SOURCE: AP/ Evan Vucci

Gov. Romney and Rep. Ryan want to once again rig the system for the rich and let the wealthy get wealthier at the expense of everyone else.

See also: The Romney-Ryan Energy Vision Rigs the System for Big Oil and The Romney-Ryan Economic Vision

Endnotes and citations are available in the pdf version of this brief.

The Republican contenders for the White House—former Massachusetts Gov. Mitt Romney and Rep. Paul Ryan (R-WI)—have spent their lives protecting the richest Americans and leaving the rest of us behind. The Romney-Ryan vision is called “the most extreme … in modern times” by The New York Times because it asks the middle class, seniors, and students to pay more so that Gov. Romney can give himself a $4.5 million tax break alongside similar handouts to the wealthiest Americans.

There are two competing visions for how our country and our economy should work: a progressive vision, where America works for everyone, and the Romney-Ryan vision that works just for the privileged few by doubling down on the failed policies of former President George W. Bush. Gov. Romney and Rep. Ryan want to once again rig the system for the rich and let the wealthy get wealthier at the expense of everyone else. Here are the stark choices their vision presents in this election.

Key facts about the Romney-Ryan plan for America

Gov. Romney and Rep. Ryan will raise taxes on the middle class, lower taxes for millionaires. The Romney-Ryan plan would raise taxes on middle-class families with children by more than $2,000 a year. Their plan would raise taxes on 95 percent of Americans to pay for tax cuts for the wealthiest 5 percent. The Ryan-Romney plan would give every millionaire a new $265,000 tax cut on top of the Bush tax cuts.

Gov. Romney and Rep. Ryan would give a $4.5 million tax cut to Romney. Under Gov. Romney’s plan, he’d give himself a $4.5 million annual tax cut. Under Rep. Ryan’s plan, Gov. Romney would pay an income tax rate of less than 1 percent on more than $20 million.

Gov. Romney and Rep. Ryan will give huge new tax cuts to corporations, including Big Oil. The Romney-Ryan plan would cut corporate taxes by $1.1 trillion. The five largest oil companies alone would get a $2.3 billion in new tax breaks ecah year, in addition to keeping billions more in existing tax giveaways.

Gov. Romney and Rep. Ryan would end Medicare. The Romney-Ryan plan ends Medicare as we know it and turns it into a voucher program that shifts costs to seniors in order to pay for tax breaks for millionaires and huge corporations such as ExxonMobil Corp. Seniors’ out-of-pocket costs would increase between $1,000 and $6,000 a year. Their plan to repeal Obamacare would also cut seniors’ current benefits and force seniors to pay more for their necessary prescription medications.

Gov. Romney and Rep. Ryan would threaten Social Security. Rep. Ryan is an outspoken advocate for privatizing Social Security, and the Romney-Ryan plan would require massive cuts to Social Security benefits in order to finance new tax breaks for the wealthiest Americans.

Gov. Romney and Rep. Ryan will outsource American jobs. The Romney-Ryan plan protects tax breaks for outsourcing American jobs and offers huge new incentives for corporations to ship jobs overseas and to stash their profits in offshore accounts in places such as Bermuda and the Cayman Islands. Their plan would create up to 800,000 jobs in foreign countries including China and India.

Gov. Romney and Rep. Ryan will kill jobs. Gov. Romney’s plan would kill 360,000 jobs in 2013 alone. The even more radical Ryan plan, which Gov. Romney embraces, would kill more than 5 million jobs in the first two years of a Romney-Ryan administration.

Gov. Romney and Rep. Ryan would move women backwards. Gov. Romney and Rep. Ryan want to repeal Obamacare and take away benefits such as no-cost contraception coverage and mammograms. They both support radical “personhood” measures that would outlaw abortion, in vitro fertilization, and common forms of birth control. The two men do not support the equal pay law that helps ensure equal pay for equal work or other measures to ensure women’s economic security and equality in the workplace.

Gov. Romney and Rep. Ryan will raise costs for students. The Romney-Ryan plan includes dramatic cuts to education funding and would cut off student aid from more than 10 million students.

Gov. Romney and Rep. Ryan would devastate the poor. Gov. Romney and Rep. Ryan propose massive cuts to programs that would hurt families. More than 31 million people— children, seniors, people with disabilities, and the working poor—will lose their health insurance due to cuts to Medicaid. At least 8 million Americans would be kicked off the supplemental nutrition program. Nearly 2 million children would be pushed into poverty because of tax credits Gov. Romney and Rep. Ryan think should expire.

Gov. Romney and Rep. Ryan would explode the federal deficit. Gov. Romney’s policies would result in nearly $10 trillion more debt than President Obama’s proposals. In 2016 alone, Gov. Romney’s policies would lead to a $1.5 trillion deficit.

All of the details presented in this fact sheet are documented in our series on Gov. Romney’s plans for America, titled “Romney University,” presented by the Center for American Progress Action Fund. Get the facts here.

See also:

• The Romney-Ryan Energy Vision Rigs the System for Big Oil
• The Romney-Ryan Economic Vision

SOURCE: AP/ Jason E. Miczek

One of President Ronald Reagan’s important achievements, protecting spouses from impoverishment under Medicaid, would be gutted under the plans of Gov. Mitt Romney and Rep. Paul Ryan (R-WI).

This article was originally published on The Hill.

Perhaps the greatest fear facing senior citizens and their children is that they will be stricken with a long-term illness that will destroy all of their savings. This is still a concern today, but it was a much greater concern 30 years ago until President Ronald Reagan stepped up to protect spouses from impoverishment. Now, the two Republicans atop the presidential ticket in 2012 want to gut those protections.

Here’s what’s at stake. Medicare covers doctor bills and hospital bills but it provides for only a short period of nursing home care. If a nursing home patient exhausts his or her own Medicare coverage and all of his or her personal resources, which happens to most Americans after a year or so in a nursing home, Medicaid will then cover the cost of the care. About one-third of all Medicaid payments are for long-term care. 

But in the early 1980s, most if not all state Medicaid programs required a patient to deplete not only all of his or her resources but those of their spouse as well. If a wife or husband was in a nursing home, their combined savings and income were reduced to near poverty levels before the spouse could get Medicaid coverage. People who had worked and saved all of their lives were in many instances living on a budget that allowed little recreation, nothing more than a very frugal diet, and in some instances moving to substandard housing because of their spouse’s illness. 

That changed in 1988 when President Reagan signed legislation that forced states to grant Medicaid coverage based on the financial condition of the patient and allowed the spouses of patients to protect enough assets and income to live with some degree of comfort and dignity.

But twice in the past two years, former Massachusetts Gov. Mitt Romney’s newly announced choice for his vice presidential running mate, Rep. Paul Ryan (R-WI), has taken a budget proposal to the floor of the U.S. House of Representatives that would not only drastically slash federal support for state Medicaid programs over the next decade but also eliminate all mandates—including the ban on spousal impoverishment. Disturbingly, that plan developed and pushed by Rep. Ryan, the House Budget Committee chairman, was adopted in the House on both occasions. The Ryan budget failed to become law only because of objections in the U.S. Senate and the threat of a veto from the White House. 

A report that I issued more than one year ago, “The Ryan Medicaid Plan: A Threat to Middle Class Security,” outlined the problem. In addition to eliminating the expansion of Medicaid eligibility provided under the Affordable Care Act, the Ryan budget proposal would turn Medicaid funding into block grants for the states, providing far less funding in future years than will be needed to keep pace with the increased numbers of elderly or others currently eligible for Medicaid benefits or the increased costs of providing medical care. Based on estimates by the nonpartisan Congressional Budget Office, Rep. Ryan’s plan would cut the expected federal contribution to state Medicaid plans from a projected level of $428 billion in fiscal year 2021 to $307 billion. That would cover only 37 percent of the federal share of the increased cost of the program, and leave the states to not only deal with their share of the increased costs but also a $122 billion federal shortfall.

How could states do that? Rep. Ryan says it’s easy—the federal government removes all of those troublesome mandates that states have to comply with. And his running mate Gov. Romney apparently agrees, having said he’s fully behind the Ryan budget plan.

In fact, Rep. Ryan’s proposed repeal of these mandates would make life incredibly hard for millions of seniors and their children who are hoping for a modicum of comfort and dignity in their old age. Don’t be fooled by Republican talk of Medicaid reform in this election campaign. The Gipper wouldn’t be.

Scott Lilly is a Senior Fellow at the Center for American Progress Action Fund.

This article was originally published on The Hill.

SOURCE: AP/Jae C. Hong

Republican presidential candidate Mitt Romney delivers the commencement address at Liberty University in Lynchburg, Virginia, Saturday, May 12, 2012.

For more facts on Gov. Romney’s plans for America, a Center for American Progress Action Fund series entitled “Romney University,” click here.

Download this issue brief (pdf)

Endnotes can be found in the PDF version.

Today’s Millennial generation is the largest, most diverse, and most progressive generation in American history. By the 2020 presidential election about 90 million eligible voters, comprising nearly 40 percent of the electorate, will hail from the Millennial generation, and 44 percent of all Millennial adults will be people of color. These voters, ages 18 to 34, are already demonstrating their political clout. And their progressive leanings will have repercussions as Millennials shape and transform the cultural, economic, and political attributes of America.

In analysis and research conducted previously by the Center for American Progress of 21 core values and beliefs garnering majority support among these young Americans, only four of those values were classified as conservative. 44 percent of young Americans self-identified as progressive or liberal in contrast with the 28 percent identifying as conservative or libertarian.

This represents a huge challenge for the Republican candidate for president, former Massachusetts Gov. Mitt Romney. His vision of the United States and our country’s path forward differs dramatically with that of today’s young people. Even younger, self-identified Republicans have a significantly more progressive worldview than that of Gov. Romney. These young Republicans often have more in common with their fellow Millennials than they would with older conservatives, which means the contrast between Gov. Romney’s policy positions and those of the majority of Millennials highlights just how antiquated his policies really are. Specifically, among young Republicans:

• 59 percent say that the economic system unfairly favors the wealthy.
• 56 percent favor the Buffett Rule to ensure economic fairness in our nation.
• 51 percent say that the government should do more to reduce the gap between the rich and the poor.
• 49 percent favor allowing gay and lesbian people to marry.

So let’s take a closer look at Gov. Romney’s policy positions to see how out of sync they are with the vast majority of the Millennial generation, from the economy to the role of government in our society, and from immigration reform and women’s health rights to gay and transgender equality.

The economy

The current generation of young Americans has a vastly different vision of the economy than Gov. Romney. This generation sees a clear role for the government to play in strengthening the economy and also believe that the system unfairly benefits the wealthy.

Economic fairness

When it comes to the most fundamental issues of economic fairness, Millennials disagree strongly with Gov. Romney’s stated policies. Nearly three-quarters of Millennials, including the majority of Republican Millennials, believe that the current economic system unfairly benefits the wealthy. While they admire those who work hard to become wealthy, the majority of all Millennials believe that the problem is that not everyone is given an equal chance in life.

To address this problem Millennials believe the government should be doing more to give those less fortunate a hand up as they seek their own opportunities in our economy today. Seventy-two percent favor increasing the tax rate on Americans earning more than $1 million a year in order to create a more broad-based middle class. This, again, includes the majority of Republican Millennials.

While Millennials are concerned about the current economic system being unfair, Gov. Romney has professed the opposite viewpoint by declaring himself “not concerned about the very poor.” In fact, he supports the Bush-era tax cuts for those making over $1 million a year, putting himself in opposition with nearly three-quarters of Millennials who would favor moving in the opposite direction by adopting a policy such as the Buffett Rule, which would apply a minimum tax rate of 30 percent on those making more than $1 million a year.

Indeed, on just about every economic policy position, the core values of the Millennial generation conflict with those of Gov. Romney. Specifically:

• 73 percent of college-age Millennials ages 18 to 24 agree that “the economic system in this country unfairly favors the wealthy.”
• 72 percent favor “increasing the tax rate on Americans earning more than $1 million a year.”
• 69 percent agree that “the government should do more to reduce the gap between rich and poor.”

In contrast, Gov. Romney is clear where he stands:

• “I support the Bush tax cuts. The Bush tax cuts helped get our economy going again when we faced the last tough times.”
• “I’m not concerned about the very poor. We have a safety net there.”

The role of government

With such basic and wide-reaching differences in the Millennials’ assessment of whether the economy is working for everyone, it is not shocking that the disagreements between Millennials and Gov. Romney extend sharply into the role of the federal government. The majority of Millennials believe the federal government should prioritize spending to help our economy recover rather than reducing the budget deficit. And over the long term, four out of five Millennials believe that it’s government investments in education, infrastructure, and science that are necessary to ensure U.S. economic growth.

Unfortunately, these views are not shared by Gov. Romney. He wants to “cut, cap, and balance” federal spending, which conservatives want to do to limit federal spending to an impossibly low set percentage of Gross Domestic Product, the largest measure of economic growth. While young Americans would prefer to invest money in education instead of tax breaks for the wealthy, Gov. Romney believes we need fewer teachers and less government intervention. As he put it, “Instead of thinking in the federal budget, what should we cut—we should ask ourselves the opposite question. What should we keep?”

Here’s what Millennials think of the proper role of government in our economy:

• 80 percent agree that “government investments in education, infrastructure, and science are necessary to ensure America’s long-term economic growth,” compared to 6 percent who disagree.
• 55 percent think “the higher priority for the federal government should be spending to help the economy recover rather than reducing the budget deficit.”

In contrast, Gov. Romney thinks:

• “Instead of thinking in the federal budget, what we should cut—we should ask ourselves the opposite question. What should we keep?”
• “I am for cut, cap, and balance.”
• “[President Obama] says we need more firemen, more policemen, more teachers. Did he not get the message of Wisconsin? The American people did. It’s time for us to cut back on government and help the American people.”

Gay and transgender equality

Survey after survey has shown that Millennials strongly believe in equal rights for lesbian, gay, bisexual, and transgender individuals. Majorities of young Americans strongly support allowing gay and lesbian couples to marry, allowing same-sex couples to adopt children, enacting employment-discrimination protections for all Americans, and allowing gay and lesbian couples to form civil unions.

Gov. Romney takes the opposite stance. He is opposed to gay marriage, opposed to civil unions, and supports the Defense of Marriage Act, federal legislation that defined marriage as between a man and a woman. He believes that society has “established marriage as a relationship between a man and a woman because access to both genders is helpful in the development of a child.”

Here’s what Millennials believe about gay and transgender equality:

• 79 percent favor employment discrimination protections for gay and lesbian people.
• 71 percent favor allowing gay and lesbian couples to form civil unions.
• 69 percent favor allowing gay and lesbian couples to adopt children.
• 62 percent favor allowing gay and lesbian couples to marry, including 49 percent of Republican Millennials and 44 percent of white evangelical Millennials.

In contrast, Gov. Romney believes:

• “Marriage is a sacred institution between a man and a woman and I have been rock solid in my support of traditional marriage. Marriage is first and foremost about nurturing and developing children.”
• “When I am president, I will preserve the Defense of Marriage Act and I will fight for a federal amendment defining marriage as a relationship between one man and one woman.”
• “Society has, from the beginning of recorded time, established marriage as a relationship between a man and a woman because access to both genders is helpful in the development of a child.”
• “I indicated my view, which is I do not favor marriage between people of the same gender, and I do not favor civil unions if they are identical to marriage other than by name.”

Immigration

As the most diverse generation in U.S. history, Millennials have personal and firsthand knowledge of the benefits of diversity. As a result, it is not surprising that they are among the most progressive when it comes to immigration policies. Broadly, more than two-thirds of Millennials believe that “newcomers strengthen society,” which in turn forms the basis of their opinions on specific immigration policies. Over 80 percent believe there should be a path to citizenship for undocumented immigrants, and more than two-thirds support legislative versions of that path such as the DREAM Act, which would provide a path to citizenship for undocumented youth.

While Millennials are embracing diversity and eager to make the immigration system better to build a stronger United States, Gov. Romney again heads in the opposite direction. He opposed a path to citizenship for undocumented immigrants, stating “there should be no special pathway to permanent residency or citizenship for those that have come here illegally.” He also is opposed to specific proposals such as the DREAM Act, and he has indicated that he would strike down recent executive action that provides temporary relief to younger undocumented immigrants.

Indeed, Millennials strongly favor comprehensive immigration reform, with:

• 81 percent saying they believe in providing a path to citizenship for illegal immigrants, compared to 17 percent who oppose doing so.
• 69 percent saying that “newcomers strengthen society,” compared to 27 percent who say that “newcomers threaten customs and values.”
• 64 percent of 18- to 29-year-olds saying they support the DREAM Act, compared to 31 percent who oppose it.

And once again, Gov. Romney is out of step with the majority of Millennials, saying:

• “I disagree fundamentally with the idea that the 12 million people who’ve come here illegally should all be allowed to remain in the U.S. permanently. … That is a form of amnesty, and that it’s not appropriate.”
• “For those who come here illegally, the idea of giving them in-state tuition credits or other special benefits I find to be contrary to the idea of a nation of law.”
• “Some people have asked if I will let stand the president’s executive action. The answer is that I will build my own long-term solution that will replace and supersede the president’s temporary measure.”

Women’s health rights

Millennials wholeheartedly support the rights of women to make their own health decisions. From reproductive rights to pro-choice abortion protections, the Millennial generation stands with progressives in protecting and expanding the health rights of women. This includes doing everything possible to make prescription birth control affordable and accessible to those who want it.

Gov. Romney is on the opposite side of the Millennial generation by advocating for overturning Roe v. Wade and saying that “states should be allowed to put in place pro-life legislation.” He has also called for getting rid of Planned Parenthood, an organization dedicated to providing women with access to preventative health care, such as mammograms. A prominent Romney supporter, Foster Friess, has even gone so far as to recommend that “gals” use Bayer aspirin as contraception by putting it “between their knees.”

Millennials by around three-to-one support women’s health rights, with:

• 84 percent agreeing that “we should do everything we can to make sure that people who want to use prescription birth control have affordable access to it and that cost is not an obstacle.”
• 83 percent agreeing that private insurance should cover birth control.
• 79 percent agreeing that government-sponsored insurance should cover birth control.
• 66 percent opposing “cutting off federal government funding to Planned Parenthood.”
• 60 percent of college-age Millennials believe that “religiously affiliated colleges and hospitals should be required to provide their employees with health care plans that cover contraception at no cost.”

Gov. Romney and his presidential campaign spokespeople, of course, disagrees with all of these positions, saying:

• “Planned Parenthood, we’re going to get rid of that.”
• “I’d love to have an America that didn’t have abortion. But that’s not what the American people [want] right now. And so I’d like to see Roe v. Wade overturned and allow the states to put in place pro-life legislation.”
• Spokeswoman Andrea Saul: Requiring all university health insurance plans to cover contraceptives “is a direct attack on religious liberty and will not stand in a Romney presidency.”

Conclusion

On issue after issue, Gov. Romney is on the wrong side of history and on the wrong side of the Millennial generation. Studies show that Millennials are progressive, hopeful, diverse, and believe in the power of people to create real and lasting social change.

Millennials believe in a just and fair economy that ensures everyone is playing by the same rules. They believe that we cannot have a sustainable economy without ensuring the middle class is growing and that all Americans have the opportunity to live out their dreams.

Policies that reduce the rights of women, immigrants, minorities, voters, and the gay and transgender community have been handily rejected by this generation. Millennials have refused to follow leaders and political ideologies that treat any American as a second-class citizen.

Time and time again we see that Gov. Romney’s extreme agenda is in direct contrast to our generation’s values and ideals. Over the course of the next few months, Campus Progress Action and Pushback.org will highlight these differences through youth-led reporting, original reports, fact sheets, infographics, social media, and more.

Tobin Van Ostern is the Policy Manager for Campus Progress Action. Joshua Murphy, Sharon Reshef, and Doug Lavey contributed to this report.

Download this issue brief (pdf)

Endnotes can be found in the PDF version.

For more facts on Gov. Romney’s plans for America, a Center for American Progress Action Fund series entitled “Romney University,” click here.

SOURCE: Center for American Progress

Download this testimony (pdf)

Thank you Chairman Camp and Ranking Member Levin for inviting me here today to testify on the effects of tax policy on the U.S. manufacturing sector. My name is Heather Boushey and I’m a Senior Economist at the Center for American Progress Action Fund.

The U.S. manufacturing sector is and will remain vital to our nation’s economic prosperity. The rise of American industry made the United States the wealthiest and strongest nation on earth, provided the foundation for a strong middle class, and fueled critical breakthroughs in innovation and technology that transformed our lives and produced previously unimaginable achievements, from the invention of Henry Ford’s assembly line to the landing of a man on the moon.

