate: the perilous fiscal health of the federal government.

The Grim Deficit Outlook I know — it’s soooo 1995 to worry about such things. But we face a serious problem, and despite the promises of reform advocates, the legislation being considered is not going to make it less severe. CBO projects the 2009 deficit to be 11.2 percent of GDP, which will put the federal debt held by the public at 53.8 percent of GDP (see Tables 1-2 and 1-6). Not since 1945 has the deficit been this big (see Table 1.2). Not since 1955 has the federal debt been so large (see Table 7.1). And all that understates the magnitude of the problem. If you take into account the net liabilities incurred in the federal government’s takeover of Fannie Mae, Freddie Mac, GM, and Chrysler, and the bank assets purchased as part of TARP, things look far worse — we could potentially be understating deficits over the next 10 years by as much as 80 percent.

Assume for the moment that health care reform does not pass. Deficits actually won’t look quite so bad in two or three years, but they will increase steadily thereafter (see Figure 1-2). Under realistic assumptions, the national debt will continue growing as a share of GDP — to roughly 100 percent by 2022 (assuming no losses on those recently purchased financial assets). That is worth restating: our current path will cause the federal debt to be as large as the entire annual output of the U.S. economy within a dozen years (see Figure 1-3). That hasn’t happened since World War II (Table 7.1). And while the national debt was roughly cut in half over the dozen years following the war, after 2022 the national debt would increase at an accelerating rate.

Now the first person to say that health care reform is deficit reduction gets a smack to the head. Yes, the growth in deficits and the debt over the long run anticipated by these projections will be due to rising health costs (see Figure 4-1). And yes, in addition to expanding insurance coverage, cost control has been widely cited as an objective for health care reform. The problem is, the bills under consideration have ended up not taking cost control seriously.

And for good reason, since real cost control under the delivery and insurance systems favored by reform advocates would have proved either too expensive or too intrusive to pass. Alternative systems, such as those envisioned by Sen. Ron Wyden (D-OR), might have been able to control expenditures through progressive cost sharing. (Under Wyden’s proposal, individuals would be subsidized on a sliding scale for the purchase of insurance from among plans that compete on price, with incentives for them to choose more cost-efficient coverage.) But the supposed savings in the House and Senate bills are fictions that reform supporters have been complicit in spreading.

The Illusion of Cost Control Consider the House bill. The CBO has to take the provisions in the bill at face value, even if they are highly unlikely to ever be implemented. Revenue to pay for the $1.052 trillion dollar gross cost of the insurance expansions comes from a number of sources. Roughly $460 billion would come from raising taxes on those with an adjusted gross income of $500,000 (individual) or $1 million (joint). At least $240 billion would be raised from Medicare cuts to providers (perhaps closer to $300 billion), about $170 billion would come from penalties assessed on individuals and employers for not complying with mandates, and $170 billion would come from reducing payments to managed care plans under Medicare. These and other changes would reduce the deficit over 10 years by $109 billion and could reduce the deficit slightly over the following 10 years.

Now, here’s where advocates — columnists, bloggers, even think tank researchers and economists — have drifted imperceptibly from pontificating to shilling. Put aside the strong likelihood that the Medicare provider cuts are dialed way back (if they are not, the administration’s own Centers for Medicare and Medicaid Services predicts that many providers will stop accepting Medicare patients). Put aside the fact that the “doc fix” to reverse most of the provider cuts that were already legislated for coming years will add $210 billion over this same 10-year period when it is passed. The bill’s purported deficit reduction of $109 billion is about two percent of the accumulated deficits from 2010 to 2019 (see Table 1-2). In other words, the House bill would barely make a dent in future deficits under the rosiest of interpretations — and is actually likely to increase rather than decrease them taking into account the anticipated adjustments.

What about the Senate bill? Harry Reid’s mash-up awaits CBO’s final word, but the Baucus bill would cover fewer people and therefore be slightly cheaper than the House bill. The bill’s insurance provisions have a gross cost of $829 billion over 10 years, paid for by a tax on high-premium private health plans (about $200 billion), Medicare provider cuts (about $160 billion), and Medicare managed-care cuts (about $120 billion).

Here, it’s worth noting the sloppiness of some reform proponents’ arguments over the wisdom of pursuing such an ambitious program despite yawning deficits. In a recession, they have argued, we cannot worry about deficits — greater spending is just what is needed to stimulate the economy. With the return of growth, we will have little problem dealing with deficits later.

