Category Archives: Economics

‘Like’ the Vote

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America had an electoral fraud problem. Voter intimidation was pervasive. Bribery, too, was common. Laws against both were regularly ignored. What Americans needed most was a secret ballot.

Today, many people may take for granted the fact that they are able to cast their ballots in secret, but Americans that lived up until the late 1800s had no such illusions.

“Confidence was shaken in a voting system which made known the contents of every man’s ballot,” declared an 1892 essay on a new Pennsylvania law that established, for the first time in the state’s history, a secret ballot.

The new system, known as the “Australian system” after the country in which it was first implemented in 1856, ensured secrecy and fairness in several key ways. It stipulated that all ballots must be the exact same. It ordered the names of all legally nominated candidates be printed on the ballots. And it required voters to mark their preferences in secret.

The laws combated intimidation and bribery by making it difficult to verify how a person had actually voted. But the laws, which had spread to nearly every state by 1892, had another, unintended side effect, as well.

Voter turnout in the mid to late 1800s had been fairly high, around 70 to 80 percent of the voting age population for presidential elections. In the years after the spread of the secret ballot, that percentage steadily tumbled, finally settling around about 50 to 60 percent.

What happened?

Well, the late 1800s were a period of rapid change in America. Industrialization was quickly changing the country. Immigration increased tremendously and the population exploded, with workers flocking to the nation’s cities. At the same time, reformers focused on “good government” laws, like civil service reform, and attacked political ‘bosses’ and their machines.

All of these societal changes likely had an effect on voter turnout. But so too did the secret ballot.

Voting has long confounded economists, as the act of voting seems to be inherently irrational. The gains — one lousy vote in an election decided by hundreds of thousands — seem small compared to the time and effort spent waiting in line at the polling place.

True, there is also the satisfaction of performing a civic duty, but there is also another important component to why people vote: social pressure. Simply put, people know they are “supposed to vote,” and do not want to be caught otherwise.

A 2008 study of Swiss voter turnout after the adoption of optional postal voting demonstrated this. Postal voting, in which citizens can mail in their ballots, is meant to reduce the costs of voting and increase turnout. Yet in small Swiss communities — the types of places where one might expect voters are more likely to know each other — turnout actually went down. Postal ballots, it seems, may have eliminated the social pressure to be seen at the polls because, well, maybe that person mailed in their ballot.

The opposite also appears to be true. In 2006, researchers sent out several kinds of mailers to Michigan citizens, one of which  promised to publish whether they and their neighbors voted in the next election. They found that those people who thought their voter turnout information would be publicized were more likely to vote.

Which brings us to Facebook. If social pressures impact voter turnout, then it would make sense that social media affect it as well. And, in fact, this is exactly what researchers studying the 2010 election reported. On Election Day, Facebook provided an “I Voted” button at the top of users’ news feeds for them to show they had cast their ballots. Some users were shown the pictures of friends who had voted; others were not. By comparing friend data with voter rolls, researchers determined that the first group were more likely to vote in that election.

So go ahead and tweet your followers or update your status this Election Day to let everyone know you voted. You never know who might be watching.

–FURTHER READING–

Charles Binney, “American Secret Ballot Decisions,” American Law Register and Review.

Charles Binney, “The Merits and Defects of the Pennsylvania Ballot Law of 1891.”

Robert Bond, et al, “A 61-million-person experiment in social influence and political mobilization,” Nature.

Stephen Dubner and Steven Levitt, “Why Vote?” New York Times.

Patricia Funk, “Social Incentives and Voter Turnout: Evidence from the Swiss Mail Ballot System.”

Michael J. Gaudini, “Election-time reflections on the irrational voter,” Main Line Times.

Alan Gerber, et al, “Social Pressure and Voter Turnout: Evidence from a Large-Scale Field Experiment,” American Political Science Review.

John Markoff, “Social Networks Can Affect Voter Turnout, Study Says,” New York Times.

“Voter Turnout in Presidential Elections: 1828-2008,” The American Presidency Project.

 

Why Any Debt Deal Will Need to Include Taxes

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One of the major downsides to the otherwise enthralling roller-coaster ride that is the 2012 GOP primary is the way that the fight for the Republican ticket has dragged the rhetoric further and further to the right. After all, you cannot become president if you do not win the party nomination — and you cannot win your party’s nomination if you do not appeal to the base voters that turn out at the primary elections. The result is a competition to “out-conservative” each other, which may yield short-term electoral gain, but does so at the expense of cooperative politics and sound policy.

Consider this excerpt from an August 2012 GOP debate in Iowa. Fox News anchor Bret Baier asks the candidates if they would walk away from a deficit reduction deal that would cut $10 in federal spending for every $1 it raised in tax revenues. Every candidate agreed that they would.

This is, of course, absurd. There is no realistic way in which deficit reduction will ever occur solely through spending cuts alone. Think about the budget for a moment. Over 60 percent of the federal budget is mandatory spending, mainly on programs like Social Security, Medicare, and Medicaid. These are programs that, by law, provide certain benefits if you meet certain requirements, such as age or income level.

There is no wiggle room here. These payments must happen unless Congress amends the law to change benefits or eligibility requirements. It would be prudent now to recall that changes to Social Security have always been controversial among the electorate. President Roosevelt planned it that way. In 1941, he recalled:

“We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program.”

