Are African Americans disadvantaged—for example, having lower school achievement—because they have lower family incomes, on average, than whites, or because they continue to suffer from an American caste system based on race?
Both are involved. Certainly, in a color-blind society, African American students would have lower average achievement simply because a higher proportion of African American than white students have income and other socioeconomic disadvantages that depress their ability to take full advantage of schooling.
Therefore, policies that attempt to offset the disadvantages that impede the success of all lower class children, regardless of race or ethnicity, can benefit black children disproportionately. But we should not delude ourselves that by narrowing socioeconomic inequality, we have also significantly addressed racial subjugation, the continuing American dilemma.
For decades, Americans’ wages have been stagnant—hardly growing at all, even as the economy becomes increasingly productive. Do you ever wonder why your paycheck is so thin? One reason might be that employers routinely ask workers to work long hours without extra compensation. President Obama has decided to fix this problem and will direct the U.S. Department of Labor to update its overtime regulations, which allow employers to deny overtime pay to millions of white collar workers who ought to receive it.
The salary threshold is supposed to be set at a level high enough to guarantee that regular employees can’t be misclassified by their employers as exempt executives, administrators or professionals, as a way to get around having to pay time-and-a-half for overtime work. Back in the days when the level was regularly adjusted, it was set at about $50,000-$60,000 a year in today’s dollars, which is reasonable and was high enough to protect most secretaries from being classified as exempt administrators, for example, and research assistants from being classified as exempt professionals. Today, the threshold is set at $455 a week, or $23,660 a year—$190 less than the poverty threshold for a family of four. Quite frankly, it’s a joke.
The second installment of the Netflix original series, House of Cards, became available recently to the delight of binge watchers everywhere. In the backdrop of Frank Underwood’s (played by Kevin Spacey) uncompromising assent to power is a very relevant debate about trade policy with China. Specifically, one of the primary sources of tension between the two countries is the U.S.’ contention that China artificially keeps the value of their currency down to gain an advantage in trade. Defining currency manipulation is an ongoing debate, but Bergsten and Gagnon laid out their own criterion and found China to be one of the “most significant currency manipulators.” The effort to label China a currency manipulator falls by the wayside in Underwood’s duplicitous schemes to push his own personal agenda, but China’s currency manipulation has real effects on trade, and the United States can take real actions to reduce the trade deficit and create jobs. In fact, EPI’s Robert Scott just released a paper which found that ending currency manipulation across 20 of the most prominent practitioners (including the linchpin, China) would create between 2.3 million to 5.8 million jobs in the United States over the next three years.
So how is “currency manipulation” defined? Bergsten and Gagnon categorize a country as a currency manipulator if it meets the following four criteria:
- They held federal exchange (FX) reserves that exceed six months of goods and services imports.
- They maintained a total (global) current-account surplus between 2001 and 2011.
- Their total FX reserves grew faster than their GDP between 2001 and 2011.
- They have gross national income in 2010 of at least $3,000 per capita, the median among 215 countries ranked by the World Bank (this criterion excludes low-incoming developing economies).
It is remarkable that until this week, no American politician has had the guts or vision to speak out against one of the most destructive trends in our troubled labor market—the scourge of illegal unpaid internships. But thank goodness for Hillary Clinton, who, as reported by Politico, “spoke passionately about millennials, blasting businesses that take advantage of unpaid interns.”
The Fair Labor Standards Act makes most unpaid internships in for-profit businesses illegal because the so-called internships are usually nothing more than employment, with no special educational purpose or structure and no pay. The U.S. Department of Labor has made clear that interns must be paid at least the minimum wage unless the business that hires them meets six criteria:
- The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
- The internship experience is for the benefit of the intern;
- The intern does not displace regular employees, but works under close supervision of existing staff;
- The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
- The intern is not necessarily entitled to a job at the conclusion of the internship; and
- The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
According to the National Journal, Clinton, who was addressing an audience at UCLA, “warned there is a “youth unemployment crisis” created by the weak economy they inherited, and stressed the need for more opportunities such as paid job training. She decried—to applause from the audience—businesses that have “taken advantage” of young people with unpaid internships.”
The table below shows the current unemployment rate and the unemployment rate in 2007, along with the ratio of those two values, for various demographic and occupational categories. One thing that is immediately obvious from the table is that there is substantial variation in unemployment rates across groups. This is always the case—it was true in 2007, before the recession began, and it is true now. But the main point of the table is that the unemployment rate is between 1.4 and 1.7 times as high now as it was six years ago for all age, education, occupation, gender, and racial and ethnic groups. Today’s sustained high unemployment relative to 2007, across all major groups, underscores the fact that the jobs crisis stems from a broad-based lack of demand. In particular, unemployment is not high because workers lack adequate education or skills; rather, a lack of demand for goods and services makes it unnecessary for employers to significantly ramp up hiring.