But the Baucus bill’s 10-year deficit reduction of $81 billion would be achieved by spending essentially nothing in the first four years (from 2010 to 2013). Needless to say, if we still need federal economic stimulus in 2013, we will have bigger problems than deficits.

The effect on deficits is basically neutral for the following six years (see Table 1). Nevertheless, CBO does estimate that the Baucus bill would continue to produce small savings in the second 10 years. Of course, if the Senate follows the path the House is taking, it will include a “doc fix” that will wipe out even these dubious savings.

Why Progressives Should Care About Costs Meanwhile, all of the magic bullets (the “game changers”) that progressives trumpeted, from the public option to comparative effectiveness research, to IT improvements, to a Medicare Commission that would propose cuts would produce negligible savings in the foreseeable future, according to CBO.

There were “strong” versions of several of these proposals that could have produced cost savings, but they proved too strong for legislators to risk their jobs for. What progressives will get out of health care reform instead is what most really wanted: near-universal coverage.

A worthy goal, no doubt. But if progressives fail to get serious about fiscal responsibility, the consequences — whether in the form of another financial crisis, slow or stalled economic growth, or political abandonment by the sons and daughters of the Perot voters — could undo much of the good that may yet come out of health care reform. Think it has been hard to pass reform? Try raising taxes dramatically to protect it down the road.
If there's one thing we know about the American economy, it's that inequality has sky-rocketed, right?  If there was ever any question, it appears to have been laid to rest by the widely-cited research of Thomas Piketty and Emmanuel Saez.  Piketty and Saez used IRS data to do what surveys cannot—measure the incomes of the richest of the rich.  Their finding that the share of income captured by the richest Americans has increased sharply since 1980 is cited all over the blogosphere (see, for instance, Paul Krugman's inaugural blog post) and throughout academia and the media.  The richest ten percent of taxpayers, for instance, received 33 percent of income in 1980 but 46 percent in 2007, and the share of the richest one percent grew from 8 to 18 percent.

But these figures exaggerate the rise in inequality.  How do I know?  Because Piketty and Saez, to their credit, have made their figures easily accessible for other researchers to examine, and several have used these figures to qualify the claims that Krugman and others make about rising inequality.  The problem is that these lines of inquiry have failed to be connected or put in the context of the latest inequality research.

Let's start by pointing out that the sharp apparent rise in income inequality that Piketty and Saez find is confined to households (tax returns, actually) in the top one-half of one percent.  The following chart, based on their spreadsheets, shows that the income share of the richest half-of-a-percent increased from 5.5 percent to 14.4 percent from 1980 to 2007.  In contrast, the income share of the second-richest half-of-a-percent increased only from 2.7 to 3.9 percent, and the income share of the next richest 4 percent increased from 13 percent to 15 percent.  The share of the next richest 5 percent was actually steady at 12 percent over the period.

This fact deserves restating: even by the raw Piketty and Saez numbers, only the richest 5 percent of the richest ten percent of Americans saw disproportionately large income growth on a scale that is significant—folks who had the equivalent of $300,000 or more in today's dollars back in 1980 but who had over $600,000 in 2007.

Putting aside for another day the decline in inequality that occurred through the early 1970s, what is of interest here is the rise in inequality that accelerated after 1980.  The first thing to note about the post-1980 increase is the large jump from 1986 to 1988.  Piketty and Saez's IRS estimates are based on individual income tax returns, and they are therefore sensitive to tax law changes that affect what gets reported on these returns and when.  A long line of research notes that the Tax Reform Act of 1986, by lowering top marginal income tax rates below corporate tax rates caused a decline in income reported by "taxable corporations" (on corporate tax returns) and a corresponding rise in income reported by "Subchapter S" corporations (on individual income tax returns).  This represents pure and simple shifting of where large incomes are reported, from one type of tax form to another, but it shows up in the Piketty and Saez data as an increase in income concentration. 

This shift to S-Corporation income actually began in the early 1980s as a result of the Economic Recovery Tax Act of 1981, and it continued after 1988, a point made most cogently by Cato Institute senior fellow Alan Reynolds.  Reynolds, whose arguments on the nation's op-ed pages sometimes have the flavor of buckshot being fired out of a cannon, nonetheless has been unfairly dismissed by the left in his critique of inequality research.  In the following chart, I use Piketty and Saez's figures to illustrate a point Reynolds makes: that growth in the share of income reported by top filers has disproportionately consisted of growth in S-Corporation income (see the "entrepreneurial income" trend).

