At today’s confirmation hearing for prospective Federal Reserve Chair Janet Yellen, Senator Heidi Heitkamp (D-N.D.) asked Yellen about how Fed policy contributes to inequality, and specifically worried that recent Fed policies (ie, quantitative easing) have helped asset owners without doing much to help low- and moderate-income Americans.
There are a couple of things to note about this. For one, Yellen’s answer that faster growth and a better job-market recovery would do a lot to ease inequality was spot-on. The short version is that the Fed can do the most to address inequality by quickly getting unemployment down to very low levels. She specifically noted the episode of the late 1990s when very tight labor markets led to across-the-board wage growth. This is exactly right, and too often under-appreciated.
We noted in The State of Working America, 12th Edition that even relatively rosy estimates of unemployment reductions imply that the Great Recession and the weak recovery that preceded it could well lead to typical Americans seeing essentially no wage and income growth for two full decades before all is said and done. This is an underappreciated policy catastrophe.
The uproar over people having their insurance plans cancelled just as the ACA “exchanges” for purchasing insurance are being set up has been amplified—probably enormously—by the failure of healthcare.gov. It is understandably anxiety-inducing to lose the insurance you have without receiving proper information on an available alternative.
Research done before the exchanges were set-up provided ample evidence that while some young, healthy, higher income people may face higher premiums (for now—but will get a better deal if they make it to the “not so young and healthy” phase of life—yah social insurance!), the vast majority of those in the individual market (and remember the uninsured!) will find better deals in the new system. So, while we have some clear evidence of that fact from states that are operating their own exchanges, people who live in states that refused to set up their own exchanges and free-rode on the federal government’s site don’t have the information yet. The U.S. Department of Health and Human Services released a useful brief on health premiums in the federally facilitated exchanges for a set of individuals, with factors that could be used to adjust them to all family types. Unfortunately, interpreting the results are out of reach for most Americans and listing the plan features with the premiums would be far more useful. The Kaiser Family Foundation created a handy calculator, which gets closer by incorporating all ages and family types, but doesn’t provide nearly the breadth of information that could be made available.
Yesterday’s Economic Snapshot showed how women’s and men’s employment prospects have fared in the Great Recession and its aftermath. Women have regained 2.9 million jobs, bringing them back to pre-recession levels, and men have gained 2.7 million jobs, still falling short 1.7 million jobs of their pre-December 2007 levels.
At first glance, it may appear that women are doing better than men. Men lost 3.4 million more jobs in the Great Recession and its aftermath than women—employment among men dropped 8.7% while women only saw a 4.0% drop in employment. By mid-2009, men had lost so many jobs that women’s payroll employment was 50% of the work force for the first time in history. In the recovery, men reversed the trend and gained more jobs than women (4.4 compared to 2.9) but, women still have a smaller jobs gap, 3.6 million compared to 4.4 million for men.
So what’s really going on here? To understand the gender dynamics of employment, it’s crucial to look at the gender breakdowns within industries. The table (an updated version of Table 5.8 from the State of Working America) below shows the distribution of male and female workers across industries and the relative change in male and female employment within their industries since 2007. The industries that have taken the biggest employment hits since 2007—construction and manufacturing, which dropped 22.3% and 12.9%, respectively—also have a disproportionately larger share of male workers than in other industries. Industries that have a larger share of female workers, such as health care and social assistance government, fared considerably better: health care and social assistance employment increased 11.5 percent since December 2007. One story of the Great Recession shows that women fared better than men, as they were disproportionately employed in industries that sustained less dramatic employment drops during Great Recession than industries that were male dominated.
The Obama administration has been rushing to complete a trade agreement with a dozen Pacific Rim countries including Japan, Canada, Malaysia and Vietnam, with key negotiations set to start next week in Salt Lake City. A bi-partisan group of more than 170 Democrats and Republicans sent letters to the president this week signaling their intent to oppose so-called “Fast Track” procedures (also known as Trade Promotion Authority) which would allow the White House to submit trade agreements to Congress without the opportunity to amend the deals.
Congress is wise to pause before giving the president carte blanche to negotiate new trade deals and wise to demand fuller consultation with Congress on the content of those deals. Fast track authority was first developed by the Nixon administration to rush trade agreements through Congress without threat of amendment. But deals such as the North American Free Trade Agreement and the recently ratified Korea-U.S. trade agreement (KORUS) have failed to live up to expectations precisely because they are much more than simple trade agreements. These agreements are concerned with stimulating foreign investment and remaking a host of regulatory policies covering labor law, patents and copyrights, food safety standards, and state owned enterprises, as well as financial, healthcare, energy, telecommunications, and other service industries, as noted in a letter this week from 151 Democratic members of Congress to the president. KORUS and dozens of other trade and investment deals have resulted in a huge surge in outsourcing and have eliminated millions of jobs, especially in U.S. manufacturing.
Last week, I wrote that Congress has been tying the hands of the Postal Service by limiting its ability to develop new products or to price its services competitively. Worse, Congress filled the Postal Service’s pockets with weights to drag them down financially, adding tens of billions in costs for retiree health insurance on a schedule no other corporation has to live with, while charging it more than $50 billion for pensions earned before the Postal Service was incorporated in 1971—costs that the federal government should bear, not the Postal Service.