Because employees pay into the Social Security system with every paycheck, they feel entitled to their own future benefits. This makes paring back benefits or raising the retirement age very unpopular politically. There is a reason why reforms to the Social Security system in 1983 were limited to an ever-so-gradual increase in the retirement age and an increase in payroll taxes. The math is simple: retirees like their Social Security benefits, and retirees reliably turn out to vote in larger numbers than younger citizens. Similar problems face the Medicare and Medicaid programs.

Interest payments on the debt are likewise mandatory, though, they are listed as a separate category from mandatory spending.

But if cutting mandatory programs (again, over 60 percent of the budget) would involve highly risky political moves, doesn’t that still leave discretionary spending of about 40 percent to carve up? Surely, we can reduce the deficit by lopping out a chunk of discretionary spending?

Not so fast. As it turns out, a lot of discretionary spending is not so discretionary after all. More than half of all discretionary spending is defense spending — a spending area that is also fraught, as politicians strive to “support the troops” and avoid being called “soft on defense.” And the nondefense portion of discretionary spending? What does that encompass?

From the Congressional Budget Office (CBO):

Seven broad budget categories accounted for more than 75 percent of the spending for nondefense discretionary activities last year [2010]. The largest of those is the category covering education, training, employment, and social services; it is followed in size by the categories for transportation, income security programs (mostly housing), and health-related research and public health. Categories with smaller amounts of discretionary spending include administration of justice (mostly for law enforcement activities), veterans benefits and services (mostly for health care), and international affairs.

It also is worthwhile to note that President Obama’s proposed nondefense discretionary spending for 2012 is about $450 billion, or around 12 percent of the federal budget. The deficit for 2011 was over $1 trillion. So, if the entire nondefense discretionary budget evaporated, it would still not have covered last year’s deficit. Nor would it cover the projected 2012 deficit of around $828 billion. If you had the entire discretionary budget (which, when you add the $868 billion in the 2012 proposed Obama budget for defense to the total for nondefense spending comes to about $1.3 trillion), you would have just covered the deficit, at least in the short term.

In the long term, you’d still have an aging population that would stress mandatory spending programs. When the baby boomers were in their working primes, taxing their large numbers enabled the government to meet entitlement payments. There were enough workers to tax to support Social Security pensions and Medicare insurance coverage. Now that those same huge numbers are retiring, there will be a shrinking pool of people to pay and a growing pool of people that will be drawing benefits.

And then, in our hypothetical, there is the fact that we just abandoned all of the government’s defensive duties, diminishing our global power and destabilizing the world as a whole. Also, with more than $1 trillion dropping out of the economy, we’ve just descended into the depths of a long depression that will send federal revenues spiraling, creating a whole new deficit problem.

Now, this hypothetical is obviously utterly unrealistic. No one (who actually understands the federal budget) is calling for the government to abandon all discretionary spending. But it nevertheless serves a purpose. It shows that the size of the deficit is comparable to an entire section of the budget. Furthermore, it shows that, as much as people talk vaguely of “cutting waste,” there is almost no part of the budget that could be touched without sparking controversy.

This is important because cuts must occur if we are to get the deficit under control. Such cuts should be timed so as not to derail economic recovery from the Great Recession (that is to say, they should not be implemented immediately) and, importantly, entitlements like Social Security and Medicare must be reformed.

The real question is a political one: how do you pass a deficit reduction package that cuts popular programs?

The Republican candidates’ unanimous rejection of a hypothetical deficit reduction package with $10 in cuts for $1 in tax increases is one way to not accomplish this goal. The reason why is, like the question posed above, inherently political.

In order to pass such legislation, one needs the president and both houses of Congress to be onboard. A simple majority would suffice in the House of Representatives, but a supermajority (two-thirds) would be needed to overcome the inevitable filibuster in the Senate. That would be virtually impossible if one side of the aisle refused to compromise, which is essentially what the Republican candidates said when they indicated they would reject any and all tax increases.

But pretend for an instant that the impossible occurs, and the Republicans land both the presidency and a filibuster-proof majority in the Senate. Also pretend that the few moderate Republicans left in the Congress (Olympia Snowe, Scott Brown, etc…) don’t jump ship. They’ve got the numbers. Do they pass this all-cuts deficit reduction package?

No.

Any economist would tell you that the Republicans don’t pass the package, even though they have the numbers. Why? They do not pass the all-cuts package for the same reason the GOP candidates are demanding an all-cuts package: incentives.

Right now, the Republican presidential candidates have a very strong incentive to call for an all-cuts package because it will help them win the primary election. As mentioned earlier, the candidates have been pushing each other further and further to the right in a race to win the presidential ticket. Calling for an all-cuts package allows them to curry favor with primary voters and gives them cover from opponents that would otherwise attack them for not ruling out tax increases.

However, passing such a package is not in our hypothetical Republican Congress’ interests because it would be widely unpopular and would energize the opposition. Unlike the presidential candidates, such a package would actually hurt their electoral prospects.

Democrats, of course, would vote in lockstep against this package, making the issue a partisan one. Democrats across the country would campaign against the hard-hearted Republican deficit reduction that was weak on defense (cuts to defense spending), harsh on both the poor and the middle class (cuts to the social safety net and Medicare), a burden to the elderly (cuts to Social Security and Medicare), but also went easy on the rich (lack of tax increases).

Voters across the country, seeing their Social Security checks shrink, their insurance coverage dropped, their unemployment evaporate, would turn their Republican representatives out of office in record numbers at the next election. And if it is one thing that political parties loathe, it is losing power.

But how would including tax increases in deficit reduction legislation prevent any of this?

