Does a Grand Bargain Have to Include a Bad Bargain?

  • Thomas L. Hungerford
  • Thomas L. Hungerford

According to various media outlets, President Obama will propose, in a speech today, changes to the corporate income tax “so long as the initial revenue generated goes toward job creation.” Increasing corporate tax revenue to fund job creation, infrastructure improvements, and strengthening U.S. manufacturing is very welcome news. The not so welcome news is he is proposing a revenue-neutral corporate tax reform with a one-time corporate tax revenue increase by granting a tax break on foreign earnings of U.S. corporations. The proposed tax break appears to be a low tax on all $2 trillion of deferred foreign earnings. This one-time revenue increase will be used to pay for job creation and infrastructure improvements.

U.S. corporations are holding almost $2 trillion overseas. This income is not subject to the U.S. corporate tax until it is brought back to the U.S. or “repatriated”—this loophole is known as deferral. A common misperception is the firms will pay 35 percent of the repatriated earnings to the federal government. However, because of various deductions and other loopholes (some legitimate, some not), the multinational ultimately pays considerably less to the government. Also, the corporations get a credit for foreign taxes paid. This deferral of taxes on overseas profits is one of the costliest corporate tax loopholes, reducing tax revenue by up to $50 billion per year.

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Social Security is the Most Effective Anti-Poverty Program in the U.S., In One Chart

Tomorrow, the U.S. House Committee on the Budget is holding a hearing on the progress of the War on Poverty. While the United States is still slowly recovering from the worst recession since the Great Depression, fortunately this time around government safety net programs have been in place to keep more people from falling into poverty. The Supplemental Poverty Measure (SPM) shows the strength of the government to mitigate the incidence of poverty.

As the figure below shows, Social Security is, by far, the most effective anti-poverty program in the United States. Without Social Security, an additional 8.3 percent of Americans, or over 25 million more people, would fall below the SPM poverty threshold. Refundable tax credits, such as the Earned Income Tax Credit, kept 2.5 percent, or nearly 8 million Americans above the SPM poverty threshold. Other programs such as SNAP (food stamps), unemployment insurance, Supplemental Security Income, and housing subsidies also have a significant impact on the ability of families to stay afloat.

Source: http://www.census.gov/hhes/povmeas/methodology/supplemental/research/Short_ResearchSPM2011.pdf

 

President Obama Recognizes the Economic Demands of the “Unfinished March”

In a recent New York Times interview, president Obama reminded readers that “there was a massive economic component” to the 1963 March on Washington for Jobs and Freedom. He added, “When you think about the coalition that brought about civil rights, it wasn’t just folks who believed in racial equality. It was people who believed in working folks having a fair shot.”

EPI has been using this 50th anniversary year of the march to make the same point. Our Unfinished March project highlights the fact that most of the marchers’ demands, demands with big economic impacts for working folks, were not achieved. The marchers’ demands for full employment, a living wage, adequate and integrated education, and decent housing have yet to be realized.

The video from our recent Unfinished March symposium can be seen here. Our Unfinished March publications can be found here. Register at the site to be updated about future publications and events.

What We Read Today

The President’s Economic Speech in 10 Charts (And More)

Yesterday, President Obama gave a speech at Knox College outlining his vision for the US economy. As EPI President Larry Mishel notes, the speech did a great job diagnosing the failure of our economy (and our economic policies) to strengthen and reward the middle-class, even if it was a bit light on prescriptions to address these failures. We look forward to hearing the president’s more specific proposals in the upcoming speeches he has planned.

EPI has researched and documented much of what the president described in his speech. (For a great overview on how the economy has not been working for most Americans over the past 35 years, and what you can do about it, visit our new website, inequality.is.)

Here’s 10 figures that illustrate many of the president’s points, as well as links to some of EPI’s research on these topics.

 

Productivity/Wages and Top 1% Income:

Obama: “The link between higher productivity and people’s wages and salaries was severed – the income of the top 1% nearly quadrupled from 1979 to 2007, while the typical family’s barely budged.”

EPI: “The economy’s failure to ensure that typical workers benefit from growth is evident in the widening gap between productivity and median wages. In the first few decades after World War II, productivity and median wages grew in tandem. But between 1979 and 2011, productivity – the ability to produce more goods and services per hour worked – grew 69.2 percent, while median hourly compensation (wages and benefits) grew just 7.0 percent.”