Weak demand for workers has kept wage growth very sluggish. Average hourly wages for all private-sector workers grew by 2.2% over the last year, which is just slightly higher than the rate of inflation. The economic link between high unemployment and low wage growth is straightforward; employers do not need to pay sizable wage increases to get and keep the workers they need when job opportunities are so weak that workers lack other options.
Growing trade deficits have cost US workers millions of jobs over the past two decades, (these were good jobs in manufacturing industries). Currency manipulation by more than 20 countries, of which China is by far the largest, is the single most important reason why U.S. trade deficits have not decisively reversed. Currency manipulation lowers the value of foreign currencies, relative to the U.S. dollar, which acts like a subsidy to their exports, and a tax on U.S. exports to China and every other country where the U.S. competes with the exports of currency manipulators.
In an era of fiscal austerity, ending global currency manipulation is the best way to reduce trade deficits, create jobs, and rebuild the U.S. economy, as shown in Stop Currency Manipulation and Create Millions of Jobs. Eliminating currency manipulation would reduce the U.S. trade deficit by between $200 billion and $500 billion in three years. This would increase annual U.S. GDP by between $288 billion and $720 billion and create 2.3 million to 5.8 million jobs. About 40 percent of the jobs gained would be in manufacturing.
Ending currency manipulation would not require any government spending – a key political virtue during this time of Congressional gridlock. In fact, it would reduce the federal budget deficit by up to $266 billion dollars per year as the extra economic activity and employment it creates boosts tax revenues and reduces safety net spending. Ending currency manipulation would create jobs in every state, with gains from 8,200 jobs (2.64 percent of total employment) in the District of Columbia to 687,100 jobs (4.18 percent of employment) in California. Ending currency manipulation would likely create jobs in every Congressional District, with gains of up to 24,400 jobs (7.05 percent of employment) in the 17th District in CA.
The Atlantic’s Derek Thompson wrote a great review of Claudia Goldin’s latest work on closing the wage gap at the upper level of the distribution. Goldin postulates that the final steps to closing the gender wage gap begin at the top rungs of the income distribution. Goldin examines MBA graduates’ earnings over their life span, and finds that the wage gap would start to close if firms didn’t have an incentive to disproportionately reward individuals “who worked long hours and who worked particular hours.” Men may be more able to choose to work long hours in a way that women, particularly in their first 10-15 years of work, may not choose to do for any number of reasons (most obviously: having kids), and whoever is willing to work these longer hours (usually men) gets disproportionately rewarded. To close the gap, Goldin calls for changes to the way jobs are structured—in short, greater work time flexibility.
While Goldin’s analysis is currently my favorite analysis for understanding gender wage inequality at the top—and I applaud her call to give high wage professionals more autonomy and encourage more flexible work schedules—her analysis doesn’t solve the question of how to close the wage gap for the majority of American workers, those who earn low- and middle-wages. (I’m also skeptical of the idea that there aren’t substantial incentives among those in power to keep the structure of high wage professions as it is or that work time flexibility will be enforced by companies even if it’s created.) For the majority of women, gender wage gaps are one way that women get the raw deal, but it is not the only way.
In tomorrow’s jobs report, we could well see the headline unemployment rate nudge down to 6.5 percent. This is the threshold at which the Federal Open Market Committee (FOMC) of the Federal Reserve had indicated they may move the short-term policy rates they control up from zero, thereby providing less monetary stimulus to the recovery.
Easing back on this stimulus would be a mistake. The economy remains far from full employment, and the headline unemployment rate is far understating the degree of economic slack remaining in the economy. This is demonstrated by the 5.85 million “missing workers”—potential workers who, because of weak job opportunities, are neither employed nor actively seeking a job. Further evidence can be seen in the 7.7 million “jobs-gap”—the number of jobs needed to restore the labor market to its pre-Great Recession health. Subdued wage and price inflation measures provide yet more evidence. The year-over-year change in the “market-based” core price deflator for personal consumption expenditures fell to 1.1 percent for all of 2013. And just today, data on unit labor costs (a key predictor of inflationary pressures in the economy) indicated that these slightly fell in the last quarter of 2013.
The President released his fiscal year 2015 budget stating that his goal is “to speed up growth, strengthen the middleclass, and build new ladders of opportunity into the middle class,” all while reducing budget deficits.
There is much to like in the budget proposal. Mr. Obama wants to expand the Earned Income Tax Credit for childless workers, which will encourage work and reduce poverty. He also provides additional funds for child care, education, research, and infrastructure. To pay for this he proposes to eliminate various tax loopholes for hedge fund managers and multinational corporations.
Seeing as how this budget proposal has virtually no chance of outmaneuvering the GOP blockade, its chief value is to demonstrate a vision of America that better addresses the core economic problems of the middle and working classes. And in this vein, the President’s budget could have been better. (more…)
Last week my colleague, Rob Scott, published a report highlighting the impact of ongoing currency manipulation on employment in the United States. In the report, Scott explained that currency manipulation by U.S. trading partners—including China, Denmark, Hong Kong, South Korea, Malaysia, Singapore, Switzerland and Taiwan—distorts trade flows in two ways. It raises the cost of U.S. exports, and lowers the cost of U.S. imports.