Well, first of all, it makes the legislation likelier to pass than an all-cuts package — the latter having absolutely no chance at becoming law. It has a better shot because it provides a platform for cooperation and compromise. The Democrats may have to swallow painful spending cuts, but at least they in turn get to temper some of them with tax increases. The Republicans may have to suffer tax increases, but they also get their desired spending cuts.

With members of both parties onboard, the legislation has a better chance of making it to the president’s desk. Additionally, it can be presented as bipartisan, robbing either party of the ability to use it against the other in future elections. Individuals and primary challengers may still use this narrative in specific elections, but the overall narrative will be very different with bipartisan cover. It is also much easier to take the dive when you are joined by both your allies and opponents.

There would still be much opposition in the electorate, but it would be more manageable. A compromise package could call for ‘shared sacrifice’ from every American.

History also provides a good guide. As the Economist notes:

Put simply, no fiscal consolidation that the IMF has judged to be successful relied on public spending cuts for more than 83% of its impact. In successful fiscal consolidations, tax rises accounted for between 17% and 33% of deficit-reduction measures.

So yes, deficit reduction legislation should probably rely more on spending cuts than tax increases — but both are essential parts of any successful package. This will probably not come as a surprise to the American people, as numerous polls have shown that they recognize the need for including tax increases in a deficit reduction package.

But, you might ask, why focus so much on how the GOP candidates responded at some primary debate in Iowa? Once they got into office, things would change. Everyone knows presidents never keep their promises anyway!

Not so.

Studies of the topic have shown that presidents generally try to keep their promises. And on the subject of taxes, any Republican president would likely be fearful of repeating George H.W. Bush’s mistake in choosing fiscal responsibility over ideology. The elder Bush infamously agreed to raise taxes in order to cut the deficit, despite promising he would do no such thing in the 1988 election. At the next election, Bush faced a primary challenger (Pat Buchanan) that emphasized Bush’s broken promise and went on to have a surprisingly strong showing early on in the primary season. Bush, of course, went on to face Bill Clinton who, like Buchanan, threw Bush’s 1988 promise back at him. “Read my lips: no new taxes,” Bush’s broken promise, went on to become a solemn warning to politicians of all stripes (and a Wikipedia page, too!).  Bill Clinton went on to take the presidency.

The irony here is that the very candidates who have staked their campaigns on fiscal responsibility are unlikely to successfully cut the deficit, should any of them take the White House.

Perhaps they should take a page from President Reagan’s book. Sure, Reagan passed the largest tax cuts in American history. But he also, when faced with gaping deficits and a Democratic Congress, reached across the aisle, compromised, and, yes, raised taxes.


A Stimulus By Any Other Name…

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This opinion column was published in the Main Line Times and the Delco Times on December 16, 2010.

*Correction — In my column, I mistakenly referred to the stimulus package passed in February 2009 as the “2008 stimulus bill.” This has been corrected in this blog post. Sorry.

On Dec. 6 President Obama gave a speech on the temporary, bipartisan agreement reached over the Bush tax cuts and unemployment benefits. He described the compromise as one that “will spur our private sector to create millions of new jobs and add momentum that our economy badly needs.” Read: stimulus. Make no mistake, the compromise package is just that. ’s “Free Exchange” blog notes that it contains a one-year cut in the Social Security payroll tax ($120 billion) and allows businesses to write off all investment expenses ($200 billion).

This is in addition to extending unemployment benefits, which is a politically easy way to provide stimulus funds. Such benefits are generally pumped right back into the economy as the unemployed spend on necessities. Extending them could also, somewhat paradoxically, be cheaper than not. Many people apply for Social Security Disability Insurance when unemployment runs out, and people on SSDI are less likely to return to the work force.

And then there’s the most famous part of the package – the Bush tax cuts. While there was some debate over whether the wealthiest Americans would keep their cuts or not, the safest decision was eventually made. Although it worsens the immediate deficit, temporarily sustaining all the cuts avoids the mistake FDR made in 1937 when fiscal tightening (that is, tax increases and spending decreases) plunged a recovering economy back into recession. Of course, tightening will be needed in the medium run (hence the temporary nature of the extension), but for now legislators have been able to shunt aside that argument.

In light of these facts, it is interesting that nowhere in President Obama’s speech is specific mention of the term “stimulus.” Of course this is understandable given the much-maligned reputation the word has (wrongly) earned over the past two years. Many Americans feel as if the 2009* stimulus bill was an exercise in wasted money despite the fact that a full third of it went to tax cuts and credits. Let us then begin the re-education process. Stimulus by any other name is still stimulus.


Beck Check: The Roaring Twenties

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Glenn Beck spent a portion of his show on February 9, 2010 discussing President Coolidge and the Roaring Twenties. I analyzed his claims about Coolidge in an earlier blog post, and have returned to fact check his points on the Roaring Twenties.

He begins by calling the Roaring Twenties “arguably the most prosperous 8 years this country has ever seen,” credits Secretary of the Treasury Andrew Mellon’s tax cuts, and cites innovation as evidence of this prosperity.

In 1920, there were only 5,800 people who had ever flown on an airplane. By 1930, it was seventy times that amount. RCA changed the world with the radio. Along with the radio came another invention or another idea: advertising. Now you could hear Babe Ruth hitting home runs anywhere in the country while someone was telling you about a product. Thomas Edison brought us movies in 1880s. You know when they really started to take off? In the 20s the true modern era motion picture arrived.

And so on. But were the Roaring Twenties really all Beck makes them out to be?