Entrepreneurial income includes not only S-Corporation income but income from sole proprietorships and partnerships, however S-Corporation and partnership income were a negligible share of top incomes prior to 1982.  In order to obtain a consistent trend in inequality, these two sources of income (which shifted from being reported on corporate tax returns to individual income tax returns over time) must be removed after 1981.  I do so below using other spreadsheets from Saez.

The tax changes in the 1980s and 1990s probably had other important effects on how taxpayers reported income—and when.  Lowered income tax rates make it more likely that the very rich will take their compensation as taxable income rather than nontaxable fringe benefits and that they will take "nonqualified" stock options (reported on individual income tax returns) rather than incentive stock options (reported as capital gains and not included in the above figures).

It is unclear how much changing tax rates distort the trends shown in the figures above.  Several adjustments seem defensible.  Most importantly, the 1986 to 1988 increase likely represents a shift in the trend line due to greater reporting of income on individual tax returns that has no basis in actual inequality trends.  The United Kingdom, for instance, showed no such break, even though inequality was steadily rising.  In that case the pre-1988 trend line should be shifted upward, which I do using the 1987 to 1988 change in the Census Bureau's Current Population Survey (CPS), as reported by Richard Burkhauser and his colleagues.  As I will show below, the Burkhauser estimates track the IRS estimates quite well.  The only other adjustment I make concerns the spikes in 1990 and 1992.  These spikes are responses to tax changes in 1986 (the end of the three-year vesting period for nonqualified stock options taken in 1987 occurred in 1990) and anticipated changes in 1993 (the Clinton tax increase, fear of which led to more income reported in 1992 ahead of the hike).  I adjust those points downward based on what happened in Canada over the period, using additional data from Saez's website.

Doing so largely erases a discrepancy between the figures based on IRS data and those based on the CPS.  Burkhauser and his colleagues, using the CPS and correcting for the censoring of high incomes that the Census Bureau implements out of concern for survey respondents' privacy, recently tried to replicate Piketty and Saez's results.  They were able to closely match the trends from 1967 to 2006 for the four percent of households just below the richest one percent.  The same was true for the next richest five percent of households.  Only among the richest one percent were they unable to produce the same trend as Piketty and Saez.

My adjusted estimates, however, match up fairly well with Burkhauser's figures:
When these same adjustments are made to the trend for the income share of the top one-half of one percent, the increase from 1980 to 2007 is from 6.1 to 10.9 percent—a 4.8-point increase over 27 years rather than the 8.9-point increase in the unadjusted data.  Finally, note that the post-1994 trend closely follows the ups and downs of the stock market.  That implies that in 2008 the income share of the top half-of-a-percent likely fell along with the stock market to around 9 percent—just a three-point increase since 1980.

The figures presented thus far do not include realized capital gains, public cash and in-kind transfers, employee health and retirement benefits, employee contributions to retirement plans, or taxes.  The Congressional Budget Office has their own income-share estimates based on IRS data and other sources that include all of these items.  The figure below adds the CBO trend to the previous chart.

The share of the top one percent rises 8.6 points, from 7.7 to 16.3 percent.  The trend line follows the others reasonably closely with several exceptions.  The spike in 1986 reflects investors taking capital gains ahead of the tax increase on gains that went into effect in 1987 (which also depresses the 1987 data point).  The other notable departure from the other trend lines is that the rise and fall of the top share with the stock market after 1994 is even more dramatic due to the inclusion of capital gains.  The S&P 500 stood at its 2002 level at the end of 2008, implying that in 2008 the top 1 percent received about 11 to 12 percent of income.  Thus, its share grew about 4 points over 28 years.

What about other estimates of inequality?  The CPS indicates that the Gini coefficient—a continuous measure that is higher when top shares of income are larger—for household income increased by about 16 percent from 1980 to 2008.  Is that increase big or small?  For context, it is about the same as the rise in median household income over the period (14 percent).