Currency manipulation has cost the U.S. economy millions of jobs, including a disproportionately large share of manufacturing jobs. The impact of these job losses is clearly evident in the Midwest, which suffered significant manufacturing job losses. Further, the displacement of manufacturing jobs not only meant fewer job opportunities, but also the elimination of unionized jobs that pay family-supporting wages. Ending currency manipulation would likely lead to significant growth in the American manufacturing sector, a necessary step to begin rebuilding a strong middle class.
Social Security (and other social insurance programs like Medicare and Medicaid) has significantly helped reduce elderly poverty over the last several decades. The U.S. Census Bureau reported that 15.3 million elderly people would have been in poverty in 2012 without Social Security. That would have meant close to four times more elderly people in poverty. The figure below illustrates how declines in elderly poverty are directly associated with sharp increases in per capita Social Security expenditures—evidence that direct government transfers keep many people from falling below the poverty line.
But Social Security, Medicare and Medicaid—as valuable as they are—do not provide a lavish lifestyle. Most of America’s 41 million seniors live on modest retirement incomes that cover just the costs of basic necessities and support a simple, yet dignified, quality of life. To highlight how official poverty measures may paint too rosy a picture of the living standards of America’s seniors, my colleague Dave Cooper and I showed nearly half of the elderly population in the United States are “economically vulnerable,” defined as having an income that is less than two times the supplemental poverty threshold (a poverty line more comprehensive than the traditional federal poverty line). A data update to that analysis shows that 47.9 percent of the elderly are economically vulnerable.
Yesterday, House Ways and Means Committee Chairman Dave Camp (R-MI) released his long-awaited (at least among budget nerds) tax reform proposal. For those used to dealing with GOP fiscal policy proposals in recent years, it was strangely careful and serious. Yet, this proposal still highlighted the excessive importance policymakers attach to “tax reform that lowers rates,” which has been a north star of fiscal policy wonks seemingly since the dawn of time. The idea is that lowering rates will spur economic efficiency, but to make up for revenue lost to lower rates, one must broaden the tax base to which the new, lower rates apply.
Lowering income tax rates, however, reduces revenue so much—especially from wealthy individuals and businesses—that it’s mathematically difficult to make up what’s missing without completely gouging the working and middle classes. This is why Republicans have shied away from the details that would make their top-line tax reform goals work. (They are then pilloried, and rightly so, for ignoring mathematical realities.) It’s easy to lower tax rates; it’s hard to then figure out where the money is going to come from to make up for it. And the payoff in terms of increased growth from all this angst is decidedly modest. Under Rep. Camp’s plan, the federal government would lose more than $1.2 trillion over the next ten years from lower tax rates for individuals and businesses, and another $1.4 trillion by repealing the Alternative Minimum Tax. Here are the good and bad of just some of the provisions that make up for the lost revenue:
I love the New York Times. But its reporters’ slant on public employee pensions has been driving me crazy, and the latest story by Mary Williams Walsh and Rick Lyman didn’t help. Walsh has been carrying a vendetta against public pensions for many years, so it is no surprise that the article makes the unsupportable claim that none of the 40 state pension overhauls has “come close to closing their pension gaps quickly enough to keep pace with a rapidly agingand retiring—public work force.” I leave it to the reader to fully decipher that statement, but it seems to reflect the story’s headline, that “Public Pension Tabs Multiply as States Defer Costs and Hard Choices.” It implies that despite the states’ pension overhauls, things are getting worse everywhere because public employees are aging and retiring faster than the financing is improving. It’s surely meant to be alarming, as is the chart of Moody’s Investor Service data showing 13 states with “unfunded pension liability greater than annual revenue.”
Moody’s, itself, tells a different story. Moody’s points out that its data are 20 months old and don’t reflect current balance sheets or the enormous market gains of the last 18-20 months. Moody’s points out that “A run-up in financial markets has helped shrink public pension shortfalls” since June 30, 2012, because “Investment returns provide the lion’s share of the retirement systems’ revenue”:
But fiscal 2012 ended for most states on June 30, 2012, and since then, a run-up in financial markets has helped shrink public pension shortfalls. Investment returns provide the lion’s share of the retirement systems’ revenue, and in 2013, pensions’ holdings reached record amounts.
That could make fiscal 2012 the high-water mark for pension problems that have rocked state governments over the last decade and led to a wave of pension reforms recently, according to Moody’s.
Pension liabilities “for 2012 may reflect a cyclical peak as a result of subsequent strong market returns and a rising interest rate trend,” the rating agency said.”
Education policy in both the Bush and Obama administrations has suffered from failure to acknowledge a critical principle of performance evaluation in all fields, public and private—if an institution has multiple goals but is held accountable only for some, its agents, acting rationally, will increase attention paid to goals for which they are evaluated, and diminish attention to those, perhaps equally important, for which they are not evaluated.