It’s a recipe for killing the Postal Service, and postal management has sometimes seemed like a willing victim. Most notoriously, they’ve pushed to end six-day delivery of mail, even though customers love it.
But this weekend brought good news. Recognizing the strength their unparalleled, universal delivery system represents, postal management has negotiated something new: not subtracting, but adding a day of package delivery on Sunday. For now it’s limited to delivering packages for Amazon in New York and Los Angeles, but once these deliveries have been extended to the rest of the nation, who knows what other customers will decide to take advantage of this new opportunity?
I firmly believe that if the Postal Service is freed to compete more fairly, without having obstacles strewn in its path by a hostile Congress, it can rise to the challenge of maintaining universal delivery at a price that customers can afford. The Postal Service and its hundreds of thousands of employees deserve the chance.
The next time you read in the newspaper or hear on TV that there is a shortage of construction workers and we have to import tens of thousands of workers from abroad in order to have enough construction labor, remember this memo from Jason Furman, Chair of the Council of Economic Advisers:
“Construction employment rose by 11,000 in October and is up 185,000 over the past year, but remains 1.9 million jobs below its previous peak, underscoring the importance of continued strengthening in housing markets and investments in infrastructure. Of the 185,000 increase in construction employment over the past year, the bulk (104,000) is in residential construction, while 65,000 are in non-residential construction, and 16,000 are in heavy and civil engineering construction. The gains in residential construction are consistent with the recovery we have seen unfolding in the housing sector, but additional steps still must be taken to create a more durable and fair system that promotes responsible homeownership. Moreover, the fact that employment in non-residential and heavy and civil engineering construction has grown slowly is an important reminder that we should also be looking for opportunities to invest in America’s roads, bridges, and schoolhouses.”
The lengths to which businesses will go to get cheap labor are boundless. Tech firms, despite their luster, are no better in this regard than landscaping firms, hotels, or construction companies. Most tech firms want to reduce their labor costs (except for their executives), and a surprising number seem to treat the law as an obstacle to get around. I’ve written about the Justice Department’s settlement with 6 of the most famous information technology (IT) companies in America over anti-trust charges involving a conspiracy to suppress wage demands, and a subsequent lawsuit filed by the employees who would have been harmed by the conspiracy.
A newer case came into the spotlight last week. The Justice Department’s $35 million settlement of civil fraud charges against Infosys, a firm whose business model is largely based on the outsourcing and offshoring of IT work to India, facilitated by using the H-1B guestworker visa, exposed a pervasive scheme of visa abuse in the H-1B and B-1 “business visitor” visa categories. This scandal lends support to the efforts of Sen. Charles E. Schumer (D-N.Y.), Sen. Richard J. Durbin (D-Ill.), and Sen. Charles Grassley (R-Iowa) to put new limits on IT outsourcing firms.
There is a lot of talk about robots these days, as if technological change has led to weak job creation, caused wage inequality, and even caused the profit share of the economy to increase as workers’ share (compensation) falls. We have definitely had problems with employment growth and growing wage inequality, alongside a profit boom not just during the Great Recession and its aftermath but since 2000—and for wage inequality, for two decades prior. Is technology driving all this? I think not.
This post tackles the issue of whether robots slowed job growth in the 2000s (my colleague Josh Bivens has addressed this previously, but for the recovery). In the near future I will be addressing whether robots are responsible for our current wage inequality. Spoiler alert: they aren’t.
MIT professors Andrew McAfee and Erik Brynjolfsson wrote the influential book Race Against The Machine, which has driven much of this conversation. They label the disconnect between employment growth and productivity growth in the 2000s the “Great Decoupling.” Moreover, they argue that there has been an “acceleration of technology” that has “hurt wages and jobs for millions of people” even as “digital progress grows the overall economic pie.” Brynjolfsson and McAfee know a lot more about technology and its impact on firms and work than I do, but attributing the job slowdown in the 2000s to robots or digitalization overlooks a simple alternative answer: slow aggregate output growth caused by the bursting of asset bubbles. In fact, they do not offer much evidence to connect the technological trends (robots and digitalization) they document to the aggregate job, wage and inequality trends they, and I, care about.
The non-elderly population across the country relies on employer-sponsored health insurance (ESI) as their primary form of health coverage. In eleven of the last twelve years, however, ESI coverage has declined. Across the country, on average, ESI coverage for the under-65 population fell 10.8 percentage points from 2000 to 2012. Translated into raw numbers, if the ESI coverage rate had not declined over this period, 29 million more Americans would be covered today by their employers. Twenty-two states experienced losses in excess of 10 percentage points over the period. The largest declines in coverage occurred in Nevada, Michigan, Georgia, Ohio, Wisconsin, and Indiana, each with losses of at least 13 percentage points.
As a result of these losses, the average coverage rate in 2012 was down to 58.4 percent. The map below compares ESI coverage for the entire under-65 population across states in 2011/2012.1 Massachusetts has the highest rate of ESI coverage at 70.8 percent. It is followed by New Hampshire (70.0 percent), Connecticut (69.7 percent), Minnesota (69.0 percent), North Dakota (67.6 percent), and Maryland (67.3 percent). In contrast, less than half of New Mexico’s non-elderly population has ESI, at 47.2 percent.