The State of Working America, 12th edition (page 7)

EPI: “Comprehensive income trends show a striking pattern in average income growth by income group: Income growth is strongly positively correlated with a household’s rank in the income distribution, and the gap in income growth between the highest-income households and the rest is enormous. For example, the top 1 percent of households registered cumulative income growth of 240.5 percent between 1979 and 2007, while households in the bottom and middle fifths of the income distribution posted gains of 10.8 and 19.2 percent, respectively.”

The State of Working America, 12th edition (page 79)

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Government Can Make Internships More Accessible by Paying for Them

Rep. Susan Bonamici of Oregon has a great idea that will simultaneously help young people with limited means pay for college, get them job experience, and stimulate our stumbling economy. She proposes to have the federal government pay for tens of thousands of internships, making them available to low-income, Pell Grant-eligible students who could otherwise not afford to take them. Under Bonamici’s Opportunities for Success Act, H.R. 2659, the federal government would send funds to colleges and universities, which would use them to provide stipends equaling at least the minimum wage, but potentially more in situations where a student was not currently attending school (such as a summer internship) and would have to pay for food, lodging and transportation. The maximum grant would be $5,000.

The need for such a program is clear. Paid internships are increasingly important to the ability of college students to gain skills, make professional connections, and find jobs after graduation. As Rep. Bonamici says in the bill’s “Findings” section:

  • Many students struggle to make ends meet; 66 percent of young community college students dedicate more than 20 hours a week to an outside job, and the need of many students to maintain a part-time or full-time job reduces or eliminates the time available for an internship.
  • Internships often require significant time commitments or temporary relocation, which many students are unable to afford; these additional living expenses include housing, meals, and travel, and these costs make unpaid internships with employers like non-profit organizations and government even more inaccessible for those with low and middle incomes.

Unless we want to exclude students from low-income and middle-income families from important opportunities to participate in government, to make important connections, and to get their foot in the door for future paid employment opportunities, it is particularly important that we provide a means of supporting them financially while they work in government internships. This is not just a matter of economic justice but a way to ensure full democratic participation and to combat economic elitism.

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Mobility and Inequality

In Seattle, San Francisco and Salt Lake City, a child raised in the poorest 20 percent of families has more than a one in ten chance of ending up in the top 20 percent of earners as an adult. In the Atlanta area, by contrast, only one poor child in 25 will make it to that top quintile during adulthood.

Why does geography matter so much to your odds of moving up the economic ladder? One reason may lie in differences in state and local policies. In a new study, which is being presented this week at a conference of the National Bureau of Economic Research, four economists explore the link between intergenerational income mobility, and a particular subset of such policies, tax expenditures. In Monday’s New York Times, David Leonhardt used the authors’ dataset to produce a fantastic interactive piece, painting a picture of economic mobility (and immobility) across America.

The study’s authors—Raj Chetty and Nathaniel Hendren of Harvard, and Patrick Kline and Emmanuel Saez of Berkeley—find that the level and progressivity of tax expenditures are associated with increased economic mobility between generations. Even when controlling for a broad range of local characteristics, the authors find that local and state tax expenditures contribute significantly to the likelihood that a child who grows up poor will experience significant upward mobility as an adult. The economists also identify particular state-level tax expenditures (such as the earned income tax credit) that are associated with greater economic mobility. “Overall,” they conclude, “these results suggest that tax expenditures aimed at low-income taxpayers can have significant impacts on economic opportunity.”

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The President’s Speech Shows He’s Better at the ‘Whereas’ than the ‘Therefore’ Part of the Resolution.

The president did a great job framing the economic problems we face, providing a narrative on what’s happened to the broad middle class.

“…a growing middle class was the engine of our prosperity.  Whether you owned a company, swept its floors, or worked anywhere in between, this country offered you a basic bargain – a sense that your hard work would be rewarded with fair wages and benefits, the chance to buy a home, to save for retirement, and, above all, to hand down a better life for your kids.”

And then he got to the core issue, “The link between higher productivity and people’s wages and salaries was severed—the income of the top 1% nearly quadrupled from 1979 to 2007, while the typical family’s barely budged.” Couldn’t have said it better, though my colleagues and I have tried many times, (here on the productivity-wage divergence and here on the top one percent).