When law and policy hold schools accountable primarily for their students’ math and reading test scores, educators inevitably, and rationally, devote less instructional resources to history, the sciences, the arts and music, citizenship, physical and emotional health, social skills, a work ethic and other curricular areas.
Over the last decade, racial minority and socio-economically disadvantaged students have suffered the most from this curricular narrowing. As those with the lowest math and reading scores, theirs are the teachers and schools who are under the most pressure to devote greater time to test prep, and less to the other subjects of a balanced instructional program.
This is black history month. It is also the month that the Emergency Manager who took political power and control from the mostly African American residents of Detroit has presented his plan to bring the city out of the bankruptcy he steered it into. This is black history in the making, and I hope the nation will pay attention to who wins and who loses from the Emergency Manager’s plan.
Black people are by far the largest racial or ethnic population in Detroit, which has the highest percentage of black residents of any American city with a population over 100,000. Eighty-three percent of the city’s 701,000 residents are black. It continues to be an underreported story that a white state legislature and white governor took over the city and forced it to file for bankruptcy against the will of its elected representatives. It is also underreported that white governors and the white state legislature failed to provide Detroit with its fair share of state tax revenues – a significant contributor to the city’s current financial distress.
Detroit’s bankruptcy plan calls for the near-elimination of the retiree health benefits that city workers earned over the years, as well as drastic cuts in the pensions that retired and current workers have earned and counted on. It is telling, I think, that for the first time since the Michigan constitution was adopted 50 years ago, the governor chose in this case to ignore the Michigan constitution’s guarantee that public employee pension benefits will be paid in full, given that Detroit’s public workforce is majority black and represented by unions that opposed the governor’s election.
This piece originally appeared on the Huffington Post.
The recent defeat of its effort to unionize workers at Volkwagen’s Chattanooga, Tennessee factory was a crushing blow to the United Auto Workers, and a setback to the embattled U.S. labor movement, which could have used the morale boost of a high-profile victory.
It was also a big loss for the vast majority of Americans who must work for a living, whether they are union members or not. Without a large robust unionized sector, there is little hope that the relentless spread of low-wage work, job insecurity and economic inequality will be reversed.
Labor unions were key to the post-World War II social contract under which the benefits of economic growth were broadly shared. Collective bargaining agreements set industry-wide standards for wages and working conditions, which put pressure on nonunion firms to keep up or face union organizing drives. Politically, unions were the most important force supporting Social Security, Medicare, unemployment compensation, overtime, job safety, progressive taxes and full employment policies that promoted prosperity far beyond their membership.
This is a story about misdirection, how authors contort their analysis to answer a question no one is asking but make it seem as if they are answering an important current question, such as ‘why has income inequality increased?’. The consequence is to be grossly misleading or, worse, to present conclusions that are directly opposite of what one’s data show.
The paper in question is titled “US income inequality and assortative marriages” and written by Jeremy Greenwood, Nezih Guner, Georgi Kocharkov, and Cezar Santos for VoxEU.org. The research relates to an increase in positive assortative mating: “how likely a person is to marry someone of similar educational background. Since education is an important determinant of income, these patterns of matching might have an impact on the economy’s distribution of income.” Basically, if higher income men are now more likely to marry higher income women then household income inequality will grow.
The authors conclude that “rising assortative mating together with increasing labour-force participation by married women [emphasis added by me] are important in order to account for the determinants of growth in household income inequality in the US.” So, right out of the gate, a key influence not trumpeted in the headline (rising labour-force participation by married women) is introduced. But we’ll stick with the findings on assortative mating for now. The authors compare assortative mating in 2005 to that of 1960. The selection of the dates for comparison, 1960 and 2005, determines their story and they choose a misleading one. They show their key finding in the very first graph, presented below, which uses Kendall’s tau statistic to measure the relationship between husband’s and wife’s educational levels. The higher the tau statistic ‘the higher is the degree of positive assortative mating.”
I was glad to see the United Auto Workers (UAW) file objections with the National Labor Relations Board (NLRB) over the nasty campaign by anti-union Tennessee politicians to affect the results of the union election at Volkswagen last week. It would be so enlightening for the NLRB to question Sen. Corker (R-Tenn.) under oath about his alleged conversations with the “real decision makers” at VW, the supposed source of his threat/promise that voting in the UAW would doom the VW plant’s hopes for expansion. Was Corker lying, or were VW executives breaking their neutrality agreement with the UAW and using Corker to help defeat the union? If he was VW’s secret agent, the election should be set aside.
In a Wall Street Journal op-ed last month, Sylvester Schieber and Andrew Biggs said that census data failed to capture much of the income Americans derive from 401(k) and IRA plans. Though no one denies that the data don’t include some distributions from retirement accounts, the extent of the under-reporting is under dispute, with Biggs and Schieber claiming census data ignore 60% or more of the money that seniors receive.