First, let’s deal with length. Beck notes that the economic expansion of the 1920s lasted 8 years — how does that compare with other U.S. expansionary periods? Of course, this depends on who you ask. For instance, the Post World War II economy could last from 1945 to 1960 or until the early 1970s. The Reagan boom beginning in 1982 could last until 1990, or it could have been part of a much broader boom that included the Reagan, Bush, and Clinton economies, ending in 2001. James Pethokoukis, writing in the U.S. News and World Report, even goes so far as to proclaim that this expansion lasted from 1982 to 2007 — that’s 25 years!

Of course, these booms were not uninterrupted. There were recessions in the 40s, 50s, and 60s, and again in the 80s, 90s, and 00s. Perhaps the 1920s were the United States’ longest uninterrupted boom? Not quite — there were recessions during the Roaring Twenties as well.

A peek at the National Bureau of Economic Research’s website, which has an excellent list of the U.S. economy’s expansions and contractions, shows that the U.S.’s longest uninterrupted expansion occurred from March 1991 to March 2001, from the end of the first Bush Administration through the Clinton years and into the beginning of the second Bush Administration. The second longest uninterrupted expansion occurred from February 1961 to December 1969 (the Kennedy, Johnson, Nixon years), the third from November 1982 to July 1990 (the Reagan and Bush years), and so on. The longest uninterrupted expansion during the Roaring Twenties period lasted from July 1924 to October 1926 — not even in the top 10 for length of uninterrupted booms.

Clearly, the Roaring Twenties were not the longest boom in American history, but (as with all aspects of life) quantity and quality do not always correspond. So how about a comparison of content?

Let’s compare some indicators with similar ones from the three longest booms in American history (1991-2001, 1961-1969, and 1982-1990). First, we’ll look at the obvious — Gross Domestic Product (GDP) (the country’s economic output).

And the unemployment rates…

Thus, GDP growth was better in the three booms we’ve been examining than in the Roaring Twenties, while unemployment seems to have been lower in the Roaring Twenties. Ironically, the minimum wage may be to blame for at least part of the higher unemployment rates of the later three booms. The minimum wage was first established as part of the National Industrial Recovery Act of 1933, which was declared unconstitutional by the Supreme Court. It was then re-established in 1938.

One of the economic consequences of the minimum wage is to increase unemployment. Think of it this way: a business owner has a certain amount of money available to spend on employees. If the amount he must pay his employees rises, but the amount of money he has available to pay them does not, he must fire someone. This force was absent in the 1920s, perhaps partially accounting for the lower unemployment rate.

Another aspect of the booms is income inequality. One of the ways this is measured is known as the GINI Index. The Gini Coefficient measures income inequality on a scale of 0 to 1, with 0 being absolute equality and 1 being absolute inequality. The following graph displays Gini estimates for the 1920s to the 1990s.

Unfortunately, the late 1990s and 2000s are not included in this graph, but the data shows that the GINI Index for families continued to rise, and even reached its highest reported point yet in 2006 at 0.444. As the graph shows, GINI estimates for the 1920s start somewhere around 0.425 and then quickly rise throughout the decade, peaking at around 0.5 before relaxing to 0.45 and then rising again to about 0.475 to finish.

This high level of inequality stands in stark contrast to the much lower levels enjoyed during the 1961-1969 boom, where the GINI Coefficient began at 0.374 and finished at 0.349.  Indeed, the lowest reported level of income inequality ever occurred in 1968, at 0.348.

The 1982-1990 boom featured greater inequality than the 60s, but still lower than either the 20s. The GINI Coefficient began at 0.380 in 1982 and stayed in the high 0.3s for the duration. It peaked at 0.401 in 1989 and finished at 0.396 in 1990.

Family income inequality increased yet again during the 1991-2001 expansion, starting at 0.397 and climbing to 0.435 at the end, its highest year. This 2001 level is higher than estimates from the beginning of the 20s, but lower than most other years of the Roaring Twenties.

Emmanuel Saez examined the share of total income of top decile (that is, the top 10th) and also the top 0.01% of earners in his paper, “Striking It Richer: The Evolution of Top Incomes in the United States.” As the graphs show below, he found that the top 10% of earners held almost 50% of total income in the United States by the end of the Roaring Twenties. This is almost matched by the high level of income held by the top 10% at the end of the 1991-2001 boom (and exceeded in 2007, as an aside). The 1960s boom seems to be the most equitable, followed by the 1982-1990 boom, which saw increasing inequality, but not at the levels of either the Roaring Twenties or the 1991-2001 boom. Examinations of the share of the top 0.01% yield similar conclusions.

One of the points Beck makes when discussing the prosperity of the Roaring Twenties is the innovation associated with the period. He appears to describe innovation in terms of something once great, now long lost. Yet innovation remains a strong part of our capitalist system. Beck awes his audience by telling them about the great leaps in technology that were made in the 1920s, and how the long-lost capitalism of Coolidge and Mellon made expensive technologies affordable.

But aren’t these processes still occurring today? Consider, for a moment, computers. In 1984, 8.2 percent of U.S. households had a computer. By 2000, 51 percent of households had computers. That’s an increase of a whopping 522 percent! This is how capitalism works — competition drives down prices. The Roaring Twenties do not hold a monopoly on innovation and advancements in technology.

Of course, other than simply listing the accomplishments of these various years (which are many) and the price drops as technology advances, how does one measure innovation? I’ve sorted through copyright registration and population figures to derive some glimpse at innovation in these various booms. The following graph lists the number of copyright registrations in the beginning and ending years of each boom, the populations of those years, and then the registration figures divided by the population (revealing how many copyrights were registered per person in the United States for those years).

