The following is a slightly edited version of remarks delivered on an Economic Policy Institute teleconference on Friday, July 25, 2014.
Since the Great Recession began almost 7 years ago, the Fed has been the most proactive and the most effective macroeconomic policy-making institution both in attempting to end the recession and then subsequently trying to spur a full recovery. It’s been the most effective by far in the United States and almost certainly the most effective in the world. The Fed deserves a lot of praise for this stance and the economic evidence argues strongly that it should continue to prioritize boosting employment and spurring a full economic recovery. Specifically, this evidence indicates:
- The economy continues to have enormous amounts of productive slack—including in the labor market.
- Until this slack is taken up, wage-driven inflationary pressures just will not materialize.
- Wage and compensation growth will have to more than double to put significant upward pressure on overall price-growth in coming years—meaning that the Fed should be fully comfortable with nominal compensation growth as high as 4 percent over the next couple of years. This follows from the fact that trend productivity growth is roughly 1.5 percent so that 2.0 to 2.5 percent nominal compensation growth above 1.5 percent implies rising unit labor costs corresponding to 2.0 percent inflation, allowing for an additional to 0.5 compensation growth at the expense of historically thick profit margins.
The Fed is commonly described as being tasked with targeting more rapid employment growth and economic activity until the point that such rapid growth begins to spur accelerating inflation. The U.S economy is nowhere near the point where growth is rapid enough to spark accelerating inflation. Instead, we remain far from fully recovered from the Great Recession, and because of this, inflationary pressures just aren’t in the data.
The following is a slightly edited version of remarks delivered on an Economic Policy Institute teleconference on Friday, July 25, 2014.
Any systematic look at the current data on the U.S. labor market says that the large costs of the incomplete recovery are quite apparent. We still have a labor market that faces three major ongoing problems. The first is that our very incomplete macroeconomic recovery means that we have continuing high cyclical non-employment and a lot of slack left in the labor market. Even if you look at prime-age workers, those 25 to 54 years old, we’re only one-third of the way back in terms of the employment rate to where we were before the Great Recession.
If you look at young workers, the situation is particularly dire. We still have close to record low employment rates for those less than 25 years old. For disadvantaged and minority young men, the fraction that are both out of school and out of work has increased enormously since 2007; for young black males aged 20 to 24 by almost 10 percentage points from about 23 percent to 32 percent. Over the last year, we are finally seeing some significant recovery in employment, but it’s not nearly enough yet to make people whole and create real opportunities for those in many low-income and working-class communities.
Second, even as we get back closer to full employment, from which we remain very far from, we will still have the scars of the Great Recession including huge increases in the long-term unemployed and in disconnected young workers who have not gotten the types of opportunities needed to jump start their careers and to be poised to move up the career ladder in a stronger economy. So we will need to run a tight labor market for longer than normal—possibly even allowing inflation to eventually overshoot the Fed’s target for a modest period as suggested in a recent paper by Glenn Rudebusch and San Francisco Fed President John Williams—just to help make many American families whole once again and to make enough progress in combating long-term unemployment.
What You Need to Know about the President’s Legal Authority to Expand Deferred Action for Unauthorized Immigrants
President Obama is reportedly considering “deferring” (temporarily suspending) the deportation of up to five million unauthorized immigrants, which would expand and be modeled after his 2012 Deferred Action for Childhood Arrivals (DACA) initiative. This has led to a stimulating and lively public discussion regarding the extent of the president’s legal authority under U.S. immigration law. Understanding the basics of what the president may or may not do under existing law, his constitutional authority and responsibilities, and what Congress can do about it if it disapproves of the president’s course of action, is essential for evaluating the various policy arguments and should help non-lawyers follow the many nuances of this substantive debate.
Here are four questions and answers to get you up to speed:
1. Does the president have legal authority to defer the deportation of all unauthorized immigrants?
No. The president cannot refuse to enforce immigration laws, or enforce an immigration law in a way that is contrary to the aims of the law, or change immigration policy on his own. This requirement comes from the “Take Care” clause in the U.S. Constitution, which requires the president to ensure “that the Laws be faithfully executed” (Article II, Section 3). The Immigration and Nationality Act, the United States’ main set of immigration laws, contains many provisions specifying who is a “removable” (i.e., deportable) migrant (the term the law uses is “alien”). Right now there are an estimated 11.7 million unauthorized immigrants in the United States, who are deportable unless they can prove that they deserve to remain in the country because they are entitled to a legal status under U.S. law.
Congress provides the executive branch the funds to enforce the immigration laws, but it has not provided nearly enough funding to deport all 11.7 million unauthorized immigrants. The Department of Homeland Security (DHS) believes that the amount Congress has appropriated is enough to deport approximately 400,000 unauthorized immigrants per year (3.4 percent of the total) and that is how many people the Obama administration has been deporting. If the president were to refuse to deport any unauthorized immigrants, such action would violate his constitutional duty to faithfully execute the laws and amount to a de facto legalization in direct contradiction of what Congress has required of the president.
A Step in the Right Direction: OMB Will Not Implement Plan to Include “Factoryless Goods Producers” In Manufacturing
Last week, the Office of Management and Budget (OMB) announced that it was cancelling plans to reclassify factoryless goods producers (FGPs) such as Apple and Nike—most of which are now in wholesaling or management of companies (both service industries)—into manufacturing. The FGP proposal is part of a broader set of changes to the North American Industry Classification System (NAICS) that were scheduled to take effect in 2017. The FGP plan would have also required government agencies to move trade in goods made by manufacturing service providers (MSPs), such as China’s Foxconn (which builds Apple products) into services. The OMB proposal was highly controversial, and more than 26,000 comments were submitted for the record. In addition, more than 40 members of the House and Senate signed letters to the OMB raising objections and requesting clarification on a number of unresolved issues regarding the proposal.
In a recent policy memo, I noted that the proposal would artificially inflate manufacturing output and employment by treating outsourced production as part of domestic manufactured output, while artificially suppressing the reported U.S. goods trade deficit, with offsetting reductions in the services trade surplus. The proposal would also require manufacturing firms to begin reporting trade and manufacturing activities on a value-added basis, which would introduce a new level of distortion in U.S. international trade statistics that would undermine enforcement of U.S. fair trade laws. Finally, adoption of the FGP proposal, as initially formulated, could undermine U.S. Buy American Laws and U.S. Export-Import Bank policies.