In an earlier blog post, I noted that Schieber and Biggs may be basing this attention-grabbing claim on Internal Revenue Service measures that count rollovers from one retirement account to another as “income.” At an American Enterprise Institute event today, Paul Van de Water of the Center on Budget and Policy Priorities, who first brought the rollover issue to my attention, asked Schieber whether he based his claims on IRS measures of total or taxable income from retirement plans. Whereas taxable income measures exclude Roth IRA distributions, total income measures include these distributions, but also rollovers. As Federal Reserve and IRS researchers have explained, rollovers are included in some IRS income measures even if taxes aren’t owed on the amounts (and whether or not households report the transactions) because financial service providers report them to the IRS.
So, which measures are Schieber and Biggs using—total or taxable income from retirement plans? Schieber wasn’t able to answer, deferring to a coauthor, Billie Jean Miller, who wasn’t present. This should raise eyebrows, since Schieber has been making the same point for years and Social Security Administration researcher John Woods raised the rollover issue back in 1996.
Without claiming any familiarity with IRS data, it appears to me that Schieber and Miller are using measures of total income from these accounts, at least with respect to pension and annuity income. In Exhibit 5 of their Journal of Retirement article, for example, Schieber and Miller cite an IRS measure of pension and annuity income of $812 billion for 2008. According to summary statistics published by the IRS, total pension and annuity income was $845 billion in 2008, whereas taxable pension and annuity income was $506 billion (all figures have been rounded). Though Schieber and Miller’s figure is somewhat smaller than the IRS measure of total pension and annuity income, the difference could be due to revisions or differences between the internal IRS data and micro-data made available for public use.
Over the last six years, the labor force participation rate dropped by several percentage points. There is a debate over how much of that drop is a direct result of the lack of job opportunities in the Great Recession and its aftermath (changes that are generally labeled cyclical), and how much is instead a result of long-run trends, such as baby boomers beginning to retire (changes that are generally labeled structural). A recent blog post in the Wall Street Journal said that among Federal Reserve officials, the view that much of the decline is structural is gaining traction. If true, that’s a problem. My read of the data shows that most of the decline is cyclical, so if the Fed believes it’s structural, it means they believe there’s less slack in the economy than there really is.
Part of the misunderstanding is that there are two components of structural change. First, there are population shifts. Age groups that tend to have lower labor force participation rates are now a larger share of the population (think retiring boomers). These are called “compositional” shifts. Accounting for purely compositional changes by gender and age, more than 40 percent of the decline in the labor force participation rate over the last six years can be accounted for. Many people doing a quick analysis on this topic tend to stop there.
However, the other component of structural change is made up of long-run trends in labor force participation within age/gender groups. The labor force participation rate among people under age 25 has been declining since the 1980s, in part due to increasing college and university enrollment. The continuation of that long-run trend accounts for an additional structural decline in the overall labor force participation rate over the last six years. The projected trend in labor force participation rate of workers age 25-54 was virtually flat, so that trend did not meaningfully contribute to structural changes over the last six years. The trend labor force participation of workers age 55+, however, was expected to rise significantly over this period, particularly for women, as cohorts with much stronger labor force attachment throughout their 20’s, 30’s, and 40’s than the cohorts that preceded them began aging into this age bracket. In other words, that’s a structural change that should have substantially contributed to an increase in labor force participation over this period.
Putting these factors together—the compositional changes between gender/age groups and the structural trends within gender/age groups—the result is that only around a quarter of the total drop in labor force participation over the last six years is structural. This means that around 75 percent of it is cyclical. In other words, there are now around 5.8 million workers who are not in the labor force but who would be if job opportunities were strong. If these workers were in the labor market looking for work, the unemployment rate right now would be 10.0 percent instead of 6.6 percent. That is a lot of additional slack in the labor market.
It has been pointed out that it is likely that at least some of the workers who are out of the labor force due to cyclical factors are people who gave up and decided to retire early. Given that retirees are less likely to reenter the labor force when job opportunities improve, improving economic conditions may not draw these workers back in. This means that labeling them as being out of the labor force due to cyclical factors may not be very useful. However, it is important to note that there are large participation gaps for workers age 54 or younger, who are unlikely to be early retirees. In fact, more than 70 percent of the 5.8 million missing workers are under age 55. These missing workers under age 55—4.2 million of them—are therefore unlikely to be deterred from entering or re-entering the labor force when job opportunities strengthen.
While much of the reaction to the most recent CBO Budget and Economic Outlook (released earlier this month) focused on the labor market impacts of the Affordable Care Act, it’s important to note that this report actually contained a multitude of interesting findings and updated projections. Among the most important is CBO’s revised projection of the costs of federal health care programs—Medicare, Medicaid, ACA subsidies, and some smaller programs as well—over the next decade. For the fourth year in a row, CBO revised these cost projections downward. The figure below shows CBO’s projections of these costs in the decade following each Budget and Economic Outlook published since 2011.