The question I want to raise is whether the solutions being discussed are of sufficient breadth and scale to overcome the forces driving the dismal outcomes just delineated. Let me identify some issues that stand out for me. The president makes the appropriate case for public investments in infrastructure, in clean energy and in education. In fact, these investments are critical to our future growth. But he shouldn’t pretend that there will be anything but DISINVESTMENT in the future, as  overall spending on domestic programs will be reduced by at least a fifth over the next ten years, even if the sequester is reversed. Looking specifically at public investments, Obama’s FY14 budget had nondefense public investment fall to 1.7% of GDP in 2023—the lowest since 1947—from 2.7% in 2008. And, we’ll never raise the revenues we need for these and other investments if we brag about “locking in tax cuts for 98% of Americans,” as the president did.

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Easily Sharable Minimum Wage Graphics

In a speech today outlining his economic agenda for the next two-and-a-half years, President Obama repeated his call for raising the minimum wage.

At the same time, today was a national day of action in support of a higher minimum wage. Americans throughout the country rallied to support legislation that would raise the minimum wage to $10.10 per hour and index it to inflation.

EPI has long supported raising the minimum wage, and it’s great to see the president, lawmakers and activists making the case for a minimum wage increase. Raising the minimum wage would boost the incomes of millions of Americans, provide a modest economic stimulus, and slow the growth of income inequality.

The inflation-adjusted value of the minimum wage is lower today than it was in 1968. If the value of the minimum wage had kept pace with average wages since then, it would be $10.50 today. If it had increased alongside productivity, it would be $18.75 today. And if it had increased at the same rate as the wages of the top 1.0 percent, it would be over $28 per hour.

In support of the national day of action, we made a series of graphics with facts about who would be affected by a minimum wage increase, and why it’s a good idea. They’re quick, to the point and easily shareable. The data points come from this paper. Check them out:

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President Obama Needs to Ground “Middle-Out” Economics in Broad-Based Wage Growth

Tomorrow at Knox College, President Obama will kick off a series of speeches outlining his vision for rebuilding the U.S. economy. He is expected to talk about how the economy works best when it grows from the “middle-out,” not from the top down.

Growing from the middle out is indeed the right approach to economic growth. I hope that President Obama will get to the heart of the matter, which is that, adjusted for inflation, wages and benefits for the vast majority of workers have not grown in ten years. This is true even for college graduates, including those in business occupations or in STEM fields, whose wages have been stagnant since 2002. Low and middle-wage workers, meanwhile, have not seen much wage growth since 1979. Corporate profits, on the other hand, are at historic highs. Income growth in the United States has been captured by those in the top one percent, driven by high profitability and by the tremendous wage growth among executives and in the finance sector.

The real challenge is how to generate broad-based real wage growth, which was only present during the last three decades for a few short years at the end of the 1990s.

To generate wage growth, we will need to rapidly lower unemployment, which can only be accomplished by large scale public investments and the reestablishment of state and local public services that were cut in the Great Recession and its aftermath. The priority has to be jobs now, rather than any deficit reduction (which under current conditions will sap demand for goods and services and slow job growth). This means an aggressive increase in the minimum wage that eventually grows to half of the average workers’ wage. It means reestablishing the right to collective bargaining for higher wages and addressing workplace concerns. It means not allowing guest workers to undercut wages in both high-wage and low-wage occupations, which can be done by giving full rights to any ‘guests’ and by scaling such programs to the limited situations for which they are needed. It means taking executive action to ensure that federal dollars are not spent employing people in poverty-level wage jobs. Overall, it means paying attention to job quality and wage growth as a key priority in and of itself, and as a mechanism for economic growth and economic security for the vast majority.

If we choose not to take this path, we will fail to achieve shared prosperity and return to relying on debt and asset bubbles to fuel growth. I have seen that movie already, and I didn’t enjoy it.

Hope and Cash, Investment and Policy: Jeep and the Future of Detroit

I just finished complaining in an earlier blog that the media wasn’t telling enough manufacturing and supply chain stories when Bill Vlasic proved me wrong with his piece on Chryslers’ Jefferson North Assembly Plant in Detroit: Last Car Plant Brings Detroit Hope and Cash.

Only two days later, the City of Detroit filed for the nation’s largest ever municipal bankruptcy. “Hope and cash” suddenly sounded like too little too late. It’s not. In fact, the story suggests what it takes to make recovery work.

We can all picture a Jeep. But Vlasic’s piece gives the new Jeep Grand Cherokee a powerful backstory:

“There is a section of Detroit’s east side that sums up the city’s decline, a grim landscape of boarded-up stores, abandoned homes and empty lots that stretch all the way to the river.

And in the middle of it stands one of the most modern and successful auto plants in the world.” 