In honor of Social Security’s 79th birthday, here’s an update to a 2011 blog post refuting Social Security myths spread by critics of the program.
- Social Security costs are escalating out of control. No. Costs are projected to rise from roughly five to six percent of GDP before leveling off.
- Americans want benefits but aren’t willing to pay for them. Wrong again. Americans across political and demographic lines support paying Social Security taxes and prefer raising taxes over cutting benefits as a way to close the projected shortfall. A popular option is raising taxes on high earners, since earnings above $117,000 aren’t taxed. But Americans prefer to close the gap on the revenue side even if they’re asked to pay more themselves.
- Our children and grandchildren will drown in debt if we don’t cut the social safety net. No, future generations will drown in debt if we don’t address health cost inflation. Though the Affordable Care Act and other factors have slowed costs considerably, this isn’t enough—we need to get costs closer in line with those in Europe and Canada. Cutting Medicare or Medicaid benefits just pushes costs onto the private sector. And there’s no reason to lump Social Security in with other programs since it’s funded through dedicated taxes and prohibited by law from borrowing.
- The Baby Boomers will sink us. On the contrary. We saw them coming. Social Security began building up a trust fund in the early 1980s in anticipation of the Boomer retirement. The trust fund is projected to keep growing for another five years to almost $3 trillion, not quite enough to get us through the peak Boomer retirement years (the Great Recession took a bite). (more…)
The saga that has unfolded at the New England grocery store Market Basket over the past few weeks has struck a nerve, and rightly so. As many others have pointed out, the story of a corporate board taking steps to squeeze customers and employees in order to generate ever-higher profits feels far too representative of the way most businesses operate today. What fewer have come out and said: it doesn’t have to be this way.
For the uninitiated in this story, Market Basket is a supermarket chain with 71 stores in Massachusetts, Maine, and New Hampshire. The company employs about 25,000 people throughout the region and had $4.6 billion in revenue in 2013. The chain is an unabashed success, having grown from a small family store to a regional powerhouse. And they have succeeded by taking a distinctly high-road approach: the company takes care of its workers, paying decent wages, offering benefits to full- and part-time staff, and providing employees with a profit-sharing plan. At the same time, Market Basket still offers prices lower than its competitors, Walmart included.
This take-care-of-your-customers and value-your-workers philosophy has given Market Basket an intensely dedicated following, both from employees and regular shoppers. Thus, it should not be surprising that when the controlling members of the chain’s board fired the company’s beloved CEO, allegedly so that they could cut back on compensation, maximize payouts to shareholders, and potentially liquidate the company, the Market Basket faithful revolted, with workers walking off the job and customers boycotting.
Corporations are adopting a new tactic to lower their taxes—renouncing their U.S. “citizenship” and adopting headquarters where there are lower tax rates. These are called “inversions.” Nothing changes in the corporations’ operations, but the “paper changes” result in lower taxes. Inversions are threatening to erode corporate taxation even further than has already occurred, which is a lot.
Corporate spokespeople would have you believe that the real problem is our corporate tax code, which they claim is in real need of “reform.” This is a total distraction, and also total nonsense.
Here’s what John Engler of the Business Roundtable said about the wave of corporations renouncing their citizenship, similar to many other quotes from business folks readily available (you can hear that same mantra from the Washington Post editorial team):
“We’re seeing one more manifestation of why the business tax structure needs to be fixed. We’re the proverbial frog that’s being boiled, and a few frogs have decided to jump out.”
The stakes here are higher and more immediate than the rehash of an old ideological dispute. This is not so much about the past as about the future. Corporate lobbyists are pushing President Obama and congressional Republicans to pass the NAFTA-like eleven-country Trans-Pacific Partnership” (TPP)—right after the November election.
Since it took effect in 1994, NAFTA has been the template for the subsequent series of trade agreements that have accelerated the globalization of the U.S. economy. But its failure to deliver as promised has soured the public and many in Congress on so-called “free trade.” Getting lawmakers to swallow the TPP will be easier if its promoters can somehow make lemonade out of the NAFTA lemon.
To start with, DeLong fails to tell the reader that he is evaluating a law he helped to produce. He worked on NAFTA when he was a deputy assistant secretary in Bill Clinton’s Treasury Department.
There are two parts to DeLong’s critique. One is his attempt to prove NAFTA was a success. The other is a series of gratuitous remarks about me and what he calls the “American left” that he sprinkles from his lofty pinnacle of ignorance about both.
Writing at the Equitable Growth blog, Brad DeLong takes on Jeff Faux’s assessment of NAFTA. DeLong tries to make a “cosmopolitan” argument for NAFTA; he claims that NAFTA cost the United States fewer than 350,000 jobs, and says that Faux got “the analysis wrong” when he reported that NAFTA resulted in a net loss of 700,000 jobs. But DeLong’s “analysis” is based on faulty data. He then goes on to assert that the jobs gained through increased exports pay more than the jobs lost due to growing imports, which also turns out to be wrong. Lastly, he ignores the larger and much more important negative impact of growing trade with low-wage countries on the wages of all U.S. workers without a college degree.
President Bill Clinton and the economists he relied on built their case for NAFTA on the assertion that the United States would gain jobs as a direct result of the agreement. He claimed that NAFTA would create an “export boom to Mexico” that would create 200,000 jobs in two years and a million jobs in five years, “many more jobs than will be lost” due to rising imports. This is the central argument used to justify NAFTA by its proponents, so it’s entirely appropriate to evaluate its impact by examining its net impacts on U.S. employment.
The economic logic behind Clinton’s argument was clear: Trade creates new jobs in exporting industries and destroys jobs when imports replace the output of domestic firms. Exports support domestic jobs and production, and imports displace domestically produced goods, displacing existing jobs and preventing new job creation. Clinton assumed, without much evidence, that the net employment effect would be positive. But unfortunately, it wasn’t.