While health care costs remain the fastest growing portion of the federal budget, and are still projected by CBO to grow significantly faster than the overall economy over the next decade, the downward revisions of the past three years are quite significant. Put simply, since 2011, CBO’s projection of what the level of federal health spending will be in 2021 has dropped by $183 billion, or about 10.4 percent.
To put this in perspective, when lawmakers passed the counterproductive, indiscriminate sequestration spending cuts as part of 2011’s Budget Control Act (BCA), they were looking at projections of federal health spending over the following decade that the latest estimates indicate were $900 billion too high. The $1.2 trillion in “sequestration” cuts over the decade, with their damaging effect to public investment and to the still-incomplete economic recovery, look even more unnecessary in this light.
Genuinely informed budget wonks know that the BCA cuts were particularly perverse because they took an ax to the portion of the budget— discretionary spending—that is not projected to grow in coming years, relative to the economy. To the extent that long-run budget projections highlight a need for restraining spending, this is entirely driven by the rapid rise in health care costs—both public and private. And these health care costs have rapidly decelerated in recent years. This deceleration began even before the provisions of the Affordable Care Act (ACA) meant to restrain cost-growth went into effect. Health care costs are so important in driving long-run budget trends that if the cost-growth slowdown of the past five years continues, there will be no long-run budget deficit problem. Lawmakers who actually cared about long-run budget deficits, not to mention living standards of typical Americans, would reverse the damaging cuts to discretionary spending and instead continue to press for efficiencies that further slow health care cost growth.
Mark Price and Estelle Sommeiller’s new paper traces the trajectory of top incomes in American states and regions from 1917 through 2011. Mapping this data across the continental United States and over the last century suggests both important similarities across states, and some key differences.
On the map below, the states tip from green to red when the top 10 percent’s share of income exceeds one-third. In the early years, inequality (as measured by the high income share of top earners), is starkest in the Northeast. This inequality is generalized by the impact of depression and war in the 1930s and 1940s, but once the policy innovations of the New Deal (collective bargaining, retirement security, labor standards, and financial regulation) take hold, inequality eases: by the middle 1950s, only New York and the Deep South are still colored red.
The pattern across the last generation is just as telling. Of the sixteen states to top this threshold in 1972, the only ones outside the South were the tri-state home of big finance—New York, New Jersey, and Connecticut. As we scroll forward from there, the states in which the top 10 percent claim less than a third of total income gradually diminish, disappearing entirely by 1989. By 2011, the top 10 percent are claiming almost 60 percent of income in New York and Connecticut, and over 40 percent in all but three states (Iowa, Nebraska, and South Dakota).
Chained CPI COLA Cut Out of the President’s Latest Budget: Another Bit of Good News for Social Security
2014 is shaping up to be a much better year for Social Security than any in the recent past. People seem to finally be recognizing that Social Security is the one leg of the retirement stool that’s working well and providing genuine, much-needed retirement security. And they’re realizing that given this, kicking away at it doesn’t make a lot of sense.
Today provides another welcome bit of news in this regard, with the Obama administration announcing that the cut to the Social Security cost of living adjustment (COLA) that was in their fiscal 2014 budget proposal will not show up again this year.
This is good news. The oft-repeated claim that using the “chained” consumer price index for urban consumers (C-CPI-U) was simply a technical improvement to the Social Security COLA was always flat-wrong. Given that Social Security is the bedrock pillar of retirement income security for so many Americans, paring benefits back is a terrible idea.
Politically, this announcement amounts to yet another confirmation that the pursuit of a budget “Grand Bargain” is dead. Even the best versions of this bargain—near-term stimulus to boost the recovery combined with a mix of tax increases and cuts to Social Security, Medicare, and Medicaid to reduce projected long-run budget deficits—were pretty bad (after all, why would boosting recovery and lowering unemployment be something that only one party cared about and would have to sacrifice something else for?). But given that Republicans in Congress refused to accept stimulus (and instead have demanded, and gotten, extreme anti-stimulus in recent years) or any tax increases, this left only cuts to the social insurance programs that have provided the majority of income growth for low- and moderate-income households over the past generation. Even more bizarrely, these same Republicans refused to actually support any specific cut to these programs and would even attack the president for offering them.
In a nutshell, cuts to Social Security, including the adoption of the C-CPI-U to cut the COLA, are bad policy and bad politics. This makes dropping it from the president’s latest budget a wise move.
So, efforts to cut Social Security are in retreat. Even more hopefully, the case for expanding it has gone from something only liberal bloggers would dare write about to something that a handful of U.S. Senators have started discussing.
Yes, the public debate on Social Security looks to be getting a lot smarter these days, which is awfully welcome.
Tuesday’s CBO report on the effects of increasing the minimum wage has generated a lot of discussion. While some of the CBO’s findings are consistent with our own analysis, we have some serious disagreements. Here’s our take on the report, particularly CBO’s estimates on employment and income (we focus on their estimates of the effects of increasing the minimum wage to $10.10 by 2016).