Employer-sponsored health insurance coverage by state, population under 65 years old, 2011–2012
|District of Columbia||57.6%|
Source: Author's analysis of Current Population Survey Annual Social and Economic Supplement microdata
These huge losses almost surely explain the increasing demand for health reform that characterized the years leading up to the passage of the ACA, and highlight why health reform was so important. The fact is the employer-based health insurance system was fraying rapidly in the decade before health reform was implemented. Even before the ACA’s implementation, many of those losing ESI found shelter in public insurance, which disguised the precipitous drop in employer coverage. Indeed, from 2000 to 2012, public insurance, primarily in the form of Medicaid and CHIP, helped counteract the erosion in employment-based coverage and is the only reason why the uninsured rate did not rise one-for-one with the fall in ESI. However, many Americans, particularly those of working age, are still falling through the cracks. Fortunately, once the (admittedly too large) kinks are worked out, the health insurance exchanges created under the ACA will make it easier and more affordable for Americans to secure and maintain health insurance coverage, even if ESI continues the decline that has characterized the last decade.
1. Because of sample size requirements, I combined two years of data 2011 and 2012.
Five days a week, I receive the Cal-OSHA Reporter News Digest, which compiles reports of deaths and injuries in California as well as other states. It’s a regular reminder that I am a lucky man to have worked my entire life in think tanks, government offices, and law firms. Every issue is filled with grim stories of workers mangled by machinery, suffocated by corn in a silo, killed in falls or struck by a careless driver as they worked on the highway, or sometimes, killed in ways so horrible that it beggars the imagination. On any given day, dozens of people are killed in the workplace, and the Cal-OSHA reporter captures only a few of these stories. It does not, and cannot, begin to capture the extent of workplace injuries, since for every one death there are a thousand injuries. And the toll from occupational illness is too slow and insidious to capture, though silicosis, black lung, asbestos disease, and cancer from hundreds of toxic chemicals kill an estimated 50,000 workers every year. Today’s Cal-OSHA Reporter was typical—a perfect reminder that American workers are not sufficiently protected from harm, that OSHA and its sister agencies in the states face an overwhelming challenge with far too few resources, and that employers that put their employees’ lives at risk and take them from their families forever are rarely punished in a way that meets the enormity of what they did or allowed to happen.
The Senate Finance Committee held hearings this week on the proposed Transatlantic Trade and Investment Partnership (TTIP). The committee chair, Sen. Max Baucus, claimed that the TTIP could boost U.S. exports to the EU by a third, adding “more than one hundred billion dollars annually to U.S. GDP,” and that it “could support hundreds of thousands of new jobs in the United States.” The statement is remarkable for its sheer audacity in the face of massive evidence of the failure of similar deals to deliver promised benefits. U.S. trade with Mexico after the North American Free Trade Agreement (NAFTA) has cost the United States nearly 700,000 jobs through 2010. U.S. trade with China has certainly failed to deliver on the promised benefits of growing exports. Since that country entered the World Trade Organization (WTO) in 2001, the U.S. has lost 2.7 million jobs through 2011 due to growing trade deficits with China. And the Korea-U.S. Free Trade Agreement (KORUS) has also resulted in growing trade deficits with that country and the loss of more than 40,000 U.S. jobs. Most of the trade-related job losses are concentrated in manufacturing, and growing trade deficits are responsible for a large share of the decline in U.S. manufacturing employment over the past fifteen years.
Using estimates of changes in two-way trade between the U.S. and the EU under the agreement reveals that TTIP is projected to result in a growing U.S. trade deficit with the EU and the loss of at least 71,000 additional U.S. jobs. Senator Baucus, citing advice from Benjamin Franklin, advises the U.S. to “jump quickly at opportunities.” When it comes to evaluating trade deals, Congress and the public would be better served by the common law principle of ‘Caveat Emptor,’ or, let the buyer beware. Congress has a duty to perform their due diligence in evaluating proposed trade and investment agreements before jumping at the next “great deal.” In particular, members should note that Sen. Baucus’s claims that the TTIP “could support hundreds of thousands of new jobs” are pure baloney.
Dear Tim Cook: Fraction of Icahn Request Could Significantly Address Apple’s Labor Rights Violations
As the size of Apple’s cash reserves continues to mount, the company has come under increasing pressure to return more of those reserves to shareholders, through dividends and/or stock buy backs. The attention became particularly heated in February 2013 when hedge fund manager David Einhorn took up this position. In April, Apple did double its “capital return” program to $100 billion, to be distributed to shareholders by the end of 2015. This step muted the debate, until billionaire investor Carl Icahn began to acquire large amounts of Apple stock and to argue that Apple should return an additional $150 billion to its shareholders. Icahn pressed this case publicly and privately with Apple CEO Tim Cook, including in a letter to Cook just last week. It is in this context that the following letter was just sent to Mr. Cook. For more information on the working conditions facing Apple workers, see www.AppleLabor.com.
Dear Mr. Cook:
Another consideration should take precedence over Apple’s assessment of Carl Icahn’s suggestion that the company return $150 billion to its shareholders through a stock buyback, which would be on top of the $100 billion already pledged to Apple shareholders through the capital return program. This other consideration is much less expensive, yet far more justified.