I want to make a two key points in my testimony today:

First, manufacturing is not only a key part of our economy, but moving forward it will remain critical to our nation’s economic vitality. A strong manufacturing industry supports solid, middle-class jobs; enables our nation to be a leader in technology and innovation; and can help us address our trade deficit. Economic research is showing that manufacturing is critical to our economic future.

Second, there are a variety of ways that policymakers can support manufacturing, of which reforming the corporate tax code is one piece of the puzzle. Manufacturers make their investment decisions based on a variety of factors, not only the level of taxation. The research is clear that any set of policies aimed at supporting U.S. manufacturing should include investments in education and training, infrastructure, basic and applied research and development, and improvements to basic data collection.

To support manufacturing, I recommend that this Congress focus on a few key items:

• Pass comprehensive business tax reform that both eliminates loopholes and inefficient business tax expenditures without disadvantaging domestic manufacturing. Currently, loopholes allow companies to avoid paying U.S. taxes by artificially shifting their profits offshore. Closing these loopholes by adopting strong provisions to prevent base erosion and will promote job growth in the United States and insure businesses are both competitive and fairly taxed.
• Find a fiscally responsible way to make the research and experimentation, or R&E, tax credit permanent in order to boost and attract domestic investment in research and development, or R&D, from the private sector. Studies have shown that the R&E tax credit stimulates as much research and development investment as a direct subsidy and that the social returns on R&D are greater than returns for private investors who finance R&D. The Obama tax proposal finances the credit exclusively through business tax reform.
• Introduce a minimum tax on foreign earnings to prevent production from going to tax havens overseas. This would also ease the tax code’s current bias towards foreign, as opposed to domestic, investment and level the playing field among competing businesses.

I want to stress, however, that the level of taxation is only one piece of the puzzle and the statutory corporate tax rate is only one aspect of the corporate tax code and how it affects businesses. Supporting manufacturing requires a deeper policy commitment and while I will focus my time in my remarks specifically on tax policy, given the jurisdiction of this committee, there are also a variety of other ways that we can promote manufacturing and innovation in the United States—or least not disadvantage it relative to other industries—including:

• Improve infrastructure so that U.S. goods can be more easily transported and marketed at home and abroad. This will also make the U.S. more appealing to businesses and globally competitive.
• Implement the Obama administration’s proposal to start an $8 billion “Community College to Career Fund” to encourage collaboration and partnerships between community colleges and businesses in training our future workforce. Two million workers would learn skills vital to working in burgeoning industries like advanced manufacturing and heath care. A highly skilled workforce would also give the U.S. and its regional economies further advantages over its global competitors.
• Increase government investment in advanced manufacturing by 19 percent, to $2.2 billion in fiscal year 2013, as outlined by the current administration. Manufacturing workers receive better pay and benefits, while the manufacturing sector is the driving force behind innovation in our economy. Additional investments in this area will benefit workers, improve our standard of living, and strengthen our economy.
• Follow through on President Obama’s plan to establish a National Network for Manufacturing Innovation. This network, comprised of up to 15 new manufacturing institutes, would facilitate and promote collaboration between companies and research universities, all with the aim of increasing and scaling up manufacturing production.

Having a strong manufacturing industry in the United States should be at the top of our national economic agenda. Without a vibrant and innovative manufacturing base, we will not be a global leader for long. Moreover, as more of our energy future will rely on high-tech manufacturing, our economic competitiveness will be even more closely aligned with our ability to be an innovator and producer of manufactured goods.

Further, this is an urgent national issue and one of those cases where success begets success. Economists have begun to study and show that the “industrial commons” matters for innovation and the extent to which we allow manufacturing processes to continue to go overseas, we only make it that much harder to regain our place as a global leader. As my colleagues Michael Ettlinger and Kate Gordon have put it, “the cross-fertilization and engagement of a community of experts in industry, academia, and government is vital to our nation’s economic competitiveness.”

Manufacturing is not only a key part of our economy, but moving forward it will remain critical to our nation’s economic vitality.

The U.S. manufacturing sector is still a force internationally and an important part of our economy, despite employment losses and the relative rise in manufacturing in other countries over the past few decades. Last year, manufacturing contributed over $1.8 trillion to U.S. gross domestic product, or about 12 percent of the economy. Two years ago, manufacturing accounted for 60 percent of all U.S. exports. In 2008, the United States ranked first in the world in manufacturing value added, and it was the third largest exporter of manufactured goods to the world, behind only China and Germany and ahead of Japan and France. Between 1979 and 2010 manufacturing output per hour of labor in the United States increased by an average of 4 percent annually, and the United States has one of the world’s most productive workforces. Moreover, in 2009 there were 11.8 million direct jobs in manufacturing and 6.8 million additional jobs in related sectors. Put another way, one in six U.S. private-sector jobs is directly linked to manufacturing.

Yet the industry suffered declines in the 2000s. The U.S. share of worldwide manufacturing value added dropped from 26 percent in 1998 to less than 20 percent in 2007, and we have gone from being a net exporter of manufactured goods in the 1960s to a net importer. Manufacturing as a share of U.S. GDP has declined from more than 15 percent in 1998 to 11 percent in 2009. And jobs in U.S. manufacturing declined from 17.6 million in January 1998 to 11.5 million in January 2010. And although the manufacturing sector has gained jobs in every month since then, for a total of 504,000 jobs as of June 2012, its share of total employment is down from 16.8 percent in 1998 to 10.8 percent today.

These trends matter because the United States needs a strong manufacturing sector. Manufacturing provides good, middle-class jobs; propels U.S. leadership in technology and innovation, which is critical to our economic growth and vitality; and is important to balancing the trade deficit, as well as important for our nation’s long-term national security.

The manufacturing sector has historically been a source of solid, middle-class jobs and it continues to be so today. The average manufacturing worker earns a weekly wage that is 8.4 percent higher than non-manufacturing workers, taking into account worker and job characteristics that influence wages, including unionization. Economist Susan Helper and her colleagues conclude that the economic evidence points to the fact that “the main reason why manufacturing wages and benefits are higher than those outside of manufacturing is that manufacturers need to pay higher wages to ensure that their workers are appropriately skilled and motivated.”

U.S.-based manufacturing underpins a broad range of jobs in other industries, including higher-skill service jobs such as accountants, bankers, and lawyers, as well as a broad range of other jobs such as basic research and technology development, product and process engineering and design, operations and maintenance, transportation, testing, and lab work. Compared to jobs in other economic sectors, manufacturing jobs have the highest “multiplier effect,” that is, the largest effect on the overall economy for each job created, relative to jobs in other industries. To put this in perspective, each job in motor vehicle manufacturing creates 8.6 indirect jobs, each job in computer manufacturing creates 5.6 indirect jobs, and each job in steel product manufacturing creates 10.3 indirect jobs.

Manufacturing is also important because it fuels the United States’ leadership in technology and innovation, which are critical to maintain for our future economic competitiveness. Manufacturing firms are more likely to innovate than firms in other industries: Research from the National Science Foundation finds that 22 percent of manufacturing companies are active innovators compared to only 8 percent of nonmanufacturing companies. This number is even higher for specific sectors within manufacturing. For example, in computer and electronic products manufacturing, 45 percent of companies are product innovators and 33 percent are process innovators. Manufacturing firms also perform the vast majority of private research and development: Despite comprising just 12 percent of the nation’s GDP in 2007, manufacturing companies contributed 70 percent of private research and development spending.

In addition to what manufacturers spend on innovation, there is increasingly strong empirical evidence showing a tight link between innovation and manufacturing production. Economic research now shows that the United States will not likely be able to keep the highly skilled technical jobs if the production jobs go overseas. Harvard Business School professors Gary Pisano and Willy Shih have written about the decline of the “industrial commons” in the United States: the collective R&D, engineering, and manufacturing capabilities that mutually reinforce each other to sustain innovation. For many types of manufacturing, geographic proximity is key to having a strong “commons,” and they point to evidence showing that there are few high-tech industries where the feedback loop from the manufacturing process is not a factor in developing new products. As they put it, “product and process innovation are intertwined.”

Pisano and Shih point to the example of rechargeable batteries as a product where innovation followed manufacturing. Rechargeable battery manufacturing left the United States many years ago, leading to the migration of the batteries commons to Asia. Now new technology (batteries for hybrid and electric vehicles) are being designed in Asia where the commons are located. I’d draw your attention to a January New York Times article on China’s increasing investment in research and development, which asked, “Our global competitiveness is based on being the origin of the newest, best ideas. How will we fare if those ideas originate somewhere else?”

Finally, manufacturing matters because it is an important part of our trade deficit, which in turn has implications for our macroeconomy. The United States has had a trade deficit in almost every year since 1971 and the size of those deficits has grown over time. The trade deficit was at $727 billion in 2011, having never topped $300 billion prior to 2000. Running a trade deficit over many years can have the effect of slowing economic growth, increasing unemployment, and risking economic instability. And, eventually, the U.S. will need to grow to pay back the debt we have incurred. The U.S. trade balance in high tech began to decline in 2000 and became negative in 2002.

The trade deficit can come down in a variety of ways, but it is hard to see significant progress without manufacturing playing an important role. Brookings Institution economists Susan Helper and Howard Wial with researcher Timothy Krueger calculated that the United States could eliminate its trade deficit by 2019 through service exports alone only if service exports grew at an annual rate of 13.5 percent, compared to their annual growth rate from 2001to 2010 of 7.9 percent. According to their analysis, it would be easier to balance the trade deficit by with manufacturing exports alone, as manufacturing exports would need to grow at an annual rate of 9.3 percent, compared to their 2001-2010 annual growth rate of 6 percent.

There are a variety of ways that policymakers can support manufacturing, of which reforming the corporate tax code is one piece of the puzzle.

The goal of this Congress should be to support U.S. manufacturing in ways that generates U.S. jobs and helps to locate the United States as an innovation leader. While taxation may be part of this agenda, it is far from the only part. For too long we have allowed this one aspect of how to grow our economy and support U.S. manufacturing to overshadow all others. Yet, the research is clear that any set of policies aimed at supporting U.S. manufacturing should include investments in education and training, infrastructure, basic and applied research and development, and improvements to basic data collection. Further, as economist Susan Helper and her colleagues have noted, the focus should include encouraging workers, employers, and unions, and government to share the responsibility for improving the manufacturing base.

I want to stress that the level of taxation is only one piece of the puzzle and the statutory corporate tax rate is only one aspect of the corporate tax code and how it affects businesses. I urge you to keep in mind the reason we tax. Tax revenues fund public goods that U.S. corporations and global corporations that do business in the United States benefit from and which otherwise would not exist. For that reason, when considering levels of taxation, it is equally important to weigh the benefits of the public goods and services made possible with taxpayer dollars. When it comes to creating good manufacturing jobs in the United States, I will argue that government spending plays a critical role in setting the stage for economic growth.

First, investments in education and worker training are critical to ensuring that manufacturers can find skilled workers to make their products. In a recent survey conducted by Accenture, 61 percent of companies indicated that they are considering more closely matching supply location with demand location, which means products for the U.S. market are increasingly likely to be made in the United States. However, these same companies also expressed that they are concerned about the availability of a skilled workforce in the United States. Another survey by Deloitte documents a growing skills gap in manufacturing. Of companies surveyed, 67 percent reported a moderate to severe shortage in qualified workers overall and 83 percent reported a moderate to serious shortage of skilled production workers; the majority expect this gap to worsen over time. While companies can and should do more to train workers, it also makes sense for the country to boost investments in workforce training and education. Instead, the House approved a budget that would actually cut investments in education and training by 48 percent per capita over 2010 levels.

Second, there is broad bipartisan consensus that a strong national infrastructure network is crucial to the success of the manufacturing sector and overall economic growth. Without an adequate infrastructure system, manufacturers face longer delivery times, more money wasted on gasoline as delivery trucks get stuck in traffic, rising energy costs, and more frequent power outages. But U.S. infrastructure has been woefully underfunded in recent years, to the great detriment of our manufacturing competiveness. The Center for American Progress has written extensively about the need to repair our aging roads, bridges, water, and other key public assets.

About one-in-four bridges in the country is structurally deficient or functionally obsolete. Inadequate freight rail means that our highways are clogged with both trucks and passenger vehicles, making transporting goods inefficient and costly. Our strained electrical grid contributes to an increasing frequency of debilitating blackouts. The repercussions of this failing infrastructure system to U.S. competitiveness are severe: according to the World Economic Forum’s Global Competitiveness Report, the United States now ranks 24th on key global indicators for infrastructure quality among 142 nations, down from 8th in 2006.

In order to revitalize our infrastructure and enhance our global manufacturing competitiveness, the Center for American Progress has recommended a set of critical reforms, starting with increasing the nation’s infrastructure investment by $129 billion a year over the next 10 years. Doing so will bring our crumbling infrastructure system up to par, helping to improve manufacturing productivity and ensure that manufacturers have the transportation network to efficiently bring their goods to market. Instead, this House has opted to pass a budget that would cut transportation infrastructure investments per capita by 28 percent over 2010 levels.

Third, funding adequate investments in research and development is necessary to promote U.S. manufacturing jobs. The relationship between basic research and development, commercialization, and the manufacturing sector is critical: the microwave, the photovoltaic cell, and the Internet, just three of a host of inventions, all came out of Department of Defense investments in basic research and development, without which they may have taken years or decades longer to be invented and commercialized. Yet federal research budgets have diminished in recent decades relative to GDP growth. Investments in science and technology research provide a critical basis for manufacturing innovation, but the House has instead voted for a budget that would reduce research and development spending per capita by 24 percent over 2010 levels.

Finally, improving federal data collection and competitiveness coordination is important to supporting U.S. manufacturing. One of the biggest barriers to the United States developing a more robust set of policies to support manufacturing is that policymakers do not have a clear idea of what this country already produces and there is little coordination between the many government agencies and programs that focus on basic competitiveness. For example, under the current systems of measurement, “it is not now possible to know how many jobs in the Detroit region are actually tied to the manufacturing industry.” We should reform our insufficient statistical system to assess the competitiveness of key traded industries, to adequately measure intermediate outcomes that influence competitiveness, to improve the analysis of factors that influence competitiveness, and to improve evaluation of competitiveness programs. Congress should also grant President Barack Obama the authority to reorganize the government to streamline federal competitiveness efforts by consolidating the following six agencies into one department: U.S. Department of Commerce’s core business and trade functions, the Small Business Administration, the Office of the U.S. Trade Representative, the Export-Import Bank, the Overseas Private Investment Corporation, and the U.S. Trade and Development Agency. Taking these steps is an inexpensive way to ensure that we are guided by the best, most accurate information when making manufacturing policies.

Creating a climate for the United States to be globally competitive requires that we make investments toward this goal. It is through this lens that we need to evaluate tax policy. As we think through how to construct a tax system that encourages manufacturing and other economic activity, we must balance the need for revenues to fund public goods that otherwise would not exist, alongside the distortions that taxes create. If our tax code cannot be reformed to raise additional revenue, the resulting deficits will drive debt-to-GDP ratios to unsustainable levels under any realistic spending scenario, with negative repercussions for the U.S. economy over the long term.

The fact is that we need to increase our revenues. Our current tax code is inadequate to fund our national needs without accumulating more debt and the problem is not one of accelerated spending, but rather of declining revenues. In the 1950s corporate taxes contributed about 30 percent of federal revenues, but have steadily declined and now average only about 10 percent of federal revenues. With the diminishing corporate tax the United States has relied more heavily on other taxes, in particular payroll taxes on wages, which have risen from about 12 percent of federal revenues during the 1950s to about 40 percent of revenues today. The increasing share of business activity being conducted via “pass-through” entities, including S corporations and LLCs is partly responsible for the decline in corporate tax revenues. But also responsible is the fact that corporations are paying lower effective tax rates on their profits than they did in the recent past.

The good news is that there is room for revenue-positive tax reform, including revenue-positive reform of the corporate tax code. The corporate tax is the third largest federal revenue source, behind individual income and payroll taxes. While the statutory corporate tax rate is 35 percent, the second highest in the OECD, the better measure of the actual tax paid by corporations is their effective rates. Recent studies have found that the effective rates of large U.S. corporations are in line with or actually lower than their foreign counterparts. In fact, corporate taxes represent a smaller portion of GDP in the United States than in other OECD economies.

In thinking through any reform, however, we need to bear in mind a number of key issues specific to manufacturing and whether the goal of a 26 percent rate for all industries is achievable. The Joint Committee on Taxation has said that eliminating nearly all major tax expenditures to lower the corporate rate in a revenue neutral way would allow us to get the rate to 28 percent, but not to 25 percent and if we are to increase revenue, this should be carefully targeted.

The mantra of “lower the rate, broaden the base in a revenue-neutral way” may in fact do the most harm to domestic manufacturing. Repealing tax expenditures and lowering the rate would increase, not decrease taxes on manufacturing firms. Writing for Daily Tax Report, Gerald Prante, Robert Carroll, and Tom Neubig found that:

…the biggest winners from using repeal of business tax expenditures to lower business tax rates to approximately 28 percent would be the retail and wholesale trade, information, transportation, finance and insurance, and services industries. Rate reduction would more than offset the loss of benefits from their tax expenditures.

Congress should consider carefully whether this kind of reduction serves our national economic goals. First, it is not clear that that we should continue to privilege finance over other industries and retail and wholesale trade are, by their nature, geographically constrained. In a fiscal environment where we are already facing large and growing budget deficits, we need to make sure that our tax policy both brings in sufficient revenue and focuses on supporting our manufacturing base. Prante, Carroll, and Neubig go on to note that while

…eliminating all business tax expenditures would disproportionately hit the manufacturing industry, especially those manufacturers with multinational operations. … Within manufacturing, durable goods manufacturers, especially those with a multinational presence, would be the biggest losers, requiring a far greater reduction in the corporate tax rate to break even.

This is consistent with analysis by economist Martin Sullivan in his analysis of lowering the rate in a revenue-neutral way, which found that this approach will be detrimental to domestic manufacturing. His analysis concluded that the biggest winners would be securities (net reduction of 12.3 percent), insurance (-11.9 percent), credit intermediation (-10.2 percent), and retail trade and bank holding companies (-10.1 percent each), while metal, minerals, and machinery manufacturing would see its net taxes rise by 7.3 percent and computers an electronics would see net overall taxes rise by 33.0 percent.

Second, tax reform should put an end to any bias toward foreign over domestic investment. The Government Accountability Office has found that the effective tax rate that U.S. corporations pay on their foreign profits is 16.2 percent, about two-thirds of the tax rate on their domestic profits, which they estimate to be 25.2 percent. Tax reform must level the playing field, not further tilt it against investment in the United States.

An initial, critical step to correcting this bias is to stop the drain of profits into offshore tax havens. Moving to a territorial tax system, especially without adequate safeguards, would make the problems worse. The discussion draft circulated by Chairman Camp admirably acknowledges the need for anti-tax haven rules. In seeking ways to pay for a corporate tax rate cut, the committee should be wary that many tax expenditures benefit domestic investment and eliminating them to pay for a corporate rate cut could actually make investment in the United States less attractive from a tax perspective. That’s why the best way to broaden the tax base is to crack down on offshore loopholes.

Third, tax reform should reflect our national economic priorities and support long-term U.S. competitiveness. In this regard we are long overdue for a review of the growing number of special tax breaks, or “tax expenditures.” The tax code contains permanent tax breaks to subsidize oil and gas, even though with oil hovers above $100 per barrel, there is no clear economic need for subsidies, while the tax breaks for alternative energy–which would not only help our nation lead the world in addressing the warming planet, but also support U.S. manufacturing in cutting-edge technologies–are merely temporary. This should be reversed.

There are real opportunity costs to tax expenditures and those that serve no policy purpose, like those for hedge funds and private equity fund managers (carried interest), should also be eliminated. Tax breaks that have a worthy public purpose and solid economic rationale, such as the domestic production deduction (section 199), should be reviewed to make sure they are well targeted and serving their purpose in a cost-efficient way. The president has proposed targeting that deduction more narrowly at manufacturing and advanced manufacturing, where there are the most spillover benefits.

The research credit also has a strong policy rationale. Congress should find a way to pay for a permanent or at least long-term extension rather than renewing it every year, sometimes retroactively.

Maintaining current revenue levels will only lead to continued deficits and more debt, while sacrificing the kinds of investments needed to meet basic needs and support manufacturing and economic competitiveness more generally. If our tax code cannot be reformed to raise additional revenue, the resulting deficits will drive debt-to-GDP ratios to unsustainable levels, with long-term negative repercussions for the U.S. economy. As Treasury Secretary Geithner said in a Bloomberg interview recently:

One thing we can do is change our tax system so we’re creating more powerful incentives for companies to invest here, because, again, we want the stuff that the world needs, stuff Americans are uniquely good at, to be produced in the United States by American companies and by foreign companies.

Given the important place of domestic manufacturing in our economy, this seems like the right goal.

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Heather Boushey is a Senior Economist at American Progress.