DeLong begins his jobs analysis by noting that trade would have grown with or without NAFTA. But this ignores the status quo ante. U.S.-Mexico trade was roughly balanced in the pre-NAFTA period. If exports and imports had both doubled, our bilateral trade would still have been balanced. Instead, imports grew faster than exports, so the United States developed a significant, job destroying trade deficit with Mexico. We differ over the size of this effect, which I’ll get to in a moment, but the key question is why that trade deficit developed. As I’ve shown elsewhere, the growth of outsourcing, and a near-tripling of foreign direct investment (FDI) in Mexico, were the principle causes. NAFTA created a unique set of investor protections that encouraged multinationals to shift production from the United States to Mexico. The growth of FDI in Mexico overshadowed any impact of tariff cuts (which were larger in Mexico than the United States).
DeLong develops ballpark estimates of the numbers of jobs gained and displaced by U.S. trade with Mexico after NAFTA, using gross trade data from the St. Louis Fed for total U.S. exports and imports of goods to and from Mexico. I have estimated that trade deficits with Mexico displaced 682,900 U.S. jobs in 2010 (the United States had a small trade surplus with Mexico in 1993, before NAFTA took effect, so our best estimate is that growing trade deficits displaced about 700,000 U.S. jobs between 1993 and 2010, as noted by Faux). Our analysis is based on trade data from the U.S. International Trade Commission (USITC) and an employment requirement matrix from the U.S. Bureau of Labor Statistics.
My estimates of the jobs supported by U.S. exports are based only on U.S. domestic exports to Mexico—goods produced in the United States with U.S. labor. Total exports also include a growing share of transshipments, or foreign exports (aka re-exports), goods produced in other countries (e.g., China) that are imported into the United States and re-exported to other countries (e.g., Mexico). Foreign exports do not support domestic employment. Data on transshipments are almost always excluded from analyses of the impacts of trade and trade agreements, such as those prepared by the USITC, as noted by agency economists. And the exclusion of transshipments makes a big difference in NAFTA trade, as shown in the graph below (my jobs analysis is also based on imports for consumption rather than general imports, but this distinction has no significant impact on job loss estimates).
U.S. exports to Mexico, both total and domestic, have increased since NAFTA took effect, but the gap between them (i.e., foreign exports) has increased much more rapidly. Imports (not shown) have also increased faster than exports, and as a result, the U.S. trade deficit with Mexico has increased steadily since NAFTA took effect.
The U.S.-Mexico trade deficit in 2013 (and hence the jobs displaced by trade) when properly calculated, using domestic exports, was $96.2 billion, nearly twice as large as the deficit estimated with total U.S. exports ($54.4 billion). The difference in estimated trade balances largely explains why my estimate of the jobs displaced by NAFTA (700,000) is twice as large as DeLong’s (350,000). The centerpiece of his critique of Faux’s analysis is based on faulty data, but that’s just where the problems begin.
Job losses are just the tip of the iceberg for domestic workers
DeLong asserts that even if NAFTA did result in job losses, some workers gained because the jobs gained through increased exports are “better jobs with higher pay” than the jobs lost due to higher imports. But this assertion is not backed up with any data. I have compared jobs created and displaced by NAFTA and found that the facts do not support this assumption. In a 2006 report I showed that jobs displaced by imports from Mexico paid $813 per week, while jobs supported by exports to Mexico paid only $799 per week, 1.8% percent less. More importantly, with respect to the 700,000 net jobs lost, even when re-employed in non-traded industries, workers earned only $683 per week, 19 percent less than the jobs displaced by imports. Wage losses associated with trading good jobs in import-competing industries for lower paying jobs in exporting and non-traded goods industries cost U.S. workers $7.6 billion in 2004.
My results for Mexico trade are not anomalous. I found similar and even stronger results for U.S.-China trade. Average weekly wages of jobs displaced by imports from China between 2001 and 2011 were 17.0 percent higher than average wages in jobs supported by exports to China. Workers in non-traded industries earned 9.4% less than workers in exporting industries. Growing trade deficits with China cost 2.7 million jobs between 2001 (which China entered the WTO) and 2011, resulting in $37 billion in lost wages in 2011 alone.
The analysis of wages paid to workers in import, export and non-traded industries holds everything else constant. It does not reflect the much more important, economy-wide impacts of trade on the wages of working Americans, the well-known Stolper-Samuelson effects. Direct wage losses for workers displaced by NAFTA and China trade are just indicative of the larger impact of trade on wages for working Americans. Most traded goods are manufactured products, production of which disproportionately employs non-college-educated workers. Trade with low-wage countries like Mexico and China puts manufacturing workers, and everyone with a similar skill set, into competition with low-wage workers abroad.
Josh Bivens has shown that growing trade with less developed countries (LDCs) has been responsible for large shares of the rapidly growing college–non-college wage gap. That overall wage gap increased 22.0 percentage points between 1979 and 2011. Bivens’ model estimates the broad impacts of trade on all non-college educated workers in the United States, who number about 100 million. His study shows that growing LDC trade “lowered wages in 2011 by 5.5 percent—or by roughly $1,800—for a full-time, full-year worker earning the average wage” for such workers. Trade with low-wage countries can explain roughly a third of the overall rise since 1979 in the wage premium earned by workers with at least a four-year college degree relative to those without one. However, trade with low-wage countries explains more than 90 percent of the rise in this premium since 1995. China and Mexico are the United States’ two largest low-wage trade partners.
It’s important to note that trade was not the only cause of growing inequality over the past three decades or so (since the late 1970s). Growing inequality in this era was the result of policy choices on behalf of corporate interests including macroeconomic policy (e.g., too-tight monetary policy leading to an increase in average unemployment levels), trade agreements, deregulation of the financial sector, attacks on the legal foundations of organized labor, declines in the real minimum wage, deregulation of many industries and privatization of the public sector, and other policies that have helped some workers and hurt others. Many economists and policy makers blame technology instead (more specifically, skill biased technical change), but there is mounting evidence against this view. Rapid technological progress has been a hallmark of the American economy for generations, but massive growth in inequality began only in the late 1970s, and is strongly correlated with the policy choices noted above.