The article paints a picture of today’s high-quality, high-tech manufacturing that can’t be underscored enough: making 300,000 vehicles a year with $2B a year in profit, the unionized Detroit facility is “on par with the most efficient luxury car plants in Germany and the best factories operated by Japanese automakers in the southern United States.” It’s a positive story for the auto industry and for Detroit: jobs at the plant have more than tripled, from 1,300 to 4,600, a third of employees live in the city, and its property taxes send $12 million a year to the city coffers.

Calling it the “last car plant” in Detroit is a bit misleading, however. Not only is GM’s Hamtramck facility arguably within the city limits, as are two engine plants, but from an industrial perspective, Chrysler’s plant is hardly alone. It is part of a huge cluster of automotive parts and assembly facilities in the greater Detroit area that still make up a significant share of US manufacturing output. If we’re going to bridge the gap between the auto industry’s recovery and Detroit’s, it would be more helpful to think of Jefferson North as a leader in a new generation.

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Of Final Candidates, Yellen Should Be Next Fed Chair

The choice for Ben Bernanke’s replacement as the next Chair of the Federal Reserve seems, in DC’s conventional wisdom, to have come down to Janet Yellen (Bernanke’s current deputy) or Larry Summers (a former official in both the Clinton and Obama administrations, including a stint as Treasury Secretary).

For those who think that the U.S. economy remains too weak and needs as much policy support as it can get, this seems like a pretty good choice. Both Summers and Yellen have consistently argued in the past couple of years that the primary problem facing the U.S. economy currently is slack demand.

I’d argue, however, that Yellen is the clearly correct choice for the job right now.

For one, she has been far ahead of the policymakers’ curve when it comes to diagnosing macroeconomic trouble. Recently released minutes from Federal Reserve Open Market Committee meetings in December 2007 show that Yellen was nearly alone in warning that a recession was imminent—a warning that proved correct.

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The Compensation/Productivity Link Is Indeed Broken for the Vast Majority of American Workers

On Wednesday, Jim Tankersley reported on a new study from the Heritage Foundation claiming that the apparent broken link between wages and productivity is actually just a statistical artifact.

Most of the report simply notes that compensation, not just wages, matters to American workers, that productivity and wage (compensation) growth are often calculated using different price deflators, and that one should take depreciation into account while calculating productivity.

All these are fair enough as matters of arithmetic (though we may have more to say on our interpretation of these issues, which differs a lot from the Heritage report1), and we have generally taken these factors into account in our work showing the growing gap between wages and productivity (and so have other careful analysts). So what’s the big difference between our work and the Heritage report? It’s something they spend a lot less time on.

At EPI, we don’t look simply at average compensation, but (generally) at median compensation, the compensation of a worker in the middle of the pack who makes more than half the workforce but less than the other half. This really matters;  when, say, LeBron James walks into a bar average compensation rises a lot even though  the compensation of the median person in the bar is likely unaffected.

So, average compensation does indeed track productivity growth much more closely (though not perfectly) than does median compensation. But this is just another way to make what is the entire point of the compensation/productivity gap analysis: rising inequality has kept typical Americans from seeing their compensation  track productivity.

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What We Read Today

McDonald’s Employees Don’t Need Financial Planning, They Need Raises

McDonald’s recently partnered with Visa to put out what they call the Practical Money Skills Budget Journal (pdf), a “helpful” tool for McDonald’s employees to keep track of their earnings and expenses. There have been a flurry of responses to the “McBudget” including realistic comparisons, snarky analysis, and talk of unicorns as a means for transportation. Others have defended the budget, claiming that it gives low-wage workers the necessary tools for financial planning.

Coincidentally enough, we also recently released an online tool related to family budgets—along with Elise Gould and Nicholas Finio, we developed EPI’s Family Budget Calculator, a measure of just how much income it takes for families to buy the necessities for an adequate but modest lifestyle. Our basic budgets include the cost of rent, food, health care, child care, transportation, other necessary expenses and taxes in each of 615 communities across the country. While families at these budget levels may be able to pay their bills and put food on the table, our family budgets imply a pretty austere lifestyle. There is no savings, no vacations, no cable or internet service, and, certainly, no restaurant visits.

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Prices Drop as the Affordable Care Act is Implemented

The health insurance premiums announced today for the new health insurance exchanges for New York were far lower than their current individual health insurance market. This is great news for the thousands of New Yorkers who will see their premiums fall, and for the many more thousands who will be able to find affordable coverage when they couldn’t before. This is a promising sign that the health insurance exchanges established in the Affordable Care Act (at least in states taking implementation seriously) could work as planned and improve the range of affordable choices available to consumers.