Not only do the number of copyright registrations rise with each successive boom, but they also rise per person — a real increase. This is with the notable exception of the 1991-2001 boom, in which copyright registration figures actually decrease in per person terms, though they remain above figures for the Roaring Twenties and the 1961-1969 boom.

Productivity gains, too, may be some indicator of innovation, as new technologies make manufacturing more efficient.

These estimates show productivity gains in each of the four booms, with the average yearly percentage change in productivity in the Roaring Twenties and the 1990s booms being almost a full percentage point higher than those of the 60s and 80s booms.

Perhaps we can see, through these somewhat rudimentary lenses, the steady progression of innovation.

As far as comparing booms goes, a paper by economist Robert J. Gordon notes the similarities of the 1990s and 1920s booms:

Growth in real GDP, real GDP per capita, employment, and productivity were almost identical, the conventionally measured unemployment rate was identical in 1928 and 1999, inflation was negligible (1920s) or low (1990s), and the late-1920s stock market boom is the only such episode in the century that comes close to the stock market’s ebullience in the late 1990s. Like the 1990s, the 1920s witnessed prosperity, a productivity revival, low unemployment, and low inflation. Both decades featured an explosion of applications of a fundamental “General Purpose Technology,” electricity and the internal combustion engine in the 1920s and computer hardware, software, and networking communications technology in the 1990s. Both decades appear to mock the existence of a Phillips-curve tradeoff between inflation and unemployment.

Of course, these figures are limited in that they are solely economic indicators. Bobby Kennedy noted the inadequacy of such measurements in 1968:

Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.

To provide a broader picture of the four booms, I’ve examined three other indicators — life expectancy gains, 5 to 7 year old enrollment (in school) as a percentage of the 5 to 7 year old population, and high school graduation rates and gains.

As would be expected, steady gains were made over time in life expectancy. However, averages of yearly percentage change show that the greatest gains were made during the 1991-2001 boom (0.22%), and the worst gains were made during the 1961-1969 boom (0.05%). The averages show a decrease actually occurred during the Roaring Twenties (-0.52).

As seen from the graph, the lower levels of enrollment in the Roaring Twenties (about ten percentage points below the 1980s/1990s levels of enrollment) also provided greater room for improvement, and, indeed, the Roaring Twenties saw greater gains in 5 to 7 year old enrollment as a percentage of that population (1.27%, on average). The 1960s boom also saw a high level of improvement, on average, as did the 1980s (the data for the 1980s also shows the movements of the baby boom generation out of secondary school and into college). Finally, the 1991-2001 boom, although maintaining a high level of enrollment in the 97%-98% range, saw a decrease in the yearly percent change of enrollment, on average (-0.08%).

(Quick note — the rounding to one decimal place should account for the oddity that occurs in 1967-1968, when the percentage change is -0.05 while the graduates as a percentage of the 17 year old population appears to stay the same).

Again, the low levels of the Roaring Twenties (about 50 percentage points below 60s levels) provided a greater room for improvement (6.55% yearly percentage increase on average) — and it took advantage of that room, increasing the percentage of the 17 year old population that graduated from high school every year of the boom! Although the other booms saw higher levels of graduation, none of them can boast continuous improvement (the 1960s boom saw great gains, as well, but also some declines). In fact, the 1991-2001 boom saw a steady decline, before leveling out just below its beginning 1991 level.

So the picture, on a whole, is mixed. Perhaps the comparison itself is fundamentally flawed because of vast differences of the times. The Roaring Twenties were not the longest boom in American history, nor were they greatest, in terms of GDP and output. They saw the highest levels of income inequality out of the four booms we’ve examined (though the 1991-2001 boom comes close) but also a lower level of unemployment. The life expectancy retreated a bit, on average, though schooling enrollment and graduation made real gains. Productivity in the manufacturing sector, also, was high, though lower than the 1991-2001 boom, and copyright registrations were lower per person than in the three other booms.

The true picture is complicated, and for Beck to frame the Roaring Twenties as the high water mark of United States economic history (“arguably the most prosperous 8 years this country has ever seen”) is simplistic and dishonest. Nevertheless, the Roaring Twenties were a prosperous period in United States history that, according to the data examined, saw numerous gains in various aspects of life.


Beck Check: Coolidge and Harding

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Glenn Beck spent a portion of his February 9 show discussing the presidencies of Warren G. Harding and Calvin Coolidge. I was interested in his talking points, so I decided to run some fact-checking. Here’s the results.

“Coolidge and Harding decreased the real per capita federal expenditures – the size of the government – from $170 per year in 1920 to $70 in 1924. These policies, along with fostering the mentality of self-reliance – the opposite of what the progressives had been preaching in the previous 20 years and the opposite of what progressives teach now. They’re not saying ‘be self-reliant’, they’re saying ‘too big to fail, you can’t make it without the government’s safety nets.’ Stand on your own two feet, America!”

This statement, like many Beck make, is a bit misleading. In the interest of time, we will limit our discussion to his comments regarding Harding, Coolidge, and their economic policies. Were they really the antithesis of the preceding years’ progressivism?

President Calvin Coolidge

We’ll start with the value of this statement ‘on its face’. Did Coolidge and Harding decrease the real per capita federal expenditures from $170 per year in 1920 to $70 in 1924? Yes and no.