DeLong argues that the United States, as a “hyperpower,” has a “strong moral obligation to the world” as a whole to support trade and investment deals like NAFTA. We can certainly agree that NAFTA was a much bigger deal for Mexico than it was for the United States. But it was a bad deal for Mexico. DeLong asserts that NAFTA “boosted employment in Mexico by 1.5 million” (3 percent of the Mexican labor force). But most of the jobs gained must have been in manufacturing, since about 80% of Mexico’s exports are manufactured products. However, Mexico only added about 400,000 manufacturing jobs between 1993 and 2013, and this is probably an overestimate of the employment gains from trade because it doesn’t take into account job losses in Mexican agriculture due to opening of grain trade. Furthermore, rates of growth in per capita GDP in Mexico fell from 3 percent per year in the period between the 1940s and the 1970s to 1 percent after it liberalized trade in the late 1980s and then joined NAFTA. Again, the data conflict with DeLong’s theoretical assumptions. If NAFTA was a bad deal for workers in Mexico, why should policymakers in the United States support trade and investment deals that cost jobs and reduce wages for most working Americans?
DeLong expresses consternation at the “energy the American left poured and pours into the anti-NAFTA cause.” He, of course, is energetically still trying to defend policies that he supported while serving as a deputy assistant secretary of the U.S. Treasury between 1993 and 1995, when NAFTA (and the WTO) were created. But it’s clear that NAFTA failed to measure up to the claims on which it was sold to the American people and to Congress and has been a significant contributor to growing inequality, one of the most pernicious problems of the past two decades. Furthermore, DeLong does not dispute the fact that NAFTA cost jobs in the United States, and only quibbles about the numbers. This only raises the question, if trade hurts the domestic economy, why should we supercharge it?
DeLong also argues that if NAFTA increased unemployment and lowered wages, then we should just fix our macroeconomic policies, including “exchange rate policies” to change them. But this illustrates just how flawed NAFTA was—a two thousand page document that allowed corporations to sue host governments over any laws that might possibly threaten their profits, without regard to national interest. Somehow, nothing was included in the NAFTA, WTO, or other major, U.S. trade and investment deals about exchange rate policy, perhaps the single most important determinant of trade balances (and imbalances), resulting in the loss of millions of jobs due to growing trade deficits with Mexico and China, alone.
The continued opposition of “the American left” to NAFTA and similar deals is easily explained. It’s because the self-styled technocratic center insists on shoving these agreements through the system every chance they get. In 2009 and 2010, in the absolute teeth of the Great Recession (or as DeLong calls it, the Lesser Depression) we got the Korea, Panama and Columbia trade and investment deals shoved down the throats of Congress and “the left.” And it’s well to recall that in 1993, Clinton decided to make NAFTA, rather than health care, the centerpiece of his policy agenda for what became a notably unproductive 8-year term. Despite the well-known failures of past trade and investment deals like NAFTA, the Obama Administration has made negotiating new, job killing agreements like the U.S. Korea Free Trade Agreement Free Trade Agreement and the proposed Trans-Pacific Partnership a centerpiece of its economic policies, based on its claim that such deals will create tens of thousands of “American jobs through increased exports alone.”
NAFTA has had real and significant costs for the vast majority of working Americans, and it never delivered the promised benefits for Mexico. Working Americans and “the left” have very good reasons for opposing such deals and should continue to do so.
Perhaps Hell has not frozen over, but it appears that someone down there may have leaned on the thermostat. That’s right, the Economic Policy Institute and the American Enterprise Institute are in lock-step agreement on an important fiscal policy matter.
During the Great Recession and its aftermath, the federal government acted to help victims of the severe downturn by funding programs that extended unemployment benefits—to up to 99 weeks in some cases, up from the standard 26 weeks. As the economic recovery continued, weak as it was for many in the working class, many lawmakers on the right began to believe that these extended benefits were a drag on employment—the theory being that government checks reduced the incentive for recipients to find a job, and that cutting off this lifeline would compel unemployed workers to look harder for work and perhaps take jobs they may not have accepted if the benefits had continued. Relying on this premise, Congress allowed the federally-funded Emergency Unemployment Compensation program to lapse last December.
Now, more than seven months later, data are available to test this idea. Coming from perspectives that diverge greatly along the ideological spectrum, scholars at both AEI and EPI have come to the conclusion that this “bootstraps” theory is incorrect—curtailing jobless benefits did not boost employment. Because unemployment benefits are contingent upon the people who receive them proving that they are looking for a job, receiving jobless benefits appears to make recipients at least just as likely, and certainly not less likely, to rejoin the ranks of the employed.
American Caesar? Not Even Close: The president has the statutory authority he needs to expand deferred action
Since a major reform of the immigration system is dead politically for the foreseeable future—and also in light of the debacle last week in Congress, where our legislative branch was unable to pass a law to fund managing the flow of Central American child migrants arriving at the southwest U.S. border—President Obama is reportedly considering a number of reforms he can implement under his executive authority, and he briefly addressed his willingness to do so last night. The most important action being considered is the granting of deferred action—i.e., placing potentially millions of unauthorized immigrants residing in the United States at the bottom of the priority list for deportation. According to multiple reports, the most likely beneficiaries will be those who can show they have not committed any crimes, have close family ties to U.S. citizens, and have resided in the United States for a minimum length of time. The size of this population is likely to be in the range of 4 to 5 million.
The debate about the legality of such a move by President Obama, which would (importantly) also include granting work authorization (issuing an employment authorization document or “EAD”) to unauthorized immigrants receiving deferred action, is heating up on the right and the left. But most of the commentary has missed one important fact, namely that President Obama has broad statutory legal authority under the Immigration and Nationality Act (INA) to grant employment authorization to anyone he chooses. Thus, while the authority to grant deferred action to unauthorized immigrants rests on the president’s prosecutorial discretion, which allows him to decide who he will enforce the law against, the authority to grant an EAD is plainly and clearly set out in the law.
Neil Irwin has a good piece up on the NYT Upshot blog aiming to demonstrate why the recovery from the Great Recession has been so weak. He rightly highlights the drag of government spending, but I’d argue that if one narrows down on the question of how big a role has austerity played in slowing recovery, even Irwin’s numbers don’t quite capture it.