On the flip side, today, the US House of Representatives voted to postpone implementation of the individual mandate, the provision of the ACA that requires that Americans are covered by health insurance, even if they have to buy their own. Postponing this provision would be a huge mistake.

A key feature of the ACA is that it requires that insurers offer coverage to everybody, and at a common price (subject to some variation based on age and whether or not you’re a smoker). If these requirements existed without a provision to stop free-riding (the individual mandate), too many healthy people would wait until they got sick before they enrolled in insurance and started paying premiums. This means that the insurance pool at any point in time would be less healthy, and thus more expensive, than it would be under the mandate. Simply put, the individual mandate makes health reform considerably more efficient.

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Immigration Legislation Would Improve the Labor Market by Protecting Undocumented Workers from Employer Retaliation

A disturbing report in the Huffington Post serves to remind us what abuse and exploitation of undocumented immigrant workers looks like in the U.S. labor market. Antonio Vanegas, an undocumented immigrant worker who complained to the Department of Labor (DOL) and spoke out publicly by testifying to the Congressional Progressive Caucus about alleged wage and hour violations committed by his employer, Quick Pita (in Reagan National Airport), soon thereafter found himself in detention and deportation proceedings. And this happened despite the fact that DOL agreed to investigate Quick Pita based on Vanegas’s claims that he was earning $6.50 an hour (the local minimum wage is $8.25) and working 60 hours per week without being paid for overtime. Occurrences like these are probably not uncommon and are a legitimate reason for all U.S. workers to be concerned. If S.744, the comprehensive immigration reform legislation passed by the Senate, becomes law, some of the bill’s provisions would protect vulnerable undocumented workers like Vanegas and improve the labor market for American workers too.

The situation Vanegas found himself in illustrates how employers use the immigration status of undocumented workers to keep them from demanding that their employers obey the law or from engaging in union organizing activities. As cases in the past have demonstrated, however illegal its own conduct might be, an employer can simply fire an undocumented worker without justification and without worrying about being held accountable for retaliating or other legal violations, or for paying back wages. Or an employer can fire undocumented workers as the result of a “self-audit” of the company’s employment records, or after inviting the government’s immigration authorities to conduct an audit. Ultimately, the undocumented worker is terminated, deported, or both, and has limited access to legal remedies. Although ironically Vanegas worked for years in a building that also houses the Department of Homeland Security’s immigration authorities, he never had a problem until he advocated that his employer comply with the law. Almost immediately after that, he was put in a cage for four days and subjected to deportation proceedings.

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Scapegoating the NLRB

Yesterday, it appeared that the Senate was on the verge of “going nuclear”—amending its rules mid-session to prevent the use of filibusters to block the president’s appointment of executive branch officials. The use of parliamentary tactics by a minority of senators to prevent the popularly elected President of the United States from appointing the heads of agencies that enforce key laws has reached unprecedented levels and threatens the ability of the president to govern. The Senate has been in gridlock ever since President Obama was re-elected. A concerted effort by Republican senators has prevented the passage of key legislation, blocked confirmation of federal appeals court judges, and blocked confirmation of President Obama’s nominees for Secretary of Labor, Administrator of the Environmental Protection Agency, Director of the Consumer Financial Protection Board, or any of the five nominees to the National Labor Relations Board (NLRB).

Today, it appears that a compromise has been reached that will allow the president most of his appointees, but not all. The Senate’s compromise forces the president to choose new nominees for the NLRB.

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What We Read Today

Happy Friday! Here’s a bit of what we read this week:

Every Day, Low Wages

On Wednesday, the Washington, DC, City Council passed the Large Retail Accountability Act (LRAA), a bill that will require large retail corporations—specifically businesses with more than $1 billion in sales and retail locations of at least 75,000 square feet—to pay their workers a minimum wage of $12.50 per hour. The bill’s passage may only be a temporary victory for proponents, however, as there is speculation that DC Mayor Vincent Gray may veto the bill now that Walmart, the primary target of the bill, has said that they will cancel construction of three planned stores in the District if the legislation becomes law.

It’s hard to view Walmart’s threat to scuttle the three stores, made literally the day before the Council vote, as anything but outright bullying by the largest and one of the most profitable corporations in the world. Walmart has alleged that the bill unfairly singles them out, although a few other retailers—Macy’s, Costco and Home Depot—would also be affected by the bill. But Walmart does deserve special scrutiny because of their unique track record in driving out smaller retail businesses, depressing wages (pdf), and siphoning off public tax dollars.