SOURCE: AP/Gary Kazanjian

Potholes and road closure are visible at the corner of Enterprise and Paige Avenues in Tulare, California.

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The dire state of America’s infrastructure is an all-too-familiar story. From dramatic cases of bridges collapsing and levees breaking to the more mundane but still very important problems of commutes lengthening, energy grids deteriorating, and transit becoming less reliable, we have not been making adequate investments in our nation’s infrastructure. This is the case despite abundant evidence of the needs and the benefits: Infrastructure investments boost productivity and spur economic growth, which is ever more important as other countries are making investments to pass us by.

So why has the United States neglected infrastructure investment?

There are certainly many causes, but one factor that has not received adequate attention is the decline of our middle class. When the middle class is strong, their interests—such as for greater investments in infrastructure—are more likely to be translated into political action. But when society is very unequal, the priorities of the rich tend to dominate.

Indeed, over the past several decades, America has become less of a middle-class society, with the share of income going to the middle class—defined as the middle 60 percent of the population—falling to just 46.5 percent in 2010 from 52.3 percent in 1967 as the wealthy have captured most of the economy’s gains. The top 1 percent has seen their share of income increase to 19.8 percent from 11.2 percent over the same time period.

Over the same period, as can be seen in Figure 1, federal investments in infrastructure declined as a percentage of the economy, falling by more than half as a share of gross domestic product—the broadest measure of economic activity—even after accounting for the uptick in infrastructure spending sparked by the American Recovery and Reinvestment Act of 2009. In 2011 federal infrastructure spending was 1.3 percent of GDP—a severe decline from 3.3 percent in 1968.

To be sure, this simple correlation between growing income inequality and declining public investments in infrastructure ignores a host of other factors that could be driving this relationship, among them which party controls government and the changing nature of the economy. But there is ample evidence that one of the reasons we aren’t making adequate investments in infrastructure is because high levels of economic inequality have distorted our democratic process. Academic studies examined in this issue brief alongside our own analysis indicate that the same relationship between a growing middle class and rising infrastructure investments occurs in other countries as well as here at home in our 50 states.

Indeed, the current debate in Congress over transportation funding illustrates some of the failings of our democracy that are fueled by the decline of the middle class. The gridlock that has produced a number of “temporary” extensions of the transportation funding bill, rather than a long-term bill to provide stable and adequate funding, is a hallmark of economic inequality. According to political scientists Nolan McCarthy, Howard Rosenthal, and Keith T. Poole, who have studied congressional voting patterns from 1879 to the present, income inequality leads to a widening divide between the political parties creating gridlock.

And if the gridlock is broken when the latest temporary extension expires on March 31, it is quite likely that the interests of the 1 percent will be well represented while the views of the middle class are discounted—also another hallmark of economic inequality. As Vanderbilt University political scientist Larry Bartels found in his study on the relationship between inequality and congressional votes: “In almost every instance, senators appear to be considerably more responsive to the opinions of affluent constituents than to the opinions of middle-class constituents.”

And make no mistake, the broader American public supports increased investments in infrastructure. Ninety-three percent feel making improvements to infrastructure is important; 72 percent support “increasing federal spending to build and repair roads, bridges, and schools”; and 81 percent are prepared to pay more in taxes to do so.

Yet infrastructure spending is unlikely to increase. The current Congress is poised to either keep spending at current insufficient levels or make cuts. The Senate majority recently passed a short, two-year extension of the transportation funding bill that continues spending at current levels. Reports on the draft-stage House majority transportation bill indicate that it will significantly reduce transportation funding, particularly for transit.

Similarly, the forthcoming budget plan for fiscal year 2013 from the House majority cuts tens of billions of dollars in discretionary spending, which includes infrastructure spending, every year compared to the president’s budget while cutting taxes for the wealthy. The plan would reduce transportation infrastructure investment per capita by 28 percent from 2010 levels.

Significant increases are not on the table in large part because of strong opposition to raising taxes to pay for the spending. The wealthy place a much higher priority on keeping taxes low than does the middle class, according to a number of academic studies.

In short, there are good reasons to think that the decline of the middle class may at least be partly responsible for our underinvestment in infrastructure. We detail those links in this issue brief.

The need for infrastructure

Numerous organizations and studies point out the need for increased public investment in infrastructure. The American Society of Civil Engineers gave the American infrastructure system an overall grade of D in 2009, reflecting poor grades for roads, dams, drinking water, and schools. Our colleague Donna Cooper calculated that the federal government needs to boost infrastructure spending by $48 billion a year, which would induce $11 billion in state and local spending. Another study by the Political Economy Research Institute at the University of Massachusetts, Amherst, and the Alliance for American Manufacturing came to a similar conclusion, calculating that the entire public sector would need to contribute $54 billion per year to meet the long-term need for infrastructure. Adequate investments in infrastructure are essential for the long-term economic health of our country.

Economists have long recognized the importance of investment to economic growth. Infrastructure investments in our interstate highway system or our railroads reduce transactions costs in the economy. Government investments in research and development create technologies, such as the Internet, which also boost growth. And public investments in education help create productive workers. Research by economists David Aschauer and Alicia Munnell find that public investments serve as a complement to private investments and help boost economic growth. Rather than crowding out private investment, public investment “crowds in” private capital and thus spurs growth.

How inequality reduces public investments

Several academics have looked directly into the relationship between income inequality and public investments and found that societies with stronger middle classes are more willing to invest in growth-oriented public goods. In a 2001 paper New York University economist William Easterly argues that less income inequality, among other factors, creates a “middle class consensus” that promotes investment and growth. The paper finds a positive correlation between the share of income going to the middle fifth of the population and investment in infrastructure and human capital.

Economists Alberto Alesina of Harvard University and Roberto Perotti of Bocconi University also find strong and positive correlations between the strength of the middle class and investments, both public and private, arguing that the middle class helps produce political stability, which is important for investment. As the authors write, “A ‘healthy’ middle class is conducive to capital accumulation,” and periods of high inequality are likely to reduce spending on public investment projects.

Certainly, the relationship between the middle class and infrastructure does not only run one way; public investments also help build a strong middle class. Still, academics have attempted to tease out which way the correlation flows through such mechanisms as instrumental variables, and find that a strong middle class leads to greater public investments. While this academic research hasn’t directly examined the United States, there is good reason to believe their findings would hold here.

But what is clear in our country is that the American public supports increased investments in infrastructure, yet the public’s desires aren’t being heeded. There are many explanations for why broad public support isn’t translating into political action, but at least part of the reason is the decline of the middle class. Because of rising economic inequality, our political system gives too much influence to the rich and far too little say to the broad majority of the population, as a host of academic studies have found, including those mentioned previously in this paper.

Public investments are especially important to the middle class because they are depending upon good roads, transit, and public school, and their economic opportunities are closely tied to the fate of the country. In contrast, the wealthy have more options, so public infrastructure is less of a concern. They can opt out of public goods, such as schools, or carve out special provisions within services.

This special treatment is increasingly self-evident. First-class passengers for airline flights can now enter an expedited line for security while other passengers wait in the normal line. Some cities now offer the opportunity to buy a pass into the carpool lane even if you are travelling alone. The companies advertising to the wealthy know full well the rich can more easily overcome the flaws of public goods through private means. In a full-page ad in The New York Times, the luxury carmaker Audi promoted one of its models stating, “The roads are underfunded by $450 billion. With the right car, you may never notice.”

According to academic studies, economic inequality can breed a selfish orientation toward public policy and reduce support for policies such as infrastructure spending that benefit many other people. Similarly, studies in experimental economics, a new field that explores the way people behave based on detailed analysis of behaviors in experimental settings, shows that inequality reduces the willingness of individuals to contribute to a public good and encourages people to behave selfishly.

In contrast, people in strong middle-class societies feel they share a similar fate and thus are more willing to make investments in which they may not directly benefit. These investments include roads that they may not drive on, power lines they won’t use, and schools their children won’t attend.

Skeptics might note that some wealthy Americans support increased infrastructure spending. They would be correct. Indeed, a large share of the very rich is composed of managers and executives of firms that may worry, for example, if the operations of their firm are affected by inefficient infrastructure and thus support certain types of infrastructure spending that they think would be beneficial. Other people who are wealthy may support infrastructure spending to help strengthen the country, or for any number of reasons. Evidence suggests that a majority of the wealthy probably do support increases in infrastructure spending—though it is hard to know with certainty because there is very limited polling on attitudes of the top 1 percent of income earners, or even the top 5 percent or 10 percent, about infrastructure spending.

But the point is that while the wealthy may support some infrastructure investment, increased investment may conflict with more cherished priorities of the rich, namely low tax rates. Academic studies are very clear that the wealthy want lower taxes, far more so than the middle class. So when push comes to shove, infrastructure is likely to take a backseat to keeping taxes low.

Take the current budget situation. The current level of federal spending was set by the Budget Control Act of 2011 after attempts to raise revenues were rejected. Now the current levels of infrastructure are constrained by the reluctance of the political system to increase taxes on the wealthy. The rich may say they support infrastructure investment but that support crumbles once it runs into higher priorities.

In sum, academic research and our current political situation indicate there are a number of theoretical and empirical connections between the strength of the middle class and the level of infrastructure investment.

States with a stronger middle class invest more in infrastructure

The relationship between the middle class and the level of investment in infrastructure applies to U.S. states. Our analysis shows that states with a stronger middle class—as indicated by a larger share of income going to the middle 60 percent of income earners—invest more in infrastructure than states with a weaker middle class.

Our analysis makes the simple correlation between the size of a state’s middle class and the amount of those states’ investment in public infrastructure. We do not control for a variety of factors that could also be causing the relationship. But our analysis provides additional support for the case that a strong middle class helps boost public capital investment. (see Figure 2)

Figure 2 compares the total annual infrastructure investments—in highways, schools, and utilities, for example—made by the 10 states with the strongest middle classes to the 10 states with the weakest middle classes. These annual state capital outlays, commonly known as infrastructure flows, are from the U.S. Census Bureau’s State Government Finances database and are the averages from 1999 to 2010, 12 years that cover 10 years of expansion and two years of recession.

Over this period, Alaska, Wyoming, Utah, Hawaii, Iowa, Montana, Nebraska, North Dakota, Delaware, and Wisconsin were the states with the strongest middle classes, while Connecticut, Tennessee, Oklahoma, Massachusetts, California, Louisiana, Florida, Mississippi, Texas, and New York were the states with the weakest middle classes. (Note that the results presented below all hold even when restricting the analysis to states in the contiguous United States.)

In combination with academic research, the chart about federal infrastructure at the beginning of this issue brief, and our previous research on education investment, this state-level analysis demonstrates there is a significant body of evidence that suggests a strong middle class is important for public investments.

State infrastructure outlays

On average, the top 10 states by middle-class strength spent more than 50 percent more as a share of state domestic product than the bottom 10 states by middle-class strength. Altogether the top 10 states spent, on average, 0.48 percentage points more of state domestic product per year than the bottom 10 states. An increase of that size in the state with median state domestic product would have increased state infrastructure outlays by $7.6 million in 2010.

Some analysts prefer to evaluate infrastructure spending on a per capita, or per person, basis instead of as a share of state domestic product. A strong middle class remains highly correlated with infrastructure spending when measured in this manner, too. Over the years 1999 to 2010, the top 10 states by middle-class strength spent $607 per capita in state infrastructure spending outlays while the bottom 10 states averaged $354 in per-capita expenditures.

Similarly, because the level of local government spending on infrastructure varies by state, it is worth noting that this relationship also holds when local infrastructure expenditures are included using the Census Bureau’s State and Local Government Finances dataset.

State public capital stock as a share of state domestic product

Another way to think about infrastructure investment is the value of the stock: the present value of all investments in public infrastructure, summing together historical expenditures and accounting for the depreciation of those investments.

Figure 3 compares the stock of public capital investments in strong middle-class states with weak middle-class states. The stock data were provided by the Political Economy Research Institute, based on an analysis of Census Bureau data, and are from 2006. Because the capital stock is the result of years of investment decisions and is not solely determined in a few years, we compare the current level of a state’s capital stock (2006) with the strength of its middle class over a long time period (from 1977, the earliest year data are available, to 2006).

As the graph shows, states with stronger middle classes boast significantly more valuable public infrastructure as a share of their economy. The states that ranked in the top 10 by strength of the middle class over the course of 1977 to 2006 had infrastructure worth an average of 54.21 percent of state domestic product in 2006 while the bottom 10 states averaged only 46.46 percent of state domestic product, a difference of 7.75 percentage points. An increase in the value of infrastructure by 7.75 percentage points as a share of state domestic product would equal an additional $10.6 billion in year 2000-constant dollars for the state with the median state domestic product in 2010.

State spending on highway construction is another case in point. As Figure 4 demonstrates, highway spending is also related to the strength of the middle class. The top 10 states by middle-class strength spend about 70 percent more as a share of state domestic product on highways than weak middle-class states.

Conclusion

America’s infrastructure is in dire need of renewal and improvement. Despite broad support for further investments, our federal and many state governments have not kept up with the demands of the economy and instead have let infrastructure crumble. Strengthening the middle class, while not the only solution, would help increase public investment in infrastructure.

Lower levels of income inequality are associated with lower levels of political polarization and make government less susceptible to political capture by the wealthy. Academic studies find that countries with lower levels of inequality and stronger middle classes invest more in public goods. And as the charts in this issue brief demonstrate, American states with strong middle classes also invest more.

For a variety of reasons, rebuilding the American middle class is an important step toward rebuilding America’s infrastructure.

David Madland is Director of the American Worker Project at the Center for American Progress Action Fund. Nick Bunker is a Research Assistant with the project.

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SOURCE: AP/Seth Perlman

Tax payers search through tax forms at the Illinois Department of Revenue in Springfield, Illinois.

With the tax filing season in full swing, millions of Americans are assembling the necessary paperwork to file their income tax before the April 15 deadline. For low-income workers, filing their income tax this year could provide a significant boost to their income if they take advantage of the earned income tax credit, or EITC. The EITC is a refundable federal income tax credit for low-income working individuals and families. It allows workers who qualify to increase their income by an average of $2,240. Congress originally implemented the credit in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. Over the years, the EITC has received wide support across the political spectrum and in recent years was expanded to provide additional benefits to larger size families and married couples, boosting its poverty reducing benefits.

While millions of low-income families look forward to this time of year and the income boost the EITC provides, many are not getting the full benefits of the credit because they turn to expensive tax preparation vendors to file their taxes. During tax filing season these vendors bombard low-income communities with a host of advertisements. They market their services as effective tools to help low-income consumers get their refund faster to make purchases, pay off bills, and avoid the traps of credit cards. Of course what’s missing from this marketing are the hidden fees and high interest families pay to get their tax refund a few days early.

High-cost tax preparation strips millions of dollars from families and communities each year. It is estimated that consumers in 2009 paid $606 million in refund anticipation loan, or RAL fees—essentially a high-interest loan against an individual’s tax refund. In addition to RAL fees, consumers paid another $58 million in filing charges and other processing fees to tax preparers. IRS data reveal that 87 percent of taxpayers who applied for a RAL in 2009 were low-income. Not surprisingly these loans offered by many tax preparation vendors are uniquely designed to target low-income workers. An Urban Institute report found that the median adjusted gross income of RAL borrowers is under $20,000, and that 1 in 4 taxpayers earning $10,000 to $25,000 use a RAL. These individuals typically live in low-income communities with limited access to mainstream financial services and institutions.

The targeting of low-income communities with expensive financial products isn’t just a problem at tax time, it continues throughout the year. A number of consumer instruments similar to RALs are marketed as reasonable, short-term options for individuals facing financial emergencies, those wanting to avoid late fees, or other less desirable short-term credit options. They include payday loans, high-interest loans that are geared toward low-income individuals who need immediate access to cash prior to receiving their next paycheck; auto title loans, small short-term loans secured by a borrower’s vehicle; and, rent-to-own programs. Due to the upfront charges and short repayment periods many of these programs carry fees equivalent to high annualized interest rates that can approach 400 percent. These type of loan instruments strip enormous amounts of capital from low-income communities. The Center for Responsible Lending estimates that services like payday loans trap over 12 million Americans in a vicious debt cycle while providing nearly $5 billion profits annually to the payday loan industry.

These predatory lending practices target communities, remove limited capital, and restrict the ability of many low-income families to become financially stable by building assets over time. The 2012 Corporation for Enterprise Development, or CFED, Assets & Opportunity Scorecard shows the impact of these products. In 2011 more than 1 in 4 households, 27 percent, qualified as asset poor, not having sufficient resources to survive for a short period and 43 percent of households counted as liquid asset poor, a measurement that does not include assets like a home that can’t be easily converted to cash.

Why antipoverty advocates should embrace financial empowerment

Policy changes made by the IRS in 2010 will reduce the ability of banks to offer RALs, limiting this specific form of asset stripping from low-income communities. But there are other types of high-cost financial instruments emerging to replace RALs.

Since the EITC is one of the largest single cash payments most low-income workers will receive in a given year, it presents the best opportunity for antipoverty advocates to engage families in financial empowerment planning. Across the country, communities are experimenting with different strategies and system reforms to empower low-income families so they can keep more of the income they earn. The first and perhaps easiest strategy being utilized is to encourage more families to use the free Volunteer Income Tax Assistance, or VITA, centers now available in many communities across the country. These facilities, certified by the IRS and operated by local social service providers and governments help families keep the full amount of their tax credit.

Utilizing EITC more fully

Moving beyond the free preparation, the tax filling season provides an opportunity for antipoverty advocates to implement creative programs and partnerships to help families prepare for the additional income they will receive, to think strategically about ways to avoid predatory financial practices, and to start saving for the future. If more low-income families are able to save they can better prepare for emergencies and earning fluctuations that frequently push people into poverty. Additionally, savings help keep families from falling into debt or turning to high-cost financial services during emergencies.

Traditional strategies to help the poor have rightly focused on increasing family income through employment and maintaining a strong, functioning safety net. After all, boosting incomes is the fastest way to reduce hardship and lift a family out of poverty. At the same time, higher costs for basic services reduce income and create barriers to saving and upward mobility. That’s why a comprehensive model to help low-income individuals reduce their costs, better utilize mainstream financial systems, and build assets is needed. Here are four strategies that must be incorporated into that model:

• Expand access to low-cost, mainstream financial services. Efforts must be made to encourage more financial institutions to expand services that are cost-effective, convenient to families, and profitable to an institution’s bottom line. Without available services in their communities, individuals will turn to high-cost services that are convenient.
• Establish financial education programs. These programs inform low-income families about available options and provide them with the skills to avoid predatory financial traps.
• Restrict predatory financial practices. Policymakers must implement guidelines to limit predatory marketing and financial practices that strip assets from low-income families and communities. This is simply another approach to boost the income among low-wage workers, reduce the reliance on government income transfers, and create additional incentives for work.
• Provide incentives to save. Policymakers should experiment with more programs that provide incentives to increase the savings rate among low-income communities.

A major obstacle to low-income families gaining more stable financial footing is that many of these families don’t have checking or saving accounts leaving them prey to predatory lenders.

In 2009, almost 8 percent of Americans were without a checking or saving account—what is termed “unbanked.” The unbanked level jumps to 22 percent for African Americans and 19 percent for Hispanics. Many of these families have lower incomes, yet pay higher fees to cash checks and pay for typical bills. One survey of low-income families in Kentucky found that 35 percent of regular customers of high-cost check-cashing establishments earn less than $20,000 annually, and about 62 percent earn less than $40,000.

Working toward solutions

Currently there are a number of initiatives up and running across the country that are working to financially educate families, reduce high-cost financial products, increase access to mainstream banking, and help put more families on the path to financial stability.

SaveUSAis a four-city initiative started in New York City (SaveNYC) that provides free financial counseling and money management tips to low-income families. SaveUSA also provides participants with a 50 percent match if they deposit at least $200 of their tax refund into a SaveUSA account and maintain the deposit for one year. In its first year, participating residents in the four cities opened more than 1,600 SaveUSA accounts with almost $1 million in savings. In New York City, residents with an average income of $16,000 were able to build a combined $250,000 in savings. Along with New York City, the program is now running in Newark, San Antonio, and Tulsa, Oklahoma. The matching funds are provided through a federal Social Innovation Fund grant.

Low-cost financial services

It is estimated that low-income workers pay up to $1,000 in annual fees for check-cashing services alone. Two examples of programs that are successfully working to reduce these fees and improve access to low-cost financial services operate in San Francisco.

Bank On started in San Francisco and expanded to over 100 cities across the nation. The program works with low-income families to help them develop relationships with mainstream banks. Bank On programs build local partnerships across governments, financial institutions, and nonprofits. They connect unbanked individuals to low-fee bank accounts, raise public awareness about predatory financial practices, and improve access to financial education for low-income consumers.