The Joint Committee on Taxation (JCT), Congress’s official score keeper on revenue bills, recently issued a new report that details how they are changing how they calculate the distribution of the burden of the corporate income tax among taxpayers. This is important because talk of corporate tax reform is in vogue. In deciding on changes to corporate taxes, Congress should have an idea who will pay higher taxes, who will pay lower taxes, and who will be unaffected.
The burden of the corporate income tax falls on somebody, and much research has been devoted to determining who that somebody is. The candidates are capital owners (that is, corporate shareholders), workers, and customers. Most tax analysts scratch customers from the list, leaving capital owners and labor. Until a few years ago, most tax analysts read the weight of economic evidence as suggesting that capital bore 100 percent of the corporate tax burden.
During the George W. Bush administration, some tax analysts began producing analyses that attributed 60, 90, 100, and even 400 percent of the burden of the corporate income tax to labor. Subsequent studies, however, called much of this research into question and confirmed the earlier near-consensus that the burden of the corporate income tax is indeed overwhelmingly borne by capital. But the 2000s-era research did have some influence—government agencies that deal with tax policy (the Department of Treasury, the Congressional Budget Office, and JCT) made modest changes to their methods of calculating the distribution of the burden of the corporate income. CBO now attributes 75 percent of the burden to capital and the rest to labor. Treasury settled on 82 percent of the burden on capital and 18 percent on labor. JCT has now concluded that 75 percent falls on capital and 25 percent on labor.
Following up on my previous blog post, there was considerable debate at Monday’s DC Council hearing on whether the city should raise the tipped minimum wage. One area restaurant owner in particular was adamant that there should be no change to the city’s current tipped minimum wage of $2.77 per hour. He argued that the council was attempting to “fix something that [was not] broken”—in that all of his tipped employees already earn far more than minimum wage under the current system, and if they did not, he was legally obligated to make up the difference. This is, by law, how the system should work. Notwithstanding the fact that his particular restaurant is a high-end nightclub where the average bill (and thus the average tip) is likely to be quite high, the evidence suggests his characterization reflects the exception rather than the norm for tipped workers.
Under current federal law, workers who customarily receive at least $30 from tips per month may be paid a base wage of only $2.13 per hour by their employer, so long as the their weekly earnings—tips plus base wage—equal an hourly rate of at least the regular federal minimum wage of $7.25. In other words, when you go to a restaurant in most places in the country, the server or bartender who serves you is only being paid something between $2.13 and $5 per hour by their employer, depending on the state. There are 18 states where the tipped minimum wage is $2.13, eight states where the tipped minimum wage is equal to the regular minimum wage, and 26 states with a tipped minimum somewhere in between. In the District of Columbia, the regular minimum wage is $8.25, and the tipped minimum wage is $2.77.
On Monday, I testified before the DC Council in support of the Minimum Wage Amendment Act of 2013, one of several bills being considered to raise the District’s minimum wage from its current value of $8.25 per hour up to rates ranging from $10.25 per hour to $12.50 per hour. The various bills have different phase-in schedules, i.e., some reach their final targets sooner than others, and some are “indexed” so that that they will automatically be adjusted for inflation in the years after reaching their target value.
Here’s a quick rundown of the bills, with the principal author in parenthesis:
B20-438, the “Minimum Wage and Accrued Sick and Safe Leave Amendment Act of 2013” (David Catania, Councilmember At-Large): Raises the city minimum wage to $10.50 per hour over three years; no indexing.
B20-459, the “Minimum Wage Amendment Act of 2013” (Vincent Orange, Councilmember At-Large): Raises the city minimum wage to $12.50 per hour over 4 years beginning in 2015; indexes the value to the Consumer Price Index for all urban consumers (CPI-U) thereafter; raises the “tipped” minimum wage in the District to 70% of the regular minimum wage.
B20-460, the “Living Wage for All Act of 2013” (Tommy Wells, Ward 6): Raises the city minimum wage to $10.25 per hour over 2 years; indexes the value to the CPI-U thereafter; increases the standard deduction for taxpayers in the District.
Funding to the Supplemental Nutrition Assistance Program (SNAP, or informally known as food stamps) is set to take a big hit on Friday with the expiration of expansions passed as part of the American Recovery and Reinvestment Act (ARRA). It’s important to see just how far those dollars went to lift Americans out of poverty. SNAP, bolstered by the ARRA extensions, kept 4.0 million Americans out of poverty in 2012 alone. A sad contrast is with another vital safety net program that also benefited from expansions in ARRA, but which saw the ARRA expansions fade away much more quickly—unemployment insurance.
The poverty-reducing effects of unemployment insurance declined rapidly beginning in 2011 as the share of unemployed workers eligible for UI began falling. Further, in 2012 Congress provided fewer weeks of federal UI benefits to long-term unemployed workers (clawing back extensions in ARRA).
The declining protection offered by UI as the ARRA extensions fade away could well be the future of SNAP. This would be both a human and an economic disaster. While the cuts will have real impacts on the lives of millions of American households, it will put a further drag on economic recovery. Food stamps are essentially being attacked as the last vestige of expansionary policy that hasn’t been stamped out yet by the sharp move towards austerity in recent years. It’s a mistake to think these cuts won’t have lasting effects on families, particularly children, but also will have deleterious effects on our recovery.