Now, I’m not entirely sure what source Beck used, but one of my main sources in researching his claim was a Cato Institute publication by Randall Holcombe titled: “The Growth of the Federal Government in the 1920s.” The Cato Institute is a libertarian think-thank that describes its mission as “to increase the understanding of public policies based on the principles of limited government, free markets, individual liberty, and peace.“ I assumed that because of Cato’s reputation (UPenn gave it excellent rankings in its 2010 ranking of think-tanks, including a #2 spot in the area of Domestic Economic Policy) and its advocation of limited government (a position with which Mr. Beck would likely concur), that the research of the Cato Institute would be a fairly noncontroversial in fact-checking Beck.

First, let’s define “Real Per Capita Federal Expenditures.” Federal expenditure per capita is how much money the federal government is spending per person. That is, it is the total federal government spending divided by the population. When we define this as “Real,” it simply means we’re adjusting for inflation. Because of inflation, comparing the dollar amounts of one year to another is an unequal comparison. Thus, the amounts need to be converted in order to nullify the effects of inflation and see how much the amount really increased or decreased.

As the following chart from the Holcombe paper shows, total real per capita federal expenditures in 1920 was $390.98. In 1924, that total was $194.85.

Quite a decrease.

Much of this decrease had to do with World War I. Federal expenditures increase largely during wartime in order to fund the war, and then subside once the war is over, because the military is no longer in need of large funding to sustain the war effort. In order to try to account for this, there is a second column in the table above. This one tries to subtract defense expenditures from the total. This is where Beck, it appears, is getting his numbers. According to this table, the 1920 federal expenditures per capita, minus defense, were $170.15, and those in 1924 were $70.36. Again, a nice decrease.

It would seem, then, that Beck’s statement is somewhat true. Of course, he is discounting a large part of the federal budget, but (and this is purely conjecture based on what I have seen of Beck’s opinions), he may feel that this discounting is justified as national defense is a necessary expenditure, and he would possibly want to limit his discussion to the federal government’s expenditures of which he disapproves.

Either way you look at the numbers, however, there is a nice decrease in federal expenditures. So Beck seems justified either way.

Holcombe, though, contends that the table suggests “there are war-related expenditures in the government budget even after subtracting defense, veterans, and interest expenditures. This makes it apparent that one cannot accept nonwar expenditures as unrelated to the war.” Although the table attempts to extricate total expenditures from military spending, there is still at least somewhat of a relationship between the two.

But let us overlook this for a moment and continue on with Beck’s statement. Let us assume that Coolidge and Harding were largely responsible for the decrease in real per capita federal expenditures, and not the end of World War I (a large leap). Even if this were true, Coolidge and Harding still did not reach the pre-war levels of real per capita federal expenditures — levels that occurred during the Progressive Era. In 1916, before the war began, the total was $83.60, as compared to Coolidge and Harding’s $194.85 in 1924.

Also, Beck comments only on 1920 to 1924, which should seem odd considering the Harding-Coolidge years actually stretched to 1929. Beck fails to mention that real per capita federal expenditures minus defense (the numbers from the second column that he cites during his show) actually rose after 1924. In 1929, at the end of the Harding-Coolidge run, the total expenditures minus defense had risen to  $89.30. Not a large increase, but much bigger than the total minus defense for 1916, which was $22.75. The total expenditures until 1929 actually continued to decline until 1927, as the table shows, and then increased, reaching $195.41 in 1929.

Holcombe says that:

“From 1924 to 1929, before Depression-related expenditures would have found their way into the budget, nonmilitary expenditures increased by 27 percent, all during the Coolidge administration. If we take the decline in expenditures up through 1924 as a winding down of the war effort, there appears to be a considerable underlying growth in federal expenditures through the 1920s–growth worth examining more closely. What at first appears to be a relatively stable level of federal expenditures in the 1920s actually is substantial underlying growth, masked by a decline in war-related expenditures.”

Yet, Holcombe says, “It would be misleading to try to judge the growth of the federal government in the 1920s only by looking at aggregate expenditures.” With this, we go beyond Beck, who leaves the discussion simply at expenditures. Holcombe notes several areas in which the government grew under Coolidge and Harding –

  • the creation of government-owned corporations (which began prior to Coolidge and Harding, but did not stop during their terms)
  • the expansion of federal aid to states
  • expansion in the role of the post office and the salaries of its workers (“postal deficits in the 1920s were caused by the expansion of postal services and the provision of many services without charge or considerably below cost.”)
  • expanding the enforcement of prohibition (for instance, Coolidge created the Bureau of Prohibition)
  • aid to the agriculture industry (“Whether evaluated financially or with regard to programs, the 1920s saw considerable government growth in the agricultural industry, and laid the foundation for more federal involvement that was to follow in the New Deal.”)
  • antitrust action

Below is an excerpt regarding antitrust action during the Harding-Coolidge years:

Expenditures are the easiest measure of the size of government, but tell only a part of the story of government growth. Government regulation also has a substantial impact, but is harder to measure.[23] Starting with the Sherman Act in 1890, the federal government began its antitrust activity to try to limit the economic power of businesses. Only 22 cases were brought before 1905, but the pace started picking up later in that decade, which saw 39 cases brought between 1905 and 1909. From 1910 to 1919, a total of 134 cases were brought, showing increasing antitrust enforcement. But there was little slowdown in the 1920s, which saw a total of 125 cases. [24] As Thomas McCraw (1984: 145) notes, “By the 1920s antitrust had become a permanent part of American economic and political life.” One might anticipate, after an increase in cases, that firms would be more cautious in their activities to avoid antitrust cases being brought against them. But McCraw (1984: 146) further notes that in the 1920s a large proportion of antitrust cases were brought against firms that were not normally regarded as being highly concentrated. Antitrust enforcement in the 1920s was vigorous and increasingly broad in scope.