Payday Plus SF provides an alternative to the traditional payday loan. The program helps low-income people build credit and avoid debt when they need small loans between paychecks. Too often, low-income people use predatory payday loans to bridge the gap between paychecks, which put them at risk of developing bad credit and massive debt. Payday Plus SF loans offer reasonable interest rates and realistic repayment terms. Customers can borrow up to $500 and repay it over 6 to 12 months at a maximum APR of 18 percent, even if they have low or no credit scores.

Saving incentives

Oregon Neighborhood Partnerships IDA allows individuals who contribute to the individual development account, or IDA, program to have 75 percent of their contribution count as a tax credit on their Oregon state income tax return. The program uses the donated funds to provide financial education and specific asset training for low-income families and help them establish savings goals by setting up a plan for monthly deposits. The program provides a 3-to-1 match for every dollar participants save toward their goal, up to a maximum $3,000 per year.

Conclusion

To help more working families keep what they earn, antipoverty activists are embracing financial empowerment efforts and pushing for new policies to restrict asset-stripping practices. CAP’s Half in Ten campaign outlined a set of policies in its recent report, “Restoring Shared Prosperity,”to help cut poverty and expand economic growth. Reducing the number of unbanked households is one of the key indicators that the campaign will track over the next 10 years. Half in Ten recognizes that often all it takes is one financial emergency to push a family into poverty. To that end, the campaign will work to maintain a strong social safety net, but will also explore other strategies to help families become and remain economically stable. Across the country, antipoverty advocates have fully embraced the income stabilizing powers of the earned income tax credit and are actively working during the current tax filing season to help families file for and take full advantage of the EITC. As we work to achieve income security for American families we must help more individuals and families become financially empowered so they can avoid high-cost financial products in addition to expanding asset building incentives for low-income families.

Desmond Brown is a consultant to the Center for American Progress Action Fund’s Half in Ten antipoverty project.

SOURCE: AP/Reinhold Matay

Republican presidential candidate and former Massachusetts Gov. Mitt Romney speaks at a town hall meeting in Florida in October 2011.

Following his big victory in the Florida primary on Tuesday, Republican presidential front-runner Mitt Romney, in an unscripted moment of excitement, expressed his true feelings about those families at the bottom of our economy. He stated: "I’m not concerned about the very poor. We have a safety net there. If it needs repair, I’ll fix it.”

This is just the latest in a series of outlandish comments made by former Massachusetts Gov. Romney in recent months. Tone-deaf remarks—“corporations are people,” “I like being able to fire people,” and “I am also unemployed”—top this list. These statements—coming from a former private equity executive who earned $45 million in the past two years and paid only $6.2 million in taxes—clearly demonstrate how out of touch he is with the real challenges facing everyday Americans.

At a time when economic inequality continues to rise, and real wages have failed to keep pace with productivity, a presidential candidate should not only be concerned about the poor of our nation but should also set forth a plan to restore shared prosperity for all Americans.

The media has covered this latest statement as just another unfortunate Romney gaffe. The more troubling issue is not his verbal missteps but rather the plans he has laid out to supposedly restore prosperity, rebuild the middle class, and fix the nation’s safety net.

While his recent Florida rhetoric might have been more than awkward, it’s important to note that the House Republican budget plan endorsed by Romney would be disastrous. Not only would the Republican plan fail to fix the safety net, it would destroy it. This plan would increase economic hardship and force more low-income Americans deeper into poverty. Here are three ways the House Republican plan supported by Romney would weaken the safety net:

• The Republican plan would block grants and place time limits on the nation’s most effective nutrition safety net, the Supplemental Nutrition Assistance Program, or SNAP, which was extremely effective in meeting the nutrition needs of families hit hard by unemployment during the recent recession. $127 billion in SNAP funding would be cut over 10 years.
• The Republican plan would block grant the Medicaid program for low-income Americans and disabled Americans, which would result in reduced services for the most vulnerable families because capped federal resources would not keep pace with rising health care costs. The result is those Americans least able to pay more for health care would be forced to do so or to go without.
• The Republican plan would shift more federal responsibility to economically challenged states. For states with high rates of poverty and budget shortfalls, this plan would limit their ability to leverage federal resources to provide necessary social services to assist people in need. States would be forced to cut services during periods of economic downturn when low-income families are most in need.

Perhaps the most alarming issue with Mitt Romney’s plans to fix the safety net is that it would dramatically shift resources to the wealthiest 1 percent of Americans. It would provide $2.24 trillion in tax breaks to the superrich while cutting $2.17 trillion from critical health care services for poor and elderly Americans.

At a time when 46.2 million people are classified as poor in this country—that’s 15.1 percent of Americans, or about 1 in 7—we can ill-afford to turn our backs on our most vulnerable citizens. It’s not only mean-spirited, it’s wrong.

Desmond Brown is a consultant to the Center for American Progress Action Fund’s Half in Ten antipoverty project and an expert on poverty issues and welfare reform.

SOURCE: AP/Manuel Balce Ceneta

Republican presidential candidate and former Massachusetts Gov. Mitt Romney delivers remarks at the Heritage Foundation in June 2009.

See also: Romney’s Fiscal Agenda for the 1 Percent by Michael Linden

Download the charts (pdf)

If you liked former President George W. Bush’s tax policies, then you’ll love Mitt Romney’s.

Republican presidential candidate Romney’s plan for federal taxation begins with a hefty portion of Bush-era tax policy: Permanently extend all the tax cuts passed in 2001 and 2003, including those that mainly benefit the extremely wealthy. Then Romney layers on a heaping batch of new tax cuts for the rich, including a full repeal of the estate tax—which is currently paid by only the richest 0.14 percent of estates—and a massive corporate tax cut.

The result is a tax code that asks even less of the rich than George W. Bush’s did.

Just like President Bush, Romney’s tax plan doesn’t come close to being fiscally responsible. Under President Bush, average annual tax revenue as a share of gross domestic product was the lowest it had been under any president since Harry Truman—just 17.6 percent of GDP. Romney’s tax plan would result in average revenues of only 16.5 percent.

Strangely, Romney’s tax plan has been described as “moderate” or “timid.” Compared to the full-tilt insanity of the plans of some of his fellow Republican presidential candidates (9-9-9! 15 percent flat tax!), it’s true that Romney’s plan appears more reasonable. But back here in the real world, Romney’s plan is an enormously irresponsible giveaway to the rich, boasting a tax cut for millionaires twice the size of President Bush’s. There’s nothing moderate about that.

The charts below illustrate five key points about Romney’s plan:

• It would deliver twice as many tax cuts to the rich as did Bush’s tax plan.
• It would pile on more tax cuts focused almost exclusively on the wealthy.
• It would not balance the federal budget.
• It would increase taxes for the middle class and working families.
• It would leave all corporate tax loopholes and tax breaks intact.

Clearly Romney’s plan doesn’t accomplish anything he claims it will: It won’t help middle-class families. It won’t balance the budget. And it continues to coddle the wealthy.

If he really wants to be moderate, he’s going to have to do better than that.

Michael Linden is the Director of Tax and Budget Policy and Seth Hanlon is Director of Fiscal Reform at the Center for American Progress Action Fund.

Download the charts (pdf)

See also:

• Romney’s Fiscal Agenda for the 1 Percent by Michael Linden

SOURCE: AP/Bruce Smith

National Labor Relations Board General Counsel Lafe Solomon maintained throughout the investigation and hearings that the best possible outcome was a settlement between Boeing and its workers that led to the case’s withdrawal.

The tentative deal reached last week between The Boeing Company and the International Association of Machinists and Aerospace Workers, or IAM—and scheduled to be ratified today by rank-and-file workers—is a vindication for our nation’s labor law, which has been under significant attack.

The National Labor Relations Board—the government agency charged with protecting workers’ National Labor Relations Act rights to form unions and collectively bargain free from employer retaliation—made possible the deal that benefits both Boeing and its workers. The NLRB actively encouraged settlement in this case, and the framework of how the NLRB operates made possible a privately negotiated compromise between the two parties.

The critique of the NLRB—that it is an out-of-control agency killing jobs through overly aggressive enforcement of an unworkable law—is discredited in the face of this deal that preserves and creates tens of thousands of U.S. jobs.

These attacks have no merit but they show no signs of letting up and would have dire consequences if successful. Threats to the NLRB’s ability to enforce the law or to even do away with the agency entirely would leave American workers with few workplace protections and leave employers unaccountable when they trample on workers’ rights.

NLRB actions in the Boeing case

On April 20, 2011, the acting NLRB general counsel, Lafe Solomon, filed a complaint against Boeing over its decision to move an airline production line from a union facility in the state of Washington to a new facility in South Carolina after Boeing officials made public statements indicating they did so in retaliation against strikes in the Puget Sound region. None of the NLRB’s adjudicatory bodies has yet made a ruling on the case.

At the ongoing hearing before an administrative law judge to investigate the charges, both parties have an opportunity to present evidence and argue in favor of their position. But that judge has not even made a preliminary ruling, and the case has not proceeded to the full board. In short, the NLRB is still gathering facts to determine whether Boeing acted illegally.

The National Labor Relations Act prohibits retaliation against strikes, and the NLRB is warranted in investigating cases that may involve such retaliation. Strikes were mentioned as a factor in Boeing’s location decision by a senior Boeing official. He told The Seattle Times:

The overriding factor [in moving to South Carolina] was not the business climate. And it was not the wages we’re paying today. It was that we cannot afford to have a work stoppage, you know, every three years.

Compromise is embedded into the framework of how the NLRB operates even while investigating such claims of wrongdoing, so it’s not surprising that Boeing and its employees were able to reach a deal. When the NLRB investigators determine that there is reasonable cause to believe an employer or union has violated the NLRA, their first response is to encourage settlement or adjustments to remedy the violations. Only when settlement efforts fail do cases go before an administrative law judge. More than a third of all unfair labor practice cases closed in fiscal year 2009 were settled or adjusted before an NLRB administrative law judge reached a decision.

The Boeing case followed this pattern. Acting NLRB General Counsel Lafe Solomon maintained throughout the investigation and hearings that the best possible outcome was a settlement between the two parties that led to the case’s withdrawal.

The Boeing case is similar to lawsuits against large corporations before other types of American judicial bodies, where settlements occurred in part because of the possibility of a court ruling that would have imposed significant penalties. The country’s largest tobacco companies signed the largest civil settlement in American history (valued at $206 billion) with 46 states requiring the companies to make annual payments in perpetuity as reimbursement for past tobacco-related costs, such as Medicaid expenditures.

And 8 of the top 10 class-action lawsuits in the United States ended in settlements, according to a 2010 CNBC list that included high-profile lawsuits such as ENRON and WorldCom. These corporations would have been unlikely to pay out billions in settlement costs if they hadn’t feared that a judge or jury would have awarded the plaintiffs an even larger settlement.

The deal

The deal privately negotiated between Boeing and the IAM has been called a win for both labor and the company: Workers will receive wage and benefits increases, Boeing’s commitment to continue production of several existing lines in the Puget Sound region, and the guarantee of a new fuel-efficient production line in Renton, Washington.

In exchange, Boeing wins labor peace and the resolution of the NLRB complaint. If Boeing’s workers approve the contract, the union has indicated that it will drop its complaint against the company and consequently encourage the NLRB general counsel to suspend the complaint currently being heard by an administrative law judge. Under the deal, Boeing may also continue production in South Carolina.

This deal resembles the remedy proposed by the NLRB’s acting general counsel in the complaint he issued that would allow Boeing to operate the South Carolina plant but also required the company to maintain a second line at the unionized Washington facility.

Both the union and the company signaled that the agreement will strengthen labor management relations moving forward. “We believe the proposed extension is good for our members, it’s good for Boeing, it’s good for airline customers, and it’s good for communities,” Machinist Union spokeswoman Connie Kelliher told ABC News. “It secures a strong future here, provides top-notch pay and benefits, and really signals the start of a potential new relationship with Boeing.”

Boeing’s spokesman Tim Healy called the agreement "a starting point of a new relationship" with the machinists’ union.

The uproar

Critics pilloried the NLRB for investigating the merits of allegations that Boeing broke the law and encouraging settlement. Gov. Nikki Haley (R-SC) vilified the National Labor Relations Board as a “rogue agency” for taking action against Boeing. And Rep. Darrell Issa (R-CA) claimed that “NLRB’s action in the case against Boeing has the potential to create a job-killing precedent just as U.S. manufacturers are working toward economic recovery.”

These claims were just plain false from the beginning. The remedy proposed by the NLRB’s general counsel would have allowed Boeing to operate the South Carolina plant but also would have required the company to maintain a second line at the unionized Washington facility. And now the compromise deal preserves the jobs at the South Carolina plant and actually preserves and creates more jobs in Washington.

Really, the attacks against the NLRB actions in the Boeing case are just part of a larger effort to eviscerate the agency. They show no sign of slowing down.

Conservatives are waging a battle to do away with the NLRB’s ability to protect workers’ rights by trying to stall its investigation of Boeing, eliminate its enforcement power, and even shut down the agency entirely. If successful, these attacks would have enabled employers to face few repercussions for labor law violations.

House Oversight and Government Reform Committee Chairman Darrell Issa (R-CA) issued a subpoena for all internal documents related to the investigation—a move that interfered with the ongoing hearing—even though the NLRB had already released more than a thousand pages of documents on the case to Congress. This represented the first time since 1940 that the NLRB has been subjected to a congressional subpoena, according to acting NLRB general counsel Solomon.

The House of Representatives also passed a bill that would gut the NLRB’s enforcement power in cases where a company moves operations or eliminates work to punish workers that exercise their legally protected rights. Under the bill it would still be against the law to retaliate against workers but the NLRB would no longer have much power to do anything about it. Imagine if Congress passed a similar law that maintained that armed robbery was still illegal but banned the courts from jailing or otherwise punishing anyone that they found to have committed such a crime.

Finally, some congressional House leaders have threatened to do away entirely with the NLRB or cripple its ability to act. Rep. Issa threatened, “We could eliminate the NLRB or take the premise and statutorily change it.” Indeed, three-quarters of House Republicans voted to eliminate all funding for the NLRB this past spring, a move that would have prevented the enforcement of labor law for several months. The measure failed to pass the House but the majority recently released a budget bill, H.R. 3070, which would slash NLRB funding.

And Senate Republicans indicate they will be slow to confirm any new Democratic members nominated to the NLRB—even though the agency will be down to only two members by the end of the year due to term expirations. This maneuver plays upon a recent Supreme Court ruling that requires three board members to issue decisions.

The settlement is good for workers and Boeing despite the conservative outrage

The compromise deal between Boeing and the machinists’ union preserves jobs at the South Carolina plant and actually creates new jobs in Washington state. It’s a win for both workers and management. The deal was encouraged by the NLRB and the framework of our labor laws.

We will have to wait for the critics’ next move. Has the successful resolution of the Boeing complaint convinced them that the NLRB and workers’ rights aren’t job killers? We won’t hold our breath.

But given the vindication of the NLRB’s actions in the Boeing case, it will be even easier to demonstrate how off-base the critique of the agency is.

David Madland is Director and Karla Walter is a Senior Policy Analyst with the American Worker Project at American Progress.

SOURCE: AP/Chris Hatch

CVS Caremark, along with Medco Health Solutions and Express Scripts—the two other dominant pharmacy benefit managers, or PBMs—has been plagued with opaque business practices, limited market competition, and widespread allegations of fraud. While PBMs may well prove a necessary expedient in lowering the cost of health care, measures must be taken to ensure that they operate as they are supposed to.

Download the full testimony (pdf)

I appreciate the opportunity to come before you today and testify about fee disclosures to welfare benefit plans under Section 408(b)(2). The Employee Retirement Income Security Act, or ERISA, welfare benefit plans include a wide range of services across the health care industry. I submit the following comments on a specific segment of the health care industry: pharmacy benefit managers, or PBMs.

As my testimony outlines, extending the fee disclosure provisions to PBMs will benefit ERISA beneficiaries by enabling plans to have the full set of information necessary to make PBM markets work effectively and secure benefits at the lowest cost. Greater disclosure will give plans the necessary tools to detect and prevent conflicts of interest and secure all the appropriate compensation, including undisclosed indirect compensation. Plans currently do not fully benefit from PBM cost control efforts because of conflicts of interest and the ability of PBMs to hide undisclosed indirect compensation, such as rebates from drug manufacturers. Extending the fee disclosure provisions will enable plans to secure the full benefit of compensation received on their behalf.

I am a Senior Fellow at the Center for American Progress Action Fund and have practiced antitrust law for more than 25 years, both in the government and in private practice. Prior to entering private practice, I was the policy director of the Office of Policy and Evaluation for the Bureau of Competition of the Federal Trade Commission and attorney advisor to Chairman Robert Pitofsky and helped direct the first antitrust cases against PBMs. I have counseled health plans, PBMs, pharmacies, and consumers on PBM competition and consumer protection issues. My comments are based on those decades of enforcement and real-world experience.

Today’s hearing comes as a result of EBSA’s efforts to thoroughly understand and effectively reform the fee disclosures to welfare benefit plans under Section 408(b)(2). The recent hearings leading up to the release of the interim final rule on disclosure fees and conflicts of interest affecting retirement plans spurred debate on the appropriate level of disclosure by PBMs. I have testified before Congress on how transparency can improve competition in PBM markets. The PBM market is highly concentrated; PBM contracting practices are complex and the markets are opaque. This provides a fertile environment for deceptive and fraudulent practices—in the past six years, the three major PBMs have settled four major cases brought by state attorneys general resulting in more than $370 million in penalties and fines. Much of the concern raised in these cases involved undisclosed indirect compensation of the type addressed in the proposed rule. Thus, I argue that the disclosure improvements established by the interim final rule should be applied to welfare plans and PBM services. Greater disclosure is needed in the PBM industry to protect plans and consumers, and reduce costs.

I. PBMs no longer serve as “honest brokers” and engage in a wide range of anticompetitive conduct.

Although PBMs offer a great deal of promise in terms of the potential to control pharmaceutical costs, there is a pattern of conflicts of interest, self-dealing, and anticompetitive conduct, all of which ultimately means that consumers pay far more for drugs than necessary. The three dominant PBMs—Medco Health Solutions, CVS Caremark, and Express Scripts—have been plagued with opaque business practices, limited market competition, and widespread allegations of fraud. The facts are clear: While PBMs may well prove a necessary expedient in lowering the cost of health care, measures must be taken to ensure that they operate as they are supposed to.

The fundamental elements for a competitive market are transparency, choice, and a lack of conflicts of interest. This is especially true when dealing with health care intermediaries such as PBMs and health insurers where information may be difficult to access, there are agency relationships and securing adequate information may be difficult.

Why are choice, transparency, and a lack of conflicts of interest important? It should seem obvious. Consumers need meaningful alternatives to force competitors to vie for their loyalty by offering fair prices and better services. Transparency is necessary for consumers to evaluate products carefully, to make informed choices, and to secure the full range of services they desire.

When dealing with intermediaries, it is particularly critical that there are no conflicts of interest. A PBM is fundamentally acting as a fiduciary to the plan it serves. In the PBM market, the service a PBM provides is that of being an “honest broker” bargaining to secure the lowest price for drugs and drug-dispensing services. When a PBM has an ownership interest in a drug company or a pharmacy chain, or has its own pharmacy dispensing operations, it is effectively serving two masters.

PBMs entered the health care market as “honest brokers” or intermediaries between health care entities. Health plans and plan sponsors agree to a negotiated fee and contract with PBMs to administer drug claims and serve as a third-party broker with pharmaceutical manufacturers. PBMs can play an important function in health care markets by setting up pharmaceutical benefit networks and adjudicating pharmaceutical claims. However, the role of the PBM has evolved over time and increasingly PBMs have found sources of indirect compensation, and by failing to adequately disclose the compensation (typically from manufacturers) or engaging in misleading disclosures they are able to “play the spread” and pocket the indirect compensation. As a result PBM profits have skyrocketed. From 2003 to 2007, the three largest PBMs—Medco, Caremark, and Express Scripts—nearly tripled their annual profits from $966 million to more than $2.7 billion. In addition, there has been tremendous consolidation among PBMs, so the three major PBMs (CVS Caremark, Express Scripts and Medco) now have more than 80 percent of the national PBM market.

Facing weak transparency standards, PBMs frequently engage in a wide range of deceptive and anticompetitive conduct that ultimately harms and denies benefits to consumers. Some PBMs secure rebates and kickbacks in exchange for exclusivity arrangements that may keep lower-priced drugs off the market. PBMs may switch patients from prescribed drugs to an often more expensive drug to take advantage of rebates that the PBM receives from drug manufacturers. In addition, PBMs derive their enormous profits from the ability to “play the spread” between pharmaceutical manufacturers, pharmacies, and health care plans. (All of these qualify as undisclosed indirect compensation.) Later in my testimony, I will go into mechanics of these deceptive pricing practices, but it is important to note that these pricing tactics ultimately lead to higher prices paid by plans and patients.