Irwin’s method is to look at the various components of gross domestic product and calculates the average share of total GDP that they accounted for between 1993 and 2013. Then, he multiplies this average share by the Congressional Budget Office’s estimate of 2014 potential GDP to get the level that each of these components “should be” today. The difference between today’s actual level and what that level “should be” is then the contribution of the sector to today’s economic weakness. Using this method, he comes up with government spending accounting for 40 percent of the gap between today’s actual versus potential GDP.
This is definitely a useful exercise, but I have three quick thoughts on why this might understate the actual effect of policy-induced austerity. Irwin is not trying to estimate an austerity effect, but I just want to be clear that if one wanted to isolate the effect of policy-induced austerity, his numbers might be too low.
First, there are multiplier effects, so if actual federal government spending was $118 billion higher today (that’s the gap between actual and “should be” spending identified by Irwin), then overall GDP would be roughly $180 billion higher. So, the policy decision to pursue austerity is costlier (in GDP terms) than just the difference between government spending levels.
As my summer internship draws to a close at EPI, I thought I’d reflect on some of the things I’ve learned.
1. Time-and-a-half may not be standard for many today, but it should be.
Current overtime rules provide nowhere near enough protection for workers. The salary threshold of $455 a week, set by the Fair Labor Standards Act, is actually below the poverty line for a family of four. Further, the “primary duty” test to classify an employee as an executive, professional, or administrator who is exempt from overtime is easily manipulated by employers—unless you actually believe that lots of workers officially classified as managers and supervisors make a lot of organizational decisions while mopping floors and stocking shelves.
The impact on millions of workers and their families is stark. I spoke with “managers” with no control over their own schedules who were forced to work grueling 80 hour weeks with salaries of $35,000 and no overtime pay. Some went months on end without a single day off. Their lives are riddled with stress and anxiety. The time they can spend with family and friends has eroded. One store manager was even prevented from seeing her dying niece—called into work despite having scheduled the day off. These stories, unfortunately, go on and on for far too many American workers.
Thankfully, President Obama has directed the Department of Labor to update its overtime rule. Hopefully this new rule (scheduled to be proposed in November) will at the very least raise the salary threshold to $984 a week and index it to inflation, as proposed by Ross Eisenbrey and Jared Bernstein. Such a change would benefit 5 – 10 million workers. While this would be a modest step forward, ideally the salary test would be raised even higher—Heidi Shierholz found that a $1,122 threshold would be consistent with historic levels.
Should Race-Based Affirmative Action be Replaced by Race-Neutral Preferences for Low-Income Students? The Discussion Continues
The Supreme Court has nearly abolished the obligation of selective colleges and universities to give an advantage in admissions to African Americans, as a way to compensate for centuries of racially discriminatory public policy. According to the Court, such “affirmative action” violates the Constitution, which requires public universities to be “colorblind”—equally resistant to discriminating against African Americans as to favoring them to undo the effects of past discrimination.
The only race-conscious admissions programs the Court continues to permit is the pursuit of “diversity.” Universities may seek to ensure that their entering classes include a few violinists, jai-alai players, modern dancers, chess whizzes, computer nerds and, oh yes, some African Americans as well. This is a very small hoop through which admissions officers can jump.
In response, many liberals have attempted to develop a proxy for affirmative action—policy to increase the admission of African Americans by selecting characteristics that are not specifically black, but that in practice heavily favor blacks. The most common proxy is favoring the admission of low-income students of all races, or the admission of students of all races who live in low-income communities. As Justice Ginsburg has observed, “only an ostrich” can pretend that such policy is colorblind, because everyone knows that its true purpose is to evade the Court’s prohibition of affirmative action for African Americans.
But so far, the subterfuge has worked. The academic top-tier public universities in Texas, California, and Florida have guaranteed admission to graduates with the best grade-point averages from each high school in their states. Because large numbers of African Americans in these states are trapped in segregated low-income neighborhoods, the top students from ghetto high schools are guaranteed university admission, even if their academic qualifications are weaker than those of students who are not guaranteed admission but who attend high schools in middle class communities. Some private colleges have also developed policies that favor low-income students and these, too, necessarily enroll a disproportionate number of African Americans.
Part-time work—by definition, working less than 35 hours in a week—rose fairly steeply in the recession, but has remained roughly flat for the last five years. Currently, part-time employment makes up 19 percent of total employment, compared to 17 percent before the recession began.
To understand what’s driving those trends, it’s important to distinguish between two kinds of part-timers:
- People who work part time for “noneconomic reasons.” These are workers who work part time by their own preference, because they want or need a part-time schedule given other interests or obligations. This is often referred to as “voluntary” part-time work. Most part-time work is voluntary. Before the recession, 82 percent of part-time work was voluntary. Due to trends discussed below, that dropped to 66 percent in the immediate aftermath of the recession, and has since been recovering. Currently, 72 percent of part-time work is voluntary.
- People who work part time for “economic reasons.” These are workers who want and are available for full-time work but have had to settle for a part-time schedule, because their employer doesn’t give them enough hours or because they can only find a part-time job. This is often referred to as “involuntary” part-time work.
The figure below shows trends in full-time, voluntary part-time, and involuntary part-time work in the recession and recovery (specifically, it shows the growth rate in each type of job since December 2007, the official start of the Great Recession).
In a month, I’ll be leaving EPI to begin graduate school in Seattle, which makes this my last jobs day. I’ve learned a lot in my three years at EPI, and I thought it might be useful to write a series of posts explaining how the work we do has shifted the way I think about economics.
Of all the tasks at EPI, frantically gathering and analyzing new employment data on the first Friday of every month has been one of the most formative. Jobs day is like monthly report card on how the labor market is doing for workers. While almost every news station covers the unemployment rate and jobs numbers, the full report contains a wealth of indicators and information that take a bit more analysis to understand.
My first jobs day reported the release of June 2011 data: a month that, like the months prior, showed painfully slow growth in the recovery of the Great Recession. The unemployment rate was undeniably high (9 percent), payroll employment had added an average of only 115,000 jobs per month over the last year, and both real wages and average weekly hours—two measures of how workers with jobs were faring—had fallen from the month before. We were in the beginning stages of the severe public-sector austerity that would strangle growth in coming years—governments (mostly state and local) had laid off an additional 130,000 workers within the last six months, adding to a cumulative half a million public sector jobs cut between 2007-2011. These indicators reflected a truly terrible economy. Two years out from the height of the Great Recession, many economists and policy makers were still arguing for another stimulus act, and the Fed had already launched two rounds of “quantitative easing.”