Recently, I have undertaken some research on racial under-representation in the construction industry, and some interesting early findings are worth sharing. Construction is a sector that has historically excluded black workers—including the unionized portion of the industry. Giving minority workers access to good jobs is an important part of closing our large and persistent racial wage inequities, so this is a critical issue. It was on this basis that many progressives have been hostile to infrastructure spending in the past: it provided jobs in a sector where it was well known and documented that black workers had been excluded from opportunities. Some people, such as National Black Chamber of Commerce CEO Harry C. Alford, contend that “construction sites are still close to Jim Crow.”
It is worth asking whether and to what extent construction work is racially exclusionary, especially the unionized sector as Alford also contends. After all, there have been changes over the years, with unions increasing the number of minorities admitted into apprenticeship programs, and undertaking project labor agreements that incorporate community agreements that bring excluded populations into the industry. What does the current situation look like, and how does the union sector compare to the nonunion sector? It turns out that, at least in one of our largest and heavily unionized cities, New York City, Alford’s characterization is quite outdated.
The Supreme Court has accepted a case in which the relevance of “disparate impact” evidence in discrimination cases brought under the Fair Housing Act is being challenged. The Economic Policy Institute, in collaboration with the Chief Justice Earl Warren Institute on Law and Social Policy at the University of California School of Law, and with the U.C. Berkeley Haas Institute for a Fair and Inclusive Society, has submitted an Amicus Curiae brief to the Court in this case.
Our brief argues that entrenched patterns of residential segregation, established substantially by government policy, structure the housing opportunities of African Americans into the present time. In a case like that considered by the Court, a redevelopment project that displaces African Americans could violate the Fair Housing Act if provision is not made for the relocation of displaced residents into integrated middle-class communities nearby.
Many distinguished scholars have joined us as amici in this brief, including Elizabeth Anderson, John Brittain, Nancy Denton, Christopher Edley, Jr., James Kushner, Ira Katznelson, James Loewen, Myron Orfield, Jr., John Powell, Gregory Squires, and many others.
If you are a scholar in this field, and we neglected to invite you to join these amici, please understand that it was an oversight under serious time-pressure to submit this brief by the Court’s deadline.
No, nothing to do with the website—that still seems problematic at best. But the CBO just released new estimates of the budget savings that would result from raising the Medicare eligibility age from 65 to 67. The punchline that most have focused on is that this (terrible) policy change is now estimated to save just a small fraction of what it was estimated to have saved in previous years ($19 billion over 10 years in the latest estimate, compared to $113 billion over 10 years in previous estimates).
Why the change? Mostly because CBO has changed its estimates to better reflect that fact that those who enroll in Medicare at 65 and 66 are less expensive than previously thought. The genuinely expensive 65- and 66-year-olds that are covered by Medicare tend to have been allowed to enroll at earlier ages because of chronic illness or disability. Further, many 65- and 66-year-olds still receive employer-sponsored insurance and use Medicare as secondary insurance. CBO seems to have made re-estimates that boost the importance of both these issues in reducing the estimate of what newly enrolled 65- and 66-year-olds spend on Medicare.
Happy Friday. Here’s what we read today. Read anything interesting lately? Share it in the comments!
- The Times Is Working on Ways to Make Numbers-Based Stories Clearer for Readers (New York Times)
- Are Private Schools Worth It? (The Atlantic)
- The Trillion Dollar Money Pump for the 1 Percent (Huffington Post)
- The Triumph of the Right (Nation of Change)
- Addicted to the Apocalypse (The New York Times)
In the past, I have shown that most of the improvement in the unemployment rate since its peak of 10 percent in the fall of 2009—and all of the improvement in the unemployment rate over the last year—has not been for good reasons. It has been due to people either dropping out of, or not entering, the labor force due to weak job opportunities.
But what about other measures of labor market slack that the Bureau of Labor Statistics publishes? The most comprehensive direct measure of labor market slack published by the BLS is the U-6 measure of labor underutilization, the so-called “underemployment” rate. Like the unemployment rate, the underemployment rate has declined substantially in this recovery, from a peak of 17.1 percent in the fall of 2009 to its current rate of 13.6 percent. While still very elevated—the U-6 averaged 8.3 percent in 2007—that is significant improvement. Is it a sign of major healing?
The sequester (pdf) cut approximately $85 billon from Fiscal Year 2013 spending—half from reductions in defense spending and half from elsewhere in the budget. OMB calculated (pdf) that it would result in a 5 percent reduction in nondefense discretionary spending—funding for programs like education and housing assistance, veterans’ benefits and services, medical and scientific research, and health and safety regulations.
I have long argued that cuts to government spending are uncalled for, given the lack of a robust economic recovery. However, if you are searching for sensible ways to shrink the deficit, there are better alternatives to sequestration. For example, we could eliminate the nondefense discretionary spending cuts in the sequester and shave $26 billion annually from the deficit by eliminating or closing a handful of tax loopholes.