In the past six years alone, a coalition of more than 30 state attorneys general have brought several cases attacking unfair, fraudulent, and deceptive conduct. Between 2004 and 2008, the three major PBMs have been the subject of six major federal or multidistrict cases over allegations of fraud; misrepresentation to plan sponsors, patients, and providers; unjust enrichment through secret kickback schemes; and failure to meet ethical and safety standards. These cases listed below resulted in more than $371.9 million in damages to states, plans, and patients so far:

• United States v. Merck & Co., Inc., et.al—$184.1 million in damages for government fraud, secret rebates, drug switching, and failure to meet state quality of care standards
• United States v. AdvancePCS (now part of CVS/Caremark)—$137.5 million in damages for kickbacks, submission of false claims, and other rebate issues
• State Attorneys General v. Caremark, Inc.—$41 million in damages for deceptive trade practices, drug switching, and repacking
• State Attorneys General v. Express Scripts—$9.5 million for drug switching and illegally retaining rebates and spread profits and discounts from plans

II. A lack of transparency allows PBMs to “play the spread,” leading to higher costs for plan sponsors and patients.

PBMs earn enormous profits by negotiating rebates and discounts with drug manufacturers in exchange for promoting certain drugs on their preferred formulary or engaging in drug substitution programs. PBMs also negotiate contracts with pharmacies to determine how much the pharmacists will be paid for dispensing medication and providing services. By paying a lower reimbursement rate to pharmacies but failing to adequately disclose reimbursement rates, PBMs can generate more revenue. In both respects, PBMs can “play the spread” by failing to disclose these forms of indirect compensation. The failure to disclose these payments denies purchasers important information that impacts their buying decisions. As a result, this lack of information often results in higher costs for consumers, health plans, employers, and other plan sponsors.

PBMs are free to “play the spread” between manufacturers, pharmacists, and plans because of a lack of disclosure. Unclear and inadequate disclosure of rebates and discounts undermine the ability of plan sponsors to compare competing proposals. Because rebates, discounts, and other fee structures remain undisclosed, plan sponsors cannot clearly identify and choose PBMs offering the highest value services. PBMs’ promise of controlling pharmaceutical costs has been undercut by a pattern of conflicts of interest, self-dealing, deception, and anticompetitive conduct. The dominant PBMs have been characterized by opaque business practices, limited market competition, and widespread allegations of fraud.

III. Increased disclosures by PBMs have resulted in price decreases and significant savings for health plans.

Because of the enforcement activity focusing on PBMs, there has been a great deal of attention surrounding transparency. Transparency is a somewhat ambiguous term, but in this context, David Calabrese in Managed Healthcare Executive provides a useful definition:

Transparency is a form of business practice involving full disclosure of costs and revenues, allowing the customer to make more well-informed decisions regarding purchases. In the PBM industry, transparency lays the groundwork for more simplified PBM-client business relations, more accurate financial modeling and performance metrics and a greater comfort level among PBM consumers. ‘Transparency,’ however, is a relative term used freely in the marketing efforts of many PBMs. The genuine commitment to transparency lies in the actual business practices the PBM invokes to support this claim. ‘True transparency’ is a model in which all PBM revenue streams [drug-level rebates, funding of clinical programs, administrative fees, service fees, management fees, research/educational grants, etc.] are fully disclosed to the payer; the full value of retail and mail-order pharmacy discounts is passed onto the client; data is shared with the client; and the client is given ultimate decision-making control over its drug benefit design and formulary management. It is this commitment to true transparency which has begun to differentiate newer PBMs.

Responding to the numerous enforcement actions, both a handful of states and Congress have taken measures to enact transparency provisions by requiring some degree of disclosure of rebates and other revenue. In addition, in the multistate enforcement action against Caremark, 30 state attorneys general required rebate disclosure. Finally, some large sophisticated health plans have negotiated for greater transparency.

The most significant disclosure requirements are incorporated in the Patient Protection and Affordable Care Act of 2010, or ACA. ACA works to shine light on spread pricing and undisclosed manufacturer agreements by requiring additional data reporting from PBMs that manage contracts under Medicare Part D or the state Exchanges. These PBMs must provide regulators with data on the percentage of all prescriptions that are provided through retail pharmacies compared to mail-order facilities and the generic dispensing rates for each type. PBMs must also submit the aggregate amounts and types of rebates and discounts or price concessions that the PBM negotiates on behalf of a plan. Importantly, PBMs must disclose how much of these rebates and discounts are “passed through” to the plan versus kept as company profits. In addition to this information, PBMs must also supply regulators with the aggregate difference between the amount paid by the plan and the amount the PBM pays the retail and mail-order pharmacy and number of prescriptions dispensed.

In addition to the disclosure provisions established by ACA, many plans have recognized the importance of transparency, especially plans that represent government entities. Increasingly, very powerful plans are negotiating for transparency and securing significant savings. Large plan sponsors, such as universities, states, and federal programs, have recently learned that they can achieve substantial cost savings by opting for contacts with transparent PBMs that disclose negotiations with manufacturers or simply managing their own pharmacy benefit. For example, TRICARE, the federal health plan for military personnel and their families, anticipates savings of $1.67 billion by negotiating its own drug prices, including rebates, rather than going through a PBM. The University of Michigan has saved nearly $55 million by administering its own plan for the past six years. Similarly, New Jersey projects savings of $558.9 million over six years and Texas expects savings of $265 million by switching to a transparent PBM contract. Instead of managing drug benefits through a traditional PBM, TRICARE, University of Michigan, New Jersey, and Texas are be able to engage in a more transparent negotiation process and reduce costs. Each of these examples demonstrates that disclosure can improve competition and reduce costs to plans and consumers.

Some might suggest that if some states and the federal government are regulating and private parties can negotiate for transparency, that further regulation by DOL is unnecessary. They are mistaken. First, less than a handful of states have implemented transparency provisions. Second, the ACA transparency provisions only apply to plans that are in the state Exchanges and the Medicare Part D program. Third, the fact that some powerful buyers can negotiate for certain levels of transparency does not mean that transparency regulation is unnecessary. These plans can negotiate for transparency because they have clout, but all plans and their subscribers need the protection of transparency. That is why regulation is necessary.

Some may suggest that disclosure provisions may lead to higher costs. The representatives of the PBM industry in an earlier filing argued transparency would increase costs citing a 2003 CBO report based on an a proposed amendment to the Medicare Modernization Act. There are several reasons why that argument should be dismissed. First, the CBO estimate is more than six years old. Since that time there have been numerous multistate actions demonstrating ongoing fraud and deception. Second, in the Caremark case, more than 30 state attorneys general required transparency as part of their consent order. Third, since that time numerous plans have negotiated for transparency and have achieved significant cost savings. Finally, there is no evidence that any additional transparency from these private plans or state regulation have led to collusion or any other conduct to raise costs. Simply, if transparency was bad, why would Congress enact it, state attorneys general require it, and plans, especially government plans, work so hard to secure it?

For similar reasons, the PBM industry’s reliance on FTC studies or advocacy is misguided. For example, the PBM industry relies extensively on hearings conducted by the FTC in 2004 which suggested that the PBM market was competitive. In addition, they rely on other FTC letters to state regulators on PBM transparency provisions. Much of this advocacy including the hearings preceded the numerous attorneys general enforcement actions which uncovered significant evidence of ongoing fraud and deception involving all of the major PBMs. Moreover, the FTC’s suggestion that some PBM clients may be able to secure accurate information on rebates does not discount the need for regulations to protect all purchasers of PBM services. Indeed the FTC notes that “large, sophisticated repeat-purchasers of health care services” can use useful tools to contract with PBMs. But smaller plans lack these tools and are more vulnerable to deception or conflicts of interest by PBMs.

The issue of whether transparency would lead to higher costs was debated during the enactment of ACA in 2009 and PBM advocates asked CBO to reaffirm that transparency would lead to significantly higher costs. CBO rejected that position. In 2010, the CBO estimated that PBM transparency standards established by ACA would result in zero increased costs. The significant reduction in cost estimates represents that CBO recognizes the potential benefits and unlikely risks of greater transparency. Additionally, if concerns over the risks of disclosure still persist, confidentially provisions can be established to protect the flow of information from PBMs to plans and beneficiaries. The exchange of sensitive information between competitors can be reduced through confidentiality agreements and the disclosure of information to only regulatory agencies instead of market participants.

IV. The fee disclosures for retirement plans under 408(b)(2) established by the interim final rule should be applied to welfare benefit plans including PBM services.

The standards established by the interim final rule for disclosure fees and conflicts of interest affecting retirement plans should broadly apply to welfare benefit plans. PBMs operate with little transparency and engage in deceptive practices such as drug switching and spread pricing. Without transparency, PBM profits will continue to rise exponentially at the expense of plans and patients. Broadening fee disclosures will produce substantial savings for plans and decrease patient expenditure on premiums and prescription drugs.

When establishing transparency standards for PBMs, the term “compensation or fee” should be defined as broadly as possible. The following items should be included in the definition of “compensation or fee”:

• Discounts received by a PBM with respect to its acquisition of goods and services for resale or in connection with service to be rendered by the PBM and any related profits
• Income earned by a service provider with respect to the provision of plan benefits
• Fees received by a service provider for services performed for or on behalf of a third party, provided that the services performed are part of an independent fee for a service relationship

In addition to broadening the definition of “compensation or fee,” we disagree with those who argue that a PBM should not be obligated to disclose specific information regarding its contracts and arrangements with third parties if the information constitutes a trade secret or if the information is not generally known to the public and affords the PBM a competitive advantage. This exemption would basically negate the value of requiring additional disclosure. PBMs claim that they use protected information such as rebates, discounts, and competitive reimbursement rates to achieve savings for plans. These payments which are sometimes considered “indirect compensation” should be subject to disclosure regulations. The savings experienced by TRICARE, University of Michigan, New Jersey, and Texas demonstrate that this information can be disclosed without resulting price increases. Expanded fee disclosures with limited restrictions will ultimately foster competition and cost control within the PBM market.

Conclusion

I appreciate the opportunity to present my views on the crucial need for greater fee disclosure among the PBM industry. The establishment of standards to disclose otherwise undisclosed indirect compensation will help restore PBMs to their role as “honest brokers” and facilitate greater competition in health care markets. Thank you for your time.

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SOURCE: AP/Damian Dovarganes

Marco Ignacio Sanchez, an unemployed industrial materials specialist, looks for a new job at the Marina Del Rey WorkSource Center. In the current job market there are five job seekers for every opening.

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For far too long, millions of Americans have been struggling to make ends meet. Even before the financial crash 62 percent of Americans in 2004 said the American Dream was out of reach for the middle class. Seventy percent of those polled by the Center for American Progress Action Fund and Democracy Corps in September 2010 say they or their family and friends have lost a job, and 70 percent say they or their family and friends are experiencing reduced wages or hours at work. Our job is to show that a progressive economic approach will make a difference in people’s lives. Below are some key facts, arguments, and tips to make the case for an economy that works for all Americans.

The American economy is not working for most Americans

Your message tasks

• Recognize where people are. Express outrage that the middle class is in danger.
• Build a vision for implementing values. People feel anxious about their future, not policy plans. Tell a story and put the pieces together.
• Illustrate the contrast. There are two visions of how the economy works: “trickle down” versus middle class up. We want an economy that works for everyone instead of an economy that works for CEOs and will “trickle down” to the rest of us.

Conservatives believe wealth will “trickle down” to the middle class

• Conservatives want the middle class to wait for economic success to “trickle down.” Conservatives think that if Wall Street is alright, Main Street will be alright. We know that is not the case. Conservative “trickle down” economics hurt the economy and hurt the middle class.
• This past year corporate profits reached their highest figures on record, but underemployment is at 17 percent and nearly 1 out of 10 Americans is looking for work.
• The average CEO made 364 times the salary of the average person in 2006.

Progressives believe the middle class is the economic engine of the American economy

• Progressives believe the degree to which America is fulfilling its promise is measured by the state of its middle class.
• Progressives believe the economic strength of the United States was built by the middle class, innovators, and small business people.
• Progressives believe the middle class is the backbone of the American economy.
• A lopsided economy doesn’t work. It can’t just serve the top or the bottom or the middle. Our economy has been the strongest when it works for consumers, small businesses, and middle-class families—not just those at the tippy top.

Straw man warning

• This isn’t about punishing the rich. This is about everyone paying their fair share. We need a government that works for all people, not just a handful.
• Conservatives throw out a false “class warfare” attack that Democrats want to soak the rich—the “job creators”—with taxes. But a middle-class tax cut goes to every American. If you make $8 million a year you also get a middle-class tax cut on the first $200,000 of income. Republicans are essentially proposing that America’s top earners get a tax break in addition to what everyone else gets.

Do’s and Don’ts

Good lines

• Conservative “trickle down” economics hurt the economy and hurt the middle class. Why would we try it again?
• America’s wealthiest individuals didn’t create jobs when the Bush tax cuts were put into place, and they aren’t creating them today when the cuts remain in effect. Why would extending them change that equation?
• Class warfare? The Bush tax cuts gave the country’s highest earners breaks that went to no one else. The average middle-class family got less than $1,000 a year while the average millionaire got more than $100,000.

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SOURCE: AP/Cliff Owen

House Minority Leader John Boehner of Ohio celebrates the GOP's victory that changes the balance of power in Congress and will likely elevate him to Speaker of the House. Midterm election results were fueled by the jobs crisis and apathy among progressive constituencies, but still offer a path forward for progressives.

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Experts and pundits will float many interpretations of the 2010 midterms over the next few weeks, each of which progressives should consider carefully. But the most parsimonious explanation of how 2010 unfolded in terms of lessons for progressives going forward lies in a few fundamental factors: the poor state of the economy; the abnormally conservative composition of the midterm electorate; and the large number of vulnerable seats in conservative-leaning areas. These trends cost the Democrats their House majority but were not strong enough to sweep them out in the Senate.

Independent voters, white working-class voters, seniors, and men broke heavily against the Democrats due to the economy. Turnout levels were also unusually low among young and minority voters and unusually high among seniors, whites, and conservatives, thus contributing to a massively skewed midterm electorate. The Democrats therefore faced a predictable, and arguably unavoidable, convergence of forces. Incumbent Democrats suffered a genuine backlash of voter discontent due to a weak economy with considerable concerns about job creation, deep skepticism among independents, poor turnout among key base groups, and strong enthusiasm among energized conservatives.

The 62-to-64-seat loss in the House and reduction of the Senate majority is a serious rebuke to the Democrats and the political status quo but this was not an endorsement of a conservative agenda. Data on voter opinions expressed in pre- and post-election polling confirms that the 2010 election was neither a mandate for antigovernment and Tea Party ideology, nor an endorsement of GOP policies on taxes and regulations. And the election did not turn on a repudiation of President Barack Obama’s health care plan despite staunch GOP opposition.

Given these results, progressives’ agenda going forward could not be clearer: They must do whatever is necessary to improve the jobs situation and the overall economy, and they must reengage and reenergize their ranks if they are to succeed in protecting and promoting a progressive policy agenda.

The remainder of this memo will outline our interpretation of what happened in the 2010 election based on the returns and available exit poll data. It will explore various theories about why it happened and offer some preliminary thoughts on what progressives should focus on in light of these results in order to advance their issue agenda.

What happened in 2010?

Basic election results

It looks like Republicans gained around 62 to 64 House seats in the 2010 election. This overperforms by 10 seats or so what would have been expected on the basis of the popular vote split (approximately 52 percent Republican to 45 percent Democratic). The Republican vote was efficiently distributed to produce Republican victories, especially in the Rust Belt states and in purple southern states such as Virginia and Florida.

The Republican gain of 60-plus seats is the best post-World War II seat gain by either party in a midterm election, and only the third one of more than 50 seats since that time. The others occurred in 1946 (55-seat Republican gain) and 1994 (54-seat Republican gain).

Yet Republicans slightly underperformed relative to expectations in Senate races, where their pickup was six seats, not close to enough to take control of the Senate. On governorships, the GOP met expectations. They picked up an estimated net of five governorships, though they did lose California—the most important governorship in the nation.

It was a very good night for the GOP all in all. Below we discuss what underlies this impressive performance, starting with who voted in this election—the composition of the electorate—followed by how different groups voted in the election, and concluding with what motivated voters to swing toward the GOP.

Who voted?

The voters who showed up in 2010 were far different from those who showed up in 2008 or even in the last congressional midterm election in 2006. They were much older, whiter, and more conservative.

Age. The 2010 electorate was noticeably light on young voters, who have recently been a very good group for Democrats. About 12 percent of 2010 voters were 18-29 years of age, sharply down from their 18 percent share in 2008 and also down from their 13 percent share in 2006.

On the other end of the age distribution, seniors’ turnout was very strong. They were 21 percent of 2010 voters, up sharply from their 16 percent share in 2008 and their 19 percent share in 2006. In fact, going back to 1992 seniors have never been this high a percentage of the electorate.

Race. Voters in 2010 were 77 percent white and 23 percent minority. The minority figure is a decline of 3 percentage points from the 2008 level of 26 percent. This is a sharp drop by recent standards. The years since 1992 have typically seen either been a slight increase or approximate stability in the minority percentage between a presidential and a congressional election. Even when there was a drop in the minority percentage between 2004 and 2006, it was not as large as the drop between 2008 and 2010.

Ideology. Forty-two percent of voters in this election said they were conservatives. That’s quite a bit higher than in recent elections. Only 34 percent of voters said they were conservatives in 2008, and just 32 percent in 2006. Even in 1994, only 37 percent of voters were conservatives.

The high conservative turnout came at the expense of moderates. This group was actually smaller than conservatives as a proportion of voters in 2010—38 percent compared to 42 percent. By comparison, moderates were 44 percent of voters in 2008 and they were 47 percent of voters in 2006. And in the 1988-2004 period, the percent of moderates never dropped below 45 percent.

In sum, this cycle saw a substantially older, whiter, and more conservative electorate than in 2008. This in and of itself explains a good deal of what happened in 2010. One more indicator of this is that 2010 voters said they split their vote evenly between Obama and McCain in 2008 (45-45). McCain voters were therefore strongly overrepresented in the 2010 electorate. Indeed, President Obama might not have been elected to begin with if only 2010 voters had voted in the 2008 election.

How did they vote?

The data on how these and other key groups voted in the 2010 election, combined with the turnout trends summarized above, tell the basic story of how the GOP did so well in this election.

Age. Young people aged 18-29 years old supported Democrats by a 13-point margin in the 2010 election (55 percent to 42 percent). This is a significant drop from their 63 percent to 34 percent support for congressional Democrats in 2008 and from their 60 percent to 38 percent support in 2006. Even more unusual was seniors’ very strong support for Republicans in 2010 (59 percent to 38 percent). This compares to a 1-point margin for the Democrats in 2008 and a 1-point margin for the GOP in 2006. Indeed, there is nothing even close to this election’s 21-point seniors’ margin for congressional Republicans going back to 1988.

Race. Congressional Democrats carried Hispanics 60 percent to 38 percent in 2010—a strong performance, but still off from their 68 percent to 29 percent and 69 percent to 30 percent performances in 2008 and 2006. Black voters were even stronger for Democrats—89 percent to 9 percent—which is in line with their 93 percent to 5 percent and 89 percent to 10 percent preferences in 2008 and 2006.

White voters were a different story. They supported congressional Republicans by 60 percent to 37 percent. This 23-point margin compares to an 8-point margin for congressional Republicans in 2008 and a 4-point margin in 2006. The 23-point margin among whites is also higher than it was in two other very good Republican congressional years: 19 points in 2002 and 16 points in 1994. And the 60 percent share of the white vote is higher than that attained in either one of these years—or in any other recent year.

It is worth noting that while this 60 percent share of the white vote sufficed for a thumping victory in 2010, it will probably not be adequate for any kind of a victory in 2012, given trend assumptions about minority turnout and Democratic support. The GOP will probably need at least 61 percent of the white vote to eke out the narrowest of victories in that electoral universe. So the bar just gets higher as time goes on.

White working class. The most significant shift against the Democrats occurred among the white working class. Congressional Democrats lost this group by 10 points in both 2006 and 2008. Yet this deficit ballooned to 30 points in 2010—a deficit even larger than Democrats experienced in 1994 (22 points). That created an awfully big hole for Democrats to crawl out of, especially given relatively depressed turnout among Democratic-leaning constituencies.

White college graduates. Democrats also suffered losses among white college graduates, which, unlike the white working class, are growing as a share of voters. Congressional Democrats split this group evenly in 2006 and they lost them by 6 points in 2008. But that deficit increased to 19 points in 2010.