To be clear, Walmart is not the only big-box retailer that has shut down smaller competitors, but Walmart’s market dominance in many regions, and their role as the largest private employer in the United States, gives them a unique ability to affect living standards for significant segments of the population. Unfortunately, their typical wages are abysmally low. The minimum wage of $12.50 required under the LRAA is just below the average wage of Walmart employees nationwide: $12.67 per hour. And when companies like Walmart don’t pay sufficient wages for workers to make ends meet, the American taxpayer picks up the tab. In nearly every state where it operates, Walmart has more employees on Medicaid than any other company. In some states, its employees are also the largest groups of food stamp and other cash assistance recipients.

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Senate Immigration Legislation Would Improve Human Trafficking Protections for Guestworkers

A recently concluded trial highlights how weaknesses in the country’s guestworker programs can facilitate human trafficking. Last week, a federal jury convicted Kizzy Kalu, a Denver-area man, of “89 counts of mail fraud, visa fraud, human trafficking and money laundering.” While both progressives and conservatives have complaints about the Senate immigration bill, it’s important to point out that the Senate took an important step forward in terms of new rules that would protect vulnerable foreign workers like the ones recruited by Kalu from abroad through guestworker programs.

The workers Kalu recruited thought they were coming to the United States to work full-time at an American university as “nurse instructor supervisors” through the H-1B guestworker program, which allows U.S. employers to hire workers from abroad for occupations requiring at least a college degree. But Kalu lied to the government and the foreign workers, and with disastrous results. According to the Department of Homeland Security (DHS), the university that was supposed to be the employer “existed largely in name only and had no genuine need for nurse instructor supervisors.” Thus, the workers had no jobs, and had to look for work on their own (although Kalu would not even let them travel freely). H-1B workers are legally required to be paid a “prevailing” wage, but the workers who were able to find jobs ended up working in nursing homes (not as instructors) earning less than the prevailing wage. Some were not able to find a job at all. On top of that, Kalu required the workers to pay him “between $800 to $1,200 per month or face deportation” and required them to sign employment contracts specifying the workers would owe Kalu “$25,000 if they left his employment.”

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Gearing Up for the Next Debt Ceiling Fight

It looks like House Republicans are at it again. With another deadline for a congressional vote to raise the debt ceiling looming this fall, recent reporting confirms that House Republicans are strategizing on how to best hold hostage the full faith and credit of the United States in return for even more spending cuts. (Note: The CBO reports that congressional action on the debt ceiling will be necessary sometime in October or November, after the Treasury has exhausted its full arsenal of extraordinary measures to stay under the current debt limit, which is just under $17 trillion.)

Recall that in August 2011 the GOP threatened sovereign default in order to force their agenda—dollar for dollar spending cuts in exchange for their votes to raise the debt ceiling, a habitually pro forma vote (see Table 7.3 for a record of how many times the debt ceiling has been voted on). President Obama ultimately capitulated to this bribe, signing the Budget Control Act (BCA) in exchange for a debt ceiling increase and thus solidifying our country’s pivot from prioritizing post-recession job creation policies to instead pushing policies of austerity. That debt ceiling showdown and the legislation it generated has not only stymied our recovery, but additionally led to a slew of other bad stuff, including the downgrading of our credit rating and the implementation of one of the worst pieces of fiscal legislation to come out of the Obama Administration: sequestration and the discretionary spending caps.

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North Carolina Slashes Aid to Job Seekers

On July 1, North Carolina pulled the safety net out from under the long-term unemployed. Workers in the state with the nation’s fifth-highest unemployment rate will now be eligible for only 19 weeks of unemployment compensation benefits. This is shortest duration of any state, and is well below even the pre-recession standard of 26 weeks. Furthermore, North Carolina’s politicians have disqualified their own state for over half a billion dollars in free federal unemployment aid—and all because they were determined to slash the weekly benefits provided to the unemployed.

North Carolina’s policymakers have made it clear that they have little empathy for the suffering created by the state’s stagnant labor market, which has left 8.8 percent of its workforce without a job. But if policymakers think that they can further disadvantage job seekers without damaging North Carolina’s prospects for economic recovery, they’re dead wrong. As Paul Krugman writes, the move to slash unemployment benefits is a huge mistake on both humanitarian and economic grounds.