Another way to measure inequality is to look at the ratio of income at one point in the distribution to income at another point in the distribution.  For example, the 90/10 ratio compares the income of the household at the 90th percentile—the one with income larger than 90 percent of all households—to the income of the household at the 10th percentile.  This ratio increased from about 9 to about 11 from 1980 to 2008.  The 80/50 ratio rose from 1.8 to 2.0, while the 50/20 ratio was 2.4 in both years.  In other words, the increase in inequality was about the rich getting richer and not about the poor getting poorer.  Indeed, consistent with the income share results, it was about the very rich getting richer—the 95/50 ratio rose from 2.9 to 3.6, a much bigger increase than for the 80/50 ratio.  If it were possible to construct a 99.5/50 ratio, the point would likely be even clearer.

There is one more final piece of evidence that implies that even the apparent increases in the 80/50 and 90/10 ratios is illusory and that incomes became significantly concentrated among the richest of the rich.  The CPS trends in the Gini coefficient and in the various ratios assume that the purchasing power of households has increased at the same rate for rich, middle-income, and poor households.  That is, they assume that all households experience the same cost-of-living changes.  A recent study, by Christian Broda and John Romalis, however, casts doubt on the validity of this assumption. 

Broda and Romalis used a massive private database of purchases involving bar-coded products to construct separate cost-of-living indexes for the poor, the middle class, and the rich.  They then adjusted incomes for inflation for these groups using the distinct indexes, rather than assuming that inflation has grown equally across income groups.  The result?  The cost of living has grown less for the poor than for the rich, and when this difference is taken into account, the 90/10, 90/50, and 50/10 ratios appear not to have grown in recent years (see Table 14A of their paper).  The data used in this study only go back to 1996 and only cover bar-coded purchases, but the authors provide reasons to think that the patterns they find extend to earlier years and other goods and services.  If they are right, then it would reinforce the income-share results finding that the growth in inequality has been confined to the richest of the rich.

Discussion of income inequality trends generally proceeds as if some sizable fraction of the population were getting richer (the top 10 percent, or the top 1 percent) while everyone else is getting poorer.  In reality, the "poorest" 90 percent of the top 10 percent—and even the "poorest" half of the top 1 percent—have not seen outsized income gains over the past 30 years.  It is only the top one-half-of-one-percent that has received a rapidly increasing share of income.  Furthermore, the increase in concentration at the very top has been smaller than the most-cited figures have implied.  For example, using a comprehensive measure of income, the top one percent probably received about 8 percent of income in 1980 and about 12 percent in 2008. 

Nor have the poor fallen behind the typical household.  Indeed, they may not even have fallen behind the 90th percentile.  If this finding holds up, then it would seem that resentment toward the top one-half-of-one-percent should have grown equally among households with contemporary incomes as high as half a million dollars and households below the poverty line.  Put another way, if rising inequality is unfair, then it may be that it has been as unfair for the 90th or 95th percentile as it has for the 10th percentile.

It is not immediately clear what to think about income concentration being confined to the very top.  Would it be worse if income were becoming increasingly concentrated in the top half of the distribution at the expense of the bottom half or if it were becoming increasingly concentrated in Bill and Melinda Gates's household at the expense of everyone else?  Does the answer change depending on whether the "losers" are experiencing strong income growth or not?  On some level, as long as incomes are rising for everyone, it matters little how much more the Gates's income is rising.  They cannot price others out of markets for goods and services by themselves.  On the other hand, if the top fifth of the income distribution is pulling away from the bottom 80 percent, then the consequences for those falling behind could be profound.  The top fifth might be able to sort themselves into the best neighborhoods with the best schools, and they might bid up the cost of higher education to the point where the best schools become unaffordable to most families.

The evidence indicates that patterns of inequality more closely resemble the Gates scenario than the bifurcation scenario.  It is unlikely that the rise in inequality, then, has had much practical impact on the quality of life of middle-income or poor Americans.  The exception would be if rising inequality had spawned competitive spending patterns to maintain relative standing in such a way that families end up worse off as a consequence of trying to keep up with the Joneses.  For now, however, this possibility remains largely untested.

Finally, the magnitude of the increase in inequality and its nature might be of little practical importance even as the level of inequality has deleterious effects.  In other words, what may be relevant is that the top ten percent has received at least a third of all income in every year since 1980, not that it increased from a third to nearly half by 2007.  But if that were the case, it would have different implications for American society, politics, and economics than if growing inequality is a trend to be viewed with alarm.  Indeed, we would be in worse trouble if the levels of inequality prior to the run-up of recent decades were as consequential as the level we have today, for we are unlikely to ever see inequality levels so low in the foreseeable future.