Gender. Democrats lost women by a single point in 2010 and men by 14 points. That 14-point deficit among men represents a 20-point margin swing among men relative to 2008 when Democrats had a 6-point advantage and a 17-point swing relative to 2006. The margin swings among women were slightly less: 15 points relative to 2008 and 13 points relative to 2006.

Ideology. Not only were conservatives an unusually large part of the electorate in 2010 but they also voted unusually heavily for the GOP—84 percent to 13 percent. This margin is substantially higher than the GOP has attained in any election going back to 1988. Even in 1994, they carried conservatives by “only” 81 percent to 19 percent.

Moderates supported Democrats but by a 55 percent to 42 percent margin, significantly less than Democratic margins among this group in 2008 (61 percent to 37 percent) and 2006 (60 percent to 38 percent). Yet the 2010 margin among moderates is very similar to that attained by congressional Democrats in elections prior to 2006 going back into the 1990s.

Independents. There was a sharp swing among independents toward the Republicans in 2010. The GOP carried this group by 19 points, 56 percent to 37 percent. That compares to an 8-point Democratic win among independents in 2008 and an 18-point advantage in 2006. This is by far the GOP’s best performance among this group since 1994, when they carried them by 14 points. Of course, it is possible that a substantial part of 2010’s shift is due to a higher turnout of conservative independents relative to moderate and liberal independents, but we lack data at this point to evaluate this possibility.

What motivated the swing toward the GOP?

The clearest message from the exit polls about what motivated the swing toward the GOP is, unsurprisingly, the economy. More than three-fifths (62 percent) selected the economy as the most important issue facing the country today and Republicans received 54 percent to 44 percent support among that group.

About half of voters said they were “very worried” about economic conditions, and these Americans voted Republican by 68 percent to 30 percent. Similarly, 41 percent of voters said their family financial situation was worse than two years ago, and this group voted Republican by 61 percent to 35 percent. And 37 percent described the state of the national economy as “poor,” and these voters supported the GOP by 68 percent to 28 percent.

More voters (35 percent) blamed Wall Street for today’s economic problems rather than President Bush (29 percent) or President Obama (24 percent). But these Wall-Street-blaming voters supported Republicans by 57 percent to 41 percent. The Obama administration’s association with bailing out Wall Street bankers, who are heavily blamed for the bad economy, apparently had a negative effect on Democratic performance in this election.

It is also worth noting that the election did not appear to be repudiation of the new health care reform law. About as many said they wanted to see it remain as is or be expanded (47 percent) as said they wanted it repealed (48 percent).

Nor did it appear that voters were embracing the GOP position on tax cuts. A 51 percent majority of voters wanted to either keep only the Bush tax cuts for those with less than $250,000 or let them all expire compared to 40 percent who wanted to keep all the tax cuts.

Why did it happen?

Political commentators are notoriously prone to overinterpreting election results and extrapolating singular causes for victories and losses from a multitude of possible factors. These interpretations usually underlie some desire to influence ideological debates and power struggles or to shape media stories about the election. And 2010 is no different.

Conservatives argue that conservative- and independent-minded voters rejected President Obama’s policies on health care and the stimulus plan because they fear consolidation of power and excessive government spending. More extremist elements within the conservative movement argue that President Obama himself is alien to mainstream America and is leading the country toward “European-style” socialism. Centrist forces, primarily within the Democratic Party, argue that President Obama and the Democrats are too liberal, have failed to effectively compromise with Republicans on the economy, and have overreached with an essentially moderate, center-right electorate.

Many progressives conversely argue that President Obama and the Democrats have been too timid in their plans, particularly on economic recovery, health care, and financial regulation, and that they didn’t do enough to tar the opposition with the bad economy. The economy faltered, the conservative right and the Tea Party enjoyed all the enthusiasm, and the progressive base was demoralized. A range of tactical arguments across the progressive spectrum tie into this main criticism, primarily saying that the president and Congress did a poor job on the communication and politics side of the bailouts and stimulus plans; that the 18-month focus on health care squandered precious time and political capital and ultimately left people confused; and that the White House and Democrats failed to effectively combat the massive misinformation and fear campaign launched by Fox News, Tea Party leaders, and conservative corporate interests.

Each of these explanations enjoys some grain of truth that we’ll consider in turn, and some arguments contain more relevance than others. But all of them miss the mark in terms of the larger picture.

Years of political science research show fairly conclusively that structural issues explain most of the variance in election results. Context, candidates, and politics matter, of course. But progressives should examine the basics if they want to understand why 2010 happened as it did: the poor condition of the economy; a conservative-leaning midterm electorate; and a Democratic Party with many marginal seats to lose. Strategic and policy decisions certainly made some difference in the magnitude of losses, but in a horrible economy it’s difficult to escape the reality that Democrats were poised to lose a significant number of seats no matter what they did.

The economy

President Obama was elected in November 2008 with an unemployment rate of 6.9 percent, up from 4.4 percent in May 2007. GDP growth may be improving, but it has remained far below the level necessary to drive investment and begin solving the employment crisis. The unemployment rate had hit 8.6 percent by March 2009—a few months after the Obama administration took office. The White House predicted that unemployment would peak around 10 percent without the stimulus plan, but with it, unemployment would not rise above 8 percent. Yet the unemployment rate continued to rise, hitting just more than 10 percent, and it has hovered between 9.5 percent and 10.1 percent for more than a year and remains even higher for African Americans (16.1 percent) and Hispanics (12.4 percent).

The second year of the Great Recession left the typical family with an income of $60,888, which is lower than at any time since 1997 in inflation-adjusted dollars. Family income has fallen by 5.3 percent since the recession began—compared to a 2 percent decline during the early 2000s recession and a 3.4 percent decline during the early 1990s recession. Poverty rates are rising, even though just seven targeted provisions of the American Recovery and Reinvestment Act kept more than 6 million additional people from falling into poverty last year.

President Obama correctly insists that his administration inherited an economic catastrophe and that the American Recovery and Reinvestment Act and other economic measures helped to avoid the worst with a recession turning into a depression. Yet the bulk of Americans continue to suffer from poor economic conditions. The president’s job approval on the economy turned into net disapproval in October 2009 based on the average of public polls, and things have not improved much since then. The recovery measures may have been necessary but they were clearly insufficient in the minds of many voters, particularly independents. And the Democrats consequently suffered as the incumbent party that “owned” the economy—fairly or not.

The composition of the electorate

The 2010 electorate bore little resemblance to the electorate that brought President Obama to power in 2008, as discussed earlier. Minority and youth turnout were especially low. At the same time, the exit polls show that the electorate was far more conservative than usual—42 percent of 2010 voters were self-identified conservatives compared to 32 percent to 34 percent recently. Given the unusually skewed composition of the electorate, it is not at all surprising that Democrats faced such huge headwinds in 2010. Although midterm elections tend to be more favorable to conservatives, progressives must closely examine why so many more conservative-leaning voters turned out this year and why so many progressive-leaning voters stayed home.

Democrats held many marginal seats

The Democrats won many seats in 2006 and 2008 in districts that were noticeably conservative and Republican leaning. Early examination of the 2010 electoral map shows that the bulk of Democratic losses occurred in these districts. The Democrats were almost assured of losing these seats given the state of the economy and the overall discontent of the public and conservative-leaning midterm voters.

If these structural factors help to explain the bulk of the Democrats’ dilemma in 2010, what should observers make of the alternative explanations put forth above?

First, the conservative argument about public concern over government spending is not entirely without merit, although the implications of this criticism are off base in terms of larger support for their antigovernment agenda. Democrats must confront the fact that the bank bailouts and stimulus plan were not popular policies for many Americans—particularly independents and Republicans—despite the economic merit of these efforts. Pew polling from April 2010 showed that two-thirds of Americans did not believe the stimulus plan had helped to create jobs. A plurality of Americans (49 percent) similarly said the Troubled Asset Relief Program did not help to avert a larger crisis in the economy. Partisan perceptions of the bank bailouts and stimulus plans were split with independents and Republicans holding quite negative views of these programs and slight majorities of Democrats backing both. These findings were confirmed in the exit polls as 65 percent of midterm voters said the stimulus package either hurt the economy (33 percent) or made no difference (32 percent). The roughly one-third of voters who felt the stimulus package helped the economy broke heavily Democratic while those who felt negatively or more neutral about it favored the GOP.

Seeing little improvement in the overall economy, many independent and GOP voters came to see the recovery attempts as wasteful government expenditures, which confirmed their suspicions about ineffective government. One would expect this reaction from Republicans, who uniformly opposed the stimulus plan, but the convergence of opinion among independents made it extremely difficult to argue that the Democrats’ plans on the economy were taking the country in the right direction.

Yet conservatives are wrong to assume that public negativity about government performance and the recovery measures has translated into a massive ideological shift to the right on the role of government. Strong majorities of Americans continue to want government involvement in key areas. Consider these results from a recently released pre-election survey on Americans’ attitudes toward government conducted by The Washington Post, the Kaiser Family Foundation, and Harvard University.

The poll asked the public if they supported more, less, about the same, or no federal government involvement in dealing with a variety of issues. Majorities ranging from 67 percent to 84 percent on five domestic policy issues said they wanted to see either the same or more federal government involvement in the issue. In fact, outright majorities of Americans on four of these issues said they actually wanted to see more federal involvement. Those wanting to see less or no involvement ranged from only 32 percent down to 16 percent.

Then consider this result from a general question in the same poll about whether you’d rather have the federal government provide more services even if it cost more in taxes or have the federal government cost less in taxes but provide fewer services. A slight plurality (49 percent) preferred the first government-expanding option over the second government-cutting option (47 percent). Even more interestingly, these sentiments are notably less hostile to government’s role than has been the case at a number of points in the past. Only 28 percent selected the government-expanding option in 1994, while 57 percent preferred the government-cutting option.

And what does the public say they want their representative in Congress to do—fight for more spending to create jobs in their district or fight to cut government spending even if that means fewer jobs in the district? It turns out that, by 57 percent to 39 percent, they want their representative to fight for more spending to create jobs. There is again no evidence here of an overriding commitment to cut government. And again we see a less hostile attitude toward government’s role than was seen back in 1994 when, by 53 percent to 42 percent, the public came down on the cutting spending side of the choice.

So does the public want to see government performance improve? Yes, and in a serious manner. But conservative hype about a public thirsty to cut government is overblown and not backed by credible data.

Second, the more extremist caricatures of President Obama as a foreign enemy of the republic bent on bringing socialism to American shores can be dismissed outright in terms of its influence on the majority of voters. This is purely a Fox News/Tea Party/GOP myth that has not persuaded large segments of more fair-minded Americans. A strong majority of Americans does not believe these claims. Yet it is undeniable that this narrative has influence among the most conservative elements of the electorate. There is a sizeable minority of hyperconservative Americans who believe President Obama and his plans are a threat to America and who are highly energized in opposition to his agenda. This will not likely subside in 2012.

Third, the notion that President Obama and the Democrats overreached does not hold up to empirical scrutiny, although there were serious public doubts about how some of his policies played out in Congress and some ongoing confusion about their effectiveness, particularly on health care. The public is basically split on the Affordable Care Act as described above, but it is difficult to deny that the manner in which this plan was passed and explained to the American people was suboptimal at best. Relitigating the health care debate seems counterproductive at this point, particularly in the face of Republican promises to repeal this signature achievement or to make it unworkable in practice.

Fourth, the argument that the Obama administration was too timid in its policies and thus exacerbated economic problems is a difficult counterfactual to assess. We support the argument that the stimulus plan could have been bigger and bolder and that the politics of the bank and auto bailouts were atrocious with virtually no concessions extracted from the worst offenders on Wall Street and little urgency about reining in the outsized influence of finance in the economy.

But what if the stimulus plan had been $1 trillion or greater rather than $787 billion? Would unemployment be lower than it is today? Perhaps it would, as many economists have argued and economic models suggest. But maybe the size of the package would not have mattered given the structure of the plan and the depth of the employment crisis. Should the administration have either stepped away from the banks or done something much stronger such as nationalization to force greater structural changes in finance? As progressives, we did not like seeing corrupt bankers walking away with millions after wrecking the economy and would have preferred a much stronger approach to restructuring the financial sector in the wake of its recklessness. Would this have led to faster and deeper economic recovery? Again, perhaps, but it is unknown.

It strikes us that progressives were correct to argue that these policy and political missteps—and the inability or unwillingness to more forcefully challenge conservative caricatures of progressive policies—played some role in the diminished enthusiasm of the progressive base, as seen in the below normal turnout patterns among young voters and minorities. The issue of a demoralized or apathetic progressive base is a serious concern that must be addressed by 2012. President Obama will face a very difficult environment if he heads into reelection with a likely electorate as conservative as this midterm electorate—especially if the economy continues to struggle.

What should progressives consider next?

Our primary goal in this memo is to provide an empirical-based analysis of what happened in 2010 and why it happened, not to outline a comprehensive policy agenda or political strategy for progressives.

Yet it is clear, given what we know from the elections, that progressives have three basic objectives over the next two years.

Genuine improvement on the jobs front is a prerequisite for future success and conservatives should be forced to take responsibility for the economy

Progressives should offer to work with conservatives on targeted job-creation measures and show a commitment to doing whatever it takes to fix the economy—without sacrificing long-term progressive priorities on the economy, such as the repeal of the Bush tax cuts for the wealthiest earners. Many of the most politically workable ideas will unfortunately be unsavory to progressives since Republicans will likely only sign up for supply-side measures such as tax holidays or other enticements to the private sector. But cooperation and determination to do whatever is necessary on jobs may be needed in order to achieve the larger and more pressing goal of ensuring that the economy is doing better by 2012. The more difficult challenge, for which we do not have an answer, is convincing a stubborn GOP Congress that more needs to be done on the economy beyond tax cuts for wealthy people. We don’t hold out strong hope for this cooperation given the example of the past two years, but conservatives must be forced into accepting responsibility for addressing the ailing economy in some manner.

Progressives must not yield to the conservative, antigovernment agenda or their desire to repeal health care

Cooperation on job creation may be expedient and necessary in the short term. But progressives should fight tooth-and-nail against conservative attempts to drastically slash government services for working and poor families, efforts to radically alter major programs such as Social Security, and any attempt to repeal the health care bill. Conservatives have proven time and again that they are not interested in working with progressives and the administration to address the nation’s problems, but this should not stop progressives from presenting a compelling vision of the future and standing up for their core achievements in terms of economic security and opportunity measures. If conservatives want to misinterpret the election as an endorsement of extreme antigovernment ideology, progressives should welcome that fight and stand up for their core principles and for American families.

The progressive majority that coalesced in 2006 and 2008 needs serious reengagement

It should be obvious to all progressives that an electorate that looks like the one from 2010 is disastrous to their long-term goals. They need to take stronger steps to reignite the historic coalitions that fueled the 2006 and 2008 elections, particularly among women, young people, African Americans, and Latinos. These progressive constituencies will be strong allies of renewed steps to fix the economy without compromising on long-term goals, and will stand with the president as principled opponents to conservative overreach on plans to dismantle government. President Obama and Democratic lawmakers must in turn do their part to encourage and enlist progressives in this fight for the country’s future.

The 2010 elections were undoubtedly a setback for the progressive agenda. But these elections need not be determinative of future success. Progressives must take the harsh verdict on the economy seriously, take the necessary steps to improve the jobs situation, and recognize that they will need both independent voters and core progressives to forge successful coalitions for their policy ideas going forward.

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Ruy Teixeira and John Halpin are Senior Fellows at the American Progress Action Fund who focus on political theory, communications, and public opinion analysis.

SOURCE: AP/Mark Lennihan

Conservative economic policy prescriptions would cost about $10 trillion in new deficit spending over 10 years. That's enough to break the national deficit counter—and the national budget.

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Shortly after President Obama came into office, Congress passed the American Recovery and Reinvestment Act of 2009, the $787 billion stimulus package of tax cuts and increased federal spending that bolstered the social safety net and led to critical job creation and economic growth amid rising unemployment in the face of the Great Recession. The economy at the time was on target to shed an astonishing 11 million jobs according to estimates by the nonpartisan Congressional Budget Office, but the CBO calculates that the Recovery Act saved or created about 3 million jobs since its enactment. The president’s stimulus package also provided tax cuts to more than 95 percent of American households, and kept millions of American families from falling into poverty.

Indeed, the Recovery Act and the other extraordinary steps the federal government took during the financial crisis helped avert a second Great Depression, according to a new study by Princeton Professor Alan Blinder and Mark Zandi, chief economist of Moody’s Economy.com and one of the top economic advisors to Sen. John McCain (R-AZ) during his 2008 presidential campaign.

So what do Republicans today think of this exceedingly timely rescue of the U.S. economy? They continually blast it as a failure, after all but three Republicans in Congress voted against the bill in 2009 (one of whom, Sen. Arlen Specter, later became a Democrat). And what is their alternative plan to restart the economy so that broad-based jobs growth can begin in earnest? When House Minority Whip Eric Cantor (R-VA) was asked in December to describe the Republicans’ “big idea” for creating jobs, all he could say was, “the big idea is to get, to get, to produce an environment where we can have job creation again.”

All Americans can agree on that point, of course, but Republicans have also put their plans on paper. The Economic Freedom Act of 2010—introduced by Rep. Jim Jordan (R-OH) and Rep. Jason Chaffetz (R-UT) and backed by the 116 member-strong House Republican Study Committee—makes it clear that their job-creation plan is to double down on the failed economic policy agenda of President George W. Bush. The bill calls for more deficit-funded tax cuts for the wealthy and deregulatory policies that allow corporations to do what they did under President Bush—act with almost complete disregard for consumers’ financial well-being, the environment, and worker safety.

After insulting the intelligence of the American people by presenting the same failed conservative economic policies that led to the Great Recession, they then advocate further ways to injure our economy with new budget-busting tax cuts for the wealthy and corporations. Such tax cuts led to the jobless economic recovery of 2001-2007, when jobs growth was an anemic 4.8 percent before the consequences of conservative economics over the next three years led to today’s nearly 10 percent unemployment rate.

We calculate that today’s recycled conservative economic policy prescriptions would cost about $10 trillion in new deficit spending over 10 years relative to the current Congressional Budget Office baseline, which is the CBO’s estimate of spending over 10 years figuring in no changes to current tax law and discretionary spending. This nearly $10 trillion surge in deficit spending would flow overwhelmingly to the rich and corporations, with the rest of us picking up the tab to pay the cost of borrowing these vast sums. The Economic Freedom Act alone would add about $6.9 trillion to the deficit relative to current law, while the rest comes from Republican refusal to allow any of the Bush tax cuts of 2001 and 2003 to expire.

What’s more, this spending would have considerably less “bang for the buck” than the provisions in the Recovery Act. The reason: the money would flow to a minority of Americans and corporations that would be least likely to spend or invest all of it in job-creating ways. (For a complete analysis of the Republicans’ economic policy program, see Appendix 1 and 3)

Republicans claim they will pay for their program by seizing any unspent Recovery Act funds alongside any remaining funds from the Troubled Asset Relief Program, the legislation passed in late 2008 to prevent the collapse of the U.S. and global financial system. But there is only $284 billion in unspent Recovery Act funding (much of which has already been allocated, including $50 billion dedicated to middle-class tax cuts this year), and another $180 billion of remaining TARP funds, $19 billion of which is being used to implement the recently passed Dodd-Frank Wall Street Reform Act to protect Americans from some of the predatory lending practices encouraged by Republican-led deregulation under President Bush.

So the money the Republicans would use to cover their new $10 trillion in deficit spending does not come close to covering the astronomical cost of their proposal. Even if Republicans could seize all the remaining stimulus money and TARP funds, it would amount to less than 5 percent of their $10 trillion in tax cuts.

What’s worse, this budget-busting plan would overwhelmingly benefit the same wealthy Americans who reaped the rewards of the last Republican-led tax cuts in 2001 and 2003, which of course set the U.S. government into a deficit-spending tailspin and sowed some of the seeds of the Great Recession. If the new Republican plans were to be enacted, the typical middle-income taxpayer earning an average of $40,000 per year would get a tax cut of $467 per year over 10 years, while the typical taxpayer in the richest 1 percent of the country (earning $1.4 million on average) would receive a tax cut of $157,500 per year over the same period according to an analysis of the Economic Freedom Act by Citizens for Tax Justice.

In 2011 alone, 42 percent of the tax benefits would go to the richest 5 percent of taxpayers. In 2012 that rises to 76.8 percent, with an astronomical 61.5 percent of those tax benefits going to the richest 1 percent of taxpayers. In effect, the plan is a massive redistribution of wealth up the income scale. This is not the way to create jobs.

In the pages that follow, we will unpack the Republicans sleight-of-hand economic policy program to demonstrate in detail its fiscal irresponsibility and blatant favoritism toward the most well off in our nation at the expense of everyone else. It’s a plan that deserves full public discussion in the coming months if the American people are to avoid a repeat of the Great Recession and quite possibly a second Great Depression.