[Updated - somehow didn't get the GDP row in previous table to come along—should be fixed now]
Ten years ago (July 2004) was the last time the Fed started raising the effective Federal Funds Rate to provide less support to an economic recovery. Many observers—even presidents of regional Fed banks—think the Fed should start tightening today. I thought I’d just take a quick look at some measures of slack and inflationary pressures to see if the economy does indeed look at least as tight as it did in July 2004. Indicators are in the table below.
First, the unemployment rate—it was 5.6 percent in the second quarter of 2004 (i.e., right before tightening began) and it’s 6.2 percent today.
Next, we look at the employment to population ratio for prime-age adults—simply the share of prime-age (25-54) adults with a job. This was 79 percent in July 2004 and is 76.5 percent today.
Third, we examine the output gap, as measured by the Congressional Budget Office. This is a measure of how much of the economy’s productive potential is being unused—the most direct attempt to measure economic slack. In the second quarter of 2004 this measure indicated that 0.9 percent of potential output being unused, while today this number is 4.5 percent—and this even after the CBO has made very large downward revisions in the unobserved “potential” measure.
Second quarter job growth was delightfully strong—277,000 jobs added per month on average—and even I got excited that maybe the pace of job growth was meaningfully accelerating. But July’s job growth of 209,000 certainly dampens those hopes. Over the 12 months from July 2013–June 2014, job growth averaged, yes, 209,000 per month. Sigh. At this pace, it will take nearly four years to get back to health in the labor market.
The weak labor market of the last seven years has put enormous downward pressure on wages. Employers just don’t have to offer big wage increases to get and keep the workers they need when their workers don’t have anywhere else to go. As the labor market continues to tighten, at some point wage growth will accelerate and workers will see real wage growth, which will be a very good thing. But as the figure shows, there is no sign of that yet in today’s jobs report.
Hope Springs Eternal, But The Data Is Actually Pretty Mixed About Whether Or Not Recovery Is Accelerating
The last couple of months have provided some data points that have raised hopes that the recovery is about to step into a higher gear.
Unemployment fell by 0.6 percent between December 2013 and June 2014, and essentially all of the decline was driven by actual job-growth rather than falling participation. Payroll job-growth for the second quarter of 2014 averaged 272,000, a rate that, if continued, would see us back to pre-Great Recession labor market health by early 2017. Not soon enough, but much better than the November 2018 recovery that would have happened had the pre-2014 pace of job-growth in the recovery persisted. And yesterday it was reported that gross domestic product grew at an annualized rate of 4.0 percent in the second quarter.
How excited should we be by all of this?
Let’s take GDP first, since the story is pretty unambiguous: not very excited at all. Yesterday’s second quarter number was largely a pretty predictable bounceback from the disastrous first quarter numbers, which showed that the economy contracted at a 2.1 percent rate. Average these two quarters and you have the economy growing at less than a 1 percent rate for the first half of the year. This sad performance comes even as the fiscal drag from federal and state governments has relented a lot since 2013. It’s very hard to see us moving ahead of the same 2 percent growth in final demand that we have seen over the past three years.
Last month’s jobs report was a strong one. We added 288,000 jobs, bringing the second-quarter average growth rate to 272,000 jobs per month. Meanwhile, the unemployment rate dropped for good reasons—because people found work, not because people stopped looking. Indeed, last month’s report made me unusually optimistic; at a growth rate of 272,000 jobs per month, we would get back to a healthy labor market in early 2017. That would still mean that the Great Recession, all told, will have caused roughly ten years of weakened labor market opportunities for American workers, but at least there’s light at the end of the tunnel.
So July’s jobs numbers, which will be released on Friday, will help answer the all-important question: have we really kicked it into higher gear? A jobs number north of 270,000 would be a pretty clear sign that the answer is yes—but anything much less than that would push us back to “we have to wait and see” territory. Unfortunately, consensus forecasts are for job growth around 235,000—if true, that sets us back to growth rates that put health in the labor market more than three years away.
The big news in the Social Security and Medicare trustees reports released this afternoon is the improvement in Medicare’s finances due to slowing health cost inflation. As a result, the Medicare Hospital Insurance Trust Fund is projected to remain solvent until 2030, four years later than projected last year. The projected HI Trust Fund’s 75-year shortfall is 0.87 percent of taxable payroll, down from 1.11 percent of payroll last year.
On the other hand, the trustees also assume the Medicare Sustainable Growth Rate formula will not take effect. Though Congress has overridden the legislated reduction in physician payment rates since 2003, it has also included provisions offsetting part or all of the cost to Medicare. Implicitly, the projections now assume the “doc fix” will no longer include such provisions, raising projected Medicare Part B costs by about 0.3 percentage points annually over the next 75 years.
The combined effect of these changes is a reduction in projected short- and medium-term costs and an increase in long-term costs. Last year, costs were projected to rise to 3.6, 5.8, and 6.5 percent of GDP in 2012, 2040 and 2087, respectively. This year, costs are projected to rise to 3.5, 5.6, and 6.9 percent of GDP in 2013, 2040 and 2088, respectively.
Social Security projections show little change from last year, with the combined old age and disability trust funds projected to remain solvent through 2033—the same as last year—and a modest increase in the long-term shortfall from 2.72 percent of taxable payroll last year to 2.88 percent of taxable payroll this year. The change in the valuation period—one fewer year of surplus and one more year of deficit—accounts for 0.6 percentage points of the decline. The rest is due to small changes in demographic and economic assumptions (such as a reduction in the inflation rate from 2.8 to 2.7 percent), methodological improvements, and the repeal of parts of the so-called Defense of Marriage Act.
I read two pieces about the STEM (science, technology, engineering, and math) workforce this morning: an op-ed in USA Today and an editorial in the Washington Post. Both reference a recent Census Bureau study, which found that only a quarter of bachelor’s degree graduates in STEM fields end up working in those fields. But from there, the two pieces head in very different directions.