Tax loopholes, formally known as tax expenditures, reduce tax revenues by over $1 trillion every year. There are many reasons to keep tax loopholes in the tax code: some are very popular (e.g., the mortgage interest deduction), some provide incentives to socially beneficial behaviors (e.g., the earned income tax credit), and some are technically difficult to change (e.g., the exclusion for employer retirement plans).
Recent reports from The Heritage Foundation and the American Action Forum claim that Americans (particularly young Americans) will pay more for health insurance in the new exchanges set up as part of the Affordable Care Act (ACA, or, Obamacare if you like) than they do currently. The question of how much prices differ between the current non-group market and the new health insurance exchanges is awfully interesting, but very difficult, if not impossible, to answer. And to be very clear—neither the Heritage nor the AAF studies do much to shed light on it.
Transparent prices are now widely available in the new health insurance exchanges.1 There are advertised prices for a variety of policies, for consumers in different age groups, and, similarly, subsidies can be calculated for a continuum of income levels. And these are the prices that people will actually end up paying.
Now, let’s contrast that with the non-group market before the ACA. First, the insurance policies often compared to the exchanges do not line up in terms of benefits. Policies in the individual market often have higher deductibles and exclude various conditions from what’s covered by the policy. The policies offered in the exchanges generally offer more comprehensive coverage, and hence should be more expensive on average for this reason. Second, in the pre-reform non-group market, list prices don’t reflect the true prices people will actually end up paying. The individual market, in most states, does individual risk rating. This means the insurance company (often on a website) will give a price, but then they will do an individual risk assessment, for instance, by sending someone to measure an applicant’s blood pressure, weight, etc. At that point, the true price is given. Not surprisingly, it can turn out to be higher than the price listed. This price can be effectively infinity, by the way (more on this below).
The Luddites the headline is speaking of, of course, are those of the deficit hawk industrial complex, ably personified yesterday by Erskine Bowles on MSNBC’s Morning Joe and today by Thomas Friedman’s NYT column. This is a group of people who are routinely given prominent platforms (and often paid very well) to warn that budget deficits are a clear and present danger to American living standards. They are re-emerging in force now that the current fiscal showdown seems to be moving away from repealing/defunding/undermining the Affordable Care Act (ACA) and into the traditional stage of hand-wringing about budget deficits.
Officially sanctioned hand-wringing about budget deficits as a part of deals solving fiscal showdowns has become a routine part of fiscal policy debates in recent years. And this hand-wringing has been increasingly damaging to the U.S. economy. The first instance of this phenomenon was the creation of the National Commission on Fiscal Responsibility and Reform (or, the “Simpson-Bowles Commission”) in 2010. The SB plan (not an official plan, just one forwarded by the Commission co-chairs) called for a roughly balanced mix of tax increases and spending cuts to get deficit savings over the next decade.
Even in 2010, the urgency to cut longer-run deficits was misplaced—the laser focus should have been on ensuring full recovery from the Great Recession. This failure to focus on recovery has been the primary contributor to the recovery’s dismal rate of progress between the first quarter of 2010 and the second quarter of 2013. For example, the employment rate of prime-age adults has risen by less than a percentage point, leaving intact well over 80 percent of the Great Recession-induced decline in this key measure of labor market slack.
The current fiscal showdown was actually a little different in that the House GOP and Senator Ted Cruz largely did not claim to be engaging in obstructionism in the name of reducing budget deficits. Indeed, their central demand—the wholesale rollback of the Affordable Care Act (ACA) would actually increase long-run deficits substantially.
But those days seem over and discussion after any short-term cease-fire on the continuing resolution (CR) and debt ceiling seems set to snap back to the Washington perennial of obsessing over long-run budget deficits. A clear sign that the nation’s political debate has shifted back to budget deficits is always that Erskine Bowles and Alan Simpson have launched a campaign calling on policy-makers to reduce deficits and are invited on talk shows and fawned over. Looks like we’re here again.
As comfortable as this makes Beltway pundits, it’s a disaster, since previous episodes where fiscal showdowns focused on budget deficits led to the radical austerity that has been so damaging to recovery from the Great Recession. Let’s recap.
The budget deals being talked about in the Senate and the House suggest that the government shutdown will end soon and that the debt ceiling will be raised, at least for a while. This cease-fire looks like the Tea Party has snatched a possible victory from the jaws of defeat.
Helaine Olen, author of Pound Foolish, appropriately calls this a ‘cease-fire’ because nothing got settled and hostilities are bound to resume in a few months. It seems that no hostages (like the health care law) will be taken this time but the situation is set so hostages may be taken again in February. The extortion threat remains the same but now the ransom demand is the Democrats’ assurance that the so-called grand budget deal goes according to the House Tea Party caucus’ wishes: cuts in Social Security and Medicare. This is unfortunate since the President and Senator Reid have clearly articulated that they wanted to end the hostage-taking, where either the government or the economy is a hostage. After all, the setup is to trade entitlement cuts, meaning unpopular reductions in Medicare (like raising the eligibility age) or in Social Security (cutting cost-of-living increases and/or raising the full retirement age), for revenue. That’s a tried and failed deal. So, if the President does not agree to Social Security and Medicare cuts there won’t be an increase in the debt ceiling? A government shutdown again? I wonder, is this setup meant to pressure the Tea Party into granting more revenue or is it meant to pressure Democrats into accepting Social Security and Medicare cuts they do not want or think are necessary?