The report finds that 16.5 million workers who make below $10.10 would get a raise, and an additional 8 million workers who make slightly above $10.10 would also likely get a bump (since employers like to preserve internal wage ladders). This is right in line with our estimates of the likely impact.
They found that the increase in the minimum wage would benefit mostly adults who need the earnings from their minimum wage job to make ends meet: less than 12 percent of the people who would get a raise are under age 20 and more than 70 percent of the total earnings would go to workers in families whose income is less than three times the poverty threshold. For context, in 2013, three times the poverty threshold for a family of three was around $55,700. This too is right in line with our analysis.
CBO also found that 900,000 people would be lifted out of poverty. We agree that raising the minimum will lift a significant number of people out of poverty, and if anything, CBO’s estimate here seems conservative. CBO is a bit vague on how they came to their conclusion about the effect on poverty levels, but from what we can tell, it seems that they looked at current income levels, expected poverty levels in 2016, simulated how peoples’ incomes would change following the minimum wage hike, and estimated the change in the number of people in poverty. This is a perfectly reasonable approach; however, there’s a good body of research that has looked at the real-world experience of how minimum wage hikes have affected poverty levels. A recent paper by Arin Dube looks specifically at this question and estimates that in the past, for every 10 percent increase in the minimum wage, we’ve seen a 2.4 percent decrease in the number of people in poverty. This implies that increasing the minimum wage to $10.10 could reduce the number of people in poverty by as much as 4.5 million.
In The Increasingly Unequal States of America: Income Inequality by State, Mark Price and Estelle Sommeiller develop estimates for top income shares, from 1917 through 2011, for American states and regions. The national version of this story is now quite familiar: the iconic Piketty and Saez curve that starts high in the early years of the twentieth century (with the top 10 percent claiming about half of all income and the top 1 percent claiming about one-fifth), drops with the political innovations of the New Deal, and then climbs again—returning, by 2012, to its early-century heights—as those innovations are dismantled. So what does the state and regional breakdown tell us?
The full results are plotted below. For each year, the states (the light blue dots) are plotted by top income shares. The middle of the shaded box marks the median state (half are lower on the chosen measure, half are higher), and then the states are broken into quartiles: the middle quartiles (marked by the boxes) surround the median, the outer quartiles run along the lines between the boxes and the outer tick marks.
A few patterns stand out. First, the general sweep of the graph echoes the national story. The arc of inequality from Gilded Age to New Deal and back again is experienced across every state, not just in a few of them. Second, the policy innovations that dampened inequality—collective bargaining, retirement and unemployment security, labor standards, financial regulation, progressive taxation—also narrowed the variation across states. In the middle years of the last century strong federal policies trumped (or overcame) the economic and political differences among the states. And third, the erosion of those policies, beginning in the 1970s, saw both inequality and the variation across states widen again.
The United States clearly does not have a short-term federal budget deficit problem—unless that problem is that it is closing too quickly to support rapid recovery. To the degree we do have a fiscal challenge requiring some sacrifice, it is in long-term projections of federal debt. The primary sources of the long-term projected problem are simply insufficient revenues and excessive national health expenditures. Under the “extended baseline” projection included in CBO’s last long-term budget outlook, federal outlays relative to GDP increase by 5.4 percentage points between 2013 and 2038, while federal revenues relative to GDP increase by only 2.7 percentage points; outlays and revenues are projected to diverge thereafter. Revenues have not been keeping up with spending and are not likely to keep up as far as the eye can see.
Most of the growth in outlays is due to increased spending on health care programs, primarily Medicare and Medicaid. However, what is happening with Medicare and Medicaid is just a symptom of what is happening to total national health care expenditures—the growth in Medicare and Medicaid outlays just reflect this growth in health care spending. These total expenditures rose extraordinarily fast over most of the past three decades, and this has led CBO to project they will rise significantly faster than overall economic growth for the foreseeable future. As a matter of fact, spending on Medicare and Medicaid has increased at a slower rate than private health care expenditures over the past 40 years.
None of this is news to anybody closely following budget policy. What was news is that in CBO’s most recent (and now-infamous) Budget and Economic Outlook, released last week, there was an increase in the projected accumulated deficits over the next decade. It’s worth examining the reason for this deterioration in a little detail, since too many will reflexively interpret it as a failure to contain spending. But in fact, it’s really a failure to lay the conditions for economic growth, and a resulting hemorrhaging of projected tax revenues.
At the National Academy of Social Insurance conference earlier this month, keynote speaker Michael Lind of the New America Foundation called for reducing tax subsidies for 401(k)s and other employer-based plans to help pay for expanded Social Security benefits, a view I share. Lind said it was time to move Social Security expansion to the realm of serious discussion and relegate privatization to the political fringe.