The Post says Census got the number of STEM jobs wrong, because, in fact, one out of every five jobs requires STEM skills, even if the students end up working outside their field. That’s stretching definitions, though the idea that many STEM grads can use what they learn outside their field of study is certainly true. But, amazingly, the Post also says the numbers don’t really matter: “Whatever the number generated, it should not be seen as determining the need for STEM education.” Whether one STEM worker in four finds a job in his field of study, or only one in ten, the education is so valuable we can’t have too many STEM majors, according to the Post editorial. Why, even farmers should have STEM degrees because, “many farmers rely on genetic modification of crops.” That’s just silly. Many truck drivers rely on civil engineering, but they don’t need engineering degrees any more than a farmer planting hybrid corn needs a math or genetics degree.
The Post’s editors believe there’s no such thing as an oversupply of STEM graduates, but their editorial doesn’t review the boom and bust history of STEM graduate oversupply, or even mention what effect oversupply might have on the earnings or aspirations of the students who have paid for and worked to complete STEM bachelor degrees. By contrast, the USA Today authors (some of whom have done research with EPI before), all of whom are academics with close ties to actual students, do care about what happens to STEM grads after they leave school and look for work. They are rightly concerned that the wages of IT personnel have been flat for 16 years, and they worry that overproducing STEM grads, coupled with industry’s immigration proposal to triple the number of IT guestworkers, will suppress wage growth and deny IT workers the middle class security most would like, let alone a fair share of the tech industry’s fabulous profits.
Of all the thefts that happen in the United States, one type is greatly outpacing the rest. With billions of dollars stolen annually—greater than all burglaries, robberies, larcenies, and motor vehicle thefts combined—wage theft has become an epidemic. And wage theft’s victims tend to be those who can least afford it and who lack the power to stop it: low-wage and immigrant workers. When victims do speak out, they often face severe economic retribution, like cuts in their hours or the possibility of losing their job.
The federal government is not just failing to do enough to stop wage theft—it’s an active participant in it. Federally-contracted workers are victimized at an alarming rate. According to a Senate Heath, Education, Labor, and Pensions Committee report, 35 of the Department of Labor’s 100 largest wage theft penalties from 2007-2012 (32 companies, with three repeat violations) were levied against federal contractors. In total, these firms had to repay employees $82.1 million in back wages, but only six faced civil penalties, which totaled just $640,385. Moreover, this did not prevent these firms from getting future government contracts—in FY 2012, these same 32 companies received a whopping $73.1 billion in federal contracts. If this doesn’t send a clear message to contractors, I’m not sure what does. Rip off your employees and you may get a slap on the wrist, but don’t worry, the contracts will keep coming.
In fact, the federal bidding process even provides a certain incentive for these illegal labor cost reductions. With contracts going to the lowest bidder, some firms try to shave costs in whatever ways possible, including illegally denying employees the wages they deserve.
The release of the Social Security Trustees Report, just announced for July 28, usually prompts alarmist commentary on the burdens of supporting an aging population. A recent Congressional Budget Office report fanned the flames by identifying aging as the key driver of long-term growth in federal spending, accounting for 55 percent of the projected growth in federal spending on Social Security, Medicare, and Medicaid as a share of GDP over the next quarter century. Aging eclipsed excess growth in health costs above general inflation (24 percent of the increase) and the expansion of federal health care programs under the Affordable Care Act (21 percent).
Aging appears to loom larger because health cost inflation slowed after ACA’s passage. Despite this positive development, CBO projects that by 2039 federal debt as a share of GDP will almost match the record set after World War II, even as federal revenues increase relative to the size of the economy. If aging is as inevitable as death and the Republican aversion to taxes, cuts to large social insurance programs benefiting seniors would seem to be the only way to prevent the federal debt from ballooning.
Not so fast. While CBO analysts should be given the benefit of the doubt when it comes to producing unbiased projections, how these projections are framed is not immune to politics. And while both the current and former CBO directors are known for their expertise in analyzing health costs, Peter Orszag, who stepped down as CBO director to become President Obama’s budget director, emphasized the need to rein in health costs through government action, whereas his successor, Douglas Elmendorf, has been more skeptical of government’s ability to do so, going so far as to dismiss ACA provisions designed to restrain health costs in CBO’s influential “alternative” projections.
Yesterday, House Budget Committee Chairman Paul Ryan (R-Wis.) unveiled his long-awaited plan to fight poverty, called “Expanding Opportunity in America.” And while Ryan’s new proposals serve to distance his ideas from the more draconian aspects of his annual budget proposals, as well as 2012’s Romney-Ryan presidential campaign, this new plan serves as further evidence that Ryan fundamentally misunderstands the nature of poverty in the United States.
Drifting in Ryan’s ocean of misunderstanding is some flotsam of good policy ideas. Chief among them, Ryan does not advocate the shredding of the social safety net to further the goal of deficit reduction, as he did in his most recent budget proposal, which cut $3.3 trillion from low-income support programs over 10 years. Instead, in “Expanding Opportunity,” he emphatically states that his new treatise “is not a budget-cutting exercise.” Moreover, by calling for an expansion of the Earned Income Tax Credit (EITC) for childless workers, Ryan is moving away from prior rhetoric that belittled Americans with little or no federal income tax burden.
An expanded EITC isn’t Ryan’s only proposal that would help truly alleviate poverty—he also advocates prison sentencing reform and programs to try to reduce recidivism, helpful in the fight against poverty because the incarceration rate and long duration of sentences have led to prison becoming a “poverty trap,” especially for poor African-American men and their families.
As for the EITC, Ryan’s proposal is very similar to one backed by President Obama; Ryan would increase the maximum benefit to childless workers by just over $500, to $1,005, allow workers to receive the benefit until they hit an income of $18,070 (compared to the current cutoff of $14,790), and allow workers as young as 21 (as opposed to 25) receive the credit. Ryan would also aim to have the credit applied to paychecks monthly, rather than requiring completion of complicated forms during tax season, which can be magnets for shady tax preparation outfits.
Corporate inversions are all the rage these days—over the past week and a half at least two large firms have announced plans to renounce their U.S. “citizenship.” Simply put, the U.S. corporate tax base is slowing leaking out of the U.S. to other countries. Most observers quite rightly blame our dysfunctional corporate income tax system for this problem, though there is no consensus on how to fix it—tax reform is unlikely in the near- or medium-term. As far as what to do about our eroding corporate tax base in the meantime, Democrats and Republicans are on completely different pages.