Read the full report (pdf)

Pat Garofalo is an Economics Researcher and Blogger, Michael Linden is Associate Director for Tax and Budget Policy, and Ethan Berman is an intern at the Center for American Progress Action Fund.

SOURCE: AP/Damian Dovarganes

Laborers' International Union President Terence O'Sullivan addresses day laborers at a job center in Los Angeles.

Bureau of Labor Statistics numbers released today showed that unionization rates remained virtually unchanged between 2008 and 2009—falling a tenth of a percentage point from 12.4 in 2008 to 12.3 in 2009—and for the first time unionized public sector employees outnumber private sector union members. For the last six years union membership rates have hovered between 12 and 12.5 percent, but they have dropped considerably over the last 25 years. Significant legislative changes must occur in order for a substantial portion of the American workforce to get back onto union rolls as polls indicate they would like to do.

Unionization rates increased slightly in 2007 and 2008—growing from 12 percent to 12.1 percent in 2007 and from 12.1 percent to 12.4 percent in 2008. But over the last quarter century union membership rates have fallen significantly and the current union membership rates are a fraction of what they were in the early 1980s. Rates have fallen by almost 8 percentage points since 1983, the first year comparable union data are available, when union membership rates were 20.1 percent.

The ailing economy in 2009 reduced the union workforce by 771,000, and this decline appears to have disproportionally affected private sector unionized workers. Though the American economy shed almost 4.9 million jobs last year according to the BLS union figures released today—representing a decline of 3.8 percent— the total number of private sector unionized workers declined by 10.1 percent and the private sector unionization rate fell from 7.6 percent in 2008 to 7.2 percent in 2009.

For the first time in a quarter century public sector workers make up over half—51.5 percent—of the total unionized workforce despite there being five times more wage and salary workers in the private sector.

Public sector unionization has remained relatively steady over the past few decades and the percentage of public sector unionized workers increased slightly from 36.8 percent in 2008 to 37.4 percent in 2009. The strength of unions in the public sector compared to those in the private sector is primarily due to different employer practices in union elections in each sector.

Most Americans say they would join a union if they could. But in public sector union elections employers typically remain neutral, while in the private sector the current union selection process is broken and allows antiunion employers to engage in aggressive campaigns that often intimidate workers.

These unfair union election laws mean that workers cannot choose a union without employer interference and even if they successfully vote to join a union they are often prevented from fairly negotiating a first contract. Research from MIT’s Sloan School of Management shows that workers in 45 percent of successful elections were still waiting for a first contract two years after voting.

Unions benefit workers. Those in unions earn significantly more on average than their nonunion counterparts and union employers are more likely to provide benefits. When unions are strong and able to represent the people who want to join them, these gains spread throughout the economy. Nonunion companies increase their wages and all workers have more purchasing power.

It will take substantial legislative changes to allow all Americans a stronger voice on the job and a true opportunity to unionize. The Employee Free Choice Act is the first step toward restoring workers’ basic democratic right to make a free choice to join a union. It would reform the labor relations system through provisions that create a level playing for workers by granting workers a fair and direct path to form unions, hold bad actors accountable with stiffer penalties on employers who break the rules, and restore fairness in negotiating with a first contract arbitration process. Passing the bill would help restore workplace democracy for workers attempting to organize, boost unionization rates, and improve the economic standing and workplace conditions for millions of American workers.

David Madland is the Director of the American Worker Project and Karla Walter is a Policy Analyst at American Progress.

SOURCE: AP/Marcio Jose Sanche

A foreclosure sign is seen on the lawn of a home for sale in Stockton, CA.

Download this testimony (pdf)

Any discussion of the housing finance system’s future should start from a clear sense of what we want the system as a whole to accomplish. The recent GAO report considers the range of roles historically played by the housing enterprises, specifically Fannie Mae and Freddie Mac. But if the Committee restricts its analysis of the past and prescriptions for the future to simply the GSEs, it will miss the most significant origins of the current crisis and produce a system that is inadequate to support the essential role of housing finance in our economy. The real question for the Committee’s consideration is what are the goals of the system and what combination of public, private, and hybrid arrangements, if any, will deliver those objectives.

My goal for today’s testimony is to therefore lay out a series of principles that describes the essential functions that the housing finance system must serve. In short, the specific principles are: access to credit and liquidity, countercyclicality, risk management and oversight, standardization, transparency and accountability, systemic stability, and consumer protection. I hope that these principles are useful as a starting point for reform of the housing finance system, particularly with respect to the secondary market and its participants—both public and private. I will also touch upon important lessons to be learned from the past so that we do not learn the wrong lessons from the subprime crisis, as some may be inclined to do. In short, the systemic failures stemmed from the proliferation of poorly underwritten mortgages channeled through the so-called shadow banking system of unregulated private label securities.

The principles that I present today are the result of the collaborative efforts and discussions of a group of experts and stakeholders in mortgage finance convened by the Center for American Progress that have been meeting for more than a year. The group is known as the Mortgage Finance Working Group, or MFWG. These principles, which are available on the Center for American Progress’s website, were publicly released at an event in March. While we at CAP have tremendously benefited from MFWG members’ insights and expertise over the past year, my remarks this morning should not be construed as their personal or institutional endorsement of my testimony. Needless to say, any errors herein are my own. Looking at any proposal that is made going forward, based on these principles, the Committee should ask the following questions:

• Will institutions of any size in any market have access to capital and liquidity in all markets at all times?
• How well will it do in ensuring a steady supply of 30-year fixed rate mortgages?
• How well will it do in ensuring a steady supply of finance for affordable multifamily house?
• Will it support and speed innovation? Will it support and encourage transparency?
• Will all our communities, especially those devastated by this crisis, have access to credit on fair and nondiscriminatory terms? 
• How can we transition to a new system without disruption?

With these questions in mind, policymakers can design a regime that not only sets the policy framework for the primary and secondary market actions of purely private entities and public credit enhancement agencies and provides carefully designed government backing only for those select activities of private actors that are determined to be necessary to ensure that there is credit available to support all the nation’s housing needs. Liquidity across products and time

The first concern of policy makers in contemplating any redesign the US mortgage finance system must be ensuring sufficient credit liquidity at all times to meet the needs of US homeowners. American borrowers have shown a strong preference for long-term, fixed-rate, self-amortizing loans that have allowed them to build assets and plan loan repayment. Most investors, on the other hand, seek short-term, liquid investments. Mortgage markets in the United States in recent decades have done a remarkable job of intermediation between those different needs. (As Susan Wachter has mentioned, no other housing finance system provides long-term, fixed-rate mortgage lending as well as the American system.)

What do we mean by liquidity? An investor needs to know that there will be a market for their assets—in the context of mortgage-backed securities, their particular share of loans made to individual homeowners—at all times. If an investment is not liquid, investors will charge more, if they make the capital available at all. If they don’t, a new homebuyer cannot get a loan and an existing owner may be unable to sell.

In thinking about liquidity, two important aspects must be considered: first, the need to have consistent credit liquidity through booms and busts; and second, the need to have broad availability of credit across places and housing types, Each is of paramount importance in thinking about the future of U.S. housing finance.

Broad demands for liquidity must be consistently met over time. In the most recent housing cycle, we saw too much credit flow into the U.S. housing markets during the boom, creating a housing price bubble that misallocated trillions of dollars of capital. Private mortgage securitization played an unquestionably pro-cyclical role during these bubble years. Conversely, during the aftermath of the housing bust, there has been a notable drying up of credit liquidity, one which has only been filled by the housing enterprises, Fannie Mae and Freddie Mac, both before and particularly after being placed in conservatorship, and FHA/Ginnie Mae. If not for these governmental and government-backed sources of housing finance, the downturn would have been much more severe, and no one would be talking about the possibility that we’ve seen a bottom, either for the housing market or the broader economy.

Any housing finance reform efforts must consider the importance of ensuring sufficient credit liquidity during down times, and who might provide that liquidity. Institutions with the capacity and responsibility for countercyclical activity are a requirement for a well-functioning system. This countercyclical role is one that will require some measure of government backing, as the private sector has proven itself unable or unwilling to independently provide sufficient and necessary capital during periods of retrenchment.

Credit liquidity must also be deep in addition to being broad. Policymakers must consider how a revised system will succeed in maintaining the confidence of domestic and international investors to continue directing their capital into U.S. housing markets. This confidence has been shaken, most particularly with respect to the primary lenders and secondary market institutions that are at the heart of mortgage finance today. Perhaps the biggest question policy makers face is whether U.S. housing finance can attract sufficient capital to meet its needs without a significant government role, particularly in the wake of massive failures in the private securitization market which have caused the global investment community massive losses on U.S. mortgage securities. I believe the answer to the question is that there remain critical roles for government to play in the provision of mortgage finance liquidity.

Beyond the issue of constant and deep liquidity, U.S. housing finance must provide liquidity across geographies to support the acquisition and refinancing of a wide range of housing types, from the single-family suburban home to the high-rise apartment building, from double-wide manufactured housing to triple-decker row homes. An emphasis on ensuring the availability of mortgage finance to support homeownership remains appropriate, even in the aftermath of the housing crisis, as homeownership is still the key route to economic mobility and wealth accumulation for large segments of the American populace.

But homeownership is not appropriate for everyone at every point in their lives. If the reformed housing system fails to provide sufficient financing for the production and maintenance of affordable rental housing, the system will fail to serve the needs not only of a large and sometimes vulnerable segment of the population, but also of the rest of us. Not only have almost all of us rented at some time in our lives, but the lack of quality affordable rental housing affects the fabric of our entire economy and society.

The idea of ensuring sufficient credit liquidity translates for most Americans into ensuring a supply of capital flowing to originators of single-family mortgages. But policymakers should also be careful to consider the needs of multifamily housing as well. In the context of the secondary mortgage market, providing liquidity for multifamily housing in particular will be a challenge to policymakers going forward. Because multifamily housing is not as easily securitized or underwritten as single-family mortgages are, ensuring constant liquidity is more difficult. In periods of significant to stress to the banking system during the past two decades, permanent financing for multifamily housing was predominantly financed by the GSEs, both through their direct efforts as well as through their role as an active purchaser of the tax credits that helped finance the equity portions of multifamily housing deals. Research by the National Multi Housing Council highlights the critical role the housing enterprises played during the S&L crisis, providing $9 billion for multifamily housing at a time when savings and loans were responsible for $43 billion of disinvestment in the sector. Similarly, between October 2007 and September 2008, the GSEs provided a combined 82 percent of the $83 billion in net new multifamily financing.

Demographic changes coupled with the fallout from the housing crisis make it a certainty that demand for rental units will soar in the near future, and much of that demand will be for affordable rental housing in places with access to decent job opportunities. During the height of the boom, much of the multifamily construction took the form of condominiums and higher-end developments. Any reformed housing finance system will need to meet the demand for financing multifamily housing across the range of price points; this will likely require a range of delivery channels for deeply subsidized, narrowly subsidized, and unsubsidized units.

Fair and affordable access to credit

We should expect private capital to provide consumers with access to credit on profitable but fair terms. In particular, underserved communities should receive access to credit on terms that reflect their actual, not perceived, credit risk and not on predatory terms. These are the communities that have been hardest hit by the housing and economic crisis and will need the most capital to rebuild. While an emphasis on better risk management is likely to lead to tighter underwriting standards, policymakers should be careful in ensuring that those changes are based on criteria empirically tied to credit risk—while remaining sensitive to the true costs of providing that credit—rather than on ideological or discriminatory assumptions about the credit profiles of certain communities. Stronger underwriting should ultimately lead to a more careful allocation of credit within all communities, not a deprivation of credit to underserved communities.

It is worth noting that the modern long-term fixed rate mortgage, where the homeowner does not bear interest rate risk, such as the 30-year fixed-rate mortgage that we all take for granted, is actually an affordable housing financial product created by government policy. In the 1920s and early 1930s, private-sector mortgages were short-term, non-amortizing bullet loans—many of same features found in the most toxic of the toxic mortgages originated at the height of the bubble. The Home Owners’ Loan Corporation was created in 1933 at the height of the depression to refinance distressed borrowers into stable, long-term—then 15-year—mortgages at up to 80 percent loan-to-value. FHA followed the HOLC offering these innovative long-term products. The adoption of the self-amortizing, fixed-rate mortgage by the private sector was a reflection of a need to compete on the best terms with public entities—in contrast to the race to the bottom among lenders we have witnessed over the past several years.

Long-term, fixed rate loans are a unique feature of the American system. As a policy matter we should want to ensure their continued availability, because they remain essential to creating wealth/asset building opportunities for consumers. Moreover, unlike adjustable-rate mortgages, these loans shift interest rate risk away from homeowners, the party with the least ability to manage that risk, onto institutions and individuals with greater risk-management capacity.

Absent a policy intervention to ensure the availability of these long-term mortgages, they probably will not exist, a point implicitly acknowledged by Wells Fargo CEO John Stumpf in a recent call for the GSEs to be given permission to purchase jumbo mortgages as a way to “help revive the moribund market for big mortgages.”

Another important goal is the provision of affordable housing finance products to all communities, not just the middle and upper class, but also to those underserved traditionally by decent and fair financial products and sources. Unfortunately, many have taken the wrong lessons from this crisis about the ability of low and moderate income people to be homeowners.

And while society has sometimes over-emphasized homeownership over the last two decades at the expense of rental housing, we should not learn the wrong lesson. The current high rate of default on subprime mortgages does not mean that homeownership is inappropriate for low- and moderate-income households. Indeed, from 1998 to 2006, only 9 percent of subprime mortgages went to first-time homebuyers, with 62 percent being used to refinance existing homes. As I will discuss shortly, the lesson policy makers should be taking away from the crisis is that level playing fields are necessary, particularly when it comes to affordable access to credit. When safe, affordable, and well underwritten loans must compete against unregulated exotic mortgage products priced without regard to underlying asset value or risk and marketed by brokers with misaligned incentives, the results are disastrous, both for homeowners and for the larger economy. We must ensure that parallel systems cannot again emerge that put the soundly underwritten loans in competition with unregulated and non-transparent products.

Many nonprofit, CDFI, and other innovators such as the Self-Help Credit Union were finding compelling and sound ways to lend to lower income families that proved to be far more successful than the track record of subprime product. The originations and servicing of these successful Self-Help mortgages were by banks motivated by CRA, with the liquidity provided by Fannie Mae. The Ford Foundation provided a guarantee and Self-Help provided management. In other words, this model presents a partnership that relied on government incentives and provided safe loan products to consumers at no risk to the originating lender.

It is important to understand that affordable housing finance for lower income and minority families was at a marked disadvantage in competing with predatory subprime product that was irrationally priced, poorly underwritten, and/or marketed with predatory practices. In 2005, 55 percent of borrowers given subprime loans that were sold into private label securities qualified for prime loans at the time of origination. Good affordable lending was driven out—a perfect example of Gresham’s law, "Bad money drives out good."

We need to ensure that all the money in the game is available under the same rules. This doesn’t mean that lenders should not differentiate between legitimate credit risks and price their offerings appropriately, but recent CAP research found that even among borrowers earning at least twice area median incomes, African-American and Hispanic borrowers were about three times as likely as whites to be given higher-priced mortgages. This is hardly a characteristic found in a system that ensures equal access to fairly priced credit.

We must reestablish such efforts to allocate capital on fair but economically viable terms, particularly through innovation, not shy from doing affordable homeownership right. Consumer protection

There has been a lot of discussion about the merits of consumer protection in the context of the administration’s proposal for a Consumer Financial Protection Agency, so I won’t go into great detail here to explain CAP’s support for that proposal. Rather, I will make a few brief points about the importance of consumer protection to an effective system of housing finance and vice versa—points that have been absent from the broader conversation to date.

First, it is worth noting that to a large extent, consumer protection—i.e., efforts to prevent predatory lending and encourage the origination of safe and sustainable loans—is really also a means to protect investors as well. If loans are originated with aligned incentives, consumers should tend to receive sustainable, well-underwritten loans, which benefits investors by making their investments safer. What we saw in the last market cycle was mortgage brokers and originators with misaligned incentives to sell unsustainable, high-fee mortgages because compensation was immediate and risks were divested.

At the origination level, brokers and originating lenders had no incentives to make sustainable loans, and typically had perverse compensation incentives to sell high-risk, high-fee mortgages over safer products. Subprime and Alt-A mortgages, mainstays of private label securitization, were a particular problem, as we all know. Originating lenders like Countrywide paid originators more if they sold higher risk mortgages such as option ARMs and interest only loans. (They also got paid more for higher interest rate loans, which has led to our suggesting the need for greater scrutiny of whether there had been fair lending violations at the height of the housing bubble.)

With such misaligned incentives, it is not surprising that there have been rampant reports of origination fraud, and more importantly, that the mortgages composing private-label MBS were across the board poorly underwritten with historically astronomical default risks. For example, 44 percent of subprime mortgages, and 9 out of 10 Alt-A option ARMs, originated in 2005 were made without full income documentation. At all levels of the shadow banking system, the incentives for market actors, including credit rating agencies, were to generate as much volume as possible, with no regard for credit risk and often perverse incentives to generate higher cost, higher risk loans. Because the costs generated by their poorly underwritten mortgages were not ultimately borne by the key market actors in the private securitization process, but were instead borne by others (including the taxpayer)—an externality—their incentives were all aligned towards generating high short-term fees and payments, and away from the long-term viability of the underlying mortgages.

In thinking about these problems, one potential solution stems from greater transparency and standardization. It’s a lot easier to shop for a product where you can do comparison shopping, so to the extent that the current system encourages the mass availability of certain standard mortgage products (15/30yr FRM in particular), it empowers the consumer. This is not to say that certain innovative mortgage products should be excluded entirely from the marketplace; borrowers with unique circumstances should not be forced to accept a standard product that is unsuitable for them. Nevertheless, even in these instances, terms should be easily understood and presented in a fashion that allows for consistent comparisons across offerings.

The benefits of standardization accrue to the consumers of securitized mortgages—investors—as well. As we have seen, securities with the same AAA rating have performed very differently over time. Transparency in MBS down to the loan level is often available only to market participants with very deep pockets, leaving other investors to guess how much future impairment is already priced into the security. MBS and collateralized debt obligations trade without TRACE requirements, which also impede market participants’ ability to accurately price securities that may have been sliced and diced multiple times over.

The secondary market ultimately drives the standardization that benefits consumers. Investors who innovate with exotic products should have a higher, not lower, obligation for transparency and consumer protection. Products with transparency that allows for ease of comparison across offerings in both the primary and secondary mortgage markets provide much greater efficiency and stability for individual participants and for the system as a whole.

These consumer protection considerations are essential not only for primary market regulation. The secondary market plays a key role as well.

Risk management and oversight creates transparency

Finally, there is the principle of risk management. In contemplating the reform of the housing finance system, most policy makers have understandably focused on the need to restore stability and sufficient risk oversight to the housing finance system. But those who would focus primarily on GSE reform are missing the bigger picture. After all, it is clear that the unregulated private securitization markets caused this crisis through poor underwriting and misaligned incentives that ultimately became the toxic MBS whose losses infected seemingly invincible institutions. And so we believe that any efforts to reform the housing finance system that ignore the private securitization markets are destined for failure. We must ensure a level playing field.

In discussing the crisis that hit the housing finance system, it is critical that the difference between GSE-conforming MBS and private-label MBS is understood. This is something that is clearly not well understood by many.

GSE-conforming MBS have been around since at least the 1970s and involve a guarantee from one of the government sponsored entities Fannie Mae or Freddie Mac on the timely payment of principal. This guarantee was thought to carry the implied backing of the federal government, something which was confirmed in the recent crisis, when the federal government took over the GSEs in a conservatorship and near-explicitly guaranteed their obligations. GSE-guaranteed MBS are securities based upon “conforming mortgages,” which typically are safe and standard mortgages—such as the 30 yr FRM—with strong underwriting requirements. The GSEs also purchased ARMs, Alt-A, and even subprime mortgages, but even in those cases, the quality of those loans were mostly better than what was securitized through PLS, in part because the terms of the loans contained fewer predatory features.

GSE-conforming mortgages, in large part due to the standards set by the GSEs themselves and the requirement of private mortgage insurance on loans in excess of 80 percent of the property’s value, have historically performed very well. Even in this historically unprecedented housing downturn, GSE-conforming mortgages have seen default rates that are small relative to PLS. In fact, serious delinquency rates for PLS are considerably higher than Fannie Mae or Freddie Mac’s portfolios (including their held Alt-A and subprime mortgages) as of the end of the second quarter of 2009. PLS make up 13 percent of the outstanding single-family first mortgages but account for 35 percent of the serious delinquencies. The housing enterprises, in contrast, collectively hold 57 percent of those mortgages but only 26 percent of the serious delinquent mortgages. In other words, there are more than one-third more delinquent mortgages in PLS than owned by the GSEs, despite the GSEs’ market share being more than three times the size.