I highly suggest you read the entire Holcombe paper, but those are essentially the points in the paper that I found related to Beck’s statement. I was also surprised by how well Holcombe seems to sum up the refutation of Beck’s claims. I’ll let Holcombe’s words speak for themselves:

Normalcy, in the Harding-Coolidge sense, meant peace and prosperity, but it also meant a continuation of the principles of Progressivism, which enabled the Republican party to retain the support of its Progressive element. Despite the popular view of the 1920s as a retreat from Progressivism, by any measure government was more firmly entrenched as a part of the American economy in 1925 than in 1915, and was continuing to grow. Harding and Coolidge were viewed as pro-business, [10] and there may be a tendency to equate this pro-business sentiment as anti-Progressivism. [11] The advance of Progressivism may have been slower than before the war or during the New Deal, but a slower advance is not a retreat. [12]

Late economist Herbert Stein (Former Chairman of the Council of Economic Advisors under Presidents Nixon and Ford and a member of the board of contributors for the Wall Street Journal) also wrote of Coolidge’s economic policies in his excellent book “Presidential Economics: The Making of Economic Policy from Roosevelt to Clinton.” His conclusions regarding the Coolidge years (on page 28) also run contrary to Beck’s claims:

But if we use as a test of conservatism the degree of government intervention in the economy, the Coolidge administration was not conservative compared to its predecessors. Coolidge presided over a New Era, and the era was new not only in the height of the stock market; it was also new in the economic role of the government, and part of the confidence in the future of the American economy was so strong in the Coolidge days was confidence in the cooperative policy of government. When Coolidge said that the business of America is business he did not mean that the business of government is to leave business alone. He meant that it is the business of government to help business. That was even more positively the idea of his activist Secretary of Commerce, Herbert Hoover. Coolidge did not undo the interventionist measures of the Theodore Roosevelt and Woodrow Wilson regimes. At the end of his term the federal budget was larger than in the time of, say, William Howard Taft. He reduced income tax rates, but we still had an income tax, which we hadn’t fifteen years earlier. Perhaps most important, his term was a period of increasing acceptance of the responsibility of the Federal Reserve to help stabilize the economy.

The Coolidge and Harding years, it seems, were not the years of limited government and abandonment of progressivism that Beck says they were. He may have had a few numbers correct (though he failed to properly identify them), but his implications are not entirely borne out by the facts.

(Beck goes on to describe the “Roaring Twenties,” and describes them as “arguably the most prosperous 8 years this country has ever seen.” A discussion of Beck’s “Roaring Twenties” description and how that decade compares to other economic expansions in American history (post-WWII boom and the 80s/90s, for instance) is the topic for a blog entry found here.)


Checking the Facts on Glenn Beck’s “Arguing With Idiots”

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Glenn Beck’s recent “Arguing With Idiots” video (made to promote his book by the same title) promotes itself as “truth for those who care to look” (in its opening theme song). But how much ‘truth’ does it actually contain? First, give the video a view.

Done? Good. Let’s break down the all of the claims into individual chunks and see which hold water.

  • Claim: “In 2006, the top 1 percent paid almost 40% of the country’s income taxes.”
    Status: True, but misleading.

Why is it misleading? Let’s see. The same set of data Beck uses also lists the top 1 percent’s share of the entire country’s wealth at a whopping 22.06 percent, more than a fifth of the entire country’s income. The reason for the discrepancy between high income earners paying a higher percentage of all income taxes is the progressive nature of the income tax system (higher tax brackets are taxed at higher levels). This is the inequity that Beck is railing against.

But two things stand out. The first is simply an observation that Beck’s argument, stripped of the national income share numbers as context, distort how the numbers are viewed. Consider this: even had the numbers been more in line with percentage of national income earned, it still would have sounded lopsided. Imagine that the numbers for 2006 had been that “1 percent paid 20 percent of the country’s income taxes.” This would actually be less than fair, given that the top 1 percent earned 22.06 percent of national income — yet it sounds lopsided.

The other point that stands out is that these numbers distort perceptions of tax contributions by only including the income tax. There are various kinds of taxes that Americans face, at each level of government (local, state, and federal). By picking a particularly progressive tax, Beck is able to manipulate the data to say what he wants.

If I wanted to make the case that American taxes are regressive (that is, the lower your income, the higher a percentage of your income is paid to taxes), I could do so quite easily through Mr. Beck’s strategy. By focusing only on the payroll tax, I could demonstrate that, since this particular tax is capped above a certain amount, it affects low income earners more than high income earners. Indeed, the effective tax rate for Social Insurance Taxes (payroll taxes) is 8.5 percent for the lowest fifth of Americans, but only 1.6 percent for the top 1 percent. Those aren’t shares, they’re tax rates. See how easy that was to cherry-pick data to make a point?

This this New York Times blog blog post has a good breakdown of the payroll tax:

Officially known as a “contribution,” the Social Security tax brings in almost as much revenue as the individual income tax, and is catching up. By June 2009, annual revenues for the payroll tax collections had reached almost 90 percent of individual income tax collections.

The Social Security part of the payroll tax is about 12 percent of the first $106,800 of employee earnings in a year. The Medicare part is about 3 percent of all payroll earnings (regardless of whether and how much employees make over $106,800).

As a result, people earning over $106,800 pay a lesser percentage of their earnings in payroll taxes than do people earning less than $106,800.

The highest-earning third of United States households pay more individual income tax than payroll tax. But the other two-thirds are paying more payroll tax than income tax.