The main GOP position (and the position of others as well) was best summed up by John McKinnon and Kristina Peterson of the Wall Street Journal: “Many Republicans say inversions should be addressed as part of a broader overhaul of the tax code, noting that the U.S. has the highest corporate tax rate in the developed world.” There are two major problems with this position, however.
First, tax reform is not going to happen any time soon, but the tax base is eroding now. The GOP apparently wants tax reform, but when a serious tax reform plan was proposed by House Ways and Means Committee Chairman Dave Camp, the Speaker Boehner’s first comment was literally “Blah, blah, blah, blah.” This does not sound like a leader of a party that is serious about adopting tax reform anytime soon. Unless Congress passes a stopgap measure, it is likely a major proportion of the U.S. corporate tax base will have inverted before they can agree on a tax reform proposal.
Second, while the United States has one of the highest statutory corporate tax rates among developed countries, few firms actually pay that tax rate. Citizens for Tax Justice note that many large corporations, including GE, Verizon, and Boeing, have a negative tax rate. Additionally, it is noteworthy that two of the recent firms proposing to invert pay average tax rates of 22 percent (AbbVie) and 25 percent (Mylan), which are considerably below the 35 percent statutory corporate tax rate. The main point is the average corporate tax rate (what firms actually pay) is much lower than the statutory tax rate (what is written in the tax code) and not that much different from the average tax rate of many advanced economies.
On May 22, 2014, the Office of Management and Budget solicited comments on a proposal for changes to the North American Industry Classification System (NAICS) that would take effect in a 2017 revision. The revision would reclassify factoryless goods producers (FGPs) such as Apple and Nike, most of which are now in wholesaling or management of companies, as manufacturers, and move trade by manufacturing service providers (MSPs), such as China’s Foxconn (which builds Apple products) into services. In What is manufacturing and where does it happen?, I show that this proposal would artificially inflate U.S. manufacturing production and employment and deflate U.S goods trade deficits with many countries. It would also irrevocably change U.S. balance of payments accounting. I recommend that OMB should withdraw its NAICS 2017 proposal regarding FGPs and MSPs, and remand the issue to the OMB committee that handles trade statistics policy for reconsideration.
NAICS is used by the myriad federal statistical agencies that collect, analyze, and publish economic data, including data on trade. The OMB proposal was developed to respond to the rapid growth of establishments that design products but outsource most or all of the production process.
The NAICS 2017 proposal—which is part of a broader, international, behind-the-scenes effort to redefine and recalculate U.S. and international trade accounts—would artificially inflate measures of U.S. manufacturing production and employment by arbitrarily moving wholesalers such as Apple and Nike into manufacturing, and changing substantial quantities of the goods we import into services. This would reduce our reported trade deficit in goods (on a balance of payments basis), with no change in our underlying balance of trade. And it would make it appear that U.S. manufacturing output has increased when, in fact, much of the actual manufacturing production has been offshored.
Suppressing measured trade deficits through statistical manipulation is no substitute for better trade and manufacturing policies. Congress should order a comprehensive review and evaluation of recent and planned changes to U.S. international trade and national accounting statistics, and of the international standards on which U.S. trade accounting systems are based.
Anyone who knows the shameful history of the U.S. response to Jewish refugees before World War II wants to avoid repeating it. As the Nazi genocide progressed, the United States turned its back on the Jews, infamously forcing the St. Louis, a ship with more than 900 German-Jewish refugee passengers, to sail back to Europe in June 1939 after it was refused entry to Cuba, rather than issuing visas to the refugees. President Franklin Roosevelt could have intervened through executive action, but chose not to in the face of the public’s anti-Semitism, worries about competition for scarce jobs, and isolationism. More than 250 of the St. Louis’s passengers eventually died in the Holocaust.
At the same time, Congress refused to take steps to save Jewish children who were fleeing Nazi violence and persecution. Bills introduced in the House and Senate to admit 20,000 German-Jewish children beyond the existing quotas were allowed to die in committee.
The United States had no role in the rise of the Nazis, but we are deeply involved in the political instability of Central America. We took sides in a civil war in El Salvador and supported a coup in Honduras. The United States bears a large part of the responsibility for the drug violence and armed conflict in Central America that are driving so many children from their home communities. We are the consumers of the drugs whose sale and transshipment enriches the drug gangs and fuels the drug wars. Without our insatiable consumption of illegal drugs, the drug violence would diminish. Moreover, as Jeff Faux has argued, without our militarization of the region and our billions of dollars of support for violent, right-wing governments and militias, large parts of the population would not live in terror. And finally, without our trade policies, which have disrupted the Central American economies and displaced tens of thousands of agricultural workers, there would be less of an economic incentive to immigrate to the United States.
Tuesday’s New York Times ran two interesting articles with the rather alarming headlines: “U.S. Drug Firms Seek Inversion Deals to Evade Taxes” and “Reluctantly, Patriot Flees Homeland for Greener Tax Pastures.” Both articles reported on U.S. multinational corporations trying to merge with smaller foreign corporations to move the parent corporation offshore to a lower tax country, known as corporate inversions. In essence, the corporations are giving up U.S. “citizenship” so as to avoid U.S. taxes. It is time for Congress to put a stop to the erosion of the corporate income tax base.
The corporate inversions that have been in the news recently are Pfizer wanting to become a U.K. firm (the deal has been temporarily withdrawn), and Walgreens wanting to become a Swiss firm. Now AbbVie, a Chicago-based firm, wants to become an Irish firm, and Mylan, a Pittsburgh firm, wants to become a Dutch firm (ironically, the CEO of Mylan was named “Patriot of the Year” in 2011 by Esquire magazine).
These mergers have several things in common. First, the current shareholders of the U.S. firms will own the majority of the stock in the new foreign firm (typically 70 to 79 percent). Second, little or no economic activity will be moved from the United States to the new home country. Third, the corporate tax bill of the new firm will be substantially lower. Last, some of the current stockholders could face higher tax bills. Let me discuss each in turn.