The housing and financial crisis originated in “toxic” private-label MBS

Having laid out the principles that describe the essential functions of the housing finance system, I would like to also touch upon the key points of failure of the existing system. Specifically, the rapid expansion of a “shadow banking system” consisting of private label securities and their complex derivatives distorted the secondary mortgage market and chased safer loan products out. The proliferation of PLS comprised of loosely underwritten mortgages was made possible by a lack of prudential oversight and misaligned incentives throughout the origination and securitization processes.

The unregulated private MBS market, free from any direct safety and soundness supervisory oversight, was hailed as a paradigm for efficient markets, with sophisticated private actors and cutting-edge quantitative analysis efficiently managing and allocating risk, whose complexities were boiled down into a series of letter grades issued by credit rating agencies who were paid handsomely by those packaging mortgages into securities. Despite the inherent conflicts of interest in ratings agencies’ business model, belief that the “shadow banking system” could manage its own risk while providing strong returns was nearly universal. Thus, the regulatory playing field was tilted to the advantage of private securitization, as regulators and legislators alike were reluctant to regulate a market that seemed to be functioning efficiently without regulation. The lack of regulation allowed the shadow banking system to enjoy cost advantages over other sources of housing finance, which allowed it to dominate the marketplace.

Because private securitization had relatively little regulation but the near-universal belief that its products were safe—AAA ratings coupled with expectations of perpetual house price appreciation–global capital flooded into the shadow banking system, and thus the U.S. housing markets, during the Bush administration. Private-label MBS have been created and sold for more than two decades, but their expansion was dramatic in the earlier part of this decade, expanding almost nine-fold from $135 billion 2000 to almost $1.2 trillion in 2005.

The U.S. PLS share of MBS went from 12 percent in 2002 to nearly 50 percent in 2006, which had the effect of distorting the overall economics of the U.S. housing market. Coupled with low interest rates, this flood of capital caused massive appreciation in housing prices that was unsupported by the underlying economic trends. By the end of 2007, U.S. housing prices had seen an inflation-adjusted 86 percent increase since 1996, even as household income stagnated. The PLS-induced housing bubble burst and has today left approximately one in three mortgages underwater, and that number could rise to nearly 50 percent by 2011, according to a recent study from Deutsche Bank.

The growth in mortgages originated for private securitization displaced the so-called “plain vanilla” mortgage products offered by the GSEs, FHA, and portfolio lenders. GSE conforming mortgages shrank to less than 30 percent in 2006, down from 50+ percent in the 1990s. 2005 was the first year in which PLS originations outstripped mortgages originated for agency MBS—including GNMA. Unsurprisingly, 2005 also marked the year in which mortgage lending standards deteriorated markedly, based on the proportion of loans where the intersection of credit score and LTV ratios had historical lending precedents. “By June 2006,” notes Whitney Tilson based on loan performance data presented by Amherst Securities Group, “mortgage lending standards had collapsed, even for the best loans.”

This unprecedented market share of the “shadow banking system,” which performed the basic functions of bank lending but without the risk oversight imposed on banks, was tied to the belief that these market players could self-regulate their own risk, and therefore this process of private securitization didn’t need regulation for safety and soundness.

As Alan Greenspan noted: “Deregulation and the newer information technologies have joined … to advance flexibility in the financial sector. Financial stability may turn out to have been the most important contributor to the evident significant gains in economic stability over the past two decades … Recent regulatory reform, coupled with innovative technologies, has stimulated the development of financial products, such as asset-backed securities, collateral loan obligations, and credit default swaps, that facilitate the dispersion of risk.” In hindsight, this was clearly a tremendously flawed assumption, but one which enjoyed huge support at the time.

Private-label MBS imploded because of a lack of prudential oversight and misaligned incentives

All modern banking systems have a prudential oversight regime, but when regulators fail to use their authorities, or loopholes are created that allow certain products and market participants to avoid oversight, the stability of the entire system is threatened.

At the origination level, the Federal Reserve, which had specifically been tasked by Congress to develop guidance on subprime mortgages, ignored this obligation for more than a decade. And when state-level regulators sought to provide much-needed guidelines for products and institutions operating within their borders, the Bush administration’s Office of the Comptroller of the Currency sued them arguing that national banks were already subject to federal regulation, despite the OCC’s determined unwillingness to protect consumers from dangerous loan products. The former attorney general of North Carolina, Roy Cooper, was led to remark, the OCC “took 50 sheriffs off the job during the time the mortgage lending industry was becoming the Wild West.”

The problem of regulators being philosophically opposed to regulation was an even more critical failing in light of the problem of misaligned incentives throughout the system. Put simply, virtually none of the participants in the mortgage securitization process had the incentive to originate and sell loans that were viable over the long term.

At the securitization level, loan underwriters had no incentives to verify the underwriting of the loans they were pooling, or to take measures to ensure that defaults were limited. Instead, they merely needed to attain a AAA rating for as high a volume of securities as possible.

Credit rating agencies were tasked with assessing the risk associated with these private label MBS. As Chairman Dodd, Vice Chairman Shelby, and Sen. Schumer, among others, have described, these rating agencies faced inherent conflicts of interest, as they were paid by the MBS issuers, and paid more for higher volumes of new issues.

Indeed, we have begun to see renewed activity among re-REMICs, wherein previously downgraded MBS are reorganized into new securities with better ratings, even as the underlying impaired mortgages are left untouched. This alone should put pause to anyone claiming that the market has learned its lesson (once burned, twice shy) and the worst excesses of originators and the PLS market are unlikely to return. Similarly, some who have put forth proposals that ignored the possibility of a reinvigorated PLS market and therefore saw no need to develop a regulatory structure for it are inviting a return of these distortions on the conventional market .

One possibility we at CAP are considering to ensure that whatever PLS market emerges competes on fair and transparent terms with future conventional mortgage lending would be to require all those who securitize residential mortgages to obtain a license that brings with it certain duties to transparency, risk management, and a countercyclical market presence. There are advantages and disadvantages to this model, but it is worth exploring further.

The costs of excessive risk taking by private MBS market participants were borne by others

In 2007, Fed Chairman Ben Bernanke famously stated that the damage from the subprime mortgage crisis had been contained. In fact, as we now know, this was terribly incorrect, as the excessive defaults from subprime and Alt-A securities, as well as those caused by the depreciation of housing markets artificially inflated by the surge of global capital into U.S. housing, became so great that they paralyzed our entire global financial system, necessitating massive injections of public funds into private Wall Street financial institutions and the housing enterprises.

By 2007, all of the world’s largest financial institutions had assumed enormous exposure to the U.S. private-label MBS market. As a result, when these securities began to see higher defaults as a result of their poor mortgage origination practices and the overall inflation of US housing prices, the resulting losses impacted areas of the financial markets far beyond private mortgage origination. Financial institutions as disparate as Citigroup (primarily a bank holding company regulated by federal banking regulators), AIG (primarily an insurance company regulated by state insurance regulators), and Bear Stearns (primarily an investment bank and broker-dealer regulated by the SEC) experienced losses related to their private label MBS exposure that were so severe that it impacted their other financial activities.

Ironically, the housing enterprises also experienced enormous losses as a result of the private-label MBS market. This occurred through losses on their guarantee book of business as well as through more profound losses on the private-label securities they themselves had bought in an effort to boost profits in response to lost market share from the vary same PLS.

Conclusion

In summation, the housing finance system as a whole must offer access to credit and liquidity, countercyclicality, risk management and oversight, standardization, transparency and accountability, systemic stability, and consumer protection. A robust system will likely require a combination of public, private, and hybrid entities to deliver all of these objectives. It is instructive to look back at the rapid expansion of the PLS market at the expense of conventional lending to identify the failures of the past as we begin to consider how to reform the housing finance system to achieve the principles we have laid out.

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“[The report] ‘Green Jobs/Green Homes New York’ looks at the big picture [of retrofitting homes for energy efficiency] and all the dynamics that are impacted and influenced. It speaks to the boldest and greenest terms of community, making sure that those who are the weakest amongst us will have that hope of growing out of poverty,” said Rep. Paul Tonko (D-NY) at CAP Action’s Friday event “Green Jobs/Green Homes New York: Expanding Home Energy Efficiency and Creating Good Jobs in a Clean-Energy Economy.”

Keynote speaker Van Jones, Special Advisor for Green Jobs, Enterprise, and Innovation at the White House Council on Environmental Quality, also addressed the new report from the Center for American Progress, the Center for Working Families, and Half in Ten. CAP Action Senior Fellow Bracken Hendricks moderated a follow-up panel discussion with New York State Laborers Local 10 Community Affairs Officer Lavon Chambers, Half in Ten Campaign Executive Director Lisa Donner, Conservation Services Group Senior Vice President Mark Dyen, and Center for Working Families Director of Green Policy Emmaia Gelman.

Building efficiency retrofits serve the triple benefits of mitigating global warming emissions, reducing energy bills, and creating good, local jobs. Residential buildings alone account for 21percent of total U.S. greenhouse gas emissions, and substantial efficiency savings are obtainable through easy and proven techniques. Yet if energy-efficiency retrofits offer such obvious environmental, economic, and employment benefits, why have they been so slow to materialize? The answer lies in a host of market failures, and developing viable, scalable solutions has proven challenging—until now.

“Green Jobs/Green Homes New York” outlines a policy roadmap for New York State to achieve mass-scale energy-efficiency improvements—or retrofits—of 1 million housing units over the next five years. “We know from the past 30 years of weatherization that with a relatively small investment in changing an existing structure you can save 30 to 40 percent in home energy,” said Gelman. “In New York, that will amount to about $1 billion per year if 1 million homes are weatherized.”

The policies outlined in this report can help stimulate the economy and lay the foundation for long term growth, but not without leadership from government, as well as engagement from local community groups and other stakeholders. “Free markets are not going to fix these problems without strong policy and real leadership,” said Hendricks.

Encouragingly, clean-energy policies were part of the economic stimulus package passed earlier this year. President Barack Obama outlined a plan last March to invest $59 billion from the stimulus in direct spending and tax incentives to promote clean energy and energy efficiency. Over the next two years, this federal investment will pour into state energy-efficiency programs and expand their capacity. “Those humble, hard-working energy-efficiency dollars work over time; they work double and triple time,” said Jones. These dollars can help cut home energy bills and poverty by creating jobs; reducing emissions, pollution, and asthma; and even making homes more valuable.

The Green Jobs/Green Homes NY program will make retrofits available to owners of any type of housing in New York State and at any level of income as long as owners are utility customers in good standing and live in targeted geographic areas. Retrofits can also be made available to renters of single-family homes who own the utility meter account and have sole physical control of the housing unit. The program plans to use an array of innovative financing, community outreach, and community partnership strategies to make it all happen. “New York has one of the largest weatherization programs in the country, retrofitting 25,000 to 26,000 homes per year. This report would increase the number of homes 12 times the current rate,” said Dyen.

The report estimates that the Green Jobs/Green Homes NY plan will directly create 60,000 job-years related to the expansion of retrofit work and another 60,000 job-years indirectly through additional economic activity. The program will employ 14,000 long-term, full-time skilled retrofit workers, providing an opportunity to reach out to groups that have been previously disenfranchised in the job market. “We need to consider not only how to make access to jobs for people who don’t have a lot of work experience or don’t come to it with a lot of skills, but also how to make good jobs,” said Donner. “We need to treat these as complimentary goals rather than contradictory.”

Organization on the community level will be crucial to educate local groups and homeowners about the importance of investing in retrofitting. Also, environmentalists and unions will jointly benefit from the report’s proposed policies. “If these groups can join together and replicate the New York model across the country,” said Chambers, “then ‘yes we can’ becomes more than a chant, it becomes a way of life.”

For more on this event, please see the events page.

See also: Green Jobs/Green Homes NY (CAP)

“There is no question that ‘meaningful health insurance’ is at the heart of the effort to get affordable, quality coverage for all Americans,” said CAP Senior Fellow Judy Feder at “Truth in Labeling: Transparency and Health Insurance,” an event CAP hosted last Friday. A group of experts joined Feder for the discussion, including Georgetown University Research Professor Karen Pollitz, American Cancer Society Action Network’s Senior Program Editor Steve Finan, and Senior Program Editor at Consumer Reports/Consumer Reports on Health Nancy Metcalf.

In order for health insurance to be meaningful it must “comply with the three A’s,” said Feder. “It must be adequate, available to all, and affordable.” This is unfortunately not the case with most plans; they often have coverage gaps, deny people insurance, or are too expensive for most consumers.

Being underinsured is nearly as dangerous as being uninsured. Even with insurance, “you can lose everything if you have a heart attack,” explained Pollitz. Millions of insured Americans accrue staggering medical bills each year due to inadequate coverage.

It can be difficult to tell what benefits a health insurance plan provides, and consumers are generally not even allowed to read a policy before purchasing it. These practices also make it difficult to avoid hidden costs. “For almost anything we buy these days people can get consumer information, except for health insurance,” said Finan. Despite the wide variety of plans available, consumers have almost no tools to effectively compare them and make an informed decision.

Even after purchasing coverage, it is nearly impossible for the average consumer to understand their plan and judge whether it will cover costs. “The policy language is in legal and health jargon making it difficult for people to understand,” said Pollitz. In one study three out of four people didn’t understand their policy and 53 percent didn’t know whether there was a limit on their out-of-pocket spending.

The fundamental lack of coverage transparency can lead to insurmountable debt. “We are trained as consumers [to] buy bargains,” said Metcalf, but plans that seem cheap often have costly loopholes. Pollitz and her team compared three hypothetical patients with serious health conditions under 10 different insurance plans offered in Massachusetts and 10 others in California. The discrepancy in out-of-pocket payments for their breast cancer patient ranged from $4,039 to $55,250, as detailed in their report, "Coverage When It Counts."

Often patients don’t know about the limits in their coverage until they receive their bill. Even if consumers know they have an out-of-pocket limit, and know what it is, sometimes this limit isn’t comprehensive and it is difficult to determine what is covered and what isn’t. “It is important to make the out-of-pocket limit real,” said Pollitz. Otherwise patients can incur staggering debts, even under a seemingly comprehensive policy.

“We all agree that everyone should have basic coverage, but the question is what does this mean? What do you leave out?” asked Metcalf. This will be a central issue in the process of health care reform and creating a system that doesn’t leave people without coverage.

Vital steps toward health insurance reform and transparency will be standardization, comparability, disclosure, and honesty of language. “The most important step is to make health insurance less variable,” said Pollitz. “What we have now aren’t choices. They’re traps.” Consumers should also have access to comparative information the same way they do for other products through services such as Consumer Reports. One way to do this would be through a Coverage Facts label, modeled after the FDA’s Nutrition Facts labels.

Health insurance must undergo significant reform, and transparency needs to be at the heart of it. Patients should not have to face a lifetime of debt because of dense, complex legal language. As Feder said, “If health insurance doesn’t work for sick people it doesn’t work.”

For more on this event, please see the event page.

SOURCE: Center for American Progress

Rudy deLeon is the Senior Vice President of National Security and International Policy at American Progress.

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Mr. Chairman and Members of the Committee,

Thank you for the invitation to testify before this committee on the committee’s acquisition reform package. I would like to further acknowledge Chairman Skelton and Ranking Member McHugh for their leadership on this matter.

I would like to start highlighting the problems in the weapons acquisition system. A blue-ribbon group of former Pentagon acquisition officials concluded in late 2007 that the military contracting process was plagued with systematic problems and failures.

The investigators found that acquisition and contracting procedures were inadequate to support U.S. military forward deployments in Iraq and Afghanistan. As the blue-ribbon group concluded, “the most notable characteristic of the testimony is a nearly unanimous perception of the current problems, their gravity, and the urgent need for reform.” This panel of experts report is the starting point for examining acquisition and contracting needs.

Solutions should begin at the top, with the Quadrennial Defense Review. The QDR should include a thorough review of the Pentagon investment program to ensure that budget decisions are aligned with the current military needs and priorities.

The review should include all weapons programs, joint combat and network systems, intelligence and information assurance, a full examination of space programs, and missile defense research and development. The procurement and R&D component of last year’s defense budget is $183.8 billion, more than one-third of the defense baseline. Appropriately, this QDR portion will be particularly important because significant budget realignment and redirection is likely. Secretary Gates’ statement earlier this month was the beginning of this process.

Related to this area, the QDR must also examine the availability of critical technical personnel, especially government executives who serve as program managers for these Pentagon programs. The government needs highly skilled people who understand the technology, and can make high-tech trade-offs to get taxpayers good return for their investment and the right equipment to our troops. The career civilian workforce is the best source of candidates for these positions, but their ranks were reduced by administration and congressional directed budget cuts. Technical expertise is essential to protect the public interest.

After the QDR, the next step is to implement sensible adjustments in the acquisition process. We must ensure that major defense acquisition programs are subject to careful review. I will offer my comments on the pending legislation in my oral presentation.

For any of these reforms to bear fruit, we must first invest in government personnel responsible for engineering and acquisition. No improvements will materialize without adequate expertise. Several issues require attention:

(1) The Pentagon’s capability to manage and integrate large acquisition programs needs to be improved. The solution lies in a combination of a strengthened Pentagon acquisition workforce, greater reliance on not-for-profit independent advisory bodies like RAND, the Institute for Defense Analysis, MITRE, and the other federally funded centers, and a return to industry prime contractors that are exclusively concerned with system engineering and program management.

(2) The Pentagon needs a new policy on mergers and acquisition of defense contractors that ensures a healthy defense industrial base, a robust and innovative workforce, fair competition, and low cost. For the past few years, the acquisition workforce for the DOD has been shrinking, even as procurement appropriations increased. Without adequate numbers of qualified personnel, the acquisition process will be plagued with inefficiencies.

Investment in human capital must occur now to increase the workforce in the pipeline in preparation for the retirement of the most senior and skilled personnel. We should also seek dedicated training for government personnel responsible for contract negotiation and management. This critical function and these important improvements have the potential to save dollars. Furthermore, the Pentagon could improve its capabilities for program management if it could accelerate the time required to issue security clearances to acquisition and other personnel.

(3) Many experts believe that too little emphasis is being given to technology-based activities on which advanced military weaponry is dependent. While it is true that the military must compete for technical talent in the highly competitive commercial market. Some of these obstacles can be overcome through mutually beneficial military-commercial dual use projects.

(4) There is growing concern that the future supply of U.S. scientist and engineers will be inadequate for the defense industry, a critical educational issue identified by the National Academy of Sciences report, “Rising above the Gathering Storm.” We cannot allow this to occur if we are to maintain military superiority.

The American defense workforce— public and private— is a critical national security asset. The preservation of these advanced technology skills in the engineering, manufacturing, and system integration areas is a national priority. The Pentagon and private sector must work together to preserve and regenerate these critical skills for the future.

Furthermore, there should be integration in the acquisition system.

(1) Technology advancement requires integration of platforms—aircraft, ships, ground vehicles—with redundant information networks.

(2) Successful next generation systems require that the people who will use the equipment establish clear requirements that include appropriate technological trade-offs.

(3) There should be integrated planning, programming, and budgeting for intelligence programs.

(4) The separation of the requirements process (under the Joint Chiefs of Staff) and the acquisition process (the Pentagon’s Defense Acquisition Board) should be eliminated.

I’ll be happy to address any questions you may have.

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The Center for American Progress Action Fund and John Podesta are hosting a forum entitled “National Clean Energy Project: Building the New Economy" on Monday, February 23, 2009 in Washington, DC. Senate Majority Leader Harry Reid is Honorary Chair.

The half-day event will bring together a select group of high-level government, business, labor and advocacy group leaders with a focus on developing a plan and key guiding principles to lead the transformation of U.S. energy policy and to reduce the nation’s dependence on foreign oil. Confirmed attendees include President William Jefferson Clinton, Vice President Al Gore, Energy Secretary Steven Chu, Interior Secretary Ken Salazar, House Speaker Nancy Pelosi (D-CA), Senator Jeff Bingaman (D-NM), Representative Ed Markey (D-MA), energy executive T. Boone Pickens, and leaders from government, business, labor, and the non-profit communities.

The National Clean Energy Project builds on the August 2008 “National Clean Energy Summit” sponsored by Senator Reid, CAPAF, the University of Nevada Las Vegas. The participants in the summit concluded that inadequate access to transmission was one of the most significant barriers to widespread development of renewable energy.

This forum will focus on modernizing and expanding the electricity grid, integrating energy efficiency and distributed generation into operation and regulation, rapidly increasing transmission capacity for renewable energy, and reducing our nation’s dependence on foreign oil by examining short- and long-term solutions to replace foreign oil with domestic resources to fuel vehicles and trucks, including natural gas.