NPR recently published a story that gives undue credence to a Cato Institute study lamenting the generosity of US safety net programs. In reality, welfare benefits are not nearly as generous or accessible as the study claims. The NPR piece provides useful stories from actual welfare recipients, whose experiences more faithfully represent reality.
An important part of Cato’s assertion is that these programs offer a higher level of income than do many low-wage jobs. The real problem here is that wages for the vast majority of Americans are too low, and haven’t kept up with the increased productivity of the labor force.
When the study was first released, we pointed out some of the problems with their analysis. Here’s a quick summary of why their study was so misleading:
The Cato Institute recently released a wildly misleading report by Michael Tanner and Charles Hughes, which essentially claims that what low-wage workers and their families can expect to receive from “welfare” dwarfs the wages they can expect from working. Using state-level figures, their paper implies that single mothers with two children are living pretty well relying just on government assistance, with Cato’s “total welfare benefit package” ranging from $16,984 in Mississippi to $49,175 in Hawaii. They then calculate the pretax wage equivalents in annual and hourly terms and compare them to the median salaries in each state and to the official federal poverty level. Tanner and Hughes find that welfare benefits exceed what a minimum wage job would provide in 35 states, and suggest that welfare pays more than the salary for a first year teacher or the starting wage for a secretary in many states.
So what makes this so misleading?
For one, Tanner and Hughes make the assumption that these families receive simultaneous assistance from all of the following programs: Temporary Assistance for Needy Families (TANF), Supplement Nutrition Assistance Program (SNAP), Medicaid, Housing Assistance Payments, Low Income Home Energy Assistance Program (LIHEAP), Women, Infants, and Children Program (WIC), and The Emergency Food Assistance Program (TEFAP). It is this simultaneous assistance from multiple sources that lets the entire “welfare benefits package” identified by Cato add up to serious money. But it’s absurd to assume that someone would receive every one of these benefits, simultaneously, and it ignores the fact that some programs have time limits.
The smart Austin Frakt tweeted today that “reprioritization is just a word for stiffing Social Security and Medicare beneficiaries.” My first thought was “well, yeah.” My second thought was that most people surely don’t realize that. In fact, given the intentional mystification swirling around the debt ceiling (and most other financial topics), most people probably don’t really understand much at all about the implications of the United States running into the statutory debt ceiling. So here’s an attempt (offered too late in the game, I know) to aid public understanding of this, at least a little bit.
We should start by being really clear what the problem posed by the debt ceiling is. Currently, government spending—everything from Social Security benefits to Medicare reimbursements to unemployment insurance to Federal government salaries to interest payments on holders of Treasury bills (also known as government debt)—is financed in two ways: current revenues (taxes), or, by borrowing.*
Here are some numbers for 2013. Spending by the federal government will amount to about 20.8 percent of total GDP. Taxes will account for 17.0 percent of GDP (and will hence cover 81 percent of total spending). This means we’ll borrow 3.9 percent of GDP to cover the rest of our spending.
The “True” Unemployment Rate Is the One BLS Releases Every Month*, But It’s Not the One “True” Measure of Labor Market Slack
Yesterday we released a new monthly labor market indicator, an estimate of the number of “missing workers” (potential workers who are not working or looking for work because the job market is currently so weak). We also generated another new measure—what the unemployment rate would be if these missing workers were classified by the Bureau of Labor Statistics as actively looking for work (see below figure). As of the latest data available, August 2013, there were nearly 5 million missing workers. If these workers were actively looking for work, the unemployment rate would be 10.1 percent, not 7.3 percent.
Many have asked me if I think this augmented unemployment rate is the “true” or “real” unemployment rate, so I thought it’d be useful to clarify: The unemployment rate that BLS puts out is the true unemployment rate, and there are good reasons for the BLS to use the definitions it does. But the official unemployment rate is not currently the best measure of changes in the health of the labor market.
In other words, no, I don’t think my new measure is the “true” unemployment rate, but in today’s economy, I do think it’s a better measure than the unemployment rate for gauging trends in job opportunities and the overall health of the labor market
Technically speaking, my measure is the unemployment rate plus the “participation gap” (the participation gap is the cyclical decline in the labor force participation rate, i.e. the decline in participation that is due to the weak labor market, not other trends like retiring baby boomers). In other words, unlike the unemployment rate, this measure accounts for a key component of slack in today’s labor market—the fact that many workers have dropped out of, or never entered, the labor force primarily because job opportunities are so weak. The unemployment rate misses this piece entirely because jobless workers are only counted as unemployed if they are actively seeking work. If policymakers or commentators want the best gauge of trends in the health of today’s labor market and how much productive slack exists in the economy, they should not be looking at the unemployment rate, they should be looking at this (or some other measure uninfected by cyclical changes in participation, like the employment to population ratio of prime-aged workers).