The unemployment benefit slashers demonstrate a fundamental misunderstanding about how aid to the unemployed helps the economy. First and foremost, unemployment assistance helps workers and their families keep their heads above water in the event of a job loss until they can find another job. That’s the “private” benefit. But secondly, there are benefits that we all share when the government assists job seekers. Unemployment compensation is an extremely effective means of economic stimulus, because that compensation puts money directly in the hands of people who are most likely to spend it immediately. That’s the “public” benefit: such spending props up local economies at times (like now!) when the economy is suffering from a massive shortfall in aggregate demand.

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Is a “Blank-slate” Approach the Right Way to Reform our Tax Code?

Two weeks ago, Senators Baucus and Hatch, respectively the chairman and ranking minority member of the Senate Finance Committee, sent a “Dear Colleague” letter to solicit input on which tax expenditures to keep in the tax code. They are proposing a “blank-slate” approach for tax reform—eliminate all tax expenditures from the tax code and then add in the ones that can be justified. It’s a positive development that the senators aren’t constraining the initiative to be revenue neutral, but what sounds like a novel and fresh approach to tax reform that broadens the tax base and simplifies the tax code, both laudable goals, will likely obtain neither.

My guess is the “blank-slate” approach to tax reform is doomed to failure. 100 senators, backed by thousands of lobbyists, are all but guaranteed to come up with a plan as complicated as the current tax code. Perhaps serious tax reform is not in the cards for the 113th Congress.

Tax expenditures are tax credits, tax deductions, and exclusions embedded in the tax code, which reduce a taxpayer’s tax liability; they are often referred to as loopholes. According to the Joint Committee on Taxation, there are over 200 tax expenditures affecting individuals, and they are estimated to reduce Fiscal Year 2014 tax revenues by $1.1 trillion. “Broadening the base” refers to the elimination or reduction of these expenditures, and is held up as the gold standard for tax reform. Depending on who you ask, increased revenue from broadening the base should be used to reduce tax rates, reduce deficits, or increase expenditures on education, infrastructure and the social safety net.

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Government–Not Business–Has Been the Source of Breakthrough Innovation

The New York Times obituary for Douglas C. Englebart, identified as the “Computer Visionary Who Invented the Mouse,” is fascinating reading, in part because Englebart, an Oregon farm boy, was in many ways the father of modern networked computing. Beginning in the early 1960s, he put together a team of engineers and computer scientists, funded by the federal government, that developed a prototype for most of the computer tools we all take for granted today. He unveiled them at a conference in San Francisco in December 1968, which “set the computing world on fire.” In the words of the Times obituary:

“Dr. Engelbart was developing a raft of revolutionary interactive computer technologies and chose the conference as the proper moment to unveil them.

For the event, he sat on stage in front of a mouse, a keyboard and other controls and projected the computer display onto a 22-foot-high video screen behind him. In little more than an hour, he showed how a networked, interactive computing system would allow information to be shared rapidly among collaborating scientists. He demonstrated how a mouse, which he invented just four years earlier, could be used to control a computer. He demonstrated text editing, video conferencing, hypertext and windowing.”

Englebart was a visionary, but his ground-breaking work was not supported by venture capital and his innovations were not the result of the private market or corporate enterprise. His innovations were not spurred by the prospects of incredible income and wealth, all lightly taxed. Rather, the work was funded and organized by a visionary bureaucracy in the U.S. government. As the Times describes it, “during the Vietnam War, he established an experimental research group at Stanford Research Institute (later renamed SRI and then SRI International). The unit, the Augmentation Research Center, known as ARC, had the financial backing of the Air Force, NASA and the Advanced Research Projects Agency, an arm of the Defense Department.”

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Council on Foreign Relations Wades into Education Debates, but Misses the Big Picture

The drumbeat of doom-and-gloom about American education continues. The latest entry is a June report by the Council on Foreign Relations, warning that the “real scourge of the U.S. education system–and its greatest competitive weakness–is the deep and growing achievement gap between socioeconomic groups that begins early and lasts through a student’s academic career.”

Every industrialized country has an achievement gap between higher and lower-class children. In the United States, we have a similar and overlapping gap between whites and blacks. These gaps have narrowed, but not much, because both races have posted remarkable gains in recent generations.

Consider this: black achievement has improved so much that in elementary school mathematics, blacks now perform better than whites did only a generation ago. Improvements have been less great but still substantial for black elementary and middle schoolers in reading and for black 12th graders in both math and reading. White students have also improved in this time, however, so the gap remains.