Lind is part of a growing movement that supports expanding Social Security to fill a hole caused by past benefit cuts as well as what Paul Krugman has called the “gigantic failure” of the 401(k) experiment. A bill introduced last year by Senator Tom Harkin and Representative Linda Sanchez, for example, would provide a modest across-the-board increase in benefits as well as a higher cost-of-living adjustment in recognition of the fact that seniors are more affected by rising health costs. The movement got a boost last November when Senator Elizabeth Warren made a speech on the Senate floor on the need to increase benefits to avert a retirement crisis. In her speech, Warren cited a $6.6 trillion gap between what Americans under 65 were on track to save and what they needed to maintain their standard of living in retirement.
The counterargument was presented at the conference by Edward Ferrigno of the Plan Sponsor Council of America, an industry trade association. Ferrigno argued that the current system has worked for most Americans, and that the retirement crisis is an illusion created by incomplete data. Ferrigno cited an article by Social Security Administration researchers that pointed out that Census data on senior incomes often cited as evidence that most seniors live modestly and rely heavily on Social Security benefits underreports distributions from defined contribution (DC) plans and IRAs because it doesn’t include lump sum distributions. The same issue was raised by at least two other conference participants: Andrew Biggs of the American Enterprise Institute and Karen Smith of the Urban Institute. Biggs recently coauthored a Wall Street Journal op-ed on the subject with former Social Security Advisory Board Chair Sylvester Schieber. The op-ed included the eye-popping claim that “the most commonly cited measure of retirement income ignores at least 60% of the money that seniors receive.”
Cheers for the Recovery Act on its 5th Birthday, Jeers for the Anti-Recovery Act We’ve (Implicitly) Passed in the Past Three Years
Today marks the fifth anniversary of the signing of the American Recovery and Reinvestment Act (ARRA, or simply the Recovery Act). Passed after a six-month stretch during which the economy lost an average of 750,000 jobs each month, ARRA was the single biggest contributor to stopping the economic freefall that followed the bursting of the housing bubble. To be clear, the assessment that the ARRA contributed significantly to ending the Great Recession is not a contested opinion among macroeconomists, or at least not among those macroeconomists whose paycheck depends on correctly predicting what will impact economic activity. (For example, figure C in this briefing paper shows a set of estimates from both private and public macroeconomic forecasters of ARRA’s impact on gross domestic product during its peak quarter of effectiveness.)
Further, ARRA’s overall impact was significantly blunted by the fact that a significant portion of its overall cost was absorbed by tax cuts for business and higher-income households (see tables 1 and 2 in this White House factsheet, for example)—a significantly less effective form of stimulus than either direct government spending or safety net programs. Research since ARRA has confirmed that the effective parts of ARRA—aid to state and local governments to finance Medicaid payments or build infrastructure projects—provided even better stimulus than ex ante estimates indicated.
Why is it important to remember this history? Because in a reasonable policymaking environment we would be trying to enact more fiscal stimulus today, to complete the road to full recovery from the Great Recession.
Janet Yellen testified before Congress for the first time Tuesday as the Federal Reserve Chair. Besides the excruciatingly long time that the House Financial Services Committee extended the hearing, a couple of other things stood out.
First, in terms of having a Fed chair display good judgment about the real problems facing the economy, yesterday’s testimony was awfully encouraging. Previously, the Fed had highlighted a 6.5 percent unemployment rate as a threshold (not an automatic trigger) indicating that the economy was recovering well, and hence short-term interest rates might be raised. But over the past year, the overall unemployment rate has improved much faster than other labor market indicators, and may well be painting too rosy a picture about the overall health of the economy.
Yellen made it clear that she thinks one needs to look at a wide range of indicators—particularly wage and price inflation—to assess the underlying degree of slack. And this wider range of indicators argues pretty strongly against monetary tightening anytime soon, and she seemed pretty upfront about this. By the way, for those wanting a look at some of these alternative indicators, you can check out this page on our State of Working America site. We think the employment to population ratio for prime-age workers is about as good as a single indicator gets in assessing the overall degree of labor market slack. And while it has started moving encouragingly up in recent months, it remains very far away from its pre-recession peak.
It is curious that some economists, like Harry Holzer, are so totally focused on the possibility that there could be some quantitatively small loss of employment due to a higher minimum wage that they implicitly downplay a wider universal finding: a higher minimum wage will substantially lift the average annual earnings of low-wage workers (because even if there is a small negative employment effect—which the weight of the evidence shows there isn’t—that effect is swamped by the much higher wage). Consequently, we know that low-wage workers and their families will be better off financially, no ifs, ands, or buts.
Further, the weight of the evidence does in fact show that the employment effects of increasing the minimum wage are indistinguishable from zero. There is a vast literature on the effects of increases in the minimum wage on employment that spans many decades and has gone through countless methodological improvements, with each new round of literature incorporating lessons learned from the last. In the last several years, a new series of rigorous, peer-reviewed papers on the effects of the minimum wage has been published in top academic journals, and represents the best in methodological practices (see for example here and here). These studies find that increases in the minimum wage have raised wages, but have had essentially no effect on employment, even in times when the labor market is weak. In other words, incorporating decades of work that came before, the state of the literature is that increasing the minimum wage improves the earnings of low-wage workers without significant adverse employment effects.