Higher earners are still responsible for a disproportionate fraction of total taxes, but their share becomes less disproportionate as payroll taxes grow and individual income taxes shrink

The only way to get an accurate picture of the distribution of tax burdens across American society is to consider national income share compared to total tax burden, not only the income tax. So how much of total tax burden do the richest Americans shoulder? Well, according to this New York Times blog, which cites the liberal organization “Citizens for Tax Justice“:

 in 2008 the share of total federal, state and local taxes paid by each income group was relatively close to the share of income that that group brings in, at least as compared to  comparable 2006 numbers for effective federal tax rates:

(Horizontal axis shows the income group. Taxes include all federal, state and local taxes (personal and corporate income, payroll, property, sales, excise, estate, etc.). Incomes include cash income, employer-paid FICA taxes and corporate profits net of taxable dividends.)

So, this chart attempts to balance all taxes (not just federal) that the various income groups paid against the share of the total income each group holds. Does the top 1% pay more, according to this chart? A bit, yes, but it is much more comparable to their income share than Beck’s focus on the income tax would have you believe. Why is this? Well, basically, because although federal taxes are mostly progressive (with some exceptions), state and local taxes are often regressive.

From a New York Times blog:

State and local taxes tend to be more regressive if they rely more heavily on sales and excise taxes, do not have a broad-based personal income tax, or have a personal income tax that is structured in a less progressive way (e.g., a flat-rate income tax).

So, when including state/local taxes (which vary according to area — some states do have progressive tax systems while others have a flat tax rate), total tax rates are generally in line with total tax burden.

And, as noted above, some federal taxes are still regressive, most notably the Social Security tax (payroll tax). Also, although high-earners pay less of their income in Social Security payroll taxes, they often make out better in Social Security than lower-income workers. From “Putting Our House In Order: A Guide to Social Security and Health Care Reform” by George Shultz (a former Secretary of State under Ronald Reagan, and a Secretary of the Treasury under Nixon) and John Shoven:

Social Security discourages long careers because its system, which is designed to help low-income Americans, winds up helping high-income workers who have short careers. An individual who earns just above the minimum wage over the span of a long career will be correctly identified by the Social Security system as having low lifetime earnings. However, an individual with relatively high earnings per year over a short career span would also qualify as a low average earner by Social Security calculations. This inconsistency occurs because Social Security figures out average earnings on the basis of the highest thirty-five years of earnings, which would include zeros for those years in which an individual had no earnings.

So high-income earners get to retire years ahead of low-income earners, and still receive the benefits, though since they are not working anymore, they’ve stopped contributing to the workforce. Whether or not this is fair or unfair, you’d expect to hear healthy debate about the issue. But you don’t. And why is that? Because it is easier to cherry-pick data about income tax distribution in order to rile people up about ‘unfair’ tax burdens.

  • Claim: “The top 50% of earners paid 97% of the entire income tax bill.”
     Status: True, but misleading, for the same reasons outlined above. Also, the same data Beck cites also states that the top 50%’s share of the income is 87.49%.
  • Claim: The middle class only paid 3% of the tax burden.
     Status: False.

First, we need to define what the middle class is. It’s kind of an amorphous term, so stick with me. FactCheck.org gives a lengthy discussion of what the middle class may be. Take a look:

 It’s possible to come up with a definition of what constitutes “middle income,” but it will depend on how large a slice of the middle one prefers. If we look at U.S. Census Bureau statistics, which divide household income into quintiles, we could say that the “middle” quintile, or 20 percent, might be the “middle” class. In 2006, the average income for households in that middle group was $48,561 and the upper limit was $60,224. But we could just as reasonably use another Census figure, median family income. In 2006, the median – or “middle” – income for a family of four was $70,354. Half of all four-person families made more; half made less…

But others could have different definitions. Baker interviewed a man who earned about $100,000 a year and a woman who made $35,000, both of whom said they were middle class.

Public opinion polls show how slippery the term can be. An Oct. 2007 poll by the Kaiser Family Foundation, Harvard School of Public Health and National Public Radio asked 1,527 adults what income level makes a family of four middle class. About 60 percent said a family earning $50,000 or $60,000 fit that description. But 42 percent answered an income of $40,000 and 48 percent said $80,000 were both middle class…

Republic candidate Mitt Romney…defines “middle class” as anyone with an adjusted gross income of under $200,000…

Here, you can see a thinker from the conservative Heritage Foundation arguing that people with $250,000 incomes aren’t wealthy. Does that make them middle class?

So there’s a lot of debate on who, exactly is middle class. The site notes that politicians often change the term to fit their needs. Because of this, and because $200,000 seems a bit high, let’s bypass Mr. Romney’s definition. In fact, let’s give Mr. Beck the benefit of the doubt. Let’s find the lowest number there, and we’ll use that to define the floor of middle class. $35,000 looks like the lowest number up there to me. We’ll use that as the floor. So, in our definition, you need to make above $35,000 to be middle class.

Well, according to the data Beck uses, the top 50% (that non-middle class portion he’s talking about that pays 97% of America’s taxes) begins at $31,987. Which is below one of the lower figures we used to define middle class. Needless to say its much below some of the other proposed figures up there (notably those of Mitt Romney and the Heritage Foundation).

Now let’s take a look at tax brackets. If you make $31,987 or up and are filing singly, you’re either in the 25%, 28%, 33%, or 35% tax bracket. That’s right, out of the 6 tax brackets, you could be in 4 of them, depending on how much you make.

Some of what Beck says is true. Some is not. But pretty much all of it is misleading.