The Council on Foreign Relations acknowledges that American student achievement is “higher than ever,” but says gains have been small. In fact, gains have been quite large, and for disadvantaged students, have outpaced gains in comparable industrial countries. One country with which we are typically and unfavorably compared is Finland. Yet although Finland’s scores remain high, achievement of its disadvantaged students has plummeted in the last decade, while that of comparable U.S. students has surged.

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Tagged

Does Value-Added Trade Have Any Implications for Trade Policy?

The Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) have reported that significant portions of China’s exports to the United States contain non-Chinese value added, including some small fraction of parts and materials originating in the United States. The OECD and WTO have proposed new estimates of trade in value-added (VA), a measure of trade that is net of foreign value-added. They claim that “China’s bilateral trade surplus with the United States shrinks by 25% on a value-added basis, reflecting the high level of foreign-sourced content in Chinese exports.” But, my new EPI report shows that the OECD-WTO analysis is “fundamentally flawed and should not be used in anti-dumping or other types of fair trade cases.”

The OECD-WTO analysis suffers from at least three critical flaws:

  • The OECD-WTO analysis fails to account for rapid technological change and the fact that China is rapidly moving up the value chain and increasing the domestic content of its exports.
  • The OECD relies, in part, on flawed Chinese data on its own trade flows. Estimates developed in the EPI report show that China’s global trade surplus was 117 percent to 250 percent (i.e., 2 to 3.5 times) larger than reported by China in the 2005-2009 period.
  • The OECD-WTO estimates do not accurately reflect the flow of Chinese exports coming into the United States through third countries. China became the world’s largest exporter in 2006, and roughly half of its exports are intermediate products and transshipped goods. As a result, the United States absorbed $54.2 billion to $77.9 billion per year in additional, indirect imports originating in China and imported from the rest of the world between 2005 and 2009 that were not reflected in the OECD estimates. When indirect imports are included, U.S. VA trade with China exceeds conventional measures of the gross bilateral trade deficit in this period.

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What We Read Today

Happy Fifth of July. Here’s what we read this week:

If Today’s Jobs Report is Taken as Yet Another Excuse for Inaction, It Will Be Truly Bad News

There are not enough thumbs-up graphics on the internet to show how much I agree with and how important I think this Paul Krugman blog post is. He goes through all of the obvious indicators signaling that the economy is far from healed from the Great Recession, as well as all of the puzzling ways policymakers seem determined to ignore this, and ends with:

I guess what I’m saying is that I worry that a more or less permanent depression could end up simply becoming accepted as the way things are, that we could suffer endless, gratuitous suffering, yet the political and policy elite would feel no need to change its ways.”

We said much the same thing in the introductory chapter to State of Working America, 12th Edition published last Labor Day:

We should be very clear about the danger of this complacency in the face of elevated unemployment. It’s not simply that full recovery to pre-recession health will come too slowly—though this delay alone does indeed inflict a considerable cost. Instead, the danger is that full recovery does not come at all. Nations have thrown away decades of growth because policymakers failed to ensure complete recovery. Japan has been forfeiting potential output—trillions of dollars’ worth, cumulatively—for most of the past 20 years. Recent research (Schettkat and Sun 2008) has suggested that the German economy operated below potential in 23 of 30 years between 1973 and 2002 because monetary policymakers were excessively inflation-averse. Lastly, U.S. economic history provides the exemplar of what can happen to a depressed economy when policymakers fail to respond correctly: The level of industrial production in the United States was the same in 1940 as it was 11 years before.”

And today’s jobs-numbers, while a nice mild boost above recent trends, really don’t change this assessment at all.

 

Four Years Into Recovery, Austerity’s Toll is At Least 3 Million Jobs

The official start of the recovery from the Great Recession began in June 2009. This coming Friday will mark the release of employment data for June 2013, allowing us to assess how this recovery stacks up against earlier recoveries 4 years in, as well as letting us diagnose obvious areas of economic weakness in the current recovery.

The figure below (also here) compares the current recovery to the three prior recoveries. Recessions are marked by the lines to the left of the zero point on the x-axis, while recoveries are to the right. The figure shows that job growth in the current recovery is slightly stronger than the job growth following the recession of 2001. However, it is slower than in the prior two recoveries and is in fact slower than in any other previous recovery dating back to World War II. Furthermore, jobs fell much further and faster during the Great Recession than in any other recession over that period, meaning that we are stuck in a much larger jobs-hole four years into recovery than in any previous business cycle. The fact that four years into the recovery we still have not yet come close to making up the jobs lost in the downturn, (much less the jobs needed to keep up with growth in the potential workforce over that time), is a grimmer situation than anything our labor market has seen in seven decades.

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