* Potential workers who, due to weak job opportunities, are neither employed nor actively seeking work Source: EPI analysis of Mitra Toossi, “Labor Force Projections to 2016: More Workers in Their Golden Years,” Bureau of Labor Statistics Monthly Labor Review, November 2007; and Current Population Survey public data series
The unemployment rate is vastly understating weakness in today’s labor market: Unemployment rate, actual and if missing workers* were looking for work, January 2006–July 2014
If missing workers were looking for work
* Potential workers who, due to weak job opportunities, are neither employed nor actively seeking work
Source: EPI analysis of Mitra Toossi, “Labor Force Projections to 2016: More Workers in Their Golden Years,” Bureau of Labor Statistics Monthly Labor Review, November 2007; and Current Population Survey public data series
*That is, every month the federal government is not shut down.
New EPI Economic Indicator: Monthly Updates of the Number of “Missing Workers” and What the Unemployment Rate Would Be If They Were Looking for Work
More than four years since the Great Recession officially ended in June 2009, the unemployment rate stands at 7.3 percent. This is still a percentage point above the highest unemployment rate of the early 2000s downturn, 6.3 percent. However, 7.3 percent is a big improvement from the high of 10.0 percent in the fall of 2009. Unfortunately, most of that improvement was for all the wrong reasons.
In today’s labor market, the unemployment rate drastically understates the weakness of job opportunities. This is because in the weak labor market of the aftermath of the Great Recession, there are a huge number of “missing workers”—potential workers who are neither employed nor actively seeking work simply because job opportunities remain so scarce. Because jobless workers are only counted as unemployed if they are actively seeking work, these missing workers are not reflected in the unemployment rate.
As part of its ongoing effort to create the metrics needed to assess how well the economy is working for America’s broad middle class, EPI is introducing its “missing workers” estimate. Our estimate shows there are currently nearly 5 million missing workers. These are workers who would be in the labor force if job opportunities were significantly expanded but, given the state of the labor market, are sidelined.
Exactly how many missing workers macroeconomic policymakers believe there are has enormous implications for their assessment of the strength of the job market, and therefore for their policy decisions. For example, if they underestimate the number of missing workers, they will overstate the strength of the labor market, and be less likely to provide the economy with the support it needs. As shown in the figure below, if the nearly 5 million missing workers were looking for work and thus counted as unemployed, the unemployment rate in August would have been 10.1 percent instead of 7.3 percent.
The unemployment rate is vastly understating weakness in today’s labor market: Unemployment rate, actual and if missing workers* were looking for work, January 2006–July 2014
|Date||Actual||If missing workers were looking for work|
* Potential workers who, due to weak job opportunities, are neither employed nor actively seeking work
Source: EPI analysis of Mitra Toossi, “Labor Force Projections to 2016: More Workers in Their Golden Years,” Bureau of Labor Statistics Monthly Labor Review, November 2007; and Current Population Survey public data series
Estimating the number of missing workers is not straightforward because some changes in labor force participation over the last five years have nothing at all to do with the weak labor market (for example, baby boomers beginning to reach retirement age). Our estimate of the number of missing workers isolates the cyclical component of the decline in the labor force participation rate since the start of the Great Recession. In other words, it counts just those missing workers who would be in the labor force if job opportunities were strong. It doesn’t count, for example, those retiring baby boomers who would have left the labor force whether or not the Great Recession happened.1
We will update these estimates on the first Friday of every month immediately after the Bureau of Labor Statistics releases the monthly jobs numbers. In particular, we will update the following three figures each month at EPI’s Missing Workers page:
1. The trend in the total number of missing workers, currently nearly 5 million:
Millions of potential workers sidelined: Missing workers,* January 2006–July 2014
Note: Volatility in the number of missing workers in 2006–2008, including cases of negative numbers of missing workers, is simply the result of month-to-month variability in the sample. The Great Recession–induced pool of missing workers began to form and grow starting in late 2008.
2. The breakdown of missing workers by gender and age, showing most missing workers are of prime working age:
Roughly half of missing workers are of prime working age: Missing workers,* by age and gender, July 2014
|Men under 25||630,000|
|Women under 25||420,000|
3. The earlier figure depicting what the unemployment rate would be if the missing workers were looking for jobs.
1. How do we estimate the number of missing workers? Labor force participation rate projections published by the Bureau of Labor Statistics in November 2007—before the start of the Great Recession—are available in Table 3 of Mitra Toossi, “Labor Force Projections to 2016: More Workers in Their Golden Years,” Bureau of Labor Statistics Monthly Labor Review, November 2007. The projections assumed a healthy labor market over the period in question, 2006–2016, so the participation rate changes it forecasts reflect purely non-cyclical factors (e.g., the impact of retiring baby boomers). The difference between these projections and the actual labor force participation rate is thus a good measure of the cyclical change in the labor force participation rate, i.e., the change that is a direct result of the weak labor market in the Great Recession and its aftermath. Based on this logic, missing workers are estimated in the following way: The labor force participation rate projections for 2016 by gender and age group (age groups 16–19, 20–24, 25–34, 35–44, 45–54, 55+) available in Table 3 of Toossi (2007) are assumed to be structural rates. The current month’s structural rates (by gender and age group) are calculated by linearly interpolating between 2006 and 2016. The size of the potential labor force is calculated by multiplying the current month’s structural rates by actual population numbers (available by gender and age group from the Current Population Survey public data series). The difference between the size of the potential labor force and size of the actual labor force (also available by gender and age group from the Current Population Survey public data series) is the number